Authors: William D. Cohan
The metaphor of Goldman being a “great vampire squid” soon became so ubiquitous that even Blankfein could not ignore it. “
That
Rolling Stone
article oddly enough tapped into something,” he said in an interview in August 2009. “I thought it was so over the top that I actually read it as a gonzo piece of over-the-top kind of writing that some people found fun to read. That’s how I saw it. But then you had other people sort of taking stuff as if Goldman Sachs burned down the Reichstag, fired on Fort Sumter, shot the archduke Ferdinand, all that kind of stuff.”
Goldman’s gold-plated image suddenly seemed to tarnish overnight. A few weeks later,
Joe Hagan, at
New York
magazine, followed up Taibbi’s screed with a more sober analysis of how and why things were going so wrong at the mighty Goldman. In
Capitalism: A Love Story,
the filmmaker
Michael Moore, full of vim, vigor, and irony, drove up to 85 Broad Street in a Brinks truck, hopped out, and yelled: “We’re here to get the money back for the American people!” before being ushered from the premises without getting inside.
The frenzy seemed to reach what in retrospect looks like a false peak in early November 2009 when the august
Sunday Times,
in London, weighed into the fracas with its own lengthy treatise of how Goldman had become “the best cash making machine that global capitalism has ever produced, and, some say, a political force more powerful than governments.” The usual tropes about Goldman were trotted out—including those about it being a collection of the hardest-working, smartest, and
richest kids on the block—but questions were also raised about its plethora of conflicts and its ability to manage them. Then there was the question, posed to Blankfein, about whether there can ever be—should ever be—any limit to the firm’s ambitions, or the ambitions of the people who work there. “I don’t want people in this firm to think that they have accomplished as much for themselves as they can and go on vacation,” he answered. “As the guardian of the interests of the shareholders and, by the way, for the purposes of society, I’d like them to continue to do what they are doing. I don’t want to put a cap on their ambition.” Blankfein’s comment seemed to be a direct jab at the ongoing efforts of the Obama administration during its first year to mitigate the growing discrepancy between rich and poor in the country.
As difficult to digest as Blankfein’s comment might have been for most readers, it was his off-the-cuff comment on the way out the door that he was just a banker “doing God’s work” that set off a new round of firestorms at the firm. Once again, Goldman found itself on the defensive, trying to explain an example of Blankfein’s self-deprecating sense of humor, which was ill timed and had fallen terribly flat. Ten days later,
Jeffrey Cunningham, of
Directorship
magazine, which would soon name Blankfein its 2009 “CEO of the Year,” interviewed Blankfein about the “God’s work” comment. “It’s nice to be entrapped by you so early in the game,” Blankfein quipped. “No, it was obviously a joke. If you asked me now if I wish I hadn’t said it, no of course. I’m always warned when I leave, by my handlers, ‘Now remember, Lloyd, whatever you do, don’t be yourself.’ So I walked out and I was talking to a reporter, and the questions were running along the lines of ‘How much did your tie cost?’ and ‘Do you know how much a quart of milk costs?’ And I knew where the trend was going, and as I was leaving, we’d gotten into a back and forth on the themes he was projecting, and I was leaving, I said and meant in an ironic way, ‘Now I’m off to do God’s work.’ He laughed, I laughed, but guess what? He got the last laugh. And so, I would say that if anybody has any allergies and you sneeze, and I don’t say, ‘God bless you,’ understand it’s because I’ve learned my lesson.”
Despite the gaffe, from other quarters plaudits for Blankfein continued to roll in. How could anyone ignore the firm’s extraordinary 2009 profits?
Vanity Fair
named him as its number 1 most powerful and influential person on its annual Vanity Fair 100 list. The
Financial Times
named Blankfein its 2009 “Person of the Year” but made clear, in the accompanying article, that it was grudgingly bestowed. “
This is not an unalloyed endorsement of either Mr. Blankfein or Goldman,” columnist
John Gapper wrote, “which the FT has sometimes criticised in the past
year. Instead, it is a recognition that Mr. Blankfein and his bank have taken the leading place in the world of finance, while others have fallen by the wayside.”
