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Goldman Sachs Replaces 'Brains' With Trader for CFO

Story updated with new information throughout.

NEW YORK (TheStreet) -- Goldman Sachs (GS) chief financial officer David Viniar is retiring and becoming a member of the bank's board of directors, in a change he calls "part of the natural evolution," of his role at the firm.

Viniar will be replaced at the end of January, 2013 by Harvey Schwartz, the current co-head of the bank's securities division, in a move that may indicate a closer alignment between Goldman's revenue generating sales, trading and banking businesses with its risk management functions, overseen by outgoing CFO Viniar for 12 years.

Viniar, who spent over three decades at the investment bank, was largely credited with steering the firm through the financial crisis, and in particular, preparing it to weather the housing bust.

Given the strength of Goldman's existing risk management team and its balance sheet, Viniar said on a conference call with analysts that the firm is in a position for change. He also highlighted Schwartz as having a "deep understanding of risk management," including the bank's various operational and regulatory challenges, in the wake of the financial crisis.

Schwartz said as CFO he will have a "dual mandate," drawing upon experience growing Goldman's institutional and corporate client relationships in securities and investment banking, while maintaining strong management of the bank's balance sheet, imparted by Viniar in his years as CFO.

After retiring as CFO, Viniar will join Goldman's board of directors as a non-independent director early next year. Schwartz who has been with Goldman since 1997 and was named partner in 2002, will take the reins of the firm's operations, technology and finance and will co-head its risk committee, the bank said in a statement. Prior to becoming global co-head of Goldman's securities unit, Schwartz held executive positions in sales and investment banking.

The move comes at a transitional time for Goldman Sachs as it emerges from the crisis with an earnings outlook colored by new regulations on capital and liquidity, and which prevent the bank from extending itself significantly in proprietary trading or private equity investments.

A CFO like Schwartz with experience in banking and securities may help the Goldman target better risk adjusted returns on capital either by growing strong performing units or by cutting capital intensive underperformers, says Michael Wong, a banking sector analyst with Morningstar.

Schwartz would be "intimately familiar" with top performing and burdensome trading units, putting him in a position to be decisive about where to deploy capital, says Wong, who echoed Viniar's confidence that the bank is in a position for change. "I don't think the market will take this in a negative way," he adds.

"David has made extraordinary contributions to Goldman Sachs over a remarkable 32-year career," said Goldman Sachs chief executive officer Lloyd Blankfein in a statement. "[David] represents the very best of Goldman Sachs and its culture. We look forward to continuing to benefit from his judgment and experience as a member of our Board in the years ahead," he added.

Ahead of the collapse of the U.S. housing market, which felled Goldman competitors Bear Stearns and Lehman Brothers, Viniar was instrumental in hedging the firm's exposure to the subprime mortgage market. Goldman's hedged position to what would turn into a full-fledged subprime crisis later came under scrutiny in the bailout of insurer AIG (AIG) and in the firm's $550 million settlement with the Securities and Exchange Commission on its underwriting of real-estate securities.

A July 2011 Bloomberg profile of Viniar called him "irreplaceable" and quoted Barclays analyst Roger Freeman as calling the CFO "the brains behind the operation." Prior to his retirement, Viniar had been considered a hard to replace piece of Goldman's executive team, with speculation that the bank could split up his technology, risk and operations roles.

Bloomberg's 2011 article speculated Chief Accounting Officer Sarah Smith and Treasurer Elizabeth "Liz" Beshel were candidates to eventually succeed Viniar.

Tuesday's announcement of Schwartz as incoming CFO has the bank replacing Viniar with an executive closer to its trading and investment banking operations than its risk management team.

While it's unclear how Schwartz will use his experience in many of Goldman's top revenue generating businesses to make his mark as CFO, investors may want to look at the management change as a signal the bank is looking for new ways to generate returns on equity near pre-crisis levels, in light of post-crisis realities.

Halfway through 2012, Goldman's ROE stands at just 8.8%, less than half of pre-crisis averages.

For more on Goldman Sachs, see why the bank is in a unique position to grow by shrinking

-- Written by Antoine Gara in New York

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