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Goldman, Facebook and the loss of privacy

by Robert Teitelman | Published January 19, 2011 at 1:24 PM

It's a strange dynamic: the media commenting on a breakdown of Goldman, Sachs & Co.'s Facebook deal, which the firm blames on, well, the media. Maybe "breakdown" is the wrong word. The deal to sell private investors pre-IPO shares of Facebook had to be altered, meaning Goldman had to rescind offers from U.S. investors over fears the Securities and Exchange Commission would bring security violations over "publicizing" a private placement. For all the commentary, and it continues, a few practical issues are obvious, which have little to do with right and wrong and everything to do with apprehending current realities. Goldman didn't realize that anything involving Facebook -- the subject of a Hollywood movie, a service reaching into most households and a company founded by Time's "Person of the Year" (OK, Time is no longer a huge deal, but still) -- would be news? Goldman, which became nearly as newsworthy, and even more notorious, as Facebook over the last year, didn't see that its role would be controversial? Goldman really did think its high-net-worth clients would keep a secret? And Goldman really did believe, even after the debacle of the Abacus case, that it was still operating in a world neatly split between private and public, sophisticated and unsophisticated clients that existed prior to 2008? It would be difficult to imagine that Goldman did not make the usual informal inquiries, lawyer to regulator, when it was considering the Facebook deal. And one would suspect that folks at the SEC nodded in assent. Such is the usual practice: quiet, informal, practiced. After all, these were sophisticated clients, and the SEC had been green lighting similar deals for years. Perhaps the agency, or certain officials, made the same mistake Goldman executives did: that like so much of wholesale finance, this deal would, at most, get a mention or two, then be ignored; that a kind of normalcy was taking hold. But when the stories erupted, the SEC, already faced with a Republican House gearing up to cuff it around, undoubtedly passed the word that it was disturbed by the "publicity." And Goldman had to recut the deal.

For many decades, Goldman quietly reveled in the joys of privacy. While firms like Merrill Lynch & Co. had public shareholders and a massive retail brokerage business, Goldman remained a partnership with an elite wholesale advisory and trading business (for years it hardly dealt with individual clients, high-net-worth or otherwise). Merrill was always the firm that took the hit when markets tumbled or retail clients took a bath. As a public company, Merrill was unusually sensitive to prosecutorial pressure. Merrill suffered the ignominy of the Orange County derivatives mess; Merrill led the way on the Long-Term Capital Management rescue; and Merrill's Henry Blodget became the poster child for Eliot Spitzer's research jihad. Goldman proceeded on its way, internally tending the memory of its own earlier bout with scandal: the role of Goldman Sachs Trading Corp. in the Crash of 1929.

But, for any number of reasons, the tradeoff Goldman made between privacy and size (and profits) eroded, beginning with the public offering. For all the attention Goldman's IPO receives, it wasn't sufficient by itself to make the firm a Merrill-like lightning rod. But it's a place to start. As it grew larger, the firm continued to hew to the wholesale line, even as other formerly wholesale operations, like Morgan Stanley, dabbled in retail through Discover, with its credit card and brokers. Goldman began to gather assets from the wealthy; its trading operations exploded. It skirted danger in the dot-com bust, when it was apparent just how many wretched tech IPOs it had engineered. But its natural rectitude, embodied in Henry Paulson's terse delivery, was enough to deflect most criticism; the real blame, with accompany prosecution, for the IPOs fell on Credit Suisse's Frank Quattrone, who ended up in court for an e-mail suggesting that documents be cleaned up. (He eventually got off.) Then came the financial crisis. Goldman continued its wholesale ways, but by then wholesale was bleeding into retail. Goldman shorted mortgage-backed securities, and was thus tied to a profoundly retail product. Goldman declared itself a bank holding company. And both the TARP money and the AIG bailout money that found itself to Goldman represented taxpayer dollars.

And now that it discovered itself mired in retail, Goldman's wholesale tradition, with its stress on privacy and opacity, came back to haunt it. Goldman's size, power and, particularly, its rectitude now became fuel for conspiracy -- made worse by the fact that so many former Goldmanites left the firm to enter (quite successfully in many cases) public life. Enter Matt Taibbi et al. Suddenly the conflicts that Goldman had grown accustomed to juggling in a world of sophisticated investors and clients, began to look as seamy as Blodget's "lipstick on a pig." The SEC's Abacus case was aimed at a unique vulnerability in the firm, the notion that finance operated in separate spheres, retail and wholesale, with very different rules and ethics. No matter that the agency had long encouraged and expanded the prerogatives of wholesale finance. The atmosphere had changed; the agency was under sharp attack to rein in Wall Street; and Goldman was no longer the elite, if deliberately obscure partnership. It was a public giant, the symbol of Wall Street, with none of the compensatory prestige.

Now the Facebook debacle, which ironically unfolded just as the firm was releasing a 67-page report on upgraded business practices. The scary thing about this is not that some U.S. clients can't get Facebook or that the SEC might well be running scared. It's that Goldman looks so desperate to generate profits, or so nervous about its pre-eminent position, that it read the climate so wrong -- as it has for several years now. It's true: Nothing is forever. The now-traditional bifurcation of wholesale and retail will eventually return, and the rules of the game will settle down so that an informal regulatory assent means something. In fact, for all the moaning over Dodd-Frank, the administration has shown itself as eager to return to a kind of pre-2008 normalcy -- quiet, informal, practiced -- as firms like Goldman. But the gap between long-term regulatory intent and the current political atmosphere remains wide and raw. For now, at least, Goldman needs to pretend it's the very public company it never wanted to be. - Robert Teitelman

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