Money and Power (106 page)

Several Goldman executives don’t buy that argument. “When you kind of look back, both at the end of the year and at the end of this cycle and how things can be characterized, the PR’s completely different than the reality at the time,” one of them said. “The PR now is Goldman was hedging customer positions: we had longs here and shorts here and it was a holistic analysis.” He said what really happened was that the top Goldman brass finally figured out the risks inherent in the firm’s long positions
“after us pounding on them” and convincing them that loans sitting in the CDO warehouse, for instance, had every bit as much risk as CDOs being traded in the market. He said his trading group was “frustrated” because “we felt like we don’t want to have a situation at the end of the year where they pat us on the back and go, ‘Boy, the department did great. You guys made $4 billion minus everything that was lost over here.’
We’re like, ‘If you say I can control everything else also over here, that’s fine, but I don’t control it. So don’t pay me based on that.’ ” He did concede, though, that Blankfein needed to have—and did have—a larger perspective than just what was happening on Birnbaum’s desk. “The way he looks at things on his level is that he’s got the $4 billion here and he’s got other positions that are being marked down over here,” he said. “It’s still a multibillion dollar phenomenon. But he’s thinking firmwide.”

As extraordinary as Birnbaum’s 2007 performance was, by the unique combination of chest pounding and double counting that define the Wall Street end-of-year compensation process, he marked himself down—in his personal evaluation form for 2007—as having performed even better. “As a co-head of ABS and SPG trading, my performance in 2007 has been my best ever by any objective measure,” he wrote. He claimed his P&L for the year totaled $7.5 billion, rather than $4 billion, including $2.5 billion from
synthetic deals, $2 billion from asset-backed securities deals, and $3 billion from his trading—“all #1 on the [S]treet by a wide margin” and “#2 in the world trading subprime risk.”

While acknowledging that the “execution” of the trading strategies was a “remarkable team achievement with every member playing a key role,” Birnbaum wrote that he considered himself “the initial or primary driver” of the trading strategy.

With slightly more humility than Birnbaum, Swenson trumpeted his own accomplishments in 2007. “It should not be a surprise to anyone that the 2007 year is the one that I am most proud of to date,” he wrote in his performance review. “I can take credit for recognizing the enormous opportunity for the ABS synthetics business 2 years ago. I recognized the need to assemble an outstanding team of traders and was able to lead that group to build a number one franchise that was able to achieve extraordinary profits (nearly $3bb to date).”

As examples of his leadership skills, he wrote that “as the stress in the mortgage market starting filtering” out, he “spent numerous hours on conference calls with clients discussing valuation methodologies” for mortgage-backed securities, such as GSAMP-S2, that Goldman had underwritten and sold to investors. He patted himself on the back for withstanding the onslaught from burned GSAMP-S2 investors. “I said
‘no’ to clients who demanded that GS should ‘support the GSAMP’ program as clients tried to gain leverage over us,” he wrote. A far cry indeed from Goldman’s purported top priority: “Our clients’ interests always come first.”

For his part, Sparks was more modest—at least in print—about his role in the group’s accomplishments but conveyed his points just the same. “I delivered the best performance of my career this year to the firm,” he wrote. “I led a great team through an incredibly volatile and challenging market[.] [W]e had to change business approaches dramatically and constantly[.] [W]e levered the firm’s support, and we didn’t just survive—we excelled.”

Tourre turned out to be the most understated of all in his 2007 personal professional assessment, perhaps because many of the ABACUS deals he engineered had performed poorly. Indeed, he never even mentioned the ABACUS deal he spent half of 2007 executing. Rather, all he could muster was, “In a difficult market environment, have been persistent and showed patience in executing complex transaction that were involving several financial products including corporate CDS, single-tranche synthetic ABS CDOs, and CDO management technology,” he wrote. He is still awaiting his fate at the hands of the SEC as a result of its ABACUS lawsuit, even though Goldman settled the suit, for $550 million, in the summer of 2010. In February 2011, Tourre’s lawyers tried to get the case thrown out by claiming the SEC did not have jurisdiction over the matter.

