Will Goldman Sachs Become Drexel Sachs?
Ron DeLegge, Edtior
May 18, 2010
SAN DIEGO (ETFguide.com) – The comparisons between Goldman Sachs and the now extinct Drexel Burnham Lambert are too good and too many to ignore.
During the 1980s Drexel was a Wall Street titan led by powerful financiers. Almost everything the firm did turned into big and fast profits. But charges of insider trading contributed to Drexel’s downfall and eventual death.
Fast forward to today. Goldman Sachs is Wall Street’s rock star and almost everything the firm does seemingly turns out right. But allegations of civil fraud by the Securities and Exchange Commission (SEC) have rocked the company. Will Goldman Sachs (NYSE: GS) become Drexel Sachs?
Drexel Burnham Lambert was once a top Wall Street investment banker with a storied history, not unlike Goldman Sachs. The firm was started by I.W. “Tubby” Burnham in 1935 with a $100,000 investment. The firm’s original focus was on retail brokerage but eventually it expanded into investment banking.
In 1986, Drexel’s fortunes quickly reversed when one of its managing directors (Dennis Levine) was charged with insider trading. After two long years of steadfast denials, the SEC sued Drexel for manipulating securities, insider trading and defrauding its clients. By 1990, the one-time Wall Street giant Drexel Burnham Lambert was forced into bankruptcy. Few predicted this humbling conclusion and even fewer thought that it was possible.
While Drexel’s fraud conviction didn’t lead to its immediate demise, it was undoubtedly a contributing factor to the firm’s demise. Is this Goldman Sachs’ future?
One of Drexel’s undeniable hallmarks was its aggressive corporate culture. Corporate divisions within Drexel were rewarded based upon their individual performance as opposed the collective performance of the firm. This contributed to a hostile relationship between various departments.
On a few occasions, several employees went as far to form investment partnerships that allowed them to invest alongside Drexel’s star employee, Michael Milken. In some cases, these partnerships made more money on investment deals than Drexel itself. Certain employees had become so aggressive; they were cannibalizing the very hand that was feeding them!
According to historical accounts, Drexel’s culture of wild animal aggression was so extreme that it pushed employees into unethical and sometimes illegal activity.
The fraud allegations pitted against Goldman Sachs paint a descriptive picture of an aggressive securities firm with an aspiring young executive named Fabrice Tourre who allegedly misled clients into buying botched mortgage securities. Did Goldman’s corporate culture, like Drexel’s, push it over the edge?
From Tycoon to Convict
In its heyday Drexel was led by Fred Joseph, its CEO and Michael Milken, the purported king of junk bonds. Joseph vowed to make Drexel as powerful as Goldman Sachs and for a short while he did. In 1986, Drexel netted $545.5 million which was a Wall Street record at the time. The following year, Milken was rewarded with a massive $550 million thank you payment.
But the good times at Drexel were short lived.
The SEC charged the company with insider trading and fraud and that’s when the decline into oblivion began. The biggest catch for Wall Street’s cops came in 1990, when Milken admitted guilt after being charged with 98 counts of racketeering and securities fraud.
From the first allegations of wrongdoing against Drexel to convictions and settlements, it took four years for the firm to go from top gun to complete extinction.
In a similar fashion to his predecessors, Goldman’s CEO Lloyd Blankfein on April 27, 2010 vehemently denied allegations of wrongdoing before a hostile group of U.S. senators. Likewise, the key employee at the heart of the charges, Fabrice Tourre has denied guilt.
Is history repeating itself?
At Berkshire Hathaway’s recent annual meeting, Warren Buffett defended Goldman Sachs and its embattled CEO, Lloyd Blankfein. Wouldn’t you do the same thing if you had $5 billion invested in them? Still, Buffett’s vocal support of Goldman has done little to make its legal problems and controversies go away.
Speaking of $5 billion, Charlie Gasparino of the Fox Business Network speculated a settlement with the SEC could cost Goldman that same amount.
If a settlement is indeed in the cards, it’s probable that Goldman’s legal handlers are using the “protection of the financial system” as a line of defense. Can you imagine what type of market chaos that would arise if Goldman Sachs became Drexel Sachs? In reality, we know such an event would create a lot of chaos at Goldman, but who knows, the global financial markets may actually rise up and rally out of pure joy to the pure of heart. Give hope a chance!
Over the past three months, Goldman’s stock price has fallen almost 25 percent in value. Furthermore, the stock is underperforming its peers, including S&P financial stocks (NYSEArca: XLF) and U.S. Broker/Dealers (NYSEArca: IAI).
There are many more Goldman/Drexel historical comparisons, but time and space constrain us.
In summary, Goldman’s fraud allegations are far from “business as usual.”
To the contrary, these are the sort of damning legal charges that dismantle dynasties. See Drexel Burnham’s graveyard tombstone.