At least one of those scenarios is conceivable, with Goldman in the news again for allegedly swindling its own clients, deceiving the public and generally behaving like an investment bank. The question facing Goldman directors: Is Blankfein, who succeeded Henry Paulson as CEO in 2006, now more trouble than he's worth?
Sure seems like it. The blistering report issued yesterday by Sens. Carl Levin, D-Mich., and Tom Coburn, R-Okla., is already causing one former Goldman customer, National Australia Bank, to consider suing the company. As the turmoil mounts, here are five reasons the board should cut Blankfein loose:
Liar liar: Blankfein may have deceived Congress
Levin says Blankfein may have perjured himself in testifying before Congress last year. The Michigan Democrat accuses the executive of deceiving lawmakers in claiming under oath that the company hadn't juiced profits during the financial crisis by shorting mortgage-back securities. Levin wants federal officials to consider charging Blankfein with perjury.
Although the government has shown little willingness to go after bankers implicated in the financial crisis, even the threat of a perjury investigation could prove enormously distracting for Blankfein and Goldman.
Dirty laundry: Goldman has been plagued by controversy
Betting on the housing crash while misleading investors into doing the opposite. Pushing opaque, shoddy financial products wired to self-destruct. Peddling auction-rate securities to state and local governments, resulting in huge losses in communities across the nation. Driving up oil and other commodity prices through reckless speculation. Helping Greece hide its debt.
Practically Goldman's entire business, and certainly its most lucrative parts, seems to have been touched by scandal during Blankfein's short reign. Although still highly respected in financial circles, among the public at large the company has become synonymous with corporate greed and Blankfein a poster boy for all that is wrong with the U.S. financial system.
The firm's no-holds-barred approach to doing business has drawn fire from lawmakers, regulators, academics, consumer advocates and even its own shareholders. And the company's activities could cost it more than $3 billion in legal claims.
Competency test: Does Blankfein understand Goldman's business?
The Senate panel's report suggests that Blankfein may not have understood Goldman's strategy in shorting the housing market. In 2010, he told Congress that the bank had only bet against mortgage securities as a hedge against its "long" investments in the sector. That view was critical to shoring up Goldman's contention that it didn't realize huge profits in the crash at the expense of bank clients.
But other executives within the firm have cast doubt on his claim, suggesting the Goldman placed a huge bet on housing. That not only would've created clear conflicts of interest at the firm, but also exposed it to far greater risk during the financial crisis than Blankfein has let on.
So did he lie about Goldman's housing play, or did the executive simply not get it? For investors, the latter may be even more troubling than the former.
Nunsense: Investors aren't happy with Blankfein
Shareholders -- not to mention nuns -- have previously expressed concerns with Blankfein's leadership. That may have less to do with the executive's ethics than with the company's shaky financial performance. Goldman's profits fell 38 percent in 2010, weighed down by a $550 million SEC fine over the firm's CDO practices. This year its shares are down more than 10 percent.
At the bank's annual meeting last year, investors angry about the company's mortgage-related losses and mangled reputation urged the executive to resign. The furor forced Blankfein into a humbling admission that the company needed to engage in "rigorous self-examination."
Yet Goldman's pledge to act more ethically hasn't quelled the unrest. Shareholder activists are increasingly targeting the company in a campaign to force change. That's a direct result of the heightened scrutiny of the company by regulators and the media.
Culture club: Blankfein's trading background now a PR liability
Blankfein's promotion to CEO at Goldman reflected a key business and cultural shift at the company. Once a firm defined by its emphasis on traditional investment banking services, such as counseling corporate clients on M&A, Goldman in recent years has reoriented itself around trading. Unlike Paulson, Blankfein himself was a trader, and he has been instrumental in remodeling the company to focus on dealing in stocks, bonds, commodities, derivatives and other securities.
Until the financial crisis, that led to record profits. But it also changed Goldman's identity, business practices and ethos. It is no coincidence that the most serious problems at Goldman revolve around its trading operations.
Goldman in recent months has sought to change public perceptions that it is little more than a glorified hedge fund. It has vowed to eliminate conflicts of interest, better serve clients and become more open about its business. That's PR, of course. But even such damage-control exercises have consequences. Goldman said in January that its most important business principle is as follows: "Our clients' interests always come first."
Levin and Coburn concluded otherwise. Can the company, finding itself once again at the center of a political and media firestorm, stand indefinitely behind a lightning-rod for criticism like Blankfein?
Perhaps the better question is, why should it?
Image from Flickr user DonkeyHotey
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