KMI Moves on El Paso

El Paso was founded by Houston attorney Paul Kayser in 1928 with the mission of bringing New Mexico natural gas to the El Paso city market. The company grew explosively in the 1940s and 1950s as it purchased gas from Texas’ Permian basin and shipped it to California and more northern markets. By the early 1980s, El Paso had built itself into the nation’s largest natural gas pipeline company. However, a series of unprofitable diversifications left El Paso vulnerable. In 1983 it was acquired by Burlington Northern Inc., a rail and natural resource company.

Natural gas deregulation shook the pipeline business in the mid-1980s. Previously, carriers like El Paso purchased gas from producers and transported it to distant customers. Under deregulation, producers gained a “common carrier” right to ship their owned-gas for a simple transportation fee, called a tariff. Moreover, tariffs on interstate gas pipelines like those El Paso owned, were stringently regulated by the Federal Energy Regulatory Commission (FERC). Returns on Capital for inter-state carriers were limited by FERC to a range of 8–10%, and returns could be much lower if a given pipeline was underutilized. This turned the natural gas pipeline business into a modestly attractive utility under the best of cases. Burlington decided to position itself as more of a natural resource play; in 1992 it spun off El Paso to shareholders.

Newly independent, El Paso faced life as a stand-alone regulated utility. It had 20,000 miles of gas pipelines connecting Texas, Oklahoma and New Mexico production with local markets, California, the Northeast U.S. and Mexico. However, total revenues were less than $1 billion on which El Paso earned after-tax profits of only $90 M.⁵ El Paso then devised three strategies to break out of its tightly regulated cocoon. First, it sought to expand its pipeline system to include intrastate and liquids pipelines; these were less heavily regulated. Second, it launched its own oil & gas exploration/production company. Third, it began to emulate Enron, becoming a major trader of natural gas futures and derivatives.

The results were not what El Paso expected. Pipeline expansion was carried out. El Paso merged with Sonant in 1999 and took over Coastal Corporation in 2001, more than doubling in size. However, disappointing volumes, rising safety and maintenance costs, and increasing regulation kept pipeline returns in single digits. The E&P Company fared poorly, earning a reputation for spotty exploration success and lackluster profitability. Worst of all, Enron’s catastrophic collapse littered the natural gas trading market with bad debts. El Paso’s creditors feared it too would go bankrupt as rating agencies downgraded its debt to junk status.

El Paso managed to stay afloat. Management changed, with Douglas Foshee taking over as CEO. Foshee had a background in E&P before becoming CFO at Halliburton. Arriving at El Paso, Foshee sold assets to generate cash, shut down the derivatives trading business, and revamped the E&P company’s risk taking. El Paso’s results improved markedly (see Attachment 4). By 2006 the company was generating profits of $ 475 M on $ 4.3 billion of revenue; by May 2011 its stock price, once less than $1/share in Enron’s wake, had rebounded to $19/share.⁶

El Paso’s recovery attracted the attention of KMI’s chairman, Rich Kinder. KMI was a more diversified company than El Paso. In addition to natural gas pipelines, it both processed and transported natural gas liquids and crude oil. Its little known but highly profitable CO₂ division was one of the largest onshore oil producers in Texas; it extracted crude from old Permian basin fields via CO₂ injection. KMI also had storage facilities and transportation assets. Kinder’s vision was to position KMI as the dominant processing and transportation company for servicing America’s new production revolution.

A large band of independent companies were now using hydraulic fracking to rapidly grow oil and gas production. Much of this growth was in new places, like the Marcellus shale in Pennsylvania/Ohio, the Haynesville shale in Louisiana and Arkansas and the Bakken basin in North Dakota. Infrastructure was lacking in these areas. Kinder could see tremendous opportunities for “organic KMI growth,” i.e., growth resulting from building new facilities rather than buying assets. In this environment, El Paso struck Kinder as a strategic prize. Its pipeline network would provide links to vital markets. Its technical teams would strengthen KMI’s ability to execute new projects, and El Paso brought “right of ways” that would enable Kinder to construct new pipes with much less regulatory review than if new right of ways had to be acquired.

