|Illustration: Kevin February|
Goldman seemed to be coasting to a 2014 victory parade on November 17, as it advised on two acquisitions with a combined value of over $100 billion that effectively sealed this year’s number one M&A ranking for the bank and pushed arch-rival Morgan Stanley below JPMorgan into third place.
In a banking year dominated by an advisory business boom, Goldman looked the clear winner and it has also managed a revival in the trading division that still supplies the biggest portion of its income, with fixed income revenues in the third quarter jumping by 50% over a weak comparable period in 2013.
Goldman had also just stage-managed an adulatory reception to its biennial partnership promotion process, by guiding media reports that hailed its cautious approach to adding new partners (only 78 debutantes at this ball) and a roughly even three-way split between investment bankers, traders and ‘others’ in the form of asset management, private equity and administration staff.
As press reports extolled the enduring mystique of the Goldman partnership and employees turned their attention to pitching for elevated bonuses, senior managers at the firm must have wondered what could possibly go wrong.
Plenty, as it turned out.
By the end of a week that started with the two big M&A mandates advising Actavis and Halliburton on takeovers, Goldman was yet again mired in controversy over its approach to managing conflicts of interest.
Allegations of commodity trading skullduggery dominated headlines later that week, after a US Senate committee report accused Goldman of manipulating metals supplies to increase costs for clients.
Senator Carl Levin, outgoing chairman of the investigating committee, seems to have taken a violent dislike to Goldman and appeared determined to have a last swipe at the bank before retiring at the end of the year.
JPMorgan and Morgan Stanley also took their knocks, but the largest section of the Congressional report focused on round-trip trades in aluminum that Goldman’s warehousing unit conducted between 2010 and 2013 that had the effect of creating a bottleneck in supply and higher costs for end users of the metal.
“Aluminum warehouses owned by Goldman, and overseen by a board consisting entirely of Goldman employees, manipulated their operations in a way that impacted the price of aluminum for consumers, while at the same time Goldman was trading in aluminum-related financial products,” Levin said.
Goldman’s commodities co-head Greg Agran said that the bank never integrated its commodity warehouse, Metro International, with its market making operations and that there was never any illicit information flow between the two, but Levin was clearly unconvinced. The Senate report said that Agran, who served as head of Metro’s board, and Isabelle Ealet, the former Goldman commodities head who now co-runs all securities, were among almost 50 Goldman employees with access to confidential Metro information.
The round-trip trades concluded in February 2013, just before the introduction of Goldman’s much vaunted new code of business standards in May 2013. So the bank – which is now looking to sell Metro – could potentially maintain that the trades were of a type that would not now be repeated in any unit of the firm, even as it denied that the deals had any ill-effect on metals end users.
But it also emerged that Metro’s vice-president for business development complained in his resignation letter in June 2013 about the appearance of conflicts of interest with staff in Goldman’s trading division.
And an unrelated issue in the week of November 17 highlighted the extent to which Goldman still so often seems willing to find a way to make sure a trade gets through, even when some rivals are wary and its recently installed transaction review process might be expected to counsel caution.
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Goldman has reportedly signed up to a group providing financing for a leveraged private equity bid for Swiss packaging firm SIG Combibloc. The bid is expected to value SIG at around $4.5 billion, or 6.5 times earnings. This is above the ratio of six times earnings that US regulators have been warning banks that they view as a ceiling for sensible leveraged buyout financings.
As so often with Goldman deals, there is no suggestion that it has intentionally breached a clear regulatory guideline. In leveraged finance, as for so many markets, the US regulatory landscape is fragmented and confusing. Goldman, Morgan Stanley and foreign banks such as Barclays and Credit Suisse have their leveraged lending supervised by the Federal Reserve, while the Office of the Comptroller of the Currency regulates commercial banks, such as JPMorgan and Citi.
The Federal Reserve is trying to apply a less didactic approach to leverage ratios than the OCC by giving banks the benefit of the doubt on new financing deals as long as they can demonstrate that they have sound overall risk management processes in place.
But this nebulous approach lays both the regulator and its supervisory charges open to fears that certain banks will get preferential treatment.
And a third example of controversy over Goldman’s approach to conflicts of interest in the week of November 17 related to exactly that concern about kid-gloved treatment, when the bank disclosed that it had dismissed an employee who previously worked at the Fed for forwarding confidential information from a contact at the regulator. His manager, himself a former regulator, was also dismissed.
Goldman was able to portray this incident as an example of its processes working, but did not address why it is so keen to hire former regulators, if it is not to gain an edge in its own dealings with supervisors and to profit from advising clients on how to finesse regulatory issues.
Goldman framed the dismissal of the two former regulators as though it was shocked – shocked! – that the junior banker had forwarded a confidential email from a current Fed employee, and that the more senior of the two hires had failed to catch this breach of protocol.
A cynic would guess that the real crime in Goldman’s perception on the part of these neophyte investment bankers was their stupidity in leaving an email trail. Goldman has been pursuing a policy that could charitably be described as email light since it was embarrassed by disclosure of a series of mails about shorting mortgage securities, and ended up paying a $550 million fine for misleading investors in 2010.
The reputational harm Goldman suffered over that scandal led to the eventual unveiling with great fanfare of its new code of business conduct in 2013. Clients, regulators and other interested parties can now visit Goldman’s website and scroll through the many steps technically involved in approval of a transaction. An eight-slide section on the life cycle of a transaction lays out multiple clearly illustrated safeguards against ill-advised deals.
But as so often with Goldman, it is difficult to escape the nagging feeling that where there is a healthy margin on offer, the bank will nearly always find a way to get a trade through.