THE BLOG
05/25/2010 05:12 am ET Updated May 25, 2011

Meg Whitman's Shady Goldman Sachs Past -- Is It California's Future?

Just when you thought you'd had enough of Goldman Sachs running things -- and running them into the ground -- along comes Meg Whitman. Most Californians know she's using her fortune to run for governor. They probably don't know that she was once on the board of Goldman Sachs, and most likely still would be if she hadn't been cited for a practice one law firm describes as "essentially ... an illegal bribe ... to corporate leaders." Then came the Congressional investigation, and the investor lawsuit, and ... well, it was probably best to just leave the board.

What kind of business relationship can Californians expect their state to have with Goldman Sachs and firms like it if Meg Whitman becomes governor? Here's a clue: In a report called "Corporate cash boosts Whitman," the Associated Press reported that "The biggest donations came from New York investment bankers, hedge fund managers, attorneys and others." If there's one thing these guys know it's how to prime the pump.

Not that Whitman's old pals at Goldman haven't already been profiting off California's misery. They were hired to manage some multibillion dollar state bond offerings but, as reported in the Los Angeles Times, millions in fees didn't stop Goldman from secretly undermining California's credit rating. That hurt the very sales they were hired to manage. As the Times states, the firm "urged some of its big clients to place investment bets against California bonds" by "proposing a way for ... clients to profit from California's deepening financial misery."

California bucks keep rolling in anyway, despite that little bit of backstabbing ... and despite the fact that, unlike other major banking institutions, Goldman refuses to support reinvestment for low-income communities in the state. (By contrast, Bank of America's put in a trillion dollars.) Still, California clients have rewarded Goldman Sachs with billions of dollars in business, amounting to seven percent of the firm's 2008 revenues.

No wonder they call it the "Golden State."

Whitman profited from a practice called "spinning," which a professor specializing in financial fraud and corruption calls a "quasi-kickback." As the Sacramento Bee explains:

"(Spinning) involved offering a company's executives and board members personal shares in IPOs as a reward for giving the investment firms corporate business. Investment firms initially denied that was their motive, but later agreed to ban the practice.

The firms offered key executives shares at starter IPO prices not then available to ordinary retail investors. The executives resold their shares within days, making millions."

As CEO of eBay, Whitman hired Goldman Sachs to handle the company's initial public stock offering. She was also a private banking client of the firm's at the same time. She directed eBay to use Goldman Sachs for a second stock offering, too - and to help it acquire PayPal. Goldman Sachs got $8 million in fees from eBay while Whitman was CEO, while she made $1.78 million from those "spinning" deals.

Not that she needed the cash, being a billionaire and all. But that's how it works in Meg Whitman's world: Taking chances in the stock market is for the little people. To Meg Whitman, a million here or a million there as a "thank you" for your patronage is nothing more than her due. It's noblesse oblige, the aristocratic privilege of the corporate class.

Whitman was forced to leave the board after paying $3 million to settle a lawsuit from eBay shareholders, but she and Goldman had a warm relationship while it lasted. "Meg Whitman is one of the most dynamic and forward-looking leaders in business today," said Goldman CEO Hank Paulson in 2001. (That would be future Treasury Secretary Hank Paulson, of course; these Goldman folks like government power.)

To be clear, Whitman was never convicted of a crime and never admitted to wrongdoing (unless you think that writing a $3 million dollar check is an admission of wrongdoing.) When we say her past is "shady," we're not implying criminality. We're using the Merriam-Webster definition - "of questionable merit : uncertain, unreliable b : disreputable." As for the "disreputable" part, she was singled out for censure in a Congressional report issued by Ohio Republican Representative Michael Oxley - a distinction which, she complained, was "painful."

As the Bee reports, a business ethics expert responded thusly: "She's the victim? I love the transmutation. This was a not-very-subtle form of bribery that Wall Street's big investment houses, like Goldman Sachs, were using to develop their business."

She was a competent CEO, though she didn't create eBay and was never an entrepreneur. Her most noteworthy accomplishment before joining the already-thriving company was that she'd been the worldwide product manager for "Mr. Potato Head."(1) She ran the company well ... except for, you know ... the Goldman Sachs thing. But private sector CEO experience doesn't mean you'll perform well in a government job. (Dick Cheney and Don Rumsfeld were both former CEOs: I rest my case.)

And her spending's become an embarrassment. She's shattered all records, shelling out seven times as much as her opponents ($46 million so far - $27 million on the primary alone.) Her policy proposals include making the State Legislature a part-time body (looks like Republicans in the US Senate are beating her to it, though; maybe that's why they call them "bankers' hours.")

The next governor will inherit a state in deep financial crisis. Betting's still hot and heavy on who will default first: Greece or California. As the SEIU reported (pdf), many cities (including some in California) are facing a financial crisis because of bad derivatives deals they made with firms like Goldman Sachs. With all this, does the state really need to be led by someone with a Goldman Sachs mentality?

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(1) Whitman managed the late-version Mr. Potato Head, the one with the plastic body. I'm old enough to have played as a child with the original Mr. Potato Head, discontinued in 1964 - the one where you inserted the toy eyes, ears, etc. into an actual potato. That has not influenced this analysis of Ms. Whitman in any way.

Richard (RJ) Eskow, a consultant and writer, is a Senior Fellow with the Campaign for America's Future. This post was produced as part of the Curbing Wall Street project. Richard blogs at:

No Middle Class Health Tax
A Night Light

Website: Eskow and Associates