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Monday, July 17, 2006

Ind. Gov't. - Goldman Sachs's Conflicts of Interest Convulse Chicago, Indiana

Well, this is very interesting. Bloomberg News has this story today, headlined "Goldman Sachs's Conflicts of Interest Convulse Chicago, Indiana." Some quotes:

July 17 (Bloomberg) -- If you want to know about conflicts of interest at Goldman Sachs Group Inc., just ask Chicago's city government.

Goldman, the world's most profitable securities firm, was a frontrunner to advise Chicago on the potential sale of Midway Airport after helping the city lease a toll highway last year. That was until April, when Dana Levenson, Chicago's chief financial officer, read about Goldman's plan to buy an airport company in Europe that might eventually bid for Midway. Within a day, he called Goldman to complain and in May told the New York- based firm that it wouldn't get the assignment.

"It's an obligation we have to taxpayers,'' said Levenson, who denied Goldman a formal interview at his office and hired Credit Suisse Group. ``If we think anything could hinder us from maximizing proceeds, we have to fix the situation. And that may involve making sure our advisers don't have conflicts."

A growing number of U.S. public officials are asking how an adviser charged with selling assets at the highest price can play the role of investor at the same time, seeking to buy them for as little as possible. Like Levenson, 49, administrators in Indiana, Oregon and Texas are getting wise to Wall Street's efforts and forcing firms to choose between fees and investment returns. * * *

At least 13 U.S. states may hire private companies to help build and operate $34.5 billion in toll roads spanning 2,700 miles (4,344 kilometers), according to the Federal Highway Administration. That means about $175 million in fees are up for grabs, based on rates charged on the handful of completed road sales and leases.

There are probably more to come. Local and state governments oversee about $1.7 trillion of roadways nationwide, and billions more in other infrastructure, from subways to sewers, the U.S. Bureau of Economic Analysis estimates. Less than 4 percent of the 5,244 miles of U.S. toll roads are now privately run, a figure that may jump to 32 percent based on the number of deals being considered. * * *

Goldman, the No. 1 arranger on mergers and acquisitions this year, courted conflicts twice with its unsolicited bid for BAA Plc, the offer that riled Levenson in April. Bankers at the firm made their approach to BAA, owner of London's Heathrow airport, less than two months after offering to help it fend off a hostile takeover from Spain's Grupo Ferrovial SA.

The situation prompted Goldman's chief executive officer at the time, newly appointed U.S. Treasury Secretary Henry Paulson, to warn senior managers he was concerned about the ``perception'' of the firm's actions. Paulson, 60, was succeeded last month by Lloyd Blankfein, 51, who had been Goldman's president. * * *

Sales of public assets were contentious even without the question of conflicts. From the beginning, community activists and government officials wary of ceding control over public works have threatened to derail privatizations.

The administrations that pursue sales, such as Chicago, do so largely because higher taxes are the only other way to plug deficits, fund pension obligations and combat rising fuel costs.

"You need to fund all of these fundamental programs, and raising taxes is not very palatable," said Sujit CanagaRetna, a senior fiscal analyst in Atlanta for the Council of State Governments, a research association for legislators.

Indiana budget director Charles Schalliol is another official who's mindful of the dual roles investment banks can play. Schalliol, a former executive director of corporate finance at drugmaker Eli Lilly & Co., helped pick Goldman last year to advise Indiana on the lease of a 157-mile toll road, turning down pitches from finalists Citigroup, JPMorgan and New York-based Bear Stearns Cos., the No. 5 U.S. securities firm.

The state, which received $3.8 billion for the 75-year lease when it closed June 29, paid Goldman $20 million in fees.

Schalliol, 58, said he later found out Goldman had started raising its fund to invest in toll highways and similar projects after winning the assignment from Indiana. Perturbed, he raised concerns with the firm's top infrastructure banker, 48-year-old Mark Florian.

"I told Mark Florian, after the transaction was done, it would have been a significant area of conversation," Schalliol said. "I would not go so far as to say it's unacceptable to have a fund. I would say it creates some serious questions for the engagement."

The above are just a few excerpts from the long story.

Posted by Marcia Oddi on July 17, 2006 08:36 AM
Posted to Indiana Government