Sometimes there is just lunacy written about financial companies, and sometimes there is lunacy inside of financial companies.  Forget about the argument that there are usually both for a minute.  Yesterday we covered an issue from Financial Times after they wrote an article over the weekend and this issue may not go away about Goldman Sachs Group (NYSE: GS) CEO Lloyd Blankfein placing a call to Vikram Padit at Citigroup (NYSE: C).  The topic: merger.

First and foremost, this was before the bailout package was inked andit was at the height of the woes in the sector when both Goldman Sachsand Morgan Stanley (NYSE: MS) had changed their charters to become bankholding companies.  But this proposition just seems almostunbelievable.  We don’t think that the FT’s coverage of this is wrong,but the notion that even one of these companies would consider such acall brings up a significant problem for the most prestigiousinvestment banking firm on Wall Street.

This would have been a Citi buyout of Goldman Sachs based uponfinancial values at the time.  It would have also been the riskycompany taking out one of the more prized companies.  In dire timeswhen there are only questions and no answers, this would put that "toobig to fail" argument front and center.  The overlaps here would sonumerous that in many cases the firm could have decided which teammembers could run the Department of Redundancy Department.

With all the conspiracy theories that get floated on blogs and websitesabout Hank Paulson designing everything to the direct benefit of hisformer form (yep, Goldman Sachs), the notion of a Goldman-Citi tie upshould perhaps be no big surprise.  But it is just silly.

We have pointed out how Goldman Sachs’ hay day and immunity seems to beover for the time being.  But this shows the outright fear that musthave been going through the financial market executive heads and itreminds me of some ominous instant messages being passed around thebrokerage community before even Bear Stearns had imploded.  There weremany IM’s in conversations from December to February in the brokeragecommunity that said "Wall Street is Bankrupt."  Some of these werespeculative and some were "second hand comments from executives" if youtrust such notions.

We have already stood on the edge of the financial abyss twice.  Thesad part is that we might get to stand on that edge again if the latestpackage fails to save the system and the players.  But on thinking of acombined Citi-Goldman, then the players pulling the puppet strings haveto believe that the game is pure fiction.

Part of the entire move to become a bank holding company requires thatless leverage is employed.  Goldman Sachs has a history of making greatbets, while Citi does not.  If Goldman Sachs wants to instill someconfidence it should go out and take a more serious look at some of thehealthier banks out there.  Northern Trust (NASDAQ: NTRS) has long beenthought of as the crown jewel in banking and wealth management.  Thereare many depository institutions which Goldman Sachs could gobble up ifit chose to.  US Bancorp (NYSE: USB) would essentially be a mouthfulright now, and SunTrust Banks Inc. (NYSE: STI) is another possibility.

Which institutions Goldman Sachs ends up going after is an unknown.  Itis very likely that its strategy comes in a form which few would haveenvisioned.  But the mere notion of the firm calling Citigroup about apossible deal just starts to ooze questions of management’s faith inits own ability to navigate the treacherous waters which many of usfeel are ahead (bailout or no bailout).

This makes one wonder if the current management at Goldman Sachs isgoing to be able to have many competitive advantages going forward.

Jon C. Ogg
October 28, 2008

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