Lloyd Blankfein, chief executive officer of Goldman Sachs Group Inc., speaks at a banking conference in Germany, on Wednesday, Sept. 9, 2009. Photographer: Hannelore Foerster/Bloomberg
Jan. 25 (Bloomberg) -- Goldman Sachs Asset Management remains a persistent problem for Goldman Sachs Group Chief Executive Lloyd Blankfein. Last June, Jim Clark, a founder of such technology icons as Netscape Communications Corp. and Silicon Graphics Inc., yanked roughly $400 million in investments from the asset manager, citing what he considered bad advice and poor performance. Clark isn't the unit's only only unhappy investor. Bloomberg's Deirdre Bolton reports in today's Movers & Shakers. (Source: Bloomberg)
March cover of Bloomberg Markets magazine
On Jan. 2, Jim Clark, a founder of such technology icons as Netscape Communications Corp. and Silicon Graphics Inc., was at home in Palm Beach, Florida, when he got an e-mail from an executive at Goldman Sachs Group Inc.'s private wealth management division. Goldman was offering Clark a chance to invest in the closely held social-networking company Facebook Inc. The deal -- through a fund overseen by Goldman Sachs Asset Management -- was being offered to other Goldman investors at the same time, Bloomberg Markets magazine reports in its March issue.
The firm would levy a 4 percent placement fee on clients, plus a half percent "expense reserve" fee. It would also require investors to surrender 5 percent of any profits, known as "carried interest," according to a Goldman Sachs document.
Clark, 66, turned Goldman down. In June, 2009, he had yanked most of the roughly $400 million he had invested with the firm due to what he considered bad advice and poor performance, including a big hit from GSAM's Global Alpha hedge fund. This offer, he says, just irked him further. A few months earlier, he had purchased a stake in Facebook through another firm for a lower price, he says, and without the onerous carried interest.
"I don't think it's reasonable," Clark says. "It's just another way for them to make money from their clients."
$840 Billion
Clark isn't the only investor unhappy with Goldman Sachs Asset Management. GSAM (often pronounced gee-sam) managed most of the $840 billion in assets Goldman oversaw in December, a figure that dwarfs the money managed by brand-name firms such as Legg Mason Inc. and Franklin Resources Inc. Yet the evidence shows that the behemoth inside the 141-year-old investment bank is generating subpar returns for investors and is a persistent headache for Chairman and Chief Executive Officer Lloyd Blankfein.
The CEO has dispatched a series of lieutenants on missions to fix the listless asset manager, which last year saw pension funds in California and Nevada withdraw a total of more than $900 million because they were unhappy with its performance and concerned about turnover in the investment management division's ranks.
At the same time, GSAM has become increasingly important to Goldman, as the firm's trading powerhouse has idled. Revenue from Goldman's Fixed Income, Currency and Commodities (FICC) trading division dropped 37 percent in 2010 from a year earlier, and the firm's investing for its own accounts could further suffer when new rules, including strict limits on proprietary trading by banks, kick in.
Turnover at the Top
Goldman declined to make Blankfein or any other executives available for comment on this story.
In March 2008, Peter Kraus, co-head of the investment division that oversaw GSAM, resigned after incentive fees -- the 20 percent that hedge and other funds slice off profits -- plunged 81 percent in fiscal 2007 and Global Alpha lost 40 percent, according to investors.
Co-head Ed Forst took over. He was one of a cadre of Blankfein confidantes known as Lloyd's Boys, according to former employees. Forst, now 50, left after three months to take a job at Harvard University, and investment management became the job of Marc Spilker, a former co-head of U.S. equities, and Timothy O'Neill, a former senior strategist.
They were the seventh and eighth Goldman investment heads in eight years.
Separate Accounts Lag
O'Neill, now 58, and Spilker, now 46, didn't do much better than Kraus, now 58. The division's 2009 net revenue of $3.97 billion accounted for about 8.8 percent of Goldman's total revenue and was down 12.8 percent from fiscal 2008 as both management and incentive fees declined.
A big chunk of GSAM's assets are its separate accounts -- pools of money invested for institutions and wealthy individuals. EVestment Alliance LLC, an Atlanta-based research firm, tracks about $300 billion held in the accounts and finds that Goldman trailed its peers in 73.8 percent of the categories EVestment looked at during the five years ended on Sept. 30.
Chicago-based financial publisher Morningstar Inc. tracks Goldman mutual funds and found that the 338 fund share classes it looks at trailed the average return of their respective peers in every broad category, including U.S. diversified equity, non- U.S. stock and taxable bonds, over the 3-, 5- and 10-year periods ended on Dec. 31.
Yet investors have not only stuck with GSAM; they've added tens of billions of dollars to its assets since 2000.
