Special Report: Saving Goldman Sachs

Four days after U.S. securities regulators charged Goldman Sachs Group with civil fraud, Ash Williams, the top administrator for Florida's $138 billion in public investments, wanted to talk to someone at the Wall Street firm.

And he didn't want to speak to just anyone. He asked specifically for Gary Cohn, Goldman's president and Chief Executive Officer Lloyd Blankfein's top lieutenant.

Williams got his wish. Cohn, whose firm manages $2.7 billion of Florida's investments, called soon after.

A former hedge fund manager, Williams would not discuss the substance of the call. But he said the conversation eased any lingering concerns he had over the lawsuit filed by the U.S. Securities and Exchange Commission on April 16.

I was very pleased, said Williams, executive director of the Florida State Board of Administration. If it were me in that same situation, that is what I would have done. It is a good policy, when times are tough, to talk to your clients.

Ever since the Securities and Exchange Commission charged Goldman with civil fraud over the packaging and sale of a subprime-mortgage linked security, Blankfein and Cohn have been working overtime to save the storied franchise from the worst blow to its reputation in decades.

Goldman's top brass, along with other executives, are scurrying around the globe to meet with jittery corporate clients. They are holding phone calls with anxious customers and taking hedge fund trading partners out to sushi lunches, all in a bid to prevent business from going to one of its competitors.

The firm has already taken some hits. Goldman didn't make the cut as a lead underwriter on a $300 million initial public offering for consulting firm Booz Allen Hamilton, said people familiar with the situation.

The Carlyle Group, the private equity firm which acquired Booz Allen in a $2.54 billion buyout, was worried about the public perception of Goldman leading an IPO for a company with close ties to the U.S. Department of Defense. Instead, Carlyle, whose vice chairman of global buyouts is a Goldman alum, went with Morgan Stanley and Barclays to lead the IPO.

Goldman declined to comment for this story. A Carlyle spokesman said the private equity firm had no comment on the IPO.

Rightly or wrongly, Goldman Sachs has become a symbol of a pernicious Wall Street, a firm that helped create -- and then profited from -- the subprime meltdown. For more than a year, it has been trying to fend off populist outrage, but the tin ear of its leaders to the pain the financial crisis has caused on Main Street has often made matters worse.

Goldman is also facing a spate of shareholder lawsuits stemming from the big plunge in its stock in the wake of the SEC lawsuit over the Abacus 2007 collateralized debt obligation. The firm has lost $25 billion in market value since regulators charged Goldman with failing to disclose that a hedge fund client had helped package the Abacus CDO and was betting on the security's collapse.

Meanwhile, an Australian hedge fund that lost money on another controversial subprime-mortgage linked security called Timberwolf -- which Goldman arranged and was betting against -- is suing the firm for $1 billion in damages. A now defunct hedge fund sponsored by Carlyle also lost money in the Timberwolf CDO, said people familiar with the situation.

THE RED CARPET

Even so, Goldman continues to be among the most profitable financial companies in the world. Determining just how big an impact Goldman's political and regulatory woes are having on clients, particularly corporate ones, is difficult.

One investment banker with another big Wall Street firm said he is working on an upcoming IPO for a company that likely would have tapped Goldman to manage the deal if not for the SEC lawsuit.

Any lost advising or underwriting work comes at an inopportune time for Goldman. The financial crisis has forced it and other big Wall Street banks to look further down market for deals in a quest for fees and to remain near the top of all-important league rankings.

Goldman, for instance, is underwriting far smaller stock offerings than it has in the past. So far this year, the average Goldman-led IPO has raised $218 million, compared with $685 million a decade ago, according to data complied by Thomson Reuters.

And since the SEC filed its lawsuit, the average IPO underwritten by Goldman has shrunk even more. The three offerings that Goldman has brought to market in June have raised on average $189 million.

The dwindling size of IPOs is no doubt a reflection of diminished appetite for stock offerings in the aftermath of the financial crisis. But for Goldman to go scraping for small deals is not what one would expect for a firm that in the past routinely turned away business from mid-market clients.

FULL COURT PRESS

The full court press Blankfein, Cohn & Co. are putting on clients and customers to stick with the firm appears for the most part to be working. Even with its down market moves, Goldman continues to rank at the top of the charts when it comes to advising on corporate mergers or stock and bond offerings.

And the thousands of hedge funds that rely on Goldman's prime brokerage operation for loans and executing trades are showing few signs they will bolt to other firms.

For Goldman, the toughest sells have been public pension funds or companies with strong ties to the government that don't want to be seen to be in bed with the firm.

Reuters has learned that the California Public Employees' Retirement System, the largest U.S. public pension fund, has decided not to use Goldman as a real estate investment adviser after the Wall Street firm did not disclose that it was facing potential SEC charges when bidding for the contract in March.