Like the 2004 Red Sox, though, in the first quarter of 2010, the other Wall Street banks seemingly left for dead began to show signs of life, fueled by a combination of the gift of nearly free money from the Federal Reserve—the rocket fuel of the banking sector—and an economy that had been pulled back from the brink. For the first time since before the 2008 crisis became manifest, other firms, besides Goldman, began to make big money again. Even the beleaguered Citigroup showed a profit—of $4.4 billion—after years of losses. Goldman made $3.3 billion in the first quarter of 2010.
Finally, it seemed, the intense spotlight was no longer focused on Goldman Sachs. Wall Street’s sudden return to profitability seemed to signal the return to normalcy that the architects of the TARP envisioned, and no one could have been happier about that than
Lloyd Blankfein. By all rights, 2010 should have been Blankfein’s triumphal moment. But Blankfein could not catch a break.
In the wake of the SEC’s lawsuit and Senator Levin’s hearing, a rash of new civil lawsuits were filed against the firm. The SEC was reportedly studying another Goldman
synthetic CDO marketed and sold in the fall of 2006: the $2 billion
Hudson Mezzanine Funding 2006-1, where Goldman stated in marketing materials related to the deal that its interests were aligned with the buyers—“Goldman Sachs has aligned incentives with the Hudson program by investing in a portion of equity,” according to an internal Goldman marketing document—but that, in fact, according to Senator Levin and Goldman documents, Goldman had actually been the sole, $2 billion investor on the short side of the deal, betting the security would collapse. When it did, in September 2007, Goldman made $1 billion. “Goldman Sachs profited from the loss in value of the very CDO securities it had sold to its clients,” Senator Levin said. The Justice Department was also said to be investigating Goldman on criminal charges, which if brought would be the firm’s death knell, as no financial services firm has ever survived a criminal indictment against it.
In an irony that surely Blankfein can appreciate, the SEC’s lawsuit and the Senate hearing emboldened both the firm’s supporters, who believe the firm has been wrongly singled out for persecution, and the firm’s harshest critics, who believe Goldman embodies all that is wrong with Wall Street and its current mores.
Warren Buffett is among Goldman and Blankfein’s most ardent boosters (and the firm’s largest individual shareholder). He said he backed
the firm “100 percent” and that if Blankfein were to resign, or be replaced, “
If Lloyd had a twin brother, I would vote for him” to be Goldman’s new CEO. Old hands on Wall Street say Buffett was just “talking his own book,” since he has a large financial stake in the firm. On the other hand, Steve Schwarzman, the billionaire founder of the
Blackstone Group, competes with Goldman in a number of businesses. So when, a few days after Senator Levin’s hearing, Schwarzman told the
Financial Times
that for the twenty-five years Blackstone has been around “
we never had any circumstance where there was any question about ethical character or behavior,” his words had more resonance. “We are a major client of Goldman’s and we will continue to remain a major client,” he said.
In an interview recently in a conference room off his office thirty-one floors above Park Avenue, Schwarzman said he thought Goldman was unfairly caught in the crosshairs of Obama’s populist, antibusiness rhetoric and the American public’s ire at having to bail out Wall Street for its own mistakes, only to watch as bankers and traders—especially at Goldman Sachs—were once again reaping big financial rewards while the economic suffering in many quarters remained palpable. “
Goldman became a symbol of prosperity in the time where there was no prosperity,” he said. “And Obama ran on a platform to decrease the [disparity] between prosperous people and middle-class people. That’s like his touchstone. And so Goldman became the mega-symbol because they outearned everybody, right? I think for Obama this was the nail that was too far out of the board and it was going to get hammered down into the board. They just went out about trying to hammer it down. And from talking with Lloyd at different points during this evolution, it was not clear what would feed this monster.” He said that Goldman has become for the Obama administration “either subliminally or purposefully … some kind of symbol … of the society that Obama wants to change, modify, or destroy.” (On the other hand,
Henry Kravis, Schwarzman’s rival at KKR who once tried to get a job in Goldman’s arbitrage department and was a summer intern at the firm, has watched the firm’s evolution during the past thirty-five years from one focused almost exclusively on trying to help its clients, for a fee, to one that finds new ways to compete with its clients on almost a daily basis. “That stress between KKR as a principal and Goldman Sachs as a principal was always enormous,” said one former Goldman banker. “You should talk to Henry about the firm, too, if you haven’t. He has a very, very good view of it. We had a good relationship when I was there. They still have a very good relationship. It goes in and out.” Alas, Kravis declined numerous requests to be interviewed.
