Spijsvertering van GS

[Cees Binkhorst]

REPLY TO: D66 at nic.surfnet.nl

Zou GS al rekening houden met een voorziening voor het World Online
vonnis?
Nah, small change ;)

Groet / Cees

http://www.vanityfair.com/business/features/2010/01/goldman-sachs-200101
The Bank Job

One of the biggest disconnects on Wall Street today is between the way
Goldman Sachs sees itself (they’re the smartest) and the way everyone
else sees Goldman (they’re the smartest, greediest, and most dangerous).
Questioning C.E.O. Lloyd Blankfein, C.O.O. Gary Cohn, and C.F.O. David
Viniar, among others, the author explores how their firm navigated the
collapse of September 2008, why it has already set aside $16.7 billion
for compensation this year, and which lines it’s accused of crossing.
By Bethany McLean

January 2010
Lloyd Blankfein—who was born poor in the South Bronx, put himself
through Harvard, and became the C.E.O. of Goldman Sachs in 2006, after
24 years at the firm—is a history buff, a lawyer, a wordsmith, and
something of an armchair philosopher. On a Thursday in October—the very
day when the firm announced it had made $8.4 billion in profits so far
this year—he speculates whether Goldman would have survived the
financial conflagration in the fall of 2008 entirely on its own, without
any kind of help, implicit or explicit, from the government. “I thought
we would, but it was a hell of a higher risk than I was happy with,” he
says, sitting in his 30th-floor office in Goldman’s old headquarters, at
85 Broad Street, in Lower Manhattan. “As a result of actions taken [by
the government], we were better off than we otherwise would have been.
Was it dispositive? I don’t know. I don’t think so … but I don’t know.”

He adds, “If you ask, in my heart of hearts, do I think we would have
failed … ” He pauses, then pulls out his trump card: at the height of
the crisis, Warren Buffett agreed to invest $5 billion in Goldman Sachs.

Buffett, the venerated Nebraska investor, is famously reluctant to put
money into Wall Street firms. But he has a long history with Goldman. As
a 10-year-old he went to New York with his father, a broker in Omaha,
and they stopped by Goldman Sachs to visit Sidney Weinberg. As Goldman’s
leader from 1930 to 1969, Weinberg helped build the firm into the
powerhouse it became. “For 45 minutes, Weinberg talked to me as if I
were a grown-up,” Buffett likes to recall. “And on the way out he asked
me, ‘What stock do you like, Warren?’” In later years Buffett liked to
cite Byron Trott, who until recently worked in Goldman’s Chicago office,
as one of the few investment bankers worth his salt.

And so, when Trott asked Buffett if he would be interested in investing
in Goldman during the frenetic days after Lehman Brothers’ bankruptcy,
Buffett thought about it, and on Tuesday, September 23, he and Trott
hammered out a deal. In a very brief—and very Buffett—call that
afternoon with Blankfein, Trott, and then co-president Jon Winkelried,
Buffett said he would invest $5 billion in exchange for a hefty 10
percent dividend and rights to buy additional stock over the next five
years at a price of $115 a share. “I’m taking my grandkids out to Dairy
Queen,” he told the Goldman men. “Call me and let me know what you want
to do.”

Goldman accepted Buffett’s tough terms, and thanks to the investment was
able to raise another $5.75 billion, by selling stock to other
investors. Blankfein says the firm could have raised multiples of that
but didn’t need more money. And Buffett has said that while no one could
ever understand the balance sheet of any Wall Street firm, he has
confidence that Blankfein is both very smart and very conservative. But
there was another reason he invested: “If I didn’t think the government
was going to act, I would not be doing anything this week,” he explained
to CNBC’s Becky Quick. “I might be trying to undo things this week.”

Blankfein refers to this period as “the fog of war,” and yet at 85 Broad
Street a clear story line has emerged from almost every level of the
firm: it was Goldman’s much-celebrated culture and its superior ability
to manage risk, not the helping hand of the government, that got it
through the events of fall 2008. When I ask Gary Cohn, Goldman’s chief
operating officer, and David Viniar, the firm’s chief financial officer,
if, barring a financial Armageddon, Goldman would have survived without
all the various forms of government intervention, Viniar says, “Yes!”
almost before I can finish the question. “I think we would not have
failed,” says Cohn. “We had cash.”

