Q&A: Gasparino On Goldman

Sep 7 2010 | 9:44am ET

On Friday came news that Goldman Sachs would wind down its proprietary trading desk, the Principal Strategies group. Earlier in the week, FINalternatives spoke with Fox Business Network's senior correspondent Charlie Gasparino about the future of the firm's prop trading desk, and the bigger picture at the storied investment bank.

Gasparino explained that whatever Goldman Sachs decides to do with the Principal Strategies group, the investment bank is facing a larger cultural crisis. The days of playing fast and loose are over, and Gasparino argues that if the firm is to continue to thrive, it will have to become more client-focused, and may have to make big changes at the top.

FINalternatives: Principal Strategies is a huge source of revenue for Goldman Sachs—some 10% of the firm's revenue. Do you believe that they will wind it down?

Gasparino: The equity prop. trading desk is what we are talking about, not the bond prop. trading desk. The bond prop. trading desk is what they consider much more of a customer-oriented risk mitigator within the firm. That will stay and that is their huge revenue generator, and it is a bigger portion of the firm. What is going to be affected are these equities guys—this is like a big hedge fund within Goldman. [But] if you call Goldman up they will tell you it isn't as big as people believe, and they just don't think it's material. They may make a statement about what they ultimately do because there has been so much press on it, but they don't think it is a material thing that they have to disclose.

You've been reporting on Goldman for a long time, how have you seen it evolve?

Under the Blankfein regime, Goldman became a hedge fund and was almost Darwinian in its approach to trading and where all the revenues came from. It did this by sharing information, by becoming a coherent internal unit that basically works for the betterment of the firm, often at the expense of its broader client base. The Abacus deal and the investigation of it proved one thing—and I'm not saying that was high crimes or misdemeanors, I'm not even saying whether it falls into the category of fraud—but what it proves to me is just how Darwinian Goldman is with clients, and that the firm comes first all of the time, and clients are, if anything, a distant second.

Remembered when Sen. Carl Levin (D-Mich.) used the word “crappy” about 200 times? That to me crystallized Goldman's approach: They didn't lie and cheat about these things. They weren't hiding the books from the investors.  But they had no problem selling “crappy” investments, they had no problem having [Paulson & Co.'s Paolo] Pellegrini on the other side of a trade with two other clients. It was interesting that, if you listened to some of those hearings, Bear Sterns refused to do the deal.

My broader point is this, Lloyd Blankfein and Gary Cohn, two really sharp guys, set a sort of tempo—a mindset at Goldman—where it was an internal unit, everybody works together, and that is why spinning off a hedge fund where those guys can't talk internally about risk and what is going on in the market isn't going to happen.

The bigger question is, can Goldman, given the regulatory environment and given the financial reform, continue to do what it has been doing since 2006? I don't think so. I've talked to a lot of people there, and I don't think Lloyd Blankfein is resigning tomorrow, but I wonder [whether] his way of running things, Goldman's way of running things, has got to change dramatically. They may deny it, but there is an internal freak-out going on in that company because they can't be what they want to be.

Everyone scoffed at the Securities and Exchange Commission settlement with them. Moneywise, for Goldman, it wasn't a big deal. But they had to admit that doing the Abacus deal was sleazy. They didn't say they committed fraud, but they had to admit it was not a great deal. That is key. What that means, if you unwrap it, is that Goldman can't do the Abacus deal again. You may think that that is an outlier. I don't. I think that is the way Goldman does business. And if they can't do the Abacus deal, that company is in for massive changes. And the company has to change at the top, too.

Changes at the top?

Gary Cohn has told people he wants out, and if he does anything he'll start his own hedge fund. And if he starts his own hedge fund he'll have lots of money going to him, he's a very smart guy.

Lloyd Blankfein isn't too happy about his working there either these days. We are going to have to see exactly how financial regulation gets written; what Goldman does could be really interesting in terms of just how strict those rules are, how much the Lloyd Blankfein, Gary Cohn and the Darwinian nature of the firm has to change, and if that is the case the guys at the top will have to change. I think you'd have to change the direction of the firm. It has to be much more client-focused.

Do you think this is a result of financial reform? Or does the move with the prop. trading desk also have to do with reforming their image?

I think it is a confluence of stuff. You have financial reform, which is putting some handcuffs on Goldman, but you also have regulators saying that they don't want Wall Street to become a gambling den again. They want to ratchet down the gambling. And where Goldman really made a lot of money was when Wall Street was this freewheeling gambling thing, which reached its apex in 2007 when the systems began to collapse, and it ultimately blew up roughly two years ago from today, in September 2008.

[The financial crisis] was many years in the making. Think about how much insanity has gone on in Wall Street. Think about 1998: It was smaller but we were talking about Armageddon during the Long-Term Capital crisis. Same in 1994, if you read [former U.S. Treasury Secretary] Robert Rubin's book, during the Mexican peso crisis they basically bailed out Wall Street. The gambling has been going on for many years, and what you have right now is regulators saying “we want a lot less of it,” and who knows if it will stick?

Do you think these reforms really have teeth?

I don't know; it's too early too tell. I think Wall Street can still make a lot of money. When [Wall Street] saw the final bill I think it breathed sigh of relief. Listen, you had the federal government coming in and basically bailing out every bank. We've had a lot of bailouts over the past 10 years, and it seems like regulators are now trying to take the gambling out of the situation.

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