Andrew Ross Sorkin weighs in today on Goldman’s conflicts in the takeover of El Paso Corporation (EP) by Kinder Morgan (NYSE:KMI), as laid bare in a blistering opinion by Delaware Chancellor Leo Strine. Steven Davidoff has described the decision as demonstrating that “Chancellor Strine is a bold judge, one who is brilliant and willing to make waves” — and so it’s worth extracting some of the more Rakoffian bits of Strine prose.
While Sorkin leads his column with the script that Goldman CEO Lloyd Blankfein was given when he called El Paso CEO Doug Foshee, for instance, he omits the gloss that Strine provides on that script:
Certain Chancery staff have experienced a troubling side effect to reading this evidence: Lionel Richie’s 1980’s treacle, “Hello,” came to mind and is stuck in their heads. See LIONEL RICHIE, Hello, on CAN’T SLOW DOWN (Motown Records 1983) (“Hello!/Is it me you’re looking for?/I can see it in your eyes/I can see it in your smile/You’re all I’ve ever wanted/And my arms are open wide …./And I want to tell you so much I love you ….”).
Similarly, while Foshee officially says that he has “acted at all times in a manner consistent with our values of stewardship and integrity, and always conducted myself in the best interests of El Paso, its employees, and its shareholders”, that has to be read in the context of the way in which Strine utterly skewered him:
At a time when Foshee’s and the Board’s duty was to squeeze the last drop of the lemon out for El Paso’s stockholders, Foshee had a motive to keep juice in the lemon that he could use to make a financial Collins for himself and his fellow managers interested in pursuing an MBO of the E&P business. The defendants defend this by calling Foshee’s actions and motivations immaterial and frivolous.
It may turn out after trial that Foshee is the type of person who entertains and then dismisses multi-billion dollar transactions at whim. Perhaps his interest in an MBO was really more of a passing fancy, a casual thought that he could have mentioned to Kinder over canapés and forgotten about the next day.
It could be.
Strine saves his most acid commentary for Goldman.
The defendants begrudgingly concede that El Paso’s long- standing financial advisor, Goldman, had a “potential conflict” because: (1) it owned approximately 19%, or $4 billion worth, of Kinder Morgan stock; (2) it controlled two of Kinder Morgan’s board seats; (3) it had placed two senior Goldman principals on the Kinder Morgan board who thus owed Kinder Morgan fiduciary duties; and (4) the lead Goldman banker working for El Paso, Steve Daniel, personally owned approximately $340,000 of Kinder Morgan stock.
The phrase “potential conflict” is footnoted; Strine notes drily that “Goldman’s answering brief used the phrase ‘potential conflict’ to describe its position fifteen times.” In fact, as Strine says, this wasn’t a potential conflict at all: instead, the conflict was “actual and potent”.
Goldman’s position — beautifully demolished by Strine — is that it had Chinese walls in place, and that its M&A team was blissfully ignorant of the enormous stake that Goldman had in Kinder Morgan getting El Paso on the cheap. (Never mind the fact that Goldman’s M&A team was led by someone who personally had a $340,000 stake in Kinder. As Foshee himself put it, that’s a conflict “between one person’s brain”.)
But here’s the thing: as Francesco Guerrera points out, if Goldman’s only interest here was getting a nice check for its M&A team, there was an easy and non-conflicted way for them to do that.
This unruly mess wouldn’t have happened had Goldman resigned from El Paso right after the Kinder Morgan approach. Goldman would have probably been hired by Kinder Morgan, earned similar fees and avoided uncomfortable questions about divided loyalties.
Which definitely makes it seem as though the only reason for Goldman to stay on as an El Paso adviser was to ensure that El Paso and Forshee sold themselves for a modest sum to Goldman and its fellow owners of Kinder.
Guerrera adds that “what Goldman did isn’t illegal, just inappropriate in an age in which Wall Street’s morals and behavior are under the public microscope”. But Strine actually goes further than that — he says quite clearly that “the plaintiffs have a reasonable probability of success on a claim that the Merger is tainted by breaches of fiduciary duty”. And Davidoff notes that “Goldman Sachs’s engagement letter with El Paso probably limits its liabilities to no more than $20 million”. It’s entirely possible that Goldman’s actions in this case were both inappropriate and actionable; what’s more, Goldman will probably end up settling the case at some point, for a multi-million-dollar sum.
All of this comes as Nick Dunbar of Bloomberg reports on the numbers involved in Goldman’s shenanigans in Greece.
On the day the 2001 deal was struck, the government owed the bank about 600 million euros ($793 million) more than the 2.8 billion euros it borrowed, said Spyros Papanicolaou, who took over the country’s debt-management agency in 2005. By then, the price of the transaction, a derivative that disguised the loan and that Goldman Sachs persuaded Greece not to test with competitors, had almost doubled to 5.1 billion euros, he said.
The question at this point is surely why any client would ever trust Goldman on anything. Goldman seems to have a habit, here: it recommends a certain course of action, involving a deal which the client is barred from testing in the market. (El Paso wasn’t allowed to shop itself to anybody other than Kinder; Greece wasn’t allowed to check the market price of the swaps which Goldman was selling it, because Goldman said that if Greece did that, the whole deal would be off.)
This is surely the most magical and mysterious aspect of Goldman Sachs: that despite mountains of evidence that its actions are always orchestrated to result in the best possible outcome for Goldman Sachs, its clients still seem to trust it to give excellent and impartial advice in their own best interest. Maybe that’s the key skill that Goldman investment bankers are hired for. Not analytical or strategic expertise, but rather the ability to snow clients and get them to do whatever Goldman wants.