The run-in with the SEC is reinforcing the perception that Goldman -- despite claims to the contrary -- sometimes puts its own interests ahead of its clients.

Even supporters say the allegation merely confirms what they've long suspected --- that Goldman is no more or less self-interested than any other Wall Street investment bank.

The allegations have caused some to question whether Goldman's clients still come first, as the firm's vaunted 14 guiding business principles suggest they should.

Goldman is the smartest guy out there, but it doesn't seem to be bound by any ethical guidelines, at least that we can see, said Michael Vogelzang, the chief investment officer at Boston Advisors, a $1.7 billion money manager, which owns shares of Goldman. The individuals there are great. We love working with our contacts. But it is very frustrating.

That's a sentiment that more than a dozen clients and customers expressed in recent conversations, although none would comment on the record. And it's one reason Goldman finds itself on the defensive not only with regulators but with some of its most valued clients as well.

GOLDMAN TLC

For instance, soon after the SEC charged Goldman, the firm quickly moved to patch things up with Paulson & Co. Goldman had arranged the now controversial Abacus 2007 CDO that is at the center of the SEC's fraud case for the benefit of that giant hedge fund, run by John Paulson.

While Paulson's $30 billion fund hasn't been charged by regulators, its name has been somewhat muddied. A person close to Paulson said a Goldman official called within days of the SEC lawsuit to make it clear that the firm didn't have any problem with the hedge fund and would like to continue doing business with it.

Hedge funds in general have been the recipients of the extra personal touch Goldman executives have been demonstrating lately. Traders said they've noticed that Goldman's prime brokerage operation, which provides loans to hedge funds and executes trades for funds, is going out of its way of late to show clients the firm cares.

SUSHI LUNCHES

One hedge fund trader whose firm uses Goldman as a prime broker said a Goldman executive called a few days after the SEC lawsuit and offered to treat some of the fund's trading team to a sushi lunch. Other fund customers have been similarly feted, sources said.

Besides wining and dining, Goldman's prime brokerage teams are sending out regular updates on the firm's response to the SEC lawsuit.

Another hedge fund that a year ago turned down Goldman for a prime brokerage assignment was recently contacted again by the Wall Street firm to see if it would reconsider. A person close to the hedge fund, who declined to be identified, said the incident was surprising since Goldman rarely comes back begging for business.

Since the SEC announced its charges, Blankfein and Cohn also have participated in conference calls with wealthy clients, reassuring them about the direction of the firm. Cohn, for instance, took part in a June 16 call with Goldman's wealth management customers.

A former Goldman partner, who left the firm more than a decade ago but still advises a number of Goldman clients, said the firm's sudden TLC is a clear response to the SEC lawsuit and the pounding the firm suffered during an especially harsh hearing on Capitol Hill in April.

Everything Goldman is doing now is related to the lawsuit, the former partner said. It is about brand identity and preserving the brand.

BETTER BEHAVED

A constant refrain from Goldman clients, even ones who are more wary of the firm now, is that to stop doing business with the Goldman out of principle or fear of getting taken advantage of would be foolish. The clients said the firm's ability to get deals done, even in the most difficult of market environments, makes it hard to put Goldman on any do-not-call list.

That's why one European hedge fund manager, despite having qualms about how Goldman treats its clients, said he's still giving serious consideration to hiring the firm as a prime broker for a new fund. The manager said it's hard to overlook Goldman's unrivaled ability to bring quality deals and trading opportunities to the mix.

Plus, he figures the SEC suit should serve to humble the firm a bit. Well, they will probably be a little better behaved for the next few years as a result of everything, the manager said. And they still have the best capital introduction in the world.

POLITICAL HOT POTATO

But for some, the cost of doing business with Goldman, at least right now, is simply too high.

Firms that got billions of dollars in the U.S. government's bailout of the banking industry have been among the corporate clients that are steering clear of Goldman.

In 2008, Goldman itself got a $10 billion bailout, which it repaid in 2009. But it's been criticized for profiting from the massive taxpayer assistance to American International Group Inc.

The long-standing relationship between the insurer and Goldman now appears strained. AIG CEO Robert Benmosche said last month that AIG was reviewing its dealings with Goldman. And the firm recently canceled a plan to hire Goldman for restructuring advice, instead turning to Citigroup Inc and Bank of America.

Brad Hintz, a former Morgan Stanley treasurer and an analyst with Sanford C. Bernstein, said Goldman's battered name is making it easier for vulnerable clients -- ones facing political pressure -- to take a pass.

As a decision maker for any client, if you are under pressure, your response will be to pull away to the extent you can without hurting yourself, Hintz said.

INTERNATIONAL AFFAIR

Soon after the news spread that Goldman was facing fraud charges, rivals across the world seized on it as an opportunity to move in on some of the firm's prestigious clients.

