Bought and Paid For (25 page)

Executives at the Wall Street firms were now admitting that behind the eye-popping numbers was the growing likelihood of the mother of all paydays. Barring the Fed's raising interest rates (Bernanke vowed he wouldn't, and based on that pledge, Obama was eager to reappoint him and push for his Senate confirmation) or the Treasury removing the banks' protected too-big-to-fail status, Wall Street seemed to be on course for a record year. The firms would be more than able to repay the TARP money, their executives bragged, which meant they would not have their salaries capped by Obama's executive pay czar, Ken Feinberg, and could dish out bonuses any way they saw fit.

How did the banks justify this publicly? Goldman continued to argue that it was the first firm to repay the $10 billion loan it had received during the financial crisis (it would be followed by JPMorgan, Morgan Stanley, Bank of America, and finally Citigroup) and that it was the firm best prepared to withstand the financial meltdown in 2008—both of which are undoubtedly true—and, of course, that it didn't really need all those billions in bailout money.

The others went to the public with the standard line that they were no longer wards of the government, that they weren't being bailed out anymore, so what was the harm in compensating the people responsible for their trading profits?

Word of the spin even caught their best friend in the White House by surprise. Barack Obama, as well as key members of his cabinet, owed the big Wall Street firms many things, including their tireless support during the campaign. But as he heard the PR spin repeated on business television and on the business pages of major newspapers, even Obama and key cabinet members were blown away by the arrogance, people close to him say.

Obama's reaction to the bonus news and Wall Street's spin may have been best chronicled by journalist Jonathan Alter in his book
The Promise
.
“
Let me get this straight,” Alter quotes Obama as saying as he heard the big firms rationalize making so much money so soon after the bailouts and while the special privileges continued. “They're now saying that they deserve big bonuses because they're making money again. But they're making money because they've got government guarantees.”

Obama might have projected verbal outrage, but actions speak louder than words, and his policies all but ensured that the banks would make so much money through 2009 that bonus pools would swell to astronomical levels. Those policies, combined with the banks' PR chiefs' spin, only compounded the public's distaste for Wall Street and the double standard the president privately recognized but did little to correct.

The biggest beneficiary of the bailouts and the postbailout environment once again was Goldman Sachs, which has a long history of figuring out ways to profit beyond its competitors. No matter how many times the firm attempted to say that the bailout money was forced down its throat (in reality the firm digested $10 billion worth without a hiccup) or that it hadn't benefited from the AIG bailout, a simple question remains unanswered: If Goldman didn't need handouts to survive 2008, why didn't it just return the cash to taxpayers?

That was because, thanks to the various rescues, Goldman eked out a small profit for 2008, around $2.3 billion. As a small sign of contrition, Blankfein, whose net worth is at least $1 billion, chose not to take a bonus that year, but others at the firm did: Goldman handed out nearly twice as much in bonus money as it made in taxpayer-induced profits. Yet the firm's profits in 2009 were now likely to be six times larger, and based on prior bonus calculations tied to the firm's performance, the CEO's compensation could approach $100 million, 50 percent more than his $67 million bonus in 2007. That's right, Lloyd Blankfein was on track to earn nearly $100 million as Goldman's government-supported profit making grew to new heights.

Those in Goldman's orbit benefited as well. Consider the windfall received by Warren Buffett, the legendary investor who had sunk $5 billion into Goldman during the dark days of the financial crisis, literally a week after Hank Paulson began handing his crony capitalists the bailouts that wouldn't end for the next four months. The deal gave Buffett the option to buy Goldman Sachs stock at $115 a share, and as Goldman shares headed toward $180, Buffett had earned nearly $3 billion.

Buffett, like Blankfein, was a big supporter of President Obama, and for all his folksy charm and past appreciation for fiscal prudence, he never once commented on the irony of the fact that he, one of the greatest capitalists of all time, was benefiting not just from the bailout money but also from the continued largesse of hardworking Americans, whose taxpayer dollars were being showered upon the big banks. Even so, Buffett, safely ensconced in Omaha, escaped being a target of the populist ire, but Blankfein and Goldman did not.

That populist ire—and how it's being played by various politicians—is something that Goldman truly hates. There is an interesting irony with Goldman; investors believe the firm is the most ruthless of the big Wall Street investment houses in terms of trading against their customers' best interests. And yet inside Goldman, top executives, led by Blankfein, believe theirs is the most ethical of the big firms. To them, being called a crook is a deadly slur, as Democratic senator Harry Reid discovered one afternoon when Goldman president Gary Cohn cornered him at a fund-raiser at Goldman's headquarters in Manhattan and said, “Who do you think you are, coming here asking for money while you trash us?”

Reid was now in a particularly tight spot: Like most Democrats, he was taking his cues from the White House, and banker bashing was one of his election-year talking points (2010 being a year when many House and Senate seats were up for grabs). At the same time, he needed money, lots of it, because his support of the president's unpopular heath-care plan and other measures gave him a Wall Street-like approval rating in Nevada, a moderate- to conservative-leaning state he had represented for two terms.

