For weeks now there has been talk that the management of Goldman Sachs might be considering
taking the private. Most people dismiss such talk as pure fantasy, and our own reporting reveals that top executives at Goldman have not taken any steps toward going private. But it’s worth asking what kind of structure Golman might have if it did go private.
Goldman spent most of its existence as private partnership. In a sense, by going private Goldman would be returning to its roots. But odds are that this time around, Goldman’s partnership will be very different. These days even private partnerships are often far more open than the partnerships in the past, and openness might be exactly what Goldman needs if it is to survive.
University of Illinois law professor Larry Ribstein has been a pioneer in the study of how private partnerships have been used as alternatives to solving sticky problems of corporate management. Much
of his work has centered on the problem of aligning managers’ and owners’ interests. He notes that the private partnership model popular in the private equity world might be very useful for Goldman here.
Ribstein has argued that Goldman’s new partnership “might not be th same partnership structure they left behind — it could be the beefed up private equity approach, plus SOX.”
Traditionally private companies disclosed far less about their performance and operations than public companies. This was all the more so when it came to private investment houses, which often
operated almost as clandestine services. Even after Depression era legislation introduced many reforms in the way Wall Street securities firms operated, they remained opaque institutions to most outsiders
But after the collapse of Lehman Brothers, counter-party risk is the mind of every risk manager worth his paycheck. In this environment, opacity can be a serious handicap for a securities firm. Shareholder behaviour provides important signaling for counter-parties about the financial health of a firm, while financial disclosure regulations force firms to divulge sometimes inconvenient truths about their performance. A sudden drop in a firm’s share price can signal to counterparties that shareholder have detected problems, for example. If Goldman were to attempt to use a management buyout to “go dark,” relieving itself of the burdens of public disclosure, Sarbanes-Oxley compliance and the like, it couldvery well trigger the kind of flight of the counterparties—the equivalent of a run on the bank—that crippled Bear Stearns and bankrupted Lehman Brothers.
It seems far more likely that Goldman would borrow a page from private equity firms, going private with debt financing that requires registration under securities laws and carries with it stringent reporting requirements. Sarbanes-Oxley is often presented as the bane of corporate executives but for Lehman, its accounting demands could play the vital role of assuring counter-parties that Goldman was safe to do business with even without the oversight of public shareholders.
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