Guest Post: Lloyd Blankfein's Days Are Numbered As Chairman Of Goldman Sachs

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Submitted by Charlie Gasparino

Lloyd Blankfein's Days Are Numbered as Chairman of Goldman Sachs

It's a testament to the odd world in which we live that when a Wall
Street firm pays a $550 million fine by conceding negligence in how it
dealt with clients, its stock surges, adding billions of dollars in
market value for the firm's shareholders.

But that's what's happening to Goldman Sachs, as it reached its long
awaited settlement with the Securities and Exchange Commission over how
it sold a basket of mortgage related debt to investors in 2007.

Back when the SEC brought the case, the conventional wisdom on Wall
Street and the financial media was that Goldman didn't have to settle --
the case was weak and Goldman is, after all, Goldman.

As I wrote on these pages back then, Goldman would have to settle
because: (a) the SEC dug up some real questionable activity; and (b) no
Wall Street firm, not even one with the ties to government that Goldman
possesses can go to war with its primary regulator.

Now that Goldman has indeed settled, the news is being spun, again
mostly by the financial media, that the deal with the SEC was a victory
for Goldman's CEO Lloyd Blankfein, who survived the investigation
largely unscathed, paying a measly $550 million to the government
(equivalent to a few days trading gains at Goldman) and without having
to give up any power, such as relinquishing his role as chairman of the
board, as senior executives both inside Goldman and at competing firms
believed would be part of any settlement.

Well, if history is any guide, Blankfein may not go tomorrow, or even
next month, but sometime in 2011, Blankfein will at the very least no
longer be chairman of Goldman, and may also be forced out of the firm
altogether.

If you don't believe me ask former Citigroup CEO Sandy Weill. Like
Blankfein, Weill (at least on paper) was a good CEO from an operational
standpoint. Following the creation of Citigroup in 1998, shares of the
big bank soared. The bank was what's known as a Wall Street darling for
its strong earnings and a surging stock price, and Weill was regarded as
the King of Wall Street, having engineered the largest financial deal
ever when he merged his company, the Travelers Group brokerage,
insurance and investment banking empire, with commercial banking
powerhouse Citicorp.

At the height of his power, Weill suddenly popped up on the radar
screen of New York Attorney General Eliot Spitzer. Before Spitzer got
involved with hookers and became a TV host, he was the sheriff of Wall
Street, looking to right wrongs from the last great scandal, the
internet bubble where firms sold worthless dotcom and tech stocks to
unsuspecting investors. Emails he uncovered showed that Weill at least
did something stupid, if not fraudulent: He pressured an analyst, Jack
Grubman, to inflate his stock rating on telecom giant AT&T, which
was an investment banking client (Weill also sat on AT&T's board,
while AT&T CEO Michael Armstrong sat on Citi's board)

Grubman wrote in an email that as a favor for upgrading the stock,
Weill got his kids in an exclusive pre-school. The scandal, was
described by the Wall Street Journal, as a "kid pro quo."

Weill continued to deny wrongdoing and was never charged. Citigroup,
however, was charged with fraud and ended up paying a $400 fine to
settle the matter, but Weill appeared to have retained his control of
the bank. The initial reaction in the press and among his peers in the
financial business was that Weill had won, by having the bank pay a
relatively small fine, and his status as CEO and the King of Wall Street
secure.

Not quite. A few months later, Citigroup announced that Weill was
stepping down as CEO, handing that job to Chuck Prince, who basically
negotiated the settlement package. Citigroup maintained that the two
moves were unrelated. But people in Spitzer's office told me they really
weren't: While negotiating the settlement, Citigroup's board made it
clear to investigators that Weill's days were numbered at the top of the
firm that he founded. Spitzer was merely affording Weill a graceful
exit in an effort to end the case.

Full disclosure: I have no knowledge that Goldman's board has tacitly
agreed to pull a Weill on Blankfein and has plans for him to step
aside, but the circumstances involving the two men are so remarkably
similar. While Blankfein wasn't directly involved in the questionable
trade that landed Goldman in trouble, he is responsible for remaking
Goldman into predatory trading culture that has caught the attention of
regulators, Congressional committees (recall Sen. Carl Levin badgering
Goldman traders for selling "shitty" investments to their clients) and
hurt Goldman's once stellar reputation, as Weill's actions hurt
Citigroup's.

Some would say that's where the comparisons end; Citigroup deals with
the general public that buys stocks through its brokerage unit (Smith
Barney) and makes deposits in its branch banking offices. Goldman deals
with large sophisticated investors who couldn't care less how Darwinian
the company behaves.

That used to be true, but no more. Goldman's image has been battered,
not as bad as say a company like BP, but not far behind. And image does
count these days given the scrutiny and oversight placed on Wall Street
and the banks following the financial collapse-induced bailouts.

Now that financial reform has been passed, Goldman will have to cut
back on some of that aggressive trading that powered its earnings and
was Blankfein's forte. That means it will have to devote more and more
resources to developing its client business and relationships,
convincing blue chip companies that it is the right firm to handle
delicate negotiations involving mergers, acquisitions, and other
corporate financing assignments.

More and more, these clients do care about image (ask yourself why
has so many top companies embraced the useless but politically correct
"green agenda"). In fact some have already jettisoned Goldman as
scrutiny of the firm grew over the past year.

Who is the right guy to change Goldman's image to fit the new
paradigm it faces? It's not Lloyd Blankfein and that's why he won't
survive.