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Goldman Sachs Takes on ‘Dr. Doom’
October 10, 2008, 1:28 pm Link to This
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Topics Investment BankingIndustries Financial Services

Goldman Sachs is squaring off with Nouriel Roubini, a professor from New York University’s Stern School of Business, over his dire outlook for the investment bank.

The back-and-forth began with an opinion piece of Mr. Roubini’s that appeared on Forbes.com. The article made a host of gloomy predictions and included the claim that Goldman’s latest capital raising-effort was a “cosmetic” fix and that “most of its lines of business (including trading) are now losing money.”

Elsewhere in the article, Mr. Roubini — who has warned for years that a major financial crisis was brewing — suggested a “total meltdown of the U.S. financial system could occur.”

The article drew a forceful reaction from Lucas van Praag, Goldman’s global head of media relations and a partner at the firm.

In a letter to the editor, published Friday on Forbes.com, Mr. Van Praag called Mr. Roubini’s claim that the firm was losing money “curious” and suggested that it was based more on a “gut reaction” than fact. He pointed out that Goldman reported a profit in the third quarter and had done so for every quarter since the credit crunch began last summer.

Mr. van Praag also suggested that Mr. Roubini was painting Wall Street with too broad a brush. “Mr. Roubini does not distinguish between the differing performances at various firms,” he wrote in his letter. “As a result, he fails to acknowledge that the difference in performance is clearly a function of different business models, risk management practices and decision making.”

Asked about Goldman’s response, Mr. Roubini told Dealbook that he meant to say that Goldman “will” lose money in the future. He went on to say that their profits were down across the board from the same time last year and that “the only reason Goldman didn’t go bust” was because of the “direct and indirect support from the Fed.”

Mr. Roubini contends that this support is unsustainable and that even though “Goldman may be better managed” than many of its peers, it could not survive by itself given the fundamental changes in the market. “Look at Morgan Stanley,” he said. “They are teetering on the edge. Goldman is no different — it depends on the same model to make money.”

Mr. Roubini, whom The New York Times has called “Dr. Doom,” predicted in February that every major, independent broker-dealer in the United States would fall because of business models that depend on using lots of short-term leverage to finance illiquid, long-term assets.

In one sense, he has already been vindicated: Bear Stearns and Lehman Brothers have disappeared, and Merrill Lynch it set to be sold to Bank of America. The last of the independent broker-dealers — Goldman Sachs and Morgan Stanley — changed to bank holding companies last month.

While the firms said this change would make them more financially stable, Mr. Roubini says he still believes that Goldman and Morgan are vulnerable. His advice to both banks: Merge with a foreign bank as soon as possible.

– Cyrus Sanati

Go to Mr. van Praag’s Letter via Forbes.com »
Go to Mr. Roubini’s Opinion Piece via Forbes.com »

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