As these conditions materialized, Foshee was not idle. He perceived that turning El Paso into a “pure play,” i.e., a pure pipeline company, might attract a buyer willing to offer a hefty price premium. To encourage such an offer, El Paso announced on May 14, 2011 that it would “spin off” its E&P division to shareholders. Foshee had several motives for making this move. On the one hand, Foshee sought to promote aggressive bidding for the pipeline business from multiple suitors. Unbeknownst to outsiders or the El Paso Board, Foshee was also positioning himself to lead a buyout of the E&P Company post-spinoff.

These developments did not please Rich Kinder. He did not relish getting into a bidding war for El Paso with the likes of Enterprise Products Partners (EPD) or Energy Transfer Partners (ETP). So, Kinder devised an alternative strategy. He resolved to buy El Paso before the spinoff was accomplished. Later, he would sell off the El Paso E&P division to help pay for his acquisition. Kinder thought this approach offered the possibility of getting KMI an “exclusive” negotiation, i.e., one with no other bidders involved. On August 30, 2011 Kinder made his move. Quietly contacting Foshee, Kinder offered $25.50/share in cash and KMI stock for all of El Paso’s stock. The offer amounted to 35% premium over the then prevailing El Paso stock price.

It was then that things got interesting.

El Paso Reacts and Goldman Faces its Conflicts

Foshee reviewed the KMI offer with the El Paso Board, who quickly deemed it inadequate. Then the Board authorized the El Paso CEO to be the lead negotiator for further discussions with KMI.

Foshee knew he would need advice. Now that it was “in play,” El Paso had strategic options. It could pursue an exclusive negotiation with KMI, with Kinder and Foshee talking directly. Alternatively, Foshee could pursue exactly what Kinder’s move was intended to preempt—El Paso could announce that it had received and rejected an offer, and put itself up for auction. A third alternative was to stay the course with its current strategy—complete the spinoff of the E&P division and then auction the pure-play pipeline company. This strategy, known as a “breakup,” might offer prospects of the highest net value for El Paso shareholders. They would gain E&P stock in the spinoff, which the market would value, and then collect a handsome premium when the pipeline company went to auction. However, this approach would take time. There also was no certainty that the breakup approach would yield a better net value than what Foshee might be able to extract from Kinder in negotiations.

These dilemmas were ticklish. Any route Foshee might choose was likely to be challenged by some shareholders who would allege that more value could have been generated by one of the alternatives. In such a situation, Foshee would be attempting to prove that the results of an actual deal were as good as or better than those of a hypothetical. When confronting such a challenge, it would be good to be able to point to a well-regarded adviser who endorsed the course that Foshee chose to pursue.

Goldman Sachs was an obvious candidate to be that adviser. Goldman was already El Paso’s adviser on the spinoff. This meant that Goldman was up to speed on El Paso’s financial situation and strategic options. Goldman also had good relations with El Paso senior management. Moreover, Goldman understood the Midstream energy sector, having invested in it via its private equity funds.

However, there were conflicts and complications. A big one was Goldman’s large investment in KMI, the very firm pursuing El Paso. In 2006, Goldman assisted Rich Kinder in taking KMI “private” via a management-led buyout.⁷ As a result, Goldman Sachs Capital Partners (GSCP) acquired a 19% stake in KMI and two seats on the Board.⁷ This position, which directly benefited Goldman’s senior executives, remained in place. The stake was not inconsequential. Market observers valued it at over $4 billion; this implied that a modest 5% increase in KMI’s value from an El Paso merger would be worth $200 M to GSCP. From another perspective, every $1/share reduction in the El Paso buyout price versus “fair value” would be worth $150 M to Goldman’s KMI position.⁸

A second conflict involved Goldman’s advisory mandate. The firm could expect to earn a fee of $20–25 M for advising on an El Paso spinoff. If no spinoff occurred, Goldman would earn little or nothing. Kinder’s buyout bid was clearly an effort to preempt the spinoff. Could Goldman give objective advice about a transaction that might end up preempting its advisory fee?

