Goldman Sachs’ Public Relations Strategy Raises Questions

Tuesday, April 20, 2010

Following the SEC fraud charge, Goldman Sachs (GS) put out a rebuttal press release. Here is an  item that raises questions instead of providing answers .

The Goldman press release stated:

Goldman Sachs, itself, lost more than $90 million. Our fee was $15 million. We were subject to losses and we did not structure a portfolio that was designed to lose money.”

So, they lost over $105 million on a position, converting the $15 million fee to a $90 million loss. The question is whether that figure represents:

(a)  All direct and related positions, held and traded, or

(b) Selected positions, based on some rational-sounding approach that happens to exclude offsetting profitable holdings and trades

Two items make us lean to (b):

First, Goldman was among the first to sell mortgage securities and even go short. Here is a description of what happened in 2007 (from “Senior Executives at Goldman Had a Role in Mortgage Unit,” The New York Times, by Louise Story, April 19, page A-1):

“By early 2007, Goldman’s mortgage unit had become a hive of intense activity. By then, the business had captured the attention of senior management. In addition to Mr. Blankfein [Goldman’s CEO], Gary D. Cohn, Goldman’s president, and David A. Viniar, the chief financial officer, visited the mortgage unit frequently, often for hours at a time.

“Such high-level involvement was unusual elsewhere on Wall Street, where many executives spent little time learning the workings of their mortgage businesses or how those businesses might endanger their companies.

The decision to get rid of positive bets on mortgages turned out to be prescient. Unlike most other Wall Street banks, Goldman profited from its mortgage business as the housing bubble was inflating and then again when the bubble burst.

Second, there is no hint in Goldman Sachs’ earnings backing up the “we were subject to losses” description in the press release. According to the SEC, 83 percent of the fraud-related portfolio had been downgraded and 17 percent was on negative watch by October 24, 2007. But the Goldman “trading and principal investments” earnings through November 30, 2007 give no indication of being on the wrong side of the mortgage security price declines.

A $105 million loss gets lost in the $31,226 million net earnings, but the point is: Even if true, the message that poor Goldman got caught, too, really doesn’t cut it. And, for a firm trying to rebuild trust among clients and others, such a questionable contention actually can do more damage.

So… For Goldman, a PR strategy that provides answers and doesn’t raise more questions is needed.

Disclosure: No position in Goldman Sachs (GS)


One Response to “Goldman Sachs’ Public Relations Strategy Raises Questions”


    The Wall Street Journal had a good article that discussed Goldman Sach’s need to improve their public relations effort: “Where’s the Goldman Sachs That I Used to Know?” (By James B. Stewart, April 21, page C-2).


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