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Goldman Sachs Scrambles To Avoid Egg on Its Facebook

Goldman Sachs just did a u-turn on the Facebook investment front: it limited participation to foreign clients only. Why? SEC interest in its scheme to acquire shares of the hot social networking force and make them available to its top clients while skirting regulatory triggers that would make Facebook go public.

The banking and securities firm thought that by bundling investors in groups, like specialized and limited mutual funds, it could pull off stock sales without hitting the number of individual investors that would Facebook to file an IPO. No dice. Even for a country accustomed to well-connected people locking down IPOs, this was too much. Perhaps it was because this took the idea of privilege one step further. Or maybe it was because Facebook has for close to two years prevented its own stock-holding employees from selling shares and cashing out.

Goldman says it was concerned that media attention would seem like illegal promotion of a private placement. But the real reason is that despite clear financial success for both organizations, Goldman and Facebook have targets painted on their backs by their own hands. Dodging scrutiny will only get more difficult.

The companies are actually well suited to each other. Goldman and Facebook are happy to see what they can get away with, waiting only for someone to say no. There's nothing new to the business world in this approach. However, these two have gone so far in their own ways as to regularly attract enough attention to crimp their style and operations.

The Goldman investment scheme was one example. Facebook has just put its foot into the privacy mess again by allowing apps to acquire user addresses and mobile phone numbers. Yes, users have to give permission, but the privacy settings are confusing enough that many may have already done so without realizing it. And it will be relatively easy for ethically-challenged companies to obtain the information through trickery.

Facebook has temporarily withdrawn the plan, but know that it will come back. This is another step to making Facebook an ecommerce platform that could become a true printing press for money.

Achieving that end becomes difficult when you've shown enough disregard for consumers in one way or another that only your mother gives you the benefit of the doubt. Even worse, companies and their CEOs come to assume that all they might face is a slap on the wrist.

As my BNET colleague Alain Sherter has pointed out, punishment of the financial services industry paled in comparison to the outcome of the savings and loan debacle of the 1980s, "when more than 1,500 bankers, including hundreds of CEOs, went to prison."

Even in the 90s, there were financial bigwigs that found themselves in the big house. I remember interviewing one, as he sat, dressed in an orange jumper, in a medium-security prison after a conviction of financial fraud. At the time, he talked of Enron executives who were clearly going to do time.

His advice was for them to turn on the bankers, who he said weren't innocent investors, but had gone along with highly questionable accounting to make a buck. By giving up the banks, executives might bargain for lighter sentences. They didn't, and so went to jail as the bankers stayed home.

The two points come together with two realizations. First, public attitudes move in cycles. Too much lenience towards those who act in questionable ways eventually leads to harsh outcomes. Second, as history has proven, financial executives are all too often happy to pocket their rewards and leave the penalties to others.

The enticement in this case, as Felix Salmon at Reuters astutely notes, was the possibility of a private Facebook market without the need of ever going public. All the financial details would be hidden, and yet the company would have effective access to the capital markets. It was the dream of opportunity without responsibility.

Although Goldman should have been embarrassed, it is beyond any lasting reaction to its actions. Any real penalty would fall to Facebook CEO Mark Zuckerberg and company.

To resist the pressure to do something potentially foolish, you need the ballast of something more important than just getting "big." And not many companies, high tech or finance, possess that characteristic.


Image: Flickr user nasrulekram, CC 2.0.
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