Goldman Hires Pulitzer-Winning Journalist to Snare Millionaires
By Anthony Effinger
Feb. 22 (Bloomberg) — The conference started with a
cookout at the Mandarin Oriental hotel on Elbow Beach in Bermuda
and ended with a talk by 23-year-old Lauren Bush, an anti-hunger
activist, former model and niece to President George W. Bush. In
between, executives at Goldman Sachs Group Inc. taught scions of
wealthy families how to invest in hedge funds.
Last Octobers “Next Generation gathering was a small
prod in Goldman Sachss push into the lucrative profession of
private banking. Its an area of finance that New York-based
Goldman — the worlds largest securities firm by revenue and
profit — doesnt dominate. Instead, Swiss and U.S. banks reign.
Ranked in assets held by clients with at least $1 million
to invest, Goldman comes in at No. 12, with $177 billion as of
2006, according to Scorpio Partnership Ltd., a London-based
wealth management consultant.
Goldman Sachs is shooting for individuals with $10 million
in financial assets or more — not counting the beach house,
Lamborghini or art collection. The set of ultra-rich isnt tiny:
Individuals with a minimum of $30 million totaled 94,970
worldwide in 2006, up from 85,400 in 2005, according to a report
last year by Merrill Lynch %26amp; Co. and Cap Gemini SA. Their assets
rose 17 percent to $13.1 trillion in the same period.
With U.S. housing in retreat, global stock and bond markets
shuddering and competitors taking subprime-related writedowns,
catering to the rich can offer a measure of stability and steady
profit.
“Rich people as a business model are sensational, says
Russ Prince, president of Prince %26amp; Associates Inc., a Redding,
Connecticut-based consultant on financial services for the
wealthy. “Theyre willing to pay to make it easy on themselves.
They dont fight over fees if they see value.
200 Billionaires
Goldman Sachs Chief Executive Officer Lloyd Blankfein says
hes pursuing fortunes in Asia, Latin America and Russia. “In
the Arabian Gulf countries alone, there are over 200
billionaires, he said at a New York conference in November.
Blankfein put the best face on his companys status as an
also-ran in wealth management.
“Im happy to say were not No. 1, he said. “Were not
maxed out. Theres a long, long way for us to go, and were
going to go there.
Spearheading the push is Peter Scaturro, 47, a former
competitive swimmer who looks like actor Ray Liotta from the
movie “Goodfellas. He hobnobs with Citigroup Inc. Chairman
Emeritus Sanford “Sandy Weill and serves with Maurice
“Hank Greenberg, former CEO of American International Group
Inc., on the board of the New York-based Foreign Policy
Association.
Giant Hedge Fund
Blankfein, 53, hired Scaturro in July after private banking
stints at New York-based U.S. Trust Corp. (once owned by Charles
Schwab Corp. and now part of Bank of America Corp.) and
Citigroup, where Weill was his boss.
Fees earned for managing the money of the rich, cutting
them in on private equity deals and planning their estates might
ease Goldman Sachss heavy reliance on its own trading.
Goldman calls itself an investment bank, but in its 2007
fiscal year, ended on Nov. 30, just 16 percent of its $46
billion in revenue came from advising on mergers and helping
companies raise capital. Another 16 percent came from money
management and brokerage, a segment that includes parts of
private banking. A full two-thirds, or $31 billion, came from
trading, making Goldman look more like a giant hedge fund than
any kind of bank.
That reliance on trading can be a liability when markets
stumble and recession looms.
`Terrible
Complicating Goldman Sachss pitch to the rich is last
years stumble by some of its hedge funds. Global Alpha — once
its largest, with $10 billion of assets — was hammered by
unwise bets in volatile markets and fell about 40 percent last
year, according to a report to investors obtained by Bloomberg
News.
Goldman spokeswoman Andrea Raphael confirms that some
private banking clients are invested in Global Alpha, and
Blankfein alluded to the funds plunge when he was asked about
private banking at the New York conference.
“We feel terrible about it, Blankfein said of the funds
performance.
One lure for clients may be Goldman Sachss ability to
avoid other pitfalls. Its one of the few financial companies
that hasnt had to take a reputation-sullying writedown
recently. Zurich-based UBS AG, ranked the No. 1 wealth manager
by Scorpio, wrote down $14 billion in subprime mortgage
investments in January. UBS said it planned to raise $12 billion
from the government of Singapore and an unidentified Middle
Eastern investor.
