Macaskill on markets: Blankfein circles his management wagons

By:
Jon Macaskill
Published on:

Students of internal politics at Goldman Sachs will be closely watching the career path of David Heller in the coming months. As the global co-head of securities with primary responsibility for equity trading, Heller might be expected to take the fall for a disastrous second-quarter performance in equity derivatives.

Jon Macaskill is one of the leading capital markets and derivatives journalists, with over 20 years’ experience covering financial markets from London and New York. Most recently he worked at one of the biggest global investment banks

Jon Macaskill is one of the leading capital markets and derivatives journalists, with over 20 years’ experience covering financial markets from London and New York. Most recently he worked at one of the biggest global investment banks

But power shifts are rarely straightforward at Goldman, which helps to explain the outside fascination with its Byzantine management struggles.

The firm has a visceral loathing of disclosing conflict at senior levels. Goldman goes to great lengths to keep its real trading strategies from both its rivals and its clients, and takes almost as much trouble to mask power shifts.

This is reflected in its practice of appointing multiple co-heads to many management positions. Heller is one of four current global co-heads of securities, for example. He is one of two New York-based securities co-heads, along with Harvey Schwartz. Heller’s background is in equity trading, while Schwartz is global head of sales. The two London-based securities co-heads – Ed Eisler and Pablo Salame – both have a trading background.

Heller is unlikely to pay an immediate price for the decision to leave the firm short equity derivatives volatility in the approach to the spike in prices in May, for a number of reasons.

One is the firm’s historical unwillingness to be seen to make knee-jerk management decisions as a response to trading losses or gains. A second reason is that the decision to run a substantial short volatility position is almost certain to have been reached after extensive discussion at the top of the firm.

Goldman’s claim that it is run on a more collegiate basis than other investment banks is not a shallow boast. There really is more widespread debate – upwards and downwards – of trading exposure than at other firms. There are many banks where an equity trading head could quietly run up a big volatility position with limited visibility in other departments, or even at the top of the bank. Goldman Sachs is not one of them.

The third reason for hope for Heller is that he has a strong overall trading track record and was widely viewed as a potential long-term contender for the top slot at the firm, at least until the recent mishap.

His career has followed the Goldman ideal. He started as an equity derivatives dealer and gained international management experience in Tokyo and London before returning to New York in 2002. He made partner at 29 on the back of his equity derivatives performance. He also has political connections and was one of the main Wall Street fundraisers for Obama’s presidential campaign, ranking only after Robert Wolf of UBS in cash bundling and perceived influence.

Links to the Obama administration have not been working very well for Goldman over the past year, of course. But the firm knows that it has to keep working to restore its political and regulatory influence, even if the glory days of Government Sachs cannot be resurrected.

A fourth reason for Heller to expect to be given a chance to redeem himself is that the grip of CEO Lloyd Blankfein and president Gary Cohn on the reins of power at Goldman is looser than it has been since their ascension.

The settlement of the SEC fraud suit over CDO sales practices for a relatively light $550 million was widely viewed as partial vindication for the bank and its management.

Blankfein will not need a second reminder about how exposed any bank CEO is to an all-out political attack, however. He may well be inclined to circle the management wagons and keep lieutenants with a similar trading background to his own in place, rather than push through changes that open up questions about his eventual succession.

The debate over the future role of Blankfein was relatively muted in the wake of the bombshell SEC accusations of April 16, in part because of the awareness that simply deposing him would result in Gary Cohn taking over as CEO. Cohn has the same background as Blankfein, but lacks the interpersonal skills and experience of representing the firm in public.

This may help to ensure that David Heller ends up suffering the traditional discreet Wall Street punishment for a transgression that is serious but not career threatening – in the form of a slashed 2010 bonus.