"?Marketing Muscle'
"Given the golden reputation of Goldman, it's amazing," says Anton Schutz, founder of Rochester, New York-based Mendon Capital Advisors Corp., an asset management firm that specializes in financial stocks and doesn't own Goldman Sachs shares. "What we thought was investing acumen has turned out to be a tribute to the firm's marketing muscle."
The sales prowess of the Goldman franchise lost some of its luster in the deal for Facebook, run by 26-year-old Mark Zuckerberg. Goldman had planned to sell as much as $1.5 billion of the Palo Alto-based company's stock to clients through a GSAM-affiliated fund known as a special-purpose vehicle.
Instead, Goldman on Jan. 17 halted its offering to U.S. investors due to the copious press the deal garnered.
"Goldman Sachs concluded that the level of media attention might not be consistent with the proper completion of a U.S. private placement under U.S. law," the firm said. Securities laws forbid investment firms from advertising such offerings to the general public.
2012 Facebook IPO
Analyst Josh Bernoff of Forrester Research Inc. in Cambridge, Massachusetts, expects a Facebook initial public offering in 2012.
Bundling Facebook shares into a GSAM special-purpose vehicle might have helped Facebook avoid a U.S. Securities and Exchange Commission requirement that any company with more than 499 investors meet SEC financial reporting requirements. Such moves are a common practice in the venture capital industry.
Goldman and the funds it manages, including GSAM hedge fund Goldman Sachs Investment Partners, invested $450 million in Facebook before the bank began recruiting investors. Digital Sky Technologies, a Russian investment firm, bought $50 million.
On Jan. 21, Facebook announced that Goldman had completed an over-subscribed offering to its non-U.S. clients for a fund that invested $1 billion in Facebook Class A shares.
Goldman is still dealing with the fallout from its last run-in with the SEC. In April 2010, the commission filed a civil suit accusing Goldman of fraud for selling a mortgage-related security called Abacus 2007-AC1 to clients without disclosing that bearish hedge fund Paulson & Co. helped pick some of the securities linked to it -- with the intention of selling the security short.
Abacus Settlement
Goldman settled the suit in July, agreeing to pay $550 million, a record for a Wall Street firm, without admitting or denying wrongdoing.
And Blankfein, 56, still hasn't put behind him the criticism of Goldman's controversial role in the collapse of American International Group Inc. in 2008 -- particularly its aggressive collateral calls on the credit-default swaps it had bought from AIG on subprime-packed mortgage securities, many of which it underwrote.
In April, the Senate Permanent Subcommittee on Investigations held an 11-hour hearing on Goldman Sachs's role in the financial crisis, grilling Blankfein, Chief Financial Officer David Viniar and others about Goldman's business practices.
"Goldman repeatedly put its own interests and profits ahead of the interests of its clients and our communities," said Senator Carl Levin, the Michigan Democrat who chaired the subcommittee.
Market Maker
Blankfein told the Levin hearing that as a market maker Goldman had no obligation to tell clients about Goldman's own positions in the securities it was selling.
Clients "are buying an exposure," Blankfein told the committee. "The thing we are selling to them is supposed to give them the risk they want."
Clark was particularly irked by the disclosures surrounding Abacus. He had met with Paulson & Co. founder John Paulson in August, 2006 and been impressed by the hedge fund manager's plans to bet against the subprime-mortgage market. His Goldman brokers talked him out of investing with Paulson, describing him as a bit player, Clark says.
Paulson generated a 590 percent return in his flagship credit fund in 2007.
"?These Jerks'
"When it came out that Paulson had the biggest payday in history, I got angry," Clark says. The fact that Goldman Sachs had such a close relationship with Paulson incensed Clark further.
"They just butter their own bread and charge huge fees, these jerks," Clark says.
Goldman spokeswoman Andrea Raphael says the firm has no comment on Clark's complaint.
The conflict between what Goldman does for itself versus what it does for its customers was addressed by Blankfein & Co. in a 63-page internal document released in mid-January. The Report of the Business Standards Committee probed a raft of issues, including conflicts of interest, transparency and disclosure, as well as the firm's responsibilities to its clients.
The report recommended the creation of a simplified balance sheet that would make transparent the division between the deals it does for its own profit and those it carries out for its customers. As the report recommended, the firm's operations are now divided into four reporting segments: investment banking, investing and lending, investment management and institutional client services.
A Matter of Reputation
"It is important to articulate clearly both to our people and to clients the specific roles we assume in each case," Goldman said in the report.
Protecting the firm's image was a high priority of the 21- member committee, led by managing director E. Gerald Corrigan and Goldman Sachs Asia Chairman J. Michael Evans.
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