Rockefeller Methods
As Blankfein seeks multimillionaire clients, hell be
battling more than just Swiss banks such as UBS. An old-
fashioned idea, the so-called family office, is making a
comeback. Traditionally, a family office handled investments,
taxes and estate planning for opulent clans. Rockefeller %26amp; Co.,
one of the worlds oldest, got its start in 1884 when oil baron
John D. Rockefeller hired two men to handle his personal
affairs.
These days, family offices cater to more than one family to
gain economies of scale.
Assets supervised by family offices in North America grew
20 percent to $305 billion in 2006 from 2005, according to the
Family Wealth Alliance LLC in Wheaton, Illinois. Almost one firm
in five boosted assets more than 50 percent.
The rivalry cuts both ways. Tom Livergood, CEO of the
alliance, asked family offices in 2007 to name the firm they
bumped into most when making pitches to wealthy families. The
most frequent answer was Goldman Sachs.
Smelling a Deal
“Goldman is a formidable competitor, Livergood says.
“They smell when a deal is going to close.
Elizabeth Nesvold, founder of Silver Lane Advisors, a New
York-based investment bank that serves the financial services
industry, says Goldman Sachss cachet is real.
“People love to say, Goldman showed me a deal, she
says.
Many clients come to Goldman Sachs for a chance to invest
in private companies the firm has identified as smart buys. In
April 2006, Goldman, along with private clients and investors in
Goldman funds, paid $2.6 billion for a 5 percent stake in
Beijing-based Industrial %26amp; Commercial Bank of China Ltd.
ICBC sold shares to the public six months later, giving
Goldman a paper profit of almost $4 billion. During the past
three years, Goldman says its private clients have committed
more than $25 billion to such deals.
`Perfect Profile
Goldman Sachs has been building up its private banking
capabilities in recent years. In late 2006, it opened a
commercial bank in the U.S., letting it manage cash, sell
mortgages and take deposits, which have grown to $16.4 billion.
It got a similar banking license in Ireland last year. Over the
past two years, it has hired about 100 private wealth advisers,
bringing the total to 600.
Among the new Goldman Sachs hires: Sheryl WuDunn, 48, who
shared a 1990 Pulitzer Prize with her husband, Nicholas Kristof,
for reporting on Beijings Tiananmen Square protests for the New
York Times. Before becoming a journalist, she was a loan officer
at Bankers Trust Co. (now part of Frankfurt-based Deutsche Bank
AG) and got a Master of Business Administration from Harvard
Business School in Boston. And shes worldly and intelligent,
says Scaturro.
“Shes the perfect profile, he says.
Expanding Market
The trend in private banking is to divide the roles: one
team for asset management and another for attracting new clients
and handling customer service. That may not always work with
multimillionaires, says former Goldman Sachs private banker
Nicolas Sarkis, founder of AlphaOne Partners LLP, an investment
advisory firm in London. He worked in Goldmans private wealth
unit from 1997 to 2005.
“Very wealthy clients want to speak directly to the person
who is managing their money, not a salesperson, Sarkis says.
Goldman Sachs may have a natural advantage when it comes to
recruiting some clients. In its investment banking role, it
assists with initial public offerings. The founders of companies
going public often turn to Goldman for personal investment
advice.
“The source of their private banking business has always
been their investment bank, says Scorpio analyst Graham
Harvey.
In private wealth, Goldman Sachs is attacking a growth
industry. The market is expanding as the rich get richer in the
U.S. and Europe and new dynasties are created in Asia and Latin
America, two private banking hot spots.
Asian Millionaires
The number of people worldwide holding financial assets
worth at least $1 million rose 8.3 percent to 9.5 million in
2006 from 2005, according to the Merrill Lynch-Cap Gemini
report. Their combined assets jumped 11.4 percent to $37.2
trillion.
The ranks of the rich grew fastest in Singapore, India,
Indonesia, Russia and the United Arab Emirates, the report says.
All topped 15 percent growth. Chinas wealthy rose 7.8 percent
to 345,000, while the U.S. was up 9.4 percent to 2.9 million.
To understand how lucrative private banking is, consider
New York-based Citigroup. It has both a brokerage, Smith Barney,
and a private bank. The brokerage had $1.55 trillion in client
assets at the end of 2007, more than six times the $236 billion
that Citigroups private bank had. Even so, Smith Barneys
earnings were $1.35 billion last year, just over two times the
$623 million the private bank earned.
French Revolution
Private banks have been around for centuries. Switzerland
became a wealth haven in the 1790s, when the French Revolution
prompted the aristocracy to move money out of France.
“What makes us different is that weve been in the private
client business for 150 years, says Anthony DeChellis, head of
private banking in the Americas for Zurich-based Credit Suisse
Group, founded in 1856.