In other words, if Reid was to win a third term, he needed Wall Street money nearly as much as he needed to bash Wall Street bankers and traders.

What's even more ironic about this episode is that Cohn himself had invited Reid in to Goldman to visit with the firm's bonus-stuffed traders a couple of weeks earlier. Part of the reason why Cohn agreed to the request was that the Goldman president was a committed Democrat—one of the Street's earliest supporters of Obama. But Cohn had his reasons too, and he wanted Reid and the rest of the Democratic Party to understand that Wall Street, Goldman in particular, was pretty tired of being used and abused.

“We're getting sick of the bullshit!” was the message Cohn relayed to Reid, who mostly sat back and took the abuse, according to a person with knowledge of the meeting. It's unclear if the abuse was worth the trip to New York for Reid, who took home $40,000 in donations that day. Nonetheless, the episode made it clear to those on Wall Street that no matter how much people like Cohn cried, Reid's silence during the event spoke volumes. The attacks would keep coming.

In the end, Reid, like Obama and other Big Government politicians, is perfectly willing to put up with a few Wall Street tantrums if it means getting reelected.

The growing anti-Wall Street populism had John Mack, now the chairman of Morgan Stanley, concerned. Normally, hate mail rarely makes it to the desks of Wall Street's top executives, as underlings intercept and deal with it. But as the public was growing increasingly frustrated with Wall Street, Mack began occasionally reading some of the more vitriolic letters, in part because it helped him gauge the public's foul mood toward the industry and anticipate what politicians might do in response.

In the fall of 2009, after reading a particularly nasty piece of hate mail that was addressed to both him and Lloyd Blankfein, Mack called the Goldman CEO to express his concern.

“That's nothing,” Blankfein replied. “I get seventy-five to a hundred of those a day.” Goldman now disputes the magnitude of the hate mail, but what it won't dispute is that around this time Blankfein was resigned to the fact that Goldman was being unfairly singled out as the great villain of the great recession, much as J. P. Morgan had been during the Great Depression a generation earlier. He had directed his press staff to keep telling reporters that Goldman hadn't been bailed out at all or, to be more precise, never needed a bailout.

But Mack, himself a recipient of government money, knew the argument could never hold water, not with the public, not with Wall Street's new masters in the federal government like the banker-hating Congresswoman Maxine Waters, and not with unemployment hovering around 10 percent while Morgan Stanley, Goldman, and the rest of Wall Street were feasting on the benefits of the 2008 financial rescue that President Bush had enacted as an emergency and that President Obama had left firmly in place.

While John Mack was continuing to take the high road, the partners at Goldman were acting as if they were entitled to the vast riches they had received on the backs of taxpayers, which brought even more attention and further condemnation. Maybe it was because the firm believed its own mythology of Goldman as something special, the elite of the elite on Wall Street. In the world of Goldman Sachs, its partners were special because they are, after all, plucked from the best schools, and they deserved (well, they believed they deserved) those multimillion dollar salaries, having survived in a corporate culture that demanded nothing short of success.

This Goldman myth is best exemplified in Blankfein's already famous interview with the
Times
of London, in which he defended Goldman's success and executive bonuses by saying, “As the guardian of the interests of the shareholders and, by the way, for the purposes of society, I'd like [my bankers] to continue to do what they're doing.” He concluded by saying he was simply “doing God's work.”

The Goldman myth is just that, a myth, because it ignores or at least downplays some very important facts. First, Goldman had been far from infallible; the firm owned much of the same toxic housing debt that took down Merrill, Citigroup, and the rest, even if Goldman had hedged its bets better than most. (Note that as I write this in mid-2010, Goldman is under assault even for that. Evidence is mounting in SEC and Justice Department investigations that Goldman was shorting the housing market—i.e., betting that housing prices would plunge—while encouraging its clients to do the opposite and buy the toxic housing bonds it was trying to sell them. More on this later.)

Mostly, however, the Goldman myth ignores the incredible amount of entitlement that fills the halls of its opulent headquarters in lower Manhattan. As the feeling there runs, Goldman Sachs makes so much money because it
deserves
to, even if it
was
the recipient of bailout money (bailout money it insists it was forced to take even though it would have survived without it). Likewise, executives at the firm truly believed they could put forth such nonsense without worrying about accountability because they had bought the right friends in Washington. Goldman executives were among President's Obama's largest contributors for his 2008 election and gave twice as much money to Democrats in Congress as they did to Republicans, who, thanks to Goldman's donations to the Left, were firmly in the minority. Records show that Goldman executives contributed almost $1 million, but that figure doesn't count the amounts of money raised by these partners from their wealthy, blue-chip friends and families. No Wall Street firm gave as much as Goldman did to Obama and the Democrats. It was an unprecedented show of support because in the past Goldman had split its donations pretty evenly between Democrats and Republicans.

But that was before the reign of Blankfein, a committed Democrat, and his number two, Gary Cohn.

Lloyd Blankfein looks a little like the character Gollum from
The Lord of the Rings
. He's balding, with wide eyes, which also gives him the (false) appearance of being perpetually confused. In public he can be stiff and seem arrogant and is prone to gaffes.