Goldman Sachs Gets a Taste of Its Own Medicine -- and It Tastes Bitter

By Jay

Goldman Sachs' (NYSE: GS) people were once considered the "smartest guys in the room," but today its public image looks more like the "Vampire Squid" described in a scathing report by Rolling Stone in 2010.

But Goldman's image may be shifting from a bloodsucking sea monster to a crying infant. Auditing firm PricewaterhouseCoopers recently hired Lance Auer, who was formerly the New York Federal Reserve's lead supervisor of Goldman Sachs, and now Goldman is concerned that Auer may share proprietary operational and risk-management secrets with competitors.

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If you take a step back, you can see that Goldman's complaints are almost laughably hypocritical.

It's about whom you know (so long as it benefits Goldman Sachs)For many investment banks, and especially Goldman, knowing people in high places is as easy as thumbing through the company's alumni rolls. Consider this very short list of notable Goldman alumni (seriously, this list could be much, much longer):

  • Hank Paulson, former U.S. Treasury secretary
  • Robert Rubin, former U.S. Treasury secretary and chairman of the National Economic Council
  • John C. Whitehead, former chairman of the Federal Reserve Bank of New York
  • Mario Draghi, governor of the Italian Central Bank
  • Joshua Bolton, former White House chief of staff

And what happens if there aren't any former Goldman employees at, say, the regulatory agency charged with oversight of the bank? Then Goldman will go out and hire an examiner to give it the inside info it needs.

The New York Times reported such a hire earlier this year. The former examiner brought with him confidential reports and unethical back-channel access to ongoing Federal Reserve activities. The Times said that it "illustrates the blurred lines between Wall Street and the government -- and the potential conflicts of interest that can result."

The Times article continued: "When Goldman hired the former New York Fed regulator, who is 29, it assigned him to advise the same type of banks that he once policed. And the banker obtained confidential information, along with several publicly available facts, in the course of assignments from his bosses at Goldman, the lawyers said."

The Times had previously reported on one former Fed employee's lawsuit against the regulator after she claimed she was fired for "being too hard on Goldman."

If that's true, it should be no surprise given the massive revolving door and cozy relationships between Washington and Wall Street.

Have your cake and eat it, tooLet's spell this out a little further, just to fully appreciate the stance Goldman is taking here.

The bank has no problem leaning on its robust alumni network in governments around the world to give it an advantage.

The bank also sees no problem with hiring bank examiners away from the Fed and then using those hires to gain an unscrupulous competitive advantage and a secret window into the regulators' confidential dealings.

But if a regulator leaves the Fed to join another firm -- particularly one that competes with Goldman -- then suddenly the bank calls foul. It's totally fine for Goldman to pursue these human-resource tactics, but in Goldman's eyes, no one else should be allowed to.

A taste of its own medicinePwC responded by assuring Goldman that any proprietary information will remain confidential.

In a statement, a company representative said that the firm "is committed to the highest ethical standards and requires that all new hires, including those previously employed by a regulator, abide by the confidentiality obligations arising out of their prior employment."

For investors, this entire episode and the revolving door hiring practices that created it could be interpreted in two distinct ways. If you're of a more ruthlessly capitalistic viewpoint, then this is a great example of how Goldman has achieved such tremendous success over the years. This is a win-at-all-costs approach to business.

For others, myself included, this is just another example of Goldman sacrificing ethics and doing anything it can to get an unfair advantage. You can do well by doing right, and it's a shame that banks like Goldman have stained the reputation of banks that are working hard to do just that.

The article Goldman Sachs Gets a Taste of Its Own Medicine -- and It Tastes Bitter originally appeared on

Jay Jenkins has no position in any stocks mentioned. The Motley Fool recommends Goldman Sachs. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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