DeChellis says patience is the key to landing and keeping
clients with $10 million or more.
“Its not hiring a star trader and giving him a billion
dollars worth of capital that you hope he turns into $2 billion
or $3 billion of capital in a short period of time, DeChellis
says.
While Goldman Sachs sees fertile territory in Asia and
Latin America, the Swiss are prospecting on Goldmans home turf.
Credit Suisse in 2001 bought Chicago-based Frye-Louis
Capital Management Inc. The firm was co-founded in 1991 by
Jeffry Louis III, a descendant of Samuel C. Johnson, who in 1886
founded S.C. Johnson %26amp; Son Inc., now the maker of Windex cleaner
and Ziploc bags. Frye-Louis clients have $30 million or more
each.
Competitive Swimmer
UBS bought Piper Jaffray Cos. wealthy-client unit for $500
million in 2006. Last year, the bank paid about $280 million for
Cleveland-based KeyCorps McDonald Investments brokerage unit,
which serves the rich.
“Wealth managements our core business, says Marten
Hoekstra, UBSs head of private wealth in the U.S. UBS has
special services: It helps with art purchases and has vineyard
consultants available for aspiring winemakers.
Unlike many of his clients, Scaturro didnt grow up rich.
He was born and raised in New York and still has traces of a
Queens accent. He went to Archbishop Molloy High School, a
Catholic private school, where he won national recognition as an
All-American in swimming. He was a freestyle sprinter and still
has the lean body of a swimmer. His blue, striped shirt bears
his monogram — PKS — below the pocket.
Engineering Degree
Scaturro went to Columbia University in Manhattan, where he
earned a bachelors degree in engineering in 1982. His first job
on Wall Street was in the same building hes in now, though 24
floors lower, as a systems analyst for Chase Manhattan Bank, now
part of JPMorgan Chase %26amp; Co.
Working full time, he went back to Columbia and got a
masters in engineering in 1985. He joined Bankers Trust, where
he was plucked out of an in-house management program for up-and-
comers to do strategic planning for one of the vice chairmen. In
1994, he joined Bankers Trusts private bank as head of strategy
and marketing. Weill hired him to run Citigroups U.S. private
bank in 1999. He took over global private banking less than a
year later.
“Peter did a very good job, says Weill. “Hes
phenomenal with clients, and he works around the clock.
Scaturros career hit an air pocket in October 2004. He and
Vice Chairman Deryck Maughan left the company five weeks after
Japanese regulators closed Citigroups private bank in Japan,
accusing Citigroup of failing to exercise proper internal
controls and doing business with a client whom affiliates had
flagged as suspicious.
Bowing in Apology
Then-CEO Charles Prince bowed in apology at a Tokyo press
conference on Oct. 25, 2004. Scaturro and Maughan werent
accused of any wrongdoing.
Six months after his exit from Citigroup, Charles Schwab,
founder of San Francisco-based Charles Schwab Corp., hired
Scaturro to run U.S. Trust, which the discount brokerage had
purchased for $2.8 billion in 2000.
Scaturro made a splash with employees by renting space at
New Yorks Central Park Zoo for a companywide night out. The
previous CEO had cut back on everything, including color
photocopies, says a person who worked there at the time.
In return, Scaturro demanded hard work. At meetings with
rank-and-file employees, he would brag about working holidays,
the person says, and pressured bankers to sell investments. “It
became all about selling product, the person says. Scaturro
says that wasnt the case.
Schwab Sells
Schwab agreed to sell U.S. Trust to Bank of America for
$3.3 billion in November 2006. Schwab offered Scaturro almost $9
million in cash to stay until the deal closed, according to a
Nov. 21, 2006, letter from Charles Schwab to Scaturro that was
filed with the U.S. Securities and Exchange Commission. Scaturro
stayed until it did, on July 2, 2007.
He joined Goldman Sachs that same month as it hired more
wealth advisers to attract clients. As an industry, private
bankers probably control $16 trillion, according to Scorpio.
That leaves another $8.4 trillion owned by millionaires thats
sitting in retail banks and discount brokerages.
Family offices are trying to rake in some of that. They
tout so-called open architecture, industry jargon for offering
funds from outside managers. Some also say competitors such as
Goldman Sachs want to steer clients into in-house hedge funds to
earn more fees.
Follow the Money
“Their real goal is to gather the assets because thats
where the money is, says Patricia Soldano, president of Cymric
Family Office Services in Costa Mesa, California. “Our culture
is a service culture, not a products culture.
