Political India: Engaging America

From The Hindu

Trapped in the unwanted spotlight of moral ambiguity, investment bank Goldman Sachs has come back with a carefully-worded response to recent allegations by a former employee that the internal culture of the firm had made its environment “toxic and destructive”, and serving its clients was no longer its top priority.


In a statement from Goldman CEO Lloyd Blankfein and President Gary Cohn, the firm hit back at an op-ed in the New York Times on “Why I Am Leaving Goldman Sachs” by Greg Smith, said to be the company's former head of equity derivatives business in Europe. Refuting Mr. Smith's claims, Mr. Blankfein said: “In a company of our size, it is not shocking that some people could feel disgruntled. But that does not and should not represent our firm of more than 30,000 people.”

Mr. Blankfein went on to argue that it was unfortunate that an individual opinion about Goldman Sachs had been “amplified in a newspaper and speaks louder than the regular, detailed and intensive feedback you have provided the firm and independent, public surveys of workplace environments.”

The statement by the firm also cited a range of feedback surveys that indicated that the firm provided “exceptional service” to employees and that Goldman Sachs was recently named “one of the best places to work in the United Kingdom, where this employee resides”. Goldman was also the highest placed financial services company for the third consecutive year and was the only one in its peer group to make the top 25, Mr. Blankfein pointed out.

His remarks were seen as a direct retort to Mr. Smith's grim predictions about how the change in the culture of Goldman might affect its fortunes. In his op-ed Mr. Smith said, “When the history books are written about Goldman Sachs, they may reflect that the current chief executive officer, Lloyd C. Blankfein, and the president, Gary D. Cohn, lost hold of the firm's culture on their watch. I truly believe that this decline in the firm's moral fibre represents the single most serious threat to its long-run survival.”

From The Hindu

From The Hindu

Rajat Gupta (62), a former Managing Director of consulting giant McKinsey and Company and independent Director at banking conglomerate Goldman Sachs, has been charged with insider trading by the United States Security and Exchange Commission.

In an order instituting cease-and-desist proceedings against Gupta, the market regulator alleged that he illegally tipped off Galleon Management founder and hedge fund manager Raj Rajaratnam with inside information on the quarterly earnings at Goldman Sachs and Procter & Gamble and also an impending $5 billion investment by Berkshire Hathaway in Goldman.

The charges brought by the SEC’s Division of Enforcement further alleged that Gupta supplied Rajaratnam, who is already facing impending trial proceedings for insider trading, with “material non-public information” that Gupta obtained during calls with management boards of Goldman Sachs and Proctor & Gamble.

Subsequently, the SEC said, “Rajaratnam used the inside information to trade on behalf of some of Galleon’s hedge funds, or shared the information with others at his firm who then traded on it ahead of public announcements by the firms.”

This trading activity resulted in Rajaratnam and others generating more than $18 million in illicit profits and loss avoidance, the SEC noted, pointing out that Gupta was at the time a direct or indirect investor in at least some of these Galleon hedge funds, and had other potentially lucrative business interests with Rajaratnam.

Robert Khuzami, Director of the SEC’s Division of Enforcement, said “Gupta was honoured with the highest trust of leading public companies, and he betrayed that trust by disclosing their most sensitive and valuable secrets,” adding, “Directors who violate the sanctity of board room confidences for private gain will be held to account for their illegal actions.”

The order against Gupta went on to cite specific instances of large scale fraud by Gupta, including an allegation that while Gupta was a member of Goldman’s Board of Directors, Gupta he illicitly passed on information to Rajaratnam about Berkshire Hathaway’s $5 billion investment in Goldman Sachs and Goldman Sachs’ upcoming public equity offering before that information was publicly announced on September 23, 2008.

The SEC order said, “Gupta called Rajaratnam immediately after a special telephonic meeting at which Goldman’s Board considered and approved Berkshire’s investment in Goldman Sachs and the public equity offering.” It added that within a minute after the Gupta-Rajaratnam call and just minutes before the close of the markets, Rajaratnam arranged for Galleon funds to purchase more than 175,000 Goldman shares, leading to Rajaratnam making illicit profits of more than $900,000.

Under the administrative proceedings to follow the imposition of the SEC’s charges, authorities will determine what relief, if any, is in the public interest against Gupta, including “disgorgement of ill-gotten gains, prejudgment interest, financial penalties, an officer or director bar, and other remedial relief,” the SEC order said.

Written on July 15, 2009 ; there have been some interesting developments since then

Two financial results were revealed in the United States recently, one that suggests prosperity for a few and another that hints at distress for many. Goldman Sachs beat analyst expectations when it disclosed that its second-quarter profits were $3.44 billion, up 64.5% over profits during the same period last year, and its share price has risen about 77% this year. Simultaneously the U.S. Treasury made a bleak admission that the budget deficit had, for the first time in its history, crossed the $1 trillion mark. In a country that has prided itself on being the bastion of laissez-faire capitalism, especially in financial markets, the two results must evoke mixed feelings.

On the one hand the Goldman Sachs results represent the triumph of the relatively unfettered risk-reward relationship that underpins America’s material success in recent decades. The firm is reported to have benefited significantly from taking on higher levels of risk in its fixed income, currency and commodities trading at a time when even its closest rivals, such as Morgan Stanley, have been reluctant to return to the risky behaviour of the pre-credit crunch years. However even Goldman Sachs employees seem to be aware of the awkward timing of their unexpected profits, with Goldman’s Chief Financial Officer saying about the recession, “We are cognizant of it… We understand that we are living in a very uncertain world where a lot of people are out of work.”

On the other, the ballooning budget deficit, rising on the back of a breathtaking $11.5 trillion debt owed by the American people is a harbinger of fiscal, inflationary, currency and tax woes that are likely to depress the economic lives or ordinary Americans for years to come. America has some serious issues of public conscience to iron out.

At the heart of the issues that the country will have to grapple with are fundamental questions about the rules of the game and the architecture of financial regulation. Reforms revealed last month by the Obama administration took some significant steps forward with regards to the latter – it has clarified the role of some agencies, for example by making the Federal Reserve directly responsible for overseeing institutions deemed to be “too large to fail” and by creating the Consumer Financial Protection Agency.

However financial regulation in the U.S. still remains a complex maze of cross-cutting responsibility and authority spread out over multiple agencies – five for banks, one each for securities, derivatives and government-backed mortgage issuers and over 50 other state and consumer protection agencies.

Reform is also incomplete in the areas of monitoring and restriction of the risk that large financial institutions like Goldman Sachs take onto their balance sheets. For example minimum capital and liquidity requirements for such companies have been raised and the infamous practice of mortgage securitisation has been redressed by requiring the underwriter to hold at least 5% of any deal they structure.

Yet, clearer proposals are required for identifying and curbing systemic risks by, for example, limiting the acceptable levels of value at risk (a measure of risk based on the amount, theoretically, that a firm could lose in a single trading day). Goldman Sachs’ VAR rose 20% in the first quarter of 2009 and is likely to have risen further since.

Challenging though it may be to get such reform past Capitol Hill, the price of inaction may be higher still for the Obama regime. It faces the possibility of a political backlash by the American public which is staring down the barrel of higher taxes, higher inflation, lower spending on social services and the unrelenting onslaught of recessionary unemployment and mortgage debt.