Goldman Sachs: How bad is bad?

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Clearly, it's bad. Whether or not Goldman wins or loses the case, its stock has taken a pummelling and its reputation has taken a vicious bludgeoning around the head and vital organs.

For anyone wilfully unfamiliar with the case against Goldman, The Associated Press has a good summary here, there is an explanation for dummies and horse lovers here, and the media is awash with more detailed reports, including this, from the Financial Times, and this on Paulson's trades in the Wall Street Journal.

You can also view the pitchbook related to the Abacus trade in numerous places, here being among them.

Assuming, therefore, that you're relatively au fait with what went on. What does this mean in terms of jobs, pay, peace of mind, future health/wealth/happiness for anyone working at Goldman?

1) Goldman will no longer be God

Goldman Sachs used to be invincible. It may have been a vampire squid, but it had friends in high places, always pulled a profit, and somehow or other managed to emerge with the upper hand.

Yesterday's events suggest Goldman's friends in high places may have fallen from their perches. Alternatively, it may be precisely because of Goldman's success that such delight is being taken in its downfall. As Goldman is discovering, hubris, unfortunately, begets schadenfreude.

A debate is taking place on the blogosphere about the likelihood of the SEC's case standing up. On one hand, Henry Blodget thinks the case is weak. On the other, Felix Salmon thinks it's strong.

This could be the opening of the flood gates. Jake Zamansky, a veteran plaintiffs lawyer, says he's already been "contacted by Goldman customers to bring lawsuits to recover their losses."

At very worst, Goldman could do a Drexel Lambert. Having the firm on your CV could be seen as a sign of faded brilliance and slight dubiousness.

2) Pay will fall

This year's Goldman bonuses look certain to suffer. Not only will the bank now be even more politically constrained when it comes to compensation, but it may have to pay hundreds of millions of dollars in damages to ACA, IKB, and maybe even the British government.


The Wall Street Journal reports that Fabrice Tourre, the trader whose emails are making life a little difficult for Goldman, earned $2m in 2007 thanks to the Abacus deal. Will Fabrice have to pay some of that back (unlikely as clawbacks probably didn't exist at that point)?

3) Regulation will rise

Thanks to this case, it will be harder for banks to argue against regulation. As Sanford Bernstein analysts point out, "It is likely that capital charges on trading will increase, leverage will be limited, balance sheet liquidity "reserves" will increase and non-core businesses such as commodities, real estate and private equity will be constrained."

None of this looks particularly great for pay either - both at Goldman and across the industry.

4) Goldman clients will back off

This will be bad news for Goldman, but could prove good news for up and coming competitors like BarCap and Credit Suisse.

Goldman's apparent willingness to prostrate itself at the foot of its clients, has been thrown into question.

As Felix Salmon points out:

Goldman talks ad nauseam about how everything it does it does for its clients, and how any profits it ultimately ends up making are just a result of being "long-term greedy". But if it attempts legalistic hair-splitting about how its behavior in the Abacus case was technically not illegal, it's just going to end up looking even more culpable in the eyes of its clients.

Elsewhere, Bond Girl questions the sanity of anyone wishing to be a client of Goldman Sachs, given that: employees appear to mock the transactions they're arranging for you to purchase; and sacrificing your business relationship is valued as little more than collateral damage in the pursuit of fees.

5) Blankfein will be replaced by a non-trader

Dick Bove thinks Lloyd Blankfein and David Viniar will be forced to step aside because of this, and that Viniar will be replaced by an outsider.

If this happens, will Goldman really want to replace Blankfein with another trader? Could this mark the resurgence of the IBD banker?

Brad Hintz at Sanford Bernstein thinks Goldman's IBD contingent could be on the up regardless: "Goldman's leading market share positions in the highest margin businesses of Wall Street - equity underwriting and M&A advisory - will result in growing investment banking revenues coincident with recovering GDP and improving corporate earnings," he predicts.

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