Goldman Sachs's 35,000 staff just got a stiff ethics lecture. The world's most powerful investment bank, issued a public promise to tell us all more about how it makes its multibillion dollar profits, and ordered its employees to ask not just whether they "can" rush into every new money-making opportunity, but whether they "should". Goldman's profitability may have escaped unscathed from the credit crisis, but its reputation hasn't – and alarmed executives promised to spend this year trying to do something about it.
Certainly, 2010 was Goldman's annus horribilis. It was charged with fraud over a toxic mortgage deal that it engineered on the eve of the market meltdown, paid $550m to settle the case and admitted "mistakes" in its communications with clients. Executives from the bank, from chairman and chief executive Lloyd Blankfein down, were hauled, again and again, in front of political committees examining the credit crisis. Its traders were accused of acting like used car salesmen, and the whole enterprise was damned in one journalist's memorable phrase as "a giant vampire squid wrapped round the face of humanity, relentlessly jamming its blood funnel into anything that smells like money".
Can 2011 be the year that Goldman turns it around? There was no admission of mistakes at the conclusion of its internal review, published yesterday. Running to 63 pages and 39 recommendations, the report makes tweaks to the company's business processes, rather than revolutionising them. But it does amount to a thunderous warning that employees must value the reputation of the firm as much as they value its profits – and their own bonuses.
"Goldman has one reputation. We must ensure that our focus on our reputation is as grounded, consistent and pervasive as our focus on commercial success," the report's authors wrote.
This is a lecture that will be delivered not just once, as it was on Monday when Mr Blankfein revealed the contents of the report to Goldman's partners, but over and over again. He is even going on a roadshow, to deliver the message across the bank's global offices. "The Chairman's Forum on Clients and Business Standards will represent a large investment of time of our senior management team over the course of 2011," Goldman pleads.
"We have all worked at companies where you get these memos. A memo only goes so far," said Crédit Agricole Securities banking analyst Michael Mayo, speaking to The New York Times. "But it may help define some of the grey areas, and it could incrementally help perception and show clients they are trying to gain more control of the situation."
The "vampire squid" has long argued that its reputation with the public, stung by and furious about the bailouts of the banking system without which the company would not have survived, is less important than its reputation with clients. But this is the key to why executives have concluded that they must embark on more than a cosmetic exercise. Preparing the report, the bank hired an outside firm to talk to a 200-strong sample of its clients, and the results were not the uniform praise of Goldman's intelligence, probity and operational excellence that it had previously taken for granted.
"Clients raised concerns about whether the firm has remained true to its traditional values and business principles given changes to the firm's size, business mix and perceptions about the role of proprietary trading," the report says. "Clients said that, in some circumstances, the firm weighs its interests and short-term incentives too heavily." So what is Goldman promising to do? Inevitably, there will be a blizzard of new committees, policy groups and review processes, led by the establishment of client and business standards committees in every division and major region of the company.
A "firmwide new activity committee" – not to be confused with the French electronics retailer Fnac – will "consolidate and strengthen existing processes for approving new products and activities and to assess the important question of not just 'can we' undertake a given business opportunity, but 'should we'". Most of the tighter procedures will be in the bank's structured-products operations, the heart of the credit crisis, where ordinary mortgages or other real-world investments are manipulated into complex derivatives and other financial products, so that clients can make oversize bets, or avoid taxes, or get round regulators.
There will also be additional disclosure of how much trading Goldman is doing on its own account, which it will now split out from "client services". It republished its most recent results yesterday, revealing that 29 per cent of its $9.42bn in pre-tax profit for the nine months to 30 September 2010 were the result of "investing and lending" of its own money.
But for many, it did not go far enough to open up the "black box" of Goldman's trading operations. Michael Williams, dean of the Graduate School of Business at Touro College in New York, said: "What happen to the concept of full disclosure? This small step in the right ethical direction is important, but unimpressive."
How much Goldman is going to change will only become clear over time. But there was one absolutely concrete measure in the report that even cynics must think could work. The report proposes "increasing emphasis on evaluation criteria relating to reputational risk management in the firm's annual performance review and compensation and other incentive and recognition processes". In layman's terms: the better your ethics, the bigger your bonus.
Now that's something bankers definitely will understand.
Public relations blunders
* Goldman agreed to pay $550m to settle civil fraud charges over a mortgage deal called Abacus. The investors, including the UK's Royal Bank of Scotland, lost $1bn and discovered later that Abacus had been stuffed with the worst sub-prime mortgages thanks to the input of Paulson & Co, a hedge fund that was betting against the deal.
* Embarrassing emails from Goldman mortgage salesman Fabrice Tourre, pictured, show he knew "the whole building is about to collapse... Only potential survivor, the fabulous Fab".
* Goldman traders determined to get the smelliest mortgage deals out the door. "Boy, that Timberwolf was one shitty deal," one executive wrote of one such derivative. It took the bank a long time to find someone to buy Timberwolf; but it got there in the end.
* Goldman was implicated, too, in the Greek debt crisis. It organised complex financial deals that allowed the eurozone nation to skirt its debt limits.