Like most family offices, Cymric charges clients a
percentage of assets under management: 25 basis points to 100
basis points. (A basis point is 0.01 percentage point.) Charging
a family with $50 million in assets 25 basis points would bring
in $125,000 a year. Family offices often charge extra for
special projects, such as overseeing construction of a vacation
home or archiving family photographs.
Scaturro says Goldman Sachs offers clients plenty of
choice.
“Goldman has made a serious commitment to open
architecture, he says during an interview in his 41st-floor
office at One New York Plaza, on the southern tip of Manhattan.
He says one-third of his units private wealth assets are
in funds run by independent managers. As for hedge funds,
clients have $29 billion in Goldman funds and $22 billion in
non-Goldman funds, Scaturro says. It shows Goldmans system is
open, he says.
Alpha Stumble
That may be little comfort to clients who had assets in
Global Alpha. Many exited the fund as it slumped. In the fourth
quarter, investors pulled $3 billion from Global Alpha and other
Goldman Sachs quantitative funds — those using mathematical
models to detect buy-and-sell opportunities, Chief Financial
Officer David Viniar said during a Dec. 18 conference call with
analysts.
Global Alphas managers trade everything from soybeans to
Israeli shekels. For a time, gains were alluring. The fund
posted an annualized return of 19.75 percent, after fees, from
Dec. 4, 2001, to Dec. 31, 2005, according to Global Alphas 2005
annual report.
It didnt last. By mid-August 2007, the fund was down 26
percent for the year. The decline coincided with a collapse in
credit markets. Another so-called quant fund, Global Equity
Opportunities, dropped 23 percent in August, and Goldman Sachs
had to inject $2 billion to help shore it up.
Plummeting Fees
With funds that are performing well, Goldman Sachs can win
more rich clients. That would add to the firms income from
management fees and help provide extra profit in lean years.
Like most hedge funds, Goldman funds charge a management fee of
roughly 2 percent of assets, regardless of performance.
Also, like other hedge funds, Goldman Sachss funds keep 20
percent of annual gains. These fees totaled $962 million in
fiscal 2006. Last year, they plummeted to $187 million.
The quant fund losses stung. Scaturro calls their
performance “disappointing. Still, he sees no lasting damage.
“People understand that the world is complex and volatile
and that no one is going to get it right 100 percent of the
time, he says.
Poor performance in another portfolio prompted a client in
Europe to consider pulling his money from Goldman Private Wealth
Management. The client, who spoke on condition that he not be
named, says he became irked with Goldman late last year after
suffering losses in a basket of stocks aimed at the wealthy.
Bad Buys
The portfolio bought U.S. mortgage lender Countrywide
Financial Corp. at the end of June for about $35, then sold it
in mid-August for about $18, the client says. Goldman Sachs also
bought Ambac Financial Group Inc., the bond insurer, in late
2006 at $87 and sold it in November at $25, he says.
“They got it wrong all the time, says the client. “They
should have known.
Goldman Sachss Raphael declined to comment, saying the
firm doesnt talk about its clients.
Goldman has been managing money for the wealthy since 1869,
when founder Marcus Goldman invested for his family. It added
outside clients in 1906 after selling shares to the public for
Sears, Roebuck %26amp; Co. Afterward, Goldman helped Searss founders
manage their windfall.
The wealth management unit got a boost in 1967 when a
future Goldman partner named Roy Zuckerberg took it over. He
kept the Private Client Services group small and picked brokers
carefully, according to a former member of the group.
Zuckerberg, 71, became a vice chairman in 1997 and left Goldman
in 1998. He didnt return telephone calls seeking comment.
$10 Million a Year
In the past decade, Goldman Sachss private bank has been
in flux. Zuckerbergs group of bankers got much of their pay in
commissions, keeping a portion of the fee that Goldman charged
clients for buying and selling securities, according to the
former broker. Whether they brought in new clients, retained
them and made them money also helped determine pay, he says.
By the 1990s, some of the best brokers were taking home $10
million a year, the ex-broker says.
Just before Goldman Sachs became a publicly traded company
in 1999, the firm brought in McKinsey %26amp; Co., the New York-based
management consulting firm, to help increase profits from the
private wealth group, according to the former broker. McKinsey
recommended cutting the portion of pay that came from
commissions and giving more weight to other factors, such as
winning new clients, says the ex-broker.
The change in pay structure prompted many managers to
leave, the former broker says. Many took their clients with
them, and in Europe, the private banking business started to
lose money, according to two people familiar with the situation.
“It was in red ink, says one.