——

B
Y MID
-D
ECEMBER
2007, the time had come for the
Wall Street Journal
to follow
Fortune
and the
New York Times
in trying to assess how Goldman had avoided the mistakes of other securities firms in 2007. In a front-page article on December 14,
Kate Kelly, at the
Journal,
lionized Swenson, Birnbaum, and Sparks for their gutsy trades that made billions for Goldman and noted that each of them was expected to be paid between $5 million and $15 million in compensation for fiscal 2007. “
The structured-products traders were working long hours,” she wrote. “Mr. Swenson would leave his home in Northern New Jersey in time to hit the gym and be at his desk by 7:30 a.m. When Mr. Birnbaum arrived from his Manhattan loft, they’d begin executing large trades on behalf of clients. There was no time for breaks. They took breakfast and lunch at their desks—for Mr. Swenson, the same chicken-and-vegetable salad every day from a nearby deli; for Mr. Birnbaum, an egg-white sandwich for breakfast, a chicken or turkey sandwich for lunch. Mr. Sparks, the mortgage chief, climbed into his car at
5:30 each morning for the drive in from New Canaan, Connecticut. To calm his nerves, he’d stop by the gym in Goldman’s downtown building to briefly jump rope and lift weights. Sometimes he worked past midnight, arriving home exhausted. He canceled a family ski trip to Wyoming. Although he loved to attend Texas A&M football games and owned a second home near the university, he decided not to join his wife and two children on more than one trip.”

A few days after the
Journal
’s story, a Goldman “source” told
The Independent,
a British newspaper, “They are very embarrassed that their names have come out. Until now, nobody had heard of them, including most of the people on the floor where they work.” Whether deliberate or not, Kelly’s story had humanized at least three of the Goldman cyborgs—an apparent violation of the unwritten rule at Goldman that for the rank and file, no matter how successful, talking to the press is against the rules.

The fact that Goldman did not lose money from mortgages in 2007—when nearly every other major firm on Wall Street did—helped Goldman and its top executives to make a fortune. The firm had record pretax earnings of $17.6 billion in 2007, some $3 billion more than in the previous year. The top five executives at the firm split among themselves nearly $400 million, with Blankfein taking home $70.3 million, Cohn receiving $72.5 million, and Viniar being paid $58.5 million. These breathtaking sums were among the highest compensation ever paid to Wall Street executives in a single year. Still,
Gary Cohn liked to pretend with reporters that Goldman did not make nearly as much money in 2007 betting against the mortgage market as people think it did. “We don’t disclose segment-by-segment reporting,” he said in an interview. “But the market would be really disappointed if they saw our actual mortgage results last year, because they think we made a lot of money.” Sparks was much more honest about what happened. “
The good thing we did is when we made a mistake we admitted it and did something about it,” Sparks said. “We didn’t just sit there and close our eyes and pray.”

——

A
FEW MONTHS
after paying out these huge bonuses to its top executives, both Sparks, then forty-one, and Birnbaum, then thirty-five, left Goldman. Sparks had been a Goldman partner since November 2002. Birnbaum was a Goldman vice president, hoping to be made a partner in 2008. Reached at his home in October 2009, Sparks—who had been head of Goldman’s four-hundred-person mortgage department for some eighteen months—said in a brief telephone conversation that he does not like to talk to reporters about his experience at Goldman and why it came to such an abrupt end. He had told his colleagues he
was “fond of the firm” but that it was “time to move on.” He said he had been thinking about leaving Goldman often during the previous six years and the time just became right because his business was changing rapidly—in the wake of the meltdown—and he had had to fire half of his team. He claimed to still be on good terms with Goldman and that it was supportive of him. He is the chairman of
Archon Mortgage LLC, a real-estate management company in Irving, Texas, that is affiliated with Goldman. He also appears to have other company affiliations as well. Left unsaid was that, according to the
Wall Street Journal,
in and around January 2008, the
SEC had interviewed Sparks about his role in the sale of the Timberwolf CDO. Soon after, a representative of
Basis Yield Alpha Fund, an Australian hedge fund that bought $100 million of the deal, and lost money as the deal soured, told an SEC lawyer, “Our belief is the trade was portrayed in a fraudulent manner.” In March, a month before Sparks left Goldman, the SEC interviewed the Basis hedge-fund executives further about the Timberwolf deal.

