9:17 PM
By Dan Wilchins
NEW YORK | Tue Jan 11, 2011 11:07pm EST
NEW YORK (Reuters) - Goldman Sachs Group Inc pledged to be more open about how it makes money and to put the interests of clients ahead of its own in an effort to rebut criticism it acted more like a hedge fund than a bank during the credit boom and misled investors.
Goldman revealed for the first time how much it made from trading and investing on its own behalf, which many investors have suspected is a key source of the bank's profits, during the first three quarters of the year.
The bank also made structural changes to its divisions, but there was no major management shake-up, leaving in place Chief Executive Lloyd Blankfein.
Blankfein and his firm came under siege last April after U.S. securities regulators sued Goldman and bond trader Fabrice Tourre for selling repackaged mortgage bonds to investors without disclosing key information about the securities.
Tourre referred to himself as "fabulous Fab" and to a collateralized debt obligation product he helped create as "a little like Frankenstein turning against his own inventor." To many critics of Goldman, he embodied the firm's willingness to put its own interests ahead of clients.
Soon after the SEC lawsuit, Goldman commissioned a report to determine how it should change the way it does business.
The report, released on Tuesday, recommends creating at least three internal committees and focuses mainly on disclosure and oversight. It makes few recommendations for how Goldman will change the way it does business day to day and some observers questioned how much will change.
"I'm not terribly convinced it produces a new culture," said Cornelius Hurley, a professor and director of Boston University's Morin Center for Banking and Financial Law. "It seems to be part of their concerted public relations effort."
Still, Goldman did shed new light on the heretofore murky realm of proprietary trading profits, revealing that its investment and lending group -- which includes the bank's bets with its own money -- accounted for nearly 30 percent of pre-tax earnings in the first three quarters of 2010.
And Goldman's disclosure overhaul could boost pressure on rivals to follow suit, especially after the sweeping Dodd Frank financial reform bill shone a spotlight on the propensity of big Wall Street firms to make risky bets with their own capital.
"I think other banks will follow Goldman on this," said Brad Hintz, investment banking analyst at Sanford C. Bernstein in New York. "They may not want to admit it, but this kind of disclosure puts pressure on other boards to act."
The report came even as other major banks express eagerness to put the financial meltdown of 2008 behind them. Barclays Plc's new boss, Bob Diamond, said on Tuesday that banks should stop apologizing for the mistakes that helped cause the crisis.
The 63-page report prepared by a committee led by executive and former Federal Reserve Bank of New York president Gerald Corrigan and by Michael Evans, a vice chairman of the company, details 39 plans for how it will change after years of investor accusations its financial statements are opaque and client complaints about conflicts of interest.
Goldman agreed in July to pay $550 million to settle the SEC lawsuit. The SEC accused the bank of creating and selling collateralized debt obligations linked to subprime mortgages without telling investors hedge fund Paulson & Co helped choose and bet against the debt. The settlement was one of the biggest arising from the U.S. housing and credit crises.
As part of Goldman's settlement, the investment bank agreed to require two internal committees to review mortgage bond deals to make sure marketing materials describe necessary facts to investors.
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