Is Goldman CEO Lloyd Blankfein Facing Possible Prison Time?

Lloyd Blankfein

That’s the question Naomi Prins, a former managing director of Goldman Sachs and author of It Takes a Pillage: Behind the Bonuses, Bailouts, and Backroom Deals From Washington to Wall Street, asked yesterday at The Daily Beast.

I posted in a comment yesterday that I’d heard Blankfein hired a well-known Washington criminal defense attorney. Since then, the business media has been buzzing about why Blankfein hired attorney Reid Weingarten.

Big-shot Washington defense attorney Reid Weingarten, of the firm Steptoe & Johnson LLC, has represented former Enron chief accounting officer Richard Causey (who pleaded out), former Rite Aid vice chairman and chief counsel Franklin Brown (found guilty by a jury on 10 counts of conspiring to falsely inflate his company’s value), and former WorldCom CEO Bernie Ebbers (convicted on nine felony counts by a jury). All three are in jail. Two of them, Ebbers and Causey, had undergone congressional panel investigations beforehand. Another of Weingarten’s clients, former Tyco counsel Mark Belnick, was acquitted, though Tyco CEO Dennis Kozlowski, who was not represented by Weingarten, was convicted and remains in jail.

Prins speculates that Blankfein may be in trouble for two possible reasons. The first is because of his own “loose lips,” when he testified before the Senate Permanent Subcommittee on Investigations in April.

Recall that Blankfein emphatically told the subcommittee, “We didn’t have a massive short against the housing market, and we certainly did not bet against our clients.” The 650-page subcommittee report (PDF) presented on April 13, 2011, which cites Blankfein 79 times, begs to differ.

The report accused Goldman of trading against its clients by simultaneously shorting certain subprime mortgage securities (a.k.a. “cats and dogs”) while stuffing them into the collateralized debt obligations it sold. It also suggested that Goldman executives, including Blankfein, misled Congress in testimony surrounding the Abacus CDO, Hudson, Timberwolf, and other deals, by saying it didn’t have a big short.

The second possibility is that Blankfein’s colleagues are distancing themselves from him in order to protect themselves and Goldman Sachs. Prins writes:

The top lesson I learned before leaving Goldman in the wake of Enron was Goldman’s foremost internal policy is to protect Goldman. It’s also to protect the most powerful members. When cracks manifest in the corporate armor, those two policies are at odds.

The executives running Goldman are exceedingly wealthy, not least because when the firm faced its darkest hour and lowest stock price in years during the bank-created crisis of fall 2008, the government provided it billions of dollars in the form of cheap loans, FDIC debt guarantees, TARP, AIG make-wholes, and a late-night moniker change from investment bank to bank holding company, giving the firm access to excessive Federal Reserve aid.

After the news came out that Blankfein had hired Weingarten, Goldman’s shares fell 6%, and according to Prins, that kind of thing is “frowned upon.” So Blankfein may be be trying to protect himself from being stabbed in the back by his co-workers in addition to fighting anything the Justice Department has planned for him.

I doubt if Obama and Geithner will let Blankfein go to prison, but it will be fun to watch him and the wealthy Goldman partners feeling a little bit of discomfort.

Two Reuters columnists speculated about this story today. Leigh Jones writes:

If you need to hire Reid Weingarten, your career has probably hit a rough patch.

The rule now applies to Goldman Sachs (GS.N) CEO Lloyd Blankfein, who Reuters reported on Monday has retained Weingarten, a partner at Steptoe & Johnson in Washington.

With that move, Blankfein becomes the latest in a long line of executives and high-profile people in trouble who have turned to Weingarten for help. They range from Tyco (TYC.N) corporate counsel Mark Belnick, for whom Weingarten won an acquittal, to ex-Enron accounting officer Richard Causey, who pleaded guilty to fraud and conspiracy, to film director Roman Polanski, who tapped Weingarten to fight extradition to the Unites States for sexually assaulting a 13-year-old girl in 1977.

Jones spends most of the piece providing background on Weingarten, but he also points out that Blankfein’s choice of attorney is telling, and like Prins he notes the market reaction:

Blankfein’s choice of Weingarten as his lawyer has raised questions about what kind of trouble the Goldman Sachs CEO might be in. The DOJ, where Weingarten once worked, is investigating the bank for mortgage-related investments it made.

While it is not unusual for company leaders to arm themselves with their own lawyers, Weingarten’s reputation as a litigator — as opposed to a lawyer who guides clients through investigations — is making Goldman investors nervous. The day that Blankfein’s hiring of Weingarten broke, the bank’s stock dropped nearly 5 percent to its lowest level since March 2009. By late Wednesday afternoon, the shares were at $109.92, up 3.2 percent from Monday’s close at $106.51.

Alison Frankel is more sanguine, arguing that Blankfein hiring an outside attorney is really no big deal.

The market assumed the worst on Monday after Reuters’ great scoop on Goldman Sachs (GS.N) CEO Lloyd Blankfein bringing in Reid Weingarten of Steptoe & Johnson to represent him in the Justice Department’s investigation of the bank. Goldman’s share price fell almost 5 percent on the fear that Weingarten’s entrance signals that DOJ is getting serious about its follow-up to the April 2011 Senate subcommittee report on the financial crisis.

In one sense, that’s reading way too much into the mere fact that Blankfein has brought in his own lawyer. It’s standard operating procedure for corporate executives at companies under investigation to have separate counsel. Consider the example of other alleged villains of the financial meltdown. Richard Fuld of Lehman (LEHKQ.PK), Joseph Cassano of AIG (AIG.N), Angelo Mozilo and David Sambol of Countrywide, John Thain of Merrill Lynch, Kenneth Lewis of Bank of America (BAC.N): They all have their own lawyers, and none of them have faced any criminal charges. Only Mozilo and Sambol even had to answer to the SEC.

She provides a number of examples of other executives doing just that. But…

Nevertheless, Blankfein’s choice of Weingarten is very intriguing. Weingarten is a great lawyer with close ties to the Justice Department, where he once worked in the Public Integrity section, and to Attorney General Eric Holder, whom he actually represented when Congress grilled Holder about President Bill Clinton’s eleven-hour pardon of financier Marc Rich. Weingarten is not, however, part of the club of white-collar defense counsel who typically get referrals from New York firms like S&C. (That group includes Andrew Levander of Dechert; Mary Jo White of Debevoise & Plimpton; Patricia Hynes of Allen & Overy; and Gary Naftalis of Kramer Levin Naftalis & Frankel, all of whom represent high-profile Wall Streeters in financial crisis cases.)

One white-collar defense lawyer who gets referrals from Wall Street firms told me it could be significant that Blankfein went outside the usual circle, turning to a lawyer best known for his trial work. “For many people, the choice of Reid Weingarten would be unusual to represent someone in a simple interview,” he said. “He’s often retained when an investigation is going to lead to a case that would go to trial.”

Hmmmm…. Okay, I’ll believe it when I see it, but I can dream, can’t I?