Others are far less sanguine and forgiving about Goldman and its business practices than either Buffett or Schwarzman appears to be. They hope that Goldman has finally been caught in the web of its own making. There have been long-standing rumors on Wall Street that Goldman engages in “
front-running,” where the firm becomes privy to a client’s confidential trade or interest and uses that information to its financial advantage. Some even think Goldman did this when it put on its “big short” in early 2007, privy as it was to
John Paulson’s trading patterns, but that it was one example among many. “They view information gathered from their client businesses as free to them to trade on,” explained one Goldman competitor. “They don’t view that as, ‘Hey, that’s my client’s information. I’m not supposed to be knowing that in terms of trading on my own book.’ It’s as simple as that.” He gave the example of Goldman being hired by, say, a medical supply business on a potential sale or IPO and discovering as part of its due diligence on the company that the demand for the company’s services was declining daily and then relaying that information to traders, who would then short the medical supply industry or the securities of companies in the industry.
“They … knew as adviser to some of these companies inside information about what’s going on in these companies,” he said. “And they go and they use this inside information to trade in the market, and they call that ‘managing risk.’ That’s bullshit. That’s fucking insider trading.… They go, ‘Well, that’s managing our risk.’ What the fuck you mean that’s managing your risk? That is the business model … to use their clients—and their client relationships—to generate information off which they can trade. They’re doing that with countries. They’re doing that all the time. It just seems to me that you’ve got three businesses down there. You’ve got advisory, securities underwriting, and trading. And they have taken the securities underwriting and advisory businesses away from being separate and important units to being information sources for trading. And I don’t understand how that’s legal.”
Eliot Spitzer, the former New York State governor and attorney general, said in an interview that he has heard these charges about Goldman for years. “
Front-running is illegal,” he said. “Front-running is a fraud on your client. No question about it.… When you have a client, you don’t give them bad research, you don’t trade in front of them, you don’t subvert their bids. It’s really simple.” But, he noted, neither he nor any other prosecutor has brought such a case against Goldman, in large part because of how difficult it would be to prove in court. “If you had a penny for every person who told you that was what they presume Goldman had done for twenty years, you’d be the richest man in the world,”
he said. As attorney general, Spitzer was not shy about prosecuting Wall Street. Indeed, in April 2003, he forged a $1.4 billion settlement with a group of ten Wall Street firms—including Goldman, which paid $110 million—after he showed conclusively that the equity research Wall Street was issuing was being unduly influenced by the firms’ investment bankers looking to win more business.
But whether the evidence would stand up in court, the anecdotes about Goldman’s ruthless behavior abound. One hedge-fund manager recalled the experience his friend, at another hedge fund, had with Goldman during the recent financial crisis when Goldman was the hedge fund’s “prime broker,” responsible for executing and clearing trades as well as general administrative responsibilities related to the fund. “He had them as a prime broker, where they house all the positions,” he remembered. “The people he was trading with at Goldman, they knew exactly what he had and they were basically trying on the trading desk, in conjunction with the prime brokerage business, to squeeze him to make money themselves. Like this sort of front-running the trades that they knew he needed to do to take risk off, because the prime brokers were telling him he had to. They’re actively trying to put the guy out of business, because they thought at this juncture, this fund is worth more to us dead. We can mop up the pieces and sort of pick up a bunch of cheap things from them when they’re a stressed or a distressed seller. It’s worth more to us dead because we can make twenty million bucks more out of this than if it is alive. They had no qualms about making that sort of objective decision. Door 1 or Door 2—which has the highest present value for me? You wouldn’t want to be in the door with the lower dollar sign.”