Birnbaum was out the door shortly before Sparks. He is now the founder and chief investment officer at
Tilden Park Capital Management, a $1 billion, New York–based hedge fund focused on “opportunities in structured products.”
Jeremy Primer, the Goldman mortgage-modeling guru, works with Birnbaum at Tilden Park. Not surprisingly, Birnbaum was not shy about setting out his three goals for 2008 at Goldman: “Produce more than $1 billion in trading revenue,” “continue to strengthen the GS franchise,” and “Make Partner.”

It was not to be. Part of Birnbaum’s motivation for leaving Goldman seemed to be compensation related. He won’t say, but he probably made around $10 million in 2007, apparently less than he thought he should have made. “
I guess it depends on your perspective of what’s fair, right?” he said. “If you’re a steelworker you probably think I got paid pretty well. If you’re a hedge-fund manager you probably don’t.”

Goldman won’t say why its two star traders left the firm, although a spokesman said, “We’re sorry to see Dan go. He’ll be missed,” which is of course the typical corporate happy talk dispensed when the real reasons for someone’s unexpected departure are too uncomfortable to be discussed publicly. (For instance, had Sparks been leaving unexpectedly to become, say, secretary of the treasury, Goldman might have been slightly more forthcoming.) Goldman said nothing about Birnbaum’s departure. There has been speculation that the two men were forced out of Goldman—despite having a profound role in helping to construct a series of trades that may well have saved the firm. Both of them appeared at Senator Levin’s famous April 2010 filleting of Goldman Sachs.

G
oldman’s recent public-relations nightmares began in earnest in March 2009 when the firm appeared at the top of the list of counterparties that had received billions of dollars in payments funneled through
AIG by the U.S. government as part of the second phase of the 2008 $182 billion bailout of AIG. The counterparty list had been kept secret for months and was only released after much public outcry. A narrative quickly developed in the zeitgeist that Goldman had somehow received a special benefit along with its $14 billion, thanks to its numerous Washington connections, including Hank Paulson;
Steve Friedman, a Goldman board member who was then chairman of the board of the
Federal Reserve Bank of New York and a former head of the National Economic Council under
George W. Bush; and Josh Bolten, a former Goldman partner who was President George W. Bush’s chief of staff. Blankfein later acknowledged as much in a speech he gave to Goldman’s 470 partners in January 2011. “
Our history of good performance through the crisis became a liability as people wondered how we performed so well and whether we’d received favorable treatment from well-placed alumni,” he told his partners. “This was not only a poor place to be, it was a dangerous place to be.”

Soon after the release of the AIG counterparties list, Goldman snatched one public-relations defeat after another from the jaws of its financial victory. “
I think there are a lot of things, as a firm, we do really, really well,” Blankfein said, “but there are other things that we clearly could have been better at for us to be in the position that we were in. I don’t think we’ve done a very good job of explaining what Goldman Sachs does.” The opening salvo in this ongoing battle came a few days after the release of the AIG counterparty list, on March 20, when Viniar led an unprecedented—by Goldman’s standards—forty-five-minute call with journalists “to clarify certain misperceptions in the press regarding Goldman
Sachs’s trading relationship with AIG.” The gist of Viniar’s argument was that Goldman had hedged itself against a collapse of AIG as well as the securities it had asked AIG to insure. “That is why we are able to say that whether it failed or not, AIG would have had no material direct impact on Goldman Sachs,” he said.

The call seemed to raise more questions than it answered—among the very people it was designed to pacify: the journalists listening in on behalf of the American people. That frustration—and confusion—showed up first in a July 2009 issue of
Rolling Stone
magazine in a now-classic bit of conspiracy-theory journalism written by reporter
Matt Taibbi. “
The first thing you need to know about Goldman Sachs is that it’s everywhere,” Taibbi wrote. “The world’s most powerful investment bank is a great vampire squid wrapped around the face of humanity, relentlessly jamming its blood funnel into anything that smells like money.” Taibbi blamed Goldman for a multitude of financial sins, including the
Great Depression, the Internet bubble, the housing bubble, the explosion in the per-gallon price of
gasoline, as well as for “rigging the bailout” to its advantage.