Goldman sets up damage control

Goldman Sachs is fighting to clear its name, but not in a court of law.

Goldman has hit back hard against civil fraud charges with a public relations blitz aimed at poking holes in the Securities and Exchange Commission's case and repairing the bank's reputation.

Every time the SEC has punched, Goldman has quickly counterpunched.

Public relations consultants say it's too early to know if the strategy is working for Wall St's most powerful bank. Some big Goldman clients are publicly backing the firm, yet its stock has yet to recover from the double-digit nosedive that followed the SEC lawsuit on April 16.

To help its cause, Goldman has hired Mark Fabiani, a big player in the PR world with strong ties to top Democrats. Fabiani earned the nickname "Master of Disaster" for his handling of crises during the Clinton Administration.

He now works as a media consultant specialising in corporate crisis management. Goldman has also brought in top corporate lawyers. And its executives, including chief executive Lloyd Blankfein, have been out in public, not hunkering down.

The damage control efforts will be on display today when Blankfein and Fabrice Tourre, the employee named in the SEC fraud charges, are questioned by a Senate subcommittee probing the bank's role in the financial crisis.

Goldman's PR campaign, which runs counter to its long history of secrecy, is a bold yet risky move. Some analysts say a poor performance on Capitol Hill could worsen the bank's image problems and make it harder for it to attract and retain lucrative clients. If the strategy fails, analysts say, it could cost Blankfein and other Goldman executives their jobs.

But the company got a boost last week when several big clients, including the investment firm Blackstone Group and Ford, said they would stick by the bank. More support came from Warren Buffett, whose company Berkshire Hathaway has a big Goldman stake.

Blankfein and Tourre were both at Goldman's headquarters in New York over the weekend preparing for today's hearing. Tourre also met investigators for the Senate panel during a long interview, an anonymous source said.

In prepared testimony released by Goldman yesterday, Blankfein repeated Goldman's intention that it had done nothing wrong when it sold risky securities to two investors who lost hundreds of millions of dollars.

But he acknowledged, "We have to do a better job of striking the balance between what an informed client believes is important to his or her investing goals and what the public believes is overly complex and risky."

A careful strategy is critical to Goldman, given the forces lining up against the bank.

They include the SEC and congressional Democrats who are using the case to push for a regulatory overhaul of the financial services industry.

Investors, meanwhile, have started filing suit against Goldman because of the 13 per cent drop in the company's stock after the SEC lawsuit was announced.

But Goldman has its own army.

"Goldman is a very wealthy firm, and they're bringing tens of millions of dollars in resources to this fight," said Thomas Ajamie, a Houston defence lawyer who specialises in financial fraud cases but who isn't working for Goldman.

"They have hired very skilled lawyers, lobbyists and public relations people. They appear to be getting their story out."

Top financial law firm Sullivan & Cromwell LLP heads Goldman's defence. The lead lawyer is Richard Klapper, who represented Barclays Capital when Enron shareholders sued the investment firm in 2007. Goldman has also hired Gibson, Dunn & Crutcher, the law firm of former US Solicitor-General Theodore Olson, and K. Lee Blalack, a partner in Washington law firm O'Melveny.

Rounding out the team is Greg Craig, the former chief counsel under President Barack Obama.

Fabiani said he was hired this month, before the SEC sued Goldman, to help the firm prepare for congressional hearings and related issues. He declined to comment further.

The SEC alleges the bank misled two investors who bought a complex mortgage-related product that was crafted in part by Paulson & Co, a New York hedge fund led by billionaire John Paulson. The hedge fund manager was betting the product would fail.

The SEC says Goldman didn't fully disclose Paulson's role in creating the deal or his negative bet to two investors, IKB Deutsche Industriebank, a German bank, and ACA Management, a US bond insurance company.

Working in Goldman's favour is federal law's vagueness about how much disclosure investment banks need to make on private transactions between financial institutions.

"This is not selling a product to a widow who lives in Wichita. For that victim, there's a very different standard of law," said Ajamie, who won a record US$429 million securities fraud arbitration case in 2001 on behalf of a group of clients of the Paine Webber investment bank. Paine Webber was acquired by the Swiss bank UBS in 2000.

Blankfein's testimony will be before the Senate Permanent Subcommittee on Investigations. Tourre, the 31-year-old at the centre of the SEC charges, is among other Goldman employees scheduled to testify.

It's a gutsy appearance in which the executives' demeanour will likely be as important as their words, said Tim Metz, crisis management specialist at New York communications firm Hullin Metz & Co.

"They're going to have to eat some humble pie. Otherwise the senators will beat up on them."

The bank got a taste of what's to come when the Senate subcommittee's chairman, Carl Levin, released emails at the weekend showing top Goldman executives boasted about the money the firm was making as the national housing market collapsed in 2007.

Later that day, Goldman said Levin's office "cherry-picked" a few emails among 20 million documents the bank provided. It also released several more emails, including one in which Tourre describes risky investments he sold as being "like Frankenstein turning against his own inventor".

Goldman called Tourre's emails embarrassing but said it has found no evidence that he acted unlawfully.

Still, allowing Tourre to testify before Congress is a gamble, said Nomi Prins, a former Goldman employee who wrote a book about the financial crisis.

"To the extent that he could say something wrong, I find it uncharacteristically irresponsible of them," said Prins, author of It Takes a Pillage: Behind the Bonuses, Bailouts, and Backroom Deals from Washington to Wall Street.

The risk for Goldman is that negative publicity might become so intense "that clients will no longer be willing to admit they do business with so tainted a company", said Rochdale Research analyst Richard Bove.

He said Blankfein's job could be at risk. Yet Goldman's big US clients don't seem to be worrying.

"We're a major client of Goldman's and will continue to be a major client of Goldman's," Stephen Schwarzman, CEO of private equity giant Blackstone Group, said last week.

"We've never had any circumstance where there's been a question about their ethical character."

Ford, a Goldman client going back decades, also said it's standing by the bank.

"We've had a long relationship with Goldman Sachs, and we expect it to continue," spokesman Mark Truby said. Even if Goldman's business doesn't suffer, some say the damage to its public image may already be done.

Goldman "has become an iconic image of bankers with conflicts of interest", said John Coffee, securities law professor at Columbia Law School.

"That image is out there in the public's mind and will be out there in 10 years."

- AP