Goldmans Raphael declined to comment.
Goldman Sachs asked McKinsey to come back in 2005 to
examine the European business, and the consultants recommended
that the firm require brokers to focus almost exclusively on
finding new clients, the two people say. Brokers would then pass
the assets along to Goldman fund managers. This way, Goldman
could build the business faster and manage clients money more
efficiently, according to one of the two familiar with the
situation.
Goldman made the change in Europe. In the U.S., commissions
still determined much of the brokers pay, according to a person
familiar with the matter. Many brokers who wanted to continue
managing money left, according to the former broker.
McKinsey spokesman Christopher Colford said, “We never
comment on any work we do for clients.
`Payday
For all the glamour implied by the term “private banker,
some of the work can be mundane.
“My job was a lot of bending over backward and kissing
butt, says a former private banker who worked at City National
Corp. in Beverly Hills, California. The banker says he spent
much of his time filling out loan paperwork and pitching clients
to invest with City National, generating fees. “Your ultimate
goal is to capture the investments, he says. “Thats where
the payday is.
City National spokesman Cary Walker declined to comment.
Christopher Trokey, 35, says Goldman Sachs is no different.
He worked in private wealth management at the firm from 2000 to
2002 before being dismissed in a round of job cuts. He says he
remembers a class where trainers referred to the aspiring
private bankers as the sales force.
“They said, sales force, and I said, Who are those
guys? and it was us.
GenSpring
Now, Trokey works in New York for GenSpring Family Offices,
a unit of Atlanta-based SunTrust Banks Inc. GenSpring says it
can get clients into the best third-party hedge funds. Like
other family offices, GenSpring doesnt have its own funds.
Last May, the company organized a mens weekend in Las
Vegas for client families. Jamie Dinan, founder of York Capital
Management LLC, a $13 billion hedge fund firm based in
Manhattan, was one of the speakers. His flagship fund returned
an annualized 17.2 percent from inception in October 1991
through June 30, 2006. Some of his clients are GenSpring
families.
Hap Perry, whose extended family made its fortune in
Ballantine beer, started GenSpring in 1990 in Palm Beach,
Florida. In 2005, he hired Maria Elena Lagomasino, former head
of JPMorgan Chases private bank, to run it.
To woo the rich, GenSpring opened an office on 54th Street
in Manhattan, just behind the Museum of Modern Art, in a
townhouse that once belonged to the Rockefellers. GenSpring
redecorated, putting in bamboo floors and tables.
`Lose $12 Million
There are even board games. GenSpring created
“Shirtsleeves to Shirtsleeves, which challenges players to
keep a fortune from being usurped by the tax authorities and
squandered by grandchildren.
“Your daughter Brittany just returned from Vegas
announcing her marriage, reads one of the game cards. “You
realize that you never mentioned the word pre-nup. They get
divorced a year later, and he takes half her trust money. LOSE
$12 million.
To hear Lagomasino tell it, being an adviser to wealthy
families is a calling, not unlike the priesthood or social work.
“This is like a vocation, she says.
The high-mindedness may be working. GenSpring, which
charges a percentage of assets under supervision for all of its
services, has 600 families as clients. It says assets have
doubled to $15 billion from $7.5 billion in less than two years.
Quitting Wall Street
David Rosenberg is another private banker who quit Wall
Street for a family office. He was chief investment officer at
Citigroups U.S. private bank in New York. In January, he joined
Threshold Group, a family office in Gig Harbor, Washington, on
the wooded shores of Puget Sound.
Threshold makes many private banks look middle class. The
company pursues families with financial assets of more than $100
million and a total net worth of at least $200 million.
George Russell, who started Threshold, made about $1
billion after selling the family business, pension adviser Frank
Russell Co., to Milwaukee-based Northwestern Mutual Life
Insurance Co. in 1998.
Rosenberg, 49, says he moved to a tiny, rain-soaked town
across the country and took a pay cut because family offices are
the future. Banks care more about getting wealthy clients
assets into their hedge funds, he says.
“Its not about long-term relationships, Rosenberg
says.
Scaturro, meantime, is sticking with the big banks. The
recent market turmoil plays to Goldmans strengths, he says.
“With complexity and volatility comes a flight to
quality, Scaturro says.
If Scaturro is right, then Goldman Sachss bid for the rich
will be a no-brainer. The Standard %26amp; Poors 500 Index was down
8.6 percent for the year as of yesterday. A prolonged slide,
though, might be too much complexity, even for Goldman.
To contact the reporter on this story:
Anthony Effinger in Portland, Oregon, at