A third conflict concerned Steve Daniel, the Goldman managing director currently assigned to the El Paso advisory mandate. Daniel owned a $340,000 stake in KMI, rendering him personally conflicted if he continued advising El Paso about a KMI buyout.⁹

Clearly Goldman had a lot of money at stake in the KMI bid for El Paso. However, Blankfein knew that more than money was at risk. In 2007–08, Goldman had given scant consideration to reputational risk or legal consequences as it navigated the treacherous events leading up to the Financial Crisis. While Goldman escaped the worst of that crisis, the final results did include that massive SEC fine and considerable damage to Goldman’s public image. Goldman lost influence in Washington, and became a public target for campaigning politicians. The longer term consequences of these developments could easily exceed the SEC’s fine.

It was to address these concerns that Blankfein had spearheaded the 2010 review of business standards. In preparation for his call with Foshee, Blankfein thought it advisable to review the relevant recommendations of the Business Standards Committee report.

The Business Standards Committee on Client Conflicts

The Committee’s report begins with an overview that was posted on the firm’s website. Among other points, the Overview says this about client conflicts:

“The firm’s culture has been the cornerstone of our performance for decades. We believe the recommendations of the Committee will strengthen the firm’s culture in an increasingly complex environment. We must renew our commitment to our Business Principles – and above all, to client service and a constant focus on the reputational consequences of every action we take. In particular, our approach must be: not just ‘can we’ undertake a given business activity, but ‘should we.’

We believe the recommendations contained in this report represent a fundamental re-commitment by Goldman Sachs: a re-commitment to our clients and the primacy of their interests; a re-commitment to reputational excellence associated with everything the firm does; a re-commitment to transparency of our business performance and risk management practices; a re-commitment to strong, accountable processes that reemphasize the importance of appropriate behavior and doing the right thing; and a re-commitment to making the firm a better institution.”¹⁰

The report promised a Goldman “recommitment to reputational excellence….” It went on to state that a new Client and Business Standards Committee would be established “to place our client franchise at the center of our decision making process.”¹¹

A close look at the specific recommendations reveals Goldman’s underlying philosophy. In an age when Goldman is not only a banker, but also a market-maker, intermediary and trader for its own account, client conflicts are inevitable. The report provides no guidance about which client obligations should trump others. There were no principles stated as governing, e.g., fiduciary responsibility would come before proprietary interests. The report carefully preserves full decision making latitude for Goldman to practice on a case-by-case basis. It does promise two things: 1) that Goldman would carefully review situations of client conflicts before deciding what business to transact; and 2) that Goldman would do a better job disclosing its conflicts to clients. The spirit of this approach is captured by the following “key recommendations” language on Goldman’s website. Future recommended behavior would include:

“Detailing the firm’s specific professional responsibilities to our clients which depend on the nature of the relationship, role and the specific activity we are asked to undertake. We act as an advisor, fiduciary, market maker and underwriter across various businesses and it is important to articulate clearly both to our people and to clients the specific responsibilities we assume in each case.”¹²

The Report’s detailed recommendations on client conflicts are found in Attachment 3.

With this guidance in mind, Blankfein returned to the matter of what he seeks to accomplish with Doug Foshee and how he would “pitch it.”

Blankfein Considers Goldman’s Options to Manage its El Paso-KMI Conflicts

Lloyd Blankfein leaned back in his chair and stared out the window. At times like this he found it helpful to review the firm’s full range of options. His thoughts wandered to the safest course of action and then turned to more aggressive approaches:

I guess the safest course of action would be to recuse ourselves from El Paso’s negotiations. This is the course of action recommended by the senior partners at our outside counsel. El Paso would get another bank to advise them, and our spinoff advisory mandate would go dormant unless/until no deal with KMI is reached. In this scenario, Foshee is likely to get advice to put the company up for auction. A bidding war might then ensue. Final price would be hard to predict, KMI might not be the winner, and a ‘no deal outcome’ is improbable though not impossible. Goldman is on the sidelines in this scenario.

Of course, if we recused ourselves on the El Paso side, we could offer to go to work for KMI. That would align our advisory mandate with the firm’s own investment interests. Would KMI hire us? Rich Kinder has gotten this far without us, but he knows how valuable we can be in a tough negotiation. He likely would value our insights into El Paso’s situation and management perspective. Bottom line – there’s a good chance Rich would hire us on in some capacity, especially if we told him the alternative was for us to expand our existing El Paso mandate.

