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Corrigan Rails Against Critics of Goldman's 39 Steps

Jerry Corrigan was one of two men heading the committee tasked with examining Goldman Sachs’s basic business practices. After eight months of review, Corrigan’s committee came forth this spring with 39 distinct recommendations. Some hailed them as real reforms; others dismissed the effort as a publicity stunt. Here, Corrigan discusses, and defends, his committee’s conclusions with Institutional Investor staff writer Julie Segal.

In May of 2010, in the still-smoldering aftermath of the financial crisis, Goldman Sachs & Co decided to do a little soul-searching.

Although the firm had come through the collapse of the subprime mortgage market intact (and had even made a killing by shorting mortgage securities), its reputation for square-dealing with clients had taken a beating. The Securities and Exchange Commission would fine it $550 million—the largest penalty ever levied on a Wall Street firm—for supposedly misleading investors about the soundness of subprime mortgage bonds as the housing market was collapsing. Fair or not, Goldman was viewed by many as working both sides of the Street, as it were: selling securities to clients on the one hand while short-selling the same sort of securities on the other.

Goldman CEO Lloyd Blankfein, who as a former trader knew all about the potential for conflicts of interest, decided the firm should re-examine its basic business practices, particularly its relationship with clients. He named a Business Standards Committee to study the matter, and appointed Goldman Vice Chairman Gerald Corrigan, the former head of the New York Federal Reserve Bank, and Vice Chairman Michael Evans, global head of growth markets, to be its co-heads. After eight months of review, the committee came forth this spring with 39 distinct recommendations. Some hailed them as real reforms; others dismissed the effort as a publicity stunt. Here, Corrigan discusses, and defends, his committee’s conclusions with Staff Writer Julie Segal. 

What prompted Goldman to look into its business practices?

What motivated us from the beginning was a recognition that the preceding couple of years had given rise to some difficulties. No one can deny that. For any institution, it is inevitable that under the best of circumstances, adversity will occur now and then. What separates the great institutions from the good institutions is how they respond to adversity. Adversity can also be opportunity. This was a chance to step back and engage in rigorous reflection to find the best way to overcome the adversity and move ahead.

How did the committee go about its work?

This was a broad cross-section of the most senior leaders in the firm, from both the so-called income-producing side and from the “federation,” or support side. And from the beginning, the chemistry was nothing short of terrific. We all recognized that this was going to be serious business, and there was a very large element of what I like to call financial statesmanship. Even those who might have had a vested interest in the status quo quickly recognized that that was not what this was all about. There was a recognition, although not often stated, that what this exercise was ultimately all about was changing behavior.
 
Have you got an example of this cross-division cooperation?

For example, it occurred to us early on that it would be a good idea to move a number of underwriting businesses from the securities division into the investment banking division. We wanted to move these activities into banking to be sure we had common standards. I said to myself, that’s going to be a tough one to sell. Well, it wasn’t.

What sort of analysis did you perform?

We actively involved in excess of 100 of our partners--and that’s a lot.  And we went through all this analytical work, including an extensive client survey, an internal survey of our employees about cultural attributes, and discussions with all kinds of outside experts, and the use of outside consultants.

Other firms do internal audits, but rarely so openly.

No, it’s not often that you see work of this nature made available in its totality to the public. So one issues that not surprisingly became apparent was how are we going to package this, how were we going to put it together. We came up with, as kind of an anchor for the report, five broad priorities for improvement.

What were they?

The first has to do with enhancing the client franchise.  The second has to do with strengthening our commitment to reputational excellence. The third with strengthening both our internal and external disclosure and communication.  The fourth with strengthening our internal governance.  And the fifth with strengthening our internal professional development and training for our employees at all levels.

Yet you also made quite specific recommendations.

Yes, and we took what turned out to be our 39 recommendations and said, How do these relate to the five opportunities for improvement? So in the report each recommendation specifically says how it relates to one of more of the five priorities. What was fascinating was that the first two, the client franchise and reputational excellence, ended up being cited, one or both, in more than half of the 39 recommendations. That told us that told me we must have had it about right. 

But what about implementing them?

We have in place a very, very aggressive and systematic plan to guide implementation. Of the 39 recommendations, eight have already been essentially implemented.  And among these are a family of five recommendations to do with enhanced transparency in our financial reporting. The implementation of all 39 recommendations, together with all of the documentation, all of the technology changes, all of the new training and professional development programs is going to take all of this year and probably go into the first quarter of next. 

You mentioned enhanced disclosure.

In the report and in our 10-K at the end of February, we changed a lot of our financial reporting. And for the first time, we produced an alternative balance sheet, which the Securities and Exchange Commission was comfortable with. It was not intended to replace the U.S. GAAP balance sheet, but to supplement it.  It is one of the best examples of enhanced disclosure I’ve seen in my entire career. It shows in clear, unmistakable, explicit terms the total amount of the firm’s overall liquidity, and it shows the direct linkage between financing activities--the liability side of the balance sheet--and all of the activities that drive the business. From the point of view of understanding systemic risk, the alternative balance sheet is so much more useful than the GAAP balance sheet. There’s just no comparison.

How do you respond to those who say the study is all a PR exercise?

If any critic thinks this report lacks substance, it’s either because they didn’t read it or were unable to understand it. There is substance from cover to cover. If one of those people read just the section on structured products and concluded that was marketing hype, I can only wonder what they were thinking. This is really, really, really complex stuff.
 
How so, if I dare to ask?

The recommendations contain new approaches to suitability, new approaches to the pre-trade and post-trade responsibilities of underwriters, such as us. And because the changes in standards for structured products are so profound, we are going to have to develop, from scratch, a systematic training and education program for all 4,000 sales and trading people operating in several dozen jurisdictions around the world, each of which has its own regulatory requirements. 

Your report largely focuses on clients. How have they reacted?

The feedback from clients comes from many, many different channels. Our client survey was done by an independent consultant.  It was not checking boxes; it was discussions at the highest levels, often with CEOs. After the report was released, we reached out to all 207 clients worldwide who participated. We had deliberately included clients who we thought weren’t particularly fond of us, if I can put it that way. The overwhelming majority of the feedback on the report, and I mean the overwhelming majority, was constructive and positive, with one caveat. That was the implementation challenge. These people understood the scale and complexity of the implementation plan.

Might the recommendations one implemented make Goldman less competitive? 

Obviously, this was a subject discussed at great length, not just with the committee, but with senior management and with the Board of Directors’ committee involved with the project. We all concluded that if we are successful—and we intend to be—at strengthening the client franchise and strengthening our focus on reputational-risk management, we can be very confident that the net effect will be to strengthen the franchise value of the firm over time. We may lose a trade or a transaction here or there. But we expect that we will gain market share over time.

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