Saturday, 1 May 2010

Is Goldman Sachs headed for same fate as Drexel Burnham?

This rather arresting opinion comes from an op-ed column in Barrons:

HOLDERS OF GOLDMAN SACHS STOCK WOULD BE WISE to remember that the last time the Justice Department threatened to indict a major Wall Street firm, the firm went away overnight -- vanished as quickly as, in the words of Time magazine, the Berlin Wall. The year was 1990. The firm was the formidable Drexel Burnham Lambert, master of the junk-bond market, which nose-dived during a recession when the junkers were unable to pay interest to the junkies who owned the high-risk debt.

I shared memories of the period last week with some Drexel alumni at the Milken Institute Global Conference at the Beverly Hills Hilton, which in my opinion is the one financial conference that is a "must attend" event. It's like a mini-MBA program, with lectures by top-drawer executives and venture capitalists going from the crack of dawn to the early evening. I've never seen a golf club or a tennis racket at this event.

Former Drexel executives -- the conference is run by the former junkmeister-in-chief himself, Michael Milken -- noted that the Justice Department was relentless in its pursuit of the firm, investigating it for several years before threatening it with a racketeering charge. Wall Street rivals, jealous of Drexel's predominance in the lucrative junk-bond market, urged the coppers on. The mere threat of an indictment caused CEO Frederick Joseph and the board to liquidate the firm almost overnight.

Could the same thing happen to Goldman Sachs? It's facing fraud charges by the Securities and Exchange Commission and, reportedly, a criminal probe by the U.S. Attorney's Office in Manhattan. However, it could take months or even years before investigators decide whether to press charges. And Goldman has at least one advantage Drexel didn't: Rivals depend on it heavily. It's trading desk is so crucial to so many institutions that the Street is unlikely to cheer the coppers on this time around.


The parallel with Drexel is quite intriguing and it just may be, to dissent from the opinion of the writer, that some firms may be thinking already about damage limitation because of their counter-party dependency on Goldman and its 2010 version of the Milken daisy chain.

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