A third choice would be to convince Foshee to expand our spinoff advisory mandate. In this scenario, we certainly need to disclose our KMI investment and the potential conflict it poses. Failing to do so would be completely contrary to the Business Standards recommendations recently adopted. It also would invite litigation that could prove highly embarrassing. I wonder how Doug would feel about taking Goldman on? Could he get his Board to go along? He does have his own quiet agenda – that of leading a Management Buyout (MBO) of the E&P division down the road. Could that play any role in his receptivity to a Goldman advisory?

The fourth option is a bit more complicated, but was well laid out in Steve Daniel’s memo. Under this approach, we disclose our conflicts to El Paso and recommend they bring in another bank to be their advisor. However, this second bank’s mandate is strictly limited to advising on a KMI deal, and they only get paid if that deal is completed. Goldman then keeps its spinoff advisory mandate, and uses that platform to provide quiet advice to Foshee on his negotiations with Kinder. This approach has good “defensibility” – Foshee will be fully informed as to Goldman’s conflicts and it will be his and the El Paso Board’s decision if and how much we are allowed to continue giving advice. Another bank clearly will be in the picture. Any final recommendations on a KMI deal will bear their brand and endorsement.

This last option does have one technicality. Do we have to disclose Steve Daniel’s KMI stock? Steve is fully up the curve on El Paso after his spinoff work, and I’d hate to have to replace him now with someone coming in ‘cold.’

Blankfein felt satisfied he had exhausted the list of Goldman’s options. His call with CEO Foshee was scheduled for 20 minutes from now. Blankfein took one last look at his talking points, picked up a pen, and began to think whether they should be edited into a different message.

Attachment 1

(Historical Recreation)

To:	Mr. Lloyd Blankfein
From:	Steve Daniel
SUBJECT:	Talking Points for Conversations with El Paso CEO Foshee

Subsequent to my memo recommending a strategy vis a vis the El Paso-KMI Merger mandate, below please find suggested talking points consistent with that strategy:

We suggest you open as follows: “Hello, Doug — it’s been a long time since we have had the chance to visit … I was very pleased you reached out to us on this most recent matter.” After this thank you, continue emphasizing we appreciate the trust El Paso has exhibited toward the firm. We will need El Paso’s trust as regards our ability to manage the apparent conflicts of interest.

We recommend acknowledging Goldman’s conflicts upfront. Foshee likely already knows about our ownership position in KMI and our two Board seats. That said, an upfront disclosure of what we own and control will be appreciated and build trust. Combine this with adding that Goldman’s two KMI directors will recuse themselves from all deliberations on the El Paso deal.

The next step is to recommend bringing in another bank to advise El Paso on the merger. Morgan Stanley would be a good choice, clearly a top-tier M&A bank whose recommendations could not be easily dismissed if litigation occurs down the road.

We need to clarify Goldman’s ongoing role once MS&Co. (or similar institution) is in the picture. Suggest to Doug that there are reasons why Goldman’s advisory should run alongside Morgan’s. For starters, the merger may not be consummated. Terms may not be agreed or the deal could run into antitrust objections. Should the merger fail, the spinoff, with the Goldman advisory, should proceed. Second, there will be valuation issues. A final KMI offer can only be valued in relation to our original strategy, spinoff + later sale of the pure pipeline company. Having worked on an El Paso spinoff for months, Goldman will be in the best position to value these alternative deals. Finally, there is the matter of the El Paso E&P division. It is Goldman’s view that it should be spun off or sold under all scenarios. Doug may value having Goldman reinforcing this line of thought throughout whatever process unfolds.

You will have covered a lot of ground by this point. I would suggest signing off here with an agreement to talk again. When signing off, take stock of whether Doug sounded sympathetic to a tight compartmentalization of MS&Co’s advisory and a looser, more fluid definition of Goldman’s. If so, suggest that in the next conversation you would like to share some thoughts about how to structure the two advisories to keep them appropriately separate.

