Goldman vows to boost disclosure, avoid conflicts

NEW YORK (Reuters) - Goldman Sachs Group Inc pledged to be more open about how it makes money and to put clients' interests ahead of its own, eager to rebut criticism that it acts more like a hedge fund than a bank.

Goldman, due to report quarterly earnings next week, for the first time will break out how much it earns from trading on its own behalf. Other changes will aim to avoid conflicts of interest and ensure that staff are trained to think about the firm's reputation in their day-to-day activities.

"Goldman is going down the road of trying to repair its image," said Alan Villalon, an analyst at Nuveen Asset Management, in Minneapolis. "This is a step in the right direction, but it's only a step. What investors really want to know now is, what is the true earnings power of this company going forward."

The investment bank released a 63-page report on Tuesday that details 39 plans for how it will change after years of investor accusations that its financial statements are opaque and client complaints about conflicts of interest.

The internal review was kicked off after Goldman was accused by U.S. securities regulators of creating and selling collateralized debt obligations linked to subprime mortgages without telling investors that hedge fund Paulson & Co had helped choose and bet against the debt.

The apparent ethical conflicts at the center of the case were laid bare in a series of emails sent by Goldman Sachs bond trader Fabrice Tourre, who referred to himself as "fabulous Fab" and referred to some trades he created as "monstrosities."

Goldman agreed in July to pay $550 million to settle the lawsuit brought by the U.S. Securities and Exchange Commission, one of the biggest arising from the U.S. housing and credit crises. Tourre was the only individual sued in the case. The charges against him are still outstanding.

As part of Goldman's settlement with the SEC in July 2010, the investment bank agreed to require two internal committees to review mortgage bond deals to make sure marketing materials describe necessary facts to investors.

The Goldman report also follows the passage of a sweeping financial regulatory reform bill last summer that, in part, sought to restrict big Wall Street firms' ability to make bets with their own capital.

The report, which recommends the creation of at least three internal committees, focuses mainly on disclosure and oversight, and makes few recommendations for how Goldman will change the way it does business day to day.

It says nothing, for example, about replacing Chief Executive Lloyd Blankfein, widely criticized for his response to the SEC lawsuit and allegations that the bank's activities were rife with conflicts of interest that were not always disclosed to clients.

Still, the report is emblematic of a more humble tone from a firm long lambasted by critics for arrogance. Blankfein told a Senate hearing last April that Goldman was undergoing a "big soul search" in the wake of the SEC complaint and other allegations.

Goldman shares were little changed in trading, gaining 19 cents to $169.95 and underperforming a broad rise in financial stocks. The shares have gradually recovered from a steep drop that followed the disclosure of the SEC suit last April, rising about 6 percent.

The 142-year-old firm said it would start reporting more details about whether trading revenue comes from facilitating client transactions or from investing on its own behalf. The change comes in response to widespread criticism that the bank does not adequately disclose how it makes money.

"People have been asking for more information from Goldman for a long time. Black boxes are terrific when earnings are going up, but once things turn sour, investors get aggravated that they can't find out more," said Marshall Front, chairman at Front Barnett Associates in Chicago, which does not own Goldman shares.

Goldman Sachs earned a record $13.39 billion in 2009. The bank's results have been on a roller-coaster ride over the last five years, rising to an eye-popping $11.6 billion in 2007 before dropping to $2.32 billion in 2008, only to reach a record high the following year.

BLANKFEIN UNSCATHED

Goldman's 2010 results are on track to be down from 2009; the bank earned just $5.49 billion in the first nine months of the year. The bank is scheduled to report fourth-quarter results on January 19 under its new disclosure framework.

Goldman said it would set up one committee to ensure that clients are being treated fairly, another to scrutinize each potential new business activity, and a third to examine products' suitability for investors.

"We act in many capacities, including as an adviser, fiduciary, market maker and underwriter," the report said in one of several references to potential conflicts of interest. "We must be clear to ourselves and to our clients about the capacity in which we are acting and the responsibilities we have assumed."

Goldman said bolstering the firm's reputation was a key objective of the report -- famously described by a Rolling Stone magazine article as "a great vampire squid ... jamming its blood funnel into anything that smells like money."

Michael Holland, who oversees $4 billion of assets as chairman of Holland & Co, called Goldman's planned changes "yet one more smart move in a series of things they've done to repair the damage" to their reputation during and after the financial crisis.

As part of the internal review, Goldman talked to more than 200 of its clients worldwide, some of whom criticized the firm for emphasizing its own interests and short-term compensation at their expense.

Partly in response, Goldman said it will seek to put increased weight on "reputational risk management" as well as emphasizing "client service and client relationships."

(Additional reporting by Maria Aspan; writing by Christian Plumb; editing by John Wallace)