It’s hard to find anyone outside the firm who doesn’t see this as
revisionist history. Combine that with further proof of Goldman’s
worldview—namely, the huge amount of money its people will earn this
year ($16.7 billion has already been set aside for compensation, which
could translate into an average of $700,000 per Goldman employee)—and
you get rage. Widespread rage. “Complete crap,” says a senior financier,
about Goldman not needing the government’s help. “It is a bunch of
bullshit,” says a former Goldman Sachs managing director. Even Neel
Kashkari, a former Goldman banker, who became an assistant secretary of
the Treasury last summer, told The New York Times that “every single
Wall Street firm, despite their protest today, every single one
benefited from our actions. And when they get up there and say, ‘Well,
we didn’t need it,’ that’s bull.”

Factor in Goldman’s political connections—two of the firm’s past four
leaders have served as Treasury secretaries, while another source tells
me about a G-7 meeting where he counted 24 to 28 out of 32 finance
officials in attendance as ex-Goldman men—and you get conspiracy
theories on steroids. “this firm is pure evil” is a typical comment
whenever a story about Goldman is posted on the Internet, which is
almost every day now.

Goldman gets that it has a problem; people there are deeply bothered by
the outcry. “There is an embattled feeling around the place,” says
someone who knows the firm well. This is magnified, perhaps, because
there has always been a whiff of sanctimony about the firm. It not only
wants to make money; it wants to be seen as a force for good.
Blankfein’s now infamous comment to a reporter at the London Sunday
Times that he was doing “God’s work” was meant as a joke, but there was
a ring of unintentional truth to it.

Goldman executives believe they have a public-relations problem, not a
substantive one. When the firm had tarp money, there was a ban on using
the corporate box at Yankee Stadium, and last fall Blankfein went on a
charm offensive that showcased his humble roots to the press.

What Goldman doesn’t get is that all the murk about the ways it has
benefited from public money taps into a deep fear that has long existed
among those who think they know Goldman all too well. It’s a fear that,
as one person puts it, Goldman’s “skill set” is “walking between the
raindrops over and over again and getting away with it.” It is a fear
that Goldman has the game rigged, even if no one can ever prove how, not
just because of its political connections but also because of its
immense size and power. And it is a belief that despite all the happy
talk about clients and culture (and, boy, is there a lot of that) the
Goldman of today cares about one thing and one thing only: making money
for itself. Says one high-level Wall Street executive, “Why do you have
a business? Because you have a customer. You have to make an appropriate
profit. But is it possible that Goldman has changed from a firm that had
customers to a company that is just smart as shit and makes a shitload
of money?”

A Storied Firm
Founded in 1869, Goldman Sachs, in the early days, was a scrappy, Jewish
firm in a world of white-shoe investment banks (such as J. P. Morgan),
which controlled all the valuable corporate clients. In 1929, Goldman
was almost brought down by a charming manager-partner named Waddill
Catchings, who created what was known as the Goldman Sachs Trading
Corporation—a story told in detail in The Partnership, by Charles Ellis.
It was essentially a trust which used debt to buy other companies, which
used more debt to buy still more companies—in other words, a ticking
time bomb of debt, in much the same way that modern trusts designed to
buy mortgages became ticking time bombs of debt. When the inevitable
collapse came, the result tarnished Goldman for decades.

The firm’s recovery was in large part due to Sidney Weinberg, who
famously joined Goldman as a janitor in 1907. While Weinberg built the
firm’s banking business, Gus Levy, a Tulane University dropout,
developed a formidable sideline trading stocks and bonds. In 1969 he
took over Weinberg’s job at the head of Goldman. When he died, from a
stroke in 1976, Weinberg’s son John and John Whitehead, an
Illinois-born, Harvard-educated World War II veteran, continued to
transform Goldman into a major player in investment banking. For much of
Goldman’s history, the two worlds—the genteel, plush-carpeted one of
banking and the rough-and-tumble one of trading—existed in a kind of
balance.

As the firm grew, it developed a unique culture, characterized by
impossibly hard work, loyalty, secrecy, and a lack of flashiness. Senior
executives there—unlike those at other firms—do not have palatial
offices with private bathrooms. In the late 1970s, Whitehead put what
are still Goldman’s 14 Business Principles on paper. The first: “Our
clients’ interests always come first.”

At one time, outsiders could see this principle in action. In the era of
hostile takeovers, Goldman wouldn’t do them, and the firm was the last
on Wall Street to start a business managing money for wealthy
individuals, because it didn’t think it should compete with the big
money-management firms, which were also clients of its trading
operation.

By the early 1990s, Morgan Stanley and Goldman Sachs sat atop the
pinnacle of Wall Street. But even then Goldman had a mystique that
Morgan lacked.

Insiders and outsiders alike have long struggled to define Goldman
Sachs’s secret sauce. It’s a blend of impossibly hard work, intense
competitiveness, and something that closely approximates teamwork,
although that makes the culture sound more touchy-feely than it really
is. “The firm is hard-knuckled and sharp-elbowed, but that’s hidden in
the velvet glove of teamwork and collegiality,” a former managing
director tells me.