Attachment 2

(Historical Recreation)

To:	Mr. Lloyd Blankfein
From:	Steve Daniel
SUBJECT:	Goldman Recommended Strategy re: KMI’s Buyout Offer for El Paso

You have asked that I outline strategy recommendations now that KMI has made a buyout offer to El Paso. The following suggests how Goldman should position itself between these two clients and what advice we may want to give to the parties. In addition, it discusses how best to handle Goldman’s possible conflict of interest, such that we are not precluded from taking an active role in this deal.

Goldman’s Interests

The firm’s biggest interest is its $4 billion ownership position in KMI. As you know, this stake resides within Goldman Sachs Capital Partners (GSCP).

The value of this position is sensitive to the outcome of KMI’s bid for El Paso (EP). Many merger proposals do not create value. More often than not, bidders overpay for acquisitions. This is especially the case when skillful sellers organize well-structured auctions. First movers, feeling their prestige is at stake after putting the target “in play,” often “bid to win” rather than bid to create value. The resulting “winner’s curse” produces over-leveraged balance sheets, inflated goodwill that drags down EPS, and flatlining stock prices for years into the future. Should this be the outcome of a KMI-El Paso merger, GSCP would share in approximately 20% of the ensuing value destruction.

On the other hand, a value-creating KMI bid would generate handsome returns for GSCP. Using a notional $27.50 “fair value” for EP, our sensitivity analysis shows that every $1/share in lower price paid by KMI would yield a ~$150 M accretion to the value of GSCP’s KMI stake.

KMI’s Rich Kinder is an experienced acquirer and knows the industry in great depth. He can be trusted to value EP fairly and be disciplined during any process that ensues. However, Kinder has been known to put “strategic” value on top of “hard money value” as he plays out acquisition bids. Whether the market will agree that an EP acquisition has such strategic value, or that it’s as much as Kinder thinks it is, are open questions. The market is already troubled by aspects of KMI’s structure and contractual arrangements. There is no guarantee that Kinder’s assessment and that of the market will coincide.

Goldman also has an interest in realizing a fee from this transaction. A successful KMI buyout will preempt an EP spinoff and thus nullify our current mandate. We may request all or some of our $20 M fee, but chances are good that we will harvest no more than our retainer and out of pocket expenses.

Finally, there is “franchise value” to consider. The entire midstream industry knows that Goldman is close to both EP and KMI. For this marriage to happen and for Goldman not to be involved in the process does nothing to promote our M&A practice.

Handling Goldman’s Conflicts of Interest

Goldman obviously is conflicted in this situation. As we’ve been telling clients and our management team for years, such conflicts are an inevitable result of how clients value our services and the multiple roles they ask us to play.

The first key to handling these conflicts is full disclosure. Advise EP CEO Foshee of our KMI position and Board seats. Do it right away and make sure it is on the record. Whatever decisions EP then makes regarding Goldman’s subsequent involvement will be their responsibility.

We do not believe there is a need to disclose Steve Daniel’s KMI ownership position as the amount, $340 k, is not material in terms of either Daniel’s personal wealth or in terms of being likely to influence his advice to EP.

Assuming Doug is open to a continuing Goldman role, we recommend that EP bring in another bank to advise them on the KMI bid. Doing so will provide strong protection against subsequent law suits contending that Goldman gave conflicted advice to EP. However, having two banks in the picture is always complicated. We discuss below how to handle this in a way that protects Goldman’s interests.

Finally, we have detected a Foshee interest in leading a Management Buyout of the E&P division. The subject of his leading that division post-spinoff came up in our discussions. Please keep this in the back of your mind as events unfold. Doug may ultimately value that Goldman is somewhere “on the other side of the table” if the KMI bid ends up succeeding.

Positioning Goldman Now – Options

Clearly Goldman could step aside and let the EP-KMI process play out. This is the safest legal course of action. However, it does nothing to advance any of the firm’s interests. We would be in no position to help produce a fair value EP-KMI merger or benefit later from its consummation. As noted, we also likely don’t harvest an advisory fee.

