Conspiracy Watch: Goldman Spreads Its Tentacles

Goldman is tightening its grip on the global financial system. The Wall Street Journal reported yesterday that Ken Wilson, Goldman Sachs’ (NYSE: GS) top financial institutions banker, will take a temporary leave to advise Treasury Secretary Hank Paulson on the banking crisis.

Wilson is in, Treasury Under-secretary Bob Steel is out, having taken the top job at Wachovia (NYSE: WB) this month. Oh, did I mention that Bob Steel is a former vice chairman of Goldman? Surely, there is no need for further evidence of a Goldman Sachs conspiracy.

Nonsense! I’m tired of reading about conspiracy theories on Goldman -- they even surface in the Business section of The New York Times! Sure, the list of four of the last six former Goldman co-heads reveals a nice pattern:

	Post-Goldman Role in Public Service
Hank Paulson	Current Treasury Secretary
Stephen Friedman	Current Chairman of the Board, Federal Reserve Bank of New York
Robert Rubin	Former Treasury Secretary under Bill Clinton
John Whitehead	Former Chairman of the Board, Federal Reserve Bank of New York

But what does the pattern prove?

First, it’s not unusual for the president to appoint the head of a Wall Street firm as Treasury Secretary (see table below). That's simply being pragmatic; after all, bank chiefs understand the workings of the U.S. financial system and are personally acquainted with all the key actors.

	Tenure/ Administration	Former Position
Nicholas Brady	Treasury Secretary, 1988-1993 (Ronald Reagan, George Bush )	CEO, Dillon, Read & Co.
Donald Regan	Treasury Secretary, 1981-1985 (Ronald Reagan)	CEO, Merrill Lynch (NYSE: MER)
C. Douglas Dillon	Treasury Secretary, 1961-1965 (John F. Kennedy, Lyndon B. Johnson)	Chairman, Dillon, Read & Co.

Are we to deduce from the previous table that, prior to Goldman, Dillon, Read was the firm conspiring to dominate the financial system? If so, they didn’t do a very good job -- they were swallowed up by Swiss Bank Corporation in 1997 (now UBS (NYSE: UBS)).

Goldman is a good fishing hole
Besides, the pool of Wall Street firms has diminished considerably through consolidation. Goldman is one of only four remaining major investment banks, along with Merrill Lynch (NYSE: MER), Lehman Brothers (NYSE: LEH), and Morgan Stanley (NYSE: MS). Considering that Goldman is arguably the best-managed, it doesn’t seem like a bad place to fish for a Treasury Secretary or his adviser.

Finally, Goldman has (or had, at least) an edge in this numbers game, as the firm maintained a tradition of naming co-heads of the firm that were affiliated with each of the two major political parties -- that’s not a plot, just good business sense.

No conspiracy, but a potential conflict of interest
Conspiracy aside, there is a legitimate issue associated with advising the Treasury while remaining employed at an investment bank -- that of conflict of interest. The situation isn’t unprecedented, though: Ken Wilson’s former partner at Lazard Freres (now Lazard Ltd. (NYSE: LAZ)), Felix Rohatyn, advised the city of New York for nearly 20 years concurrent with his employment -- he’s credited with rescuing it from the edge of bankruptcy in the 1970s.

I’m certain that the Department of Treasury and Goldman Sachs will enact careful measures to avoid or reduce any conflict of interest. For my part, it’s a risk I’m willing to bear if it enables Paulson to get the best help he can find in the current crisis.

Now, if only I could get the word out about those silent black helicopters.

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