The place does not ooze the smug satisfaction that often comes with
great wealth. Rather, it oozes anxiety. I worked there as an analyst for
three years in the early 90s, and I remember that most people couldn’t
take advantage of the long line of black cars that waited until midnight
outside 85 Broad Street to take them home. Instead, they had to call for
cars, because they never got out early enough. I also recall being told
that having a tan in the summer was a bad sign, because it meant that
you weren’t working hard enough. You’ll often hear Goldman people speak
of “quartilers,” because Goldman divides its people into groups based on
performance. The usage would be, “You don’t send a second quartiler to
build a business.”

But, of course, not only the demands but the rewards—in terms of both
prestige and money—are bigger.

The Meek Shall Not Inherit the Firm
In the early 1990s, Goldman faced one of the biggest tests in its
history. After big trading losses, a result of a bet on bonds gone bad
in London, partners began quitting, and yanking their capital from the
firm. It was “very shaky,” recalls a former partner. “Those of us who
made partner in 1994 actually had to pay [money into the partnership to
make up for the losses]. The smart guys were all leaving.”

Into that leaderhip vacuum stepped Jon Corzine, a fixed-income trader
and a fierce believer that Goldman should be public. Whereas Morgan
Stanley had sold shares to the public in 1986, Goldman was Wall Street’s
last private partnership. In December of that year it began to seriously
debate the idea of going public, according to The Partnership, but
several questions seemed always to stop it: What would happen to the
culture if the firm went public? And how would you divvy up the money in
a fair way, among new partners, longtime partners, and former partners?

By 1998, however, Corzine had persuaded the rest of the firm. But before
the I.P.O. could get off the ground, the $4.6 billion hedge fund Long
Term Capital Management melted down, causing a crisis on Wall Street.
L.T.C.M.’s massive bets were financed with an inordinate amount of debt,
and as the trades went bad, all of Wall Street, which had lent money to
L.T.C.M. and often copied its trades, reeled. Like those at other firms,
Goldman’s fixed-income trading operation, which was Corzine’s home,
faced huge losses. Corzine had already provoked great resentment by
calling himself C.E.O. and acting unilaterally, even though Goldman had
always been run by its all-powerful executive committee. And so, the
committee of, at that time, five men staged a coup and forced Corzine
out. They replaced him with Henry Paulson, an Illinois native who made
his career at the firm by winning investment-banking business.
(Ironically for Corzine, Goldman finally did sell shares to the public,
at $53 apiece, in the spring of 1999, which meant that, just as with
other publicly traded Wall Street firms, Goldman was no longer playing
with partners’ capital, but with shareholders’ money.)

Paulson is a walking set of contradictions. A fiercely competitive man,
he is also an avid conservationist who freaked out when birds would fly
into the glass windows of 85 Broad. He is a committed Christian
Scientist, whose main talent both at Goldman and in government was a
brutal pragmatism. “Hank gets shit done,” as one person tells me. And
although Paulson’s intimidating presence and gravelly voice are now well
known to millions of Americans, less visible is a strangely endearing
quality. Most people who know him think that he always tells the truth,
mainly because he isn’t capable of the verbal slickness that is critical
to dissembling. “He didn’t want the crown, but he wore it well” was the
word among some partners regarding Paulson’s tenure as C.E.O., from 1999
to 2006.

Brave New World
The rise of Lloyd Blankfein, who took over as C.E.O. in 2006, is in part
a testament to the inexorable creep of the power of money at Goldman
Sachs. During the early years of Paulson’s reign, the heirs apparent
were his co–chief operating officers, John Thain and John Thornton.
Thornton was a classic Goldman Sachs banker, a creative thinker who was
great with clients. But his critics say that he had some weaknesses,
including a dislike for the grungy details of management. In the end,
Paulson, in a 2003 meeting in his office, told him he would not become
C.E.O. Someone close to Thornton, though, says that he had already been
making plans to leave after he realized Paulson, who initially planned
to serve as C.E.O. for only a few years, wasn’t going anywhere. And
there was something else. Thornton was also discomfited by what he felt
was a change at Goldman: a newfound obsession with making money first
and foremost. He believed great institutions had to stand for something
more.