Goldman could step aside as EP’s advisor while the process with KMI unfolds. In this situation, we could approach Rich Kinder with an offer of our services. There is a reasonable likelihood Rich would retain us—he should value our knowledge of EP’s business, strategic options and management thinking given the months we’ve spent working inside that company. KMI will also need someone to help them sell off EP E&P if their bid succeeds. After working on the spinoff, nobody would be better qualified than Goldman for such a role.

That said, having gotten this far without Goldman, there is no assurance Rich will feel compelled to hire Goldman now. He probably has other banks involved or contending for his attention. Moreover, if we step aside on the EP front, another bank will step into our shoes. That bank’s interests will be to maximize the EP sale price in any way possible. Quite likely they will recommend putting EP into an auction process. It is unclear whether an auction will actually generate a higher price than what KMI ultimately is prepared to pay. However, an auction process would inject significant uncertainty into the process. EP’s ultimate sale price and the identity of the successful bidder would be “up for grabs.” Such an outcome would not serve any Goldman interest.

Consequently, we recommend a third option. After disclosing Goldman’s conflicts and advising that another bank be brought in, we recommend persuading Doug Foshee that the two advisory mandates, ours for the spinoff and Bank X’s for the KMI bid, are connected. Suggest to Doug that he will want Goldman to stay active, if in the background, during a KMI process, and that by doing so we will be able to help him and the EP Board answer difficult valuation questions when it comes time to decide on a KMI “Best and Final” offer. Our input here will help defend both Doug and the Board against subsequent shareholder litigation, which these days is almost inevitable.

If Doug is receptive to this point, it will mean that the mandates for Bank X and Goldman must run in parallel. That creates a need to clarify our respective roles and associated compensation. When the time comes for this discussion, suggest to Doug that he confine Bank X’s mandate strictly to advising on the KMI bid. By defining Bank X’s “scope of work” in this manner, it will follow logically that they should only be paid if that deal closes.

With Bank X having a narrow mandate, Goldman can take up broader issues under its ongoing mandate. This will lay the groundwork for claiming an advisory fee outside the scope of a consummated spinoff.

I would be happy to discuss the above recommendations and answer any questions at your convenience.

Author’s Note

This case extends the analysis of Goldman Sachs’ struggles to manage client conflicts to a time after the Financial Crisis. That crisis cast a harsh light on Goldman’s ability, so strongly asserted by CEO Jon Corzine in 1995, to manage such conflicts. After the crisis, Goldman undertook an extensive effort to recommit to its values and upgrade its review processes. This case examines what this effort accomplished. Goldman’s Business Standards Committee issued its report in January 2011. Management and the Board quickly signed off. The El Paso-KMI test case arose eight months later.

This case is also about CEO leadership on the ethics front. CEOs set the ethical tone for the firm. Absent strong messages to the contrary, subordinates often look to maximize the firm’s and their own short-term financial returns. Within the context of this case, subordinates provide Goldman CEO Blankfein with exactly this type of game plan. It then becomes Blankfein’s problem to decide if that game plan poses ethics issues and reputational risks. If it does, the question for Blankfein then becomes: before calling Foshee does he alter or temper the recommended plan in any way?

Major sources for this case include The Death of Corporate Reputation: How Integrity Has Been Destroyed on Wall Street, an excellent work by Yale Law Professor Jonathan R. Macey. Chapter 2 of this book provides an account of Goldman’s conduct in the El Paso-KMI transaction along with a useful bibliography. Part of that bibliography includes the opinion of Delaware Chancery Court Judge Leo Strine who handled the shareholder litigation seeking to block the EP-KMI deal. This opinion benefitted from extensive discovery and thus it provides the most detailed account of all parties’ behavior. Usefully, it sheds light on motives behind the parties’ behavior, e.g., Foshee’s interest in a Management Buyout of the E&P Company, and Goldman’s intense efforts to claim an advisory fee on the EP-KMI merger even after another bank was supposedly handling that deal. Judge Strine’s opinion thus provides an authoritative account of what everybody DID as this transaction played out. As such, it provides the essential “how did it work out” account that casts light back on the decisions facing Goldman as it decided how to handle its conflicting interests.