In China, investment bankers lobbied executives at state-owned Agricultural Bank of China to drop Goldman as an underwriter for its more than $20 billion IPO. But the Chinese bank rebuffed those efforts and decided to keep Goldman as part of the underwriting team.

On the advisory side, I suppose it is conceivable for someone to say they are bunch of bad guys because the SEC is suing them, but I don't think it is hurting their franchise, said one corporate attorney.

Clients in places like London are fully aware of what Goldman is facing, but say they are continuing to do business with the firm because they know what to expect. What you get when you work with Goldman is a well-oiled process, Novexel SA Chief Executive Iain Buchanan told Reuters in a telephone interview. That brings comfort not just to management but also to investors.

Goldman recently advised Novexel on its sale to British drugmaker AstraZeneca Plc, a 352 million euro deal that closed in March. Based in a Paris suburb, the firm develops antibiotics to combat treatment-resistant bacteria.

Buchanan said bankers from Goldman, which had previously helped Novexel evaluate an initial public offering, were available 24-7. You have a team of people who can do a lot of heavy lifting in a short space of time. It didn't matter whether it was 3, 4 o'clock in the morning -- there was a Goldman BlackBerry whizzing in the night, Buchanan said.

SLIGHTLY WOUNDED

On the surface, Goldman's woes should be a boon to competitors. But it is not so simple.

Wall Street also has a what goes around, comes around culture, an etiquette that deters big firms from poaching clients when the going gets tough.

As a result, chief rivals like Morgan Stanley and JPMorgan Chase & Co are unlikely to raise Goldman's problems when they are making sales pitches to clients.

But, of course, clients often raise Goldman's issues unprompted, especially when they are considering using them on a deal.

Last week, bankers from Goldman and Jefferies Group, a mid-sized investment bank, advised Valeant on its $3.3 billion sale to drugmaker Biovail.

Jefferies Chief Executive Richard Handler, in an interview, said it is often difficult to tell why clients pick one firm over another for advising work.

This is a very competitive business, Handler said. Even larger competitors that are even slightly wounded, given what's going on, are still formidable competitors.

GOVERNMENT TIES

For government and other public clients, there are political ramifications for doing business with Goldman that now come into play. Perhaps that's why Cohn, Goldman's president, was so quick to respond to Ash Williams and the Florida system.

Williams said Cohn asserted that Goldman had done nothing wrong and was trying to be as transparent as possible with its clients about the SEC case. After talking to Cohn, Williams said he saw no need for the state to look elsewhere for a Wall Street money manager.

Disclosure concerns, however, have already landed Goldman in hot water with one major pension fund.

On June 16, Calpers notified Goldman that it would not use the firm in its pool of real estate investment consultants, according to a document obtained by Reuters. The pension fund's decision came after officials there said they planned to question Goldman about its failure to disclose that it was facing an investigation from the SEC when bidding for the contract in March.

The SEC served Goldman with a so-called Wells Notice last September, signaling potential charges, which the firm did not mention in its March bid for the Calpers contract. Goldman has maintained that it was not required to publicly disclose the notice it received from the SEC.

Calpers also has a brokerage relationship with Goldman and there is no indication that will change.

Other pension funds are keeping a closing eye on Goldman.

The Oklahoma Teachers Retirement System voted in April to put Goldman Sachs Asset Management on alert for 90 days as it reviewed the fraud allegations against the firm.

And in May, the New York Metropolitan Transportation Authority cut its ties with Goldman, which had served as its financial adviser.

OUR CLIENTS

Evolving from its partnership culture, Goldman has always been seen as secretive, so the disclosure concerns were less surprising to some in the industry.

What has been harder to swallow for some former Goldman executives is a shift in culture that shortchanges clients.

When Goldman became public, employees often would keep a copy of the firm's 14 business principals near their desks. The principles include items like Our clients' interests always come first and Integrity and honesty are at the heart of our business.

Over the last ten years that fell by the wayside, said a former Goldman managing director with more than 20 years experience with the firm.

The cultural changes have come as the firm has rapidly grown as a public company. It has also coincided with the evolution of more complex products.

Now, with outsiders questioning the firm's integrity, Goldman is finding it can't take any clients for granted. And many of the firm's clients expect nothing else.

Their efforts to make sure that whatever questions we have get answered, have to be speeded up a little bit these days, said Howard Bicker, executive director of the Minnesota State Board of Investment.

Bicker, who oversees $50 billion in state pension money, said he always found Goldman to be responsive in the past. But now it just seems the firm is more eager to please, he said.

If nothing else, it seems the SEC has managed to bring a bit of humility to Goldman.

(Reporting by Matthew Goldstein and Steve Eder; Additional reporting by George Chen and Fiona Lau in Hong Kong and Quentin Webb in London; editing by Jim Impoco and Claudia Parsons)