Authors: William D. Cohan
Copyright © 2011 by William D. Cohan
All rights reserved. Published in the United States by Doubleday, a division of Random House, Inc., New York, and in Canada by Random House of Canada Limited, Toronto.
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Portions of this work were previously published in
Grateful acknowledgment is made to the Columbia University Oral History Research Office Collection.
Jacket design by John Fontana
Jacket illustration by Serial Cut™
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all Street has always been a dangerous place. Firms have been going in and out of business ever since speculators first gathered under a buttonwood tree near the southern tip of Manhattan in the late eighteenth century. Despite the ongoing risks, during great swaths of its mostly charmed 142 years, Goldman Sachs has been both envied and feared for having the best talent, the best clients, and the best political connections, and for its ability to alchemize them into extreme profitability and market prowess.
Indeed, of the many ongoing mysteries about Goldman Sachs, one of the most overarching is just how it makes so much money, year in and year out, in good times and in bad, all the while revealing as little as possible to the outside world about how it does it. Another—equally confounding—mystery is the firm’s steadfast, zealous belief in its ability to manage its multitude of internal and external conflicts better than any other beings on the planet. The combination of these two genetic strains—the ability to make boatloads of money at will and to appear to manage conflicts that have humbled, then humiliated lesser firms—has made Goldman Sachs the envy of its financial-services brethren.
But it is also something else altogether: a symbol of immutable global power and unparalleled connections, which Goldman is shameless in exploiting for its own benefit, with little concern for how its success affects the rest of us. The firm has been described as everything from “
a cunning cat that always lands on its feet” to, now famously, “
a great vampire squid wrapped around the face of humanity, relentlessly jamming its blood funnel into anything that smells like money,” by
writer Matt Taibbi. The firm’s inexorable success leaves people wondering: Is Goldman Sachs better than everyone else, or have they found ways to win time and time again by cheating?
But in the early twenty-first century, thanks to the fallout from
Goldman’s very success, the firm is looking increasingly vulnerable. To be sure, the firm has survived plenty of previous crises, starting with the Depression, when much of the firm’s capital was lost in a scam of its own creation, and again in the late 1940s, when Goldman was one of seventeen Wall Street firms put on trial and accused of collusion by the federal government. In the past forty years, as a consequence of numerous scandals involving rogue traders, suicidal clients, and charges of insider trading, the firm has come far closer—repeatedly—to financial collapse than its reputation would attest.
Each of these previous threats changed Goldman in some meaningful way and forced the firm to adapt to the new laws that either the market or regulators imposed. This time will be no different. What is different for Goldman now, though, is that for the first time since 1932—when Sidney Weinberg, then Goldman’s senior partner, knew that he could quickly reach his friend, President-elect Franklin Delano Roosevelt—the firm no longer appears to have sympathetic high-level relationships in Washington. Goldman’s friends in high places, so crucial to the firm’s extraordinary success, are abandoning it. Indeed, in today’s charged political climate, which is polarized along socioeconomic lines, Goldman seems particularly isolated and demonized.
Certainly Lloyd Blankfein, Goldman’s fifty-six-year-old chairman and CEO, has no friend in President Barack Obama, despite being invited to a recent state dinner for the president of China. According to
columnist Jonathan Alter’s book
the “angriest” Obama got during his first year in office was when he heard Blankfein justify the firm’s $16.2 billion of bonuses in 2009 by claiming “Goldman was never in danger of collapse” during the financial crisis that began in 2007. According to Alter, President Obama told a friend that Blankfein’s statement was “flatly untrue” and added for good measure, “These guys want to be paid like rock stars when all they’re doing is
Complicating the firm’s efforts to be better understood by the American public—a group Goldman has never cared to serve—is a long-standing reticence among many of the firm’s current and former executives, bankers, and traders to engage with the media in a constructive way. Even retired Goldman partners feel compelled to check with the firm’s disciplined administrative bureaucracy, run by John F. W. Rogers—a former chief of staff to James Baker, both at the White House and at the State Department—before agreeing to be interviewed. Most have likely signed confidentiality or nondisparagement agreements as a condition of their departures from the firm. Should they make themselves
available, unlike bankers and traders at other firms—where self-aggrandizement in the press at the expense of colleagues is typical—Goldman types stay firmly on the message that what matters most is the Goldman team, not any one individual on it.
“They’re extremely disciplined,” explained one private-equity executive who both competes and invests with Goldman. “They understand probably better than anybody how to never take the game face off. You’ll never get a Goldman banker after three beers saying, ‘You know, listen, my colleagues are a bunch of fucking dickheads.’ They just don’t do that the way other guys will, whether it’s because they tend to keep the uniform on for a longer stretch of time so they’re not prepared to damage their squad, or whether or not it’s because they’re afraid of crossing the powers that be, once they’ve taken the blood oath … they maintain that discipline in a kind of eerily successful way.”
NYONE WHO MIGHT
have forgotten how dangerous Wall Street can be was reminded of it again, in spades, beginning in early 2007, as the market for home mortgages in the United States began to crack, and then implode, leading to the demise or near demise a year or so later of several large Wall Street firms that had been around for generations—including Bear Stearns, Lehman Brothers, and Merrill Lynch—as well as other large financial institutions such as Citigroup, AIG, Washington Mutual, and Wachovia.
Although it underwrote billions of dollars of mortgage securities, Goldman Sachs avoided the worst of the crisis, thanks largely to a fully authorized, well-timed proprietary bet by a small group of Goldman traders—led by Dan Sparks, Josh Birnbaum, and Michael Swenson—beginning in December 2006, that the housing bubble would collapse and that the securities tied to home mortgages would rapidly lose value. They were right.
In July 2007, David Viniar, Goldman’s longtime chief financial officer, referred to this proprietary bet as “the big short” in an e-mail he wrote to Blankfein and others. During 2007, as other firms lost billions of dollars writing down the value of mortgage-related securities on their balance sheets, Goldman was able to offset its own mortgage-related losses with huge gains—of some $4 billion—from its bet the housing market would fall.
Goldman earned a net profit in 2007 of $11.4 billion—then a record for the firm—and its top five executives split $322 million, another record on Wall Street. Blankfein, who took over the leadership of the firm in June 2006 when his predecessor, Henry Paulson Jr., became
treasury secretary, received total compensation for the year of $70.3 million. The following year, while many of Goldman’s competitors were fighting for their lives—a fight many of them would lose—Goldman made a “
substantial profit of $2.3 billion,” Blankfein wrote in an April 27, 2009, letter. Given the carnage on Wall Street in 2008, Goldman’s top five executives decided to eschew their bonuses. For his part, Blankfein made do with total compensation for the year of $1.1 million. (Not to worry, though; his 3.37 million Goldman shares are still worth around $570 million.)
Nothing in the financial world happens in a vacuum these days, given the exponential growth of trillions of dollars of securities tied to the value of other securities—known as “derivatives”—and the extraordinarily complex and internecine web of global trading relationships. Accounting rules in the industry promote these interrelationships by requiring firms to check constantly with one another about the value of securities on their balance sheets to make sure that value is reflected as accurately as possible. Naturally, since judgment is involved, especially with ever more complex securities, disagreements among traders about values are common.