Goldman’s own website provides links to an overview of the Business Standards Committee report and to the actual report itself. Both make for impressive reading. There can be little doubt that Goldman took the process seriously. Observers should closely consider in what ways the recommendations seek changed behavior versus how Goldman handled similar matters before the Financial Crisis.

Mystery still shrouds Goldman’s advice to EP. The evidence that Goldman shaped Foshee’s strategy is considerable but ultimately inconclusive. What can be said is that the outcome almost perfectly coincided with Goldman’s interests. No auction process occurred. KMI was able to capture EP at a price substantially below the offer EP first accepted. Goldman’s stake in KMI benefitted from this improved purchase price. This is especially so when one considers the murky value assigned to the out-of-the-money options KMI used for part of the price. EP was quite willing to pay Goldman an advisory fee. Goldman only surrendered its fee when shareholder litigation shone a spotlight on the firm. Once again Goldman was showcased as a master manipulator of complex transactions. It paid no fines as a result of litigation. The only downside—the narrative reopened questions about Goldman’s “recommitment” to its reputation.

To position the case on CEO ethical leadership, it is designed around a Blankfein call to Foshee. The case treats Blankfein as playing a major role in Goldman’s game plan, with this call being the kickoff. In fact, Blankfein’s call to Foshee took place after Goldman’s strategy was unfolding, and Blankfein performed the largely ceremonial duty of thanking Foshee for green-lighting Goldman’s ongoing involvement. Attachments 1 and 2 are thus Historical Recreations. NO SUCH DOCUMENTS ARE KNOWN TO EXIST in the public domain, and if anything of the sort was prepared inside Goldman, it factored into deliberations that took place before this phone call.

However, Attachments 1 and 2 are consistent with Goldman’s conduct after the Blankfein-Foshee call. Moreover, they lay out not only where Goldman’s financial interests lay, but also how large they were. Finally, they show how the “have its cake and eat it too” strategy worked, i.e., how keeping the Goldman advisory alive allowed for an argument to limit the second bank’s mandate, which justified circumscribing that bank’s compensation such that the KMI deal is more likely to go ahead on a basis favorable to Goldman’s investment in KMI. Laying these points out is important for teaching purposes. The case asks the students to consider what Blankfein should do in light of Goldman’s conflicts. Attachments 1 and 2 detail those conflicts and how Goldman might maneuver to maximize its own interests, possibly to the detriment of those of its client. Given this “temptation,” what then should Blankfein do?

Here it is important to note that Judge Strine did not provide injunctive relief to the EP shareholders. The legal reasoning is somewhat complex, having to do with the shareholders asking for an unusual form of relief. Beyond that, Strine noted that no other bidder for EP appeared, and given the fact that shareholders were getting a 37% premium, he was reluctant to stop a transaction when doing so would expose all shareholders to the risk that this premium might be lost. His reasoning should not be dismissed. Goldman may have successfully walked a very fine line balancing its interests and the interests of both EP and KMI.

What also should not be dismissed is the heavy note of skepticism about Goldman’s motives and conduct that appears in Strine’s opinion. Most notable was this passage:

Goldman continued to intervene and advise El Paso on strategic alternatives, and with its friends in El Paso management, was able to achieve a remarkable feat: giving the new investment bank (Morgan Stanley) an incentive to favor the Merger (with El Paso) by making sure that this bank only got paid if El Paso adopted the strategic option of selling to Kinder Morgan. In other words, the conflict-cleansing bank only got paid if the option Goldman’s financial incentives gave it a reason to prefer was the one chosen.¹³

Goldman’s Business Standards Committee took considerable pains to stress that the firm should use a long-term perspective when judging the appropriateness of business conduct. This is a correct emphasis for firms concerned about reputational risk. It is only by weighing the long run implications of problematic conduct that proper weight can be given to the costs of bad publicity, erosion of trust, and a reputation for clever hypocrisy. As CEO, it is Lloyd Blankfein’s task to give substance to the Business Standards Committee’s recommendation or to allow them to become dead letters. In the matter of El Paso-KMI, readers of the case should decide which course Blankfein allowed his firm to pursue, and whether a better ethical and business option was available.