Thain, on the other hand, was the “good son,” as one Goldman executive
puts it. A former head of Goldman’s mortgage business who became the
firm’s chief financial officer in 1994, he knew every detail of how
Goldman Sachs ran. He, too, had to rethink his future when Paulson
decided to stay. And some say his power base began to erode as Goldman’s
new breed of traders made more and more money. A former managing
director tells me that if the old Goldman made its money taking Ford
public the new Goldman made its money hedging the cost of platinum for
Ford. And that business was run not by John Thain but by Lloyd
Blankfein. In 2003, Paulson decided to appoint Thain and Blankfein as
co–chief operating officers, but Thain saw the handwriting on the wall.
The New York Stock Exchange began recruiting him to be its C.E.O., and
later that year he took the job.

One of the most surprising things about Blankfein, 55, is how likable he
is. Bald and on the short side, he is self-deprecating and has a wicked
sense of humor and a fondness for bad puns. He came to Goldman via J.
Aron, a tough, street-savvy, highly entrepreneurial commodities-trading
shop, which Goldman acquired in 1981. “I was invisible for the first 24
of my 27 years here,” Blankfein tells me. “It’s not like I sought this
out.” But this humble explanation masks another side of Blankfein. One
does not amble one’s way to the top of Goldman Sachs.

Internally, Blankfein is viewed as extremely “commercial,” which means,
in Goldman parlance, having a talent for making money. “Blankfein is
Paulson on steroids,” says one client, referring to Blankfein’s
competitiveness, even though he rarely engages in a show of brute force.
“If [former Lehman C.E.O.] Dick Fuld is a machete, then Lloyd Blankfein
is a Swiss Army knife” is how Anthony Scaramucci, a former Goldman vice
president, who now runs SkyBridge Capital, explains Blankfein to me.

Over the years one criticism of Blankfein that has stuck is that he is
not comfortable with people who aren’t his guys. Those “guys” are
usually traders. “The group running Goldman now is not a very diverse
group, and that is potentially very damaging to the franchise,” says a
former partner. Chief operating officer Cohn grew up at J. Aron, and if
Blankfein’s more ruthless side is masked by humor, Cohn’s knuckles are
usually on full display. “Cohn is a lot like Fuld,” another former
Goldman partner says. “He is a tough, aggressive trader.” Says a former
trader, “Gary was always Lloyd’s guy. I mean, always.”

Under the new leadership the culture of the firm seems to be changing.
Once upon a time in the not-so-distant past, even a Goldmanite wouldn’t
have sniffed at a million dollars a year. But in recent years, the
numbers have become multiples of that. (Of course, this is true across
Wall Street, but particularly at Goldman.) In 2007, Blankfein made $68.5
million, the most ever for a Wall Street C.E.O. Cohn made $67.5 million.
Fair or not, there’s a sense that the numbers matter because the new
Goldman cares about keeping up with the hedge-fund guys. “Everyone loves
to hate Goldman Sachs, and Goldman loves to hate the hedge-fund
community,” says one trader. “They’ve gotten rich, but they haven’t
gotten rich like Louis or Julian or George” (legendary hedge-fund
managers Louis Bacon, Julian Robertson, and George Soros).

Under Blankfein, Goldman continued to grow exponentially: by 2007 the
firm’s revenues were $46 billion, nearly three times that of 2000. In
large part, this was the result of a strategy, begun under Paulson but
embraced by Blankfein, in which Goldman no longer sat on the sidelines,
dispensing advice, but rather invested its own money alongside its
clients’. Goldman now has a money-management business; a large
private-equity business, meaning that while big buyout funds are
Goldman’s clients they are also its competitors; and a proprietary
trading business, which exists specifically to trade Goldman’s capital
on Goldman’s behalf—so hedge-fund clients are also competitors. Across
Goldman’s many trading businesses, the line is fuzzy as to when the firm
is acting for itself and when it is acting on behalf of clients.

Inside “the Black Box”
Despite the public financial statements Goldman files every quarter, no
outsider can tell how the firm really makes its money. You cannot see
into “the black box” of the trading empire. Blankfein says that only
about 10 percent of Goldman’s profits come from purely proprietary
trades, but there is no way any outsider can confirm that independently.
And, anyway, what’s in the black box is always changing, so the numbers
are relevant only in the current moment. “Goldman changes the doughnut
machine all the time,” says independent analyst Meredith Whitney. “It’s
never the same doughnut. Around the rest of the Street, it’s always the
same doughnut,” by which she means that Goldman constantly adjusts its
investment strategies, as opposed to other banks, which tend to be less
responsive to the market. Blankfein uses the word “nimble” to describe
Goldman, and it indisputably is.

A side effect is that, in a firm where producing profits helps you rise,
banking has now become an adjunct of the trading business, where the
real money is made. Steve Scherr, a 17-year Goldman veteran who helps
run the investment-banking business, claims that he does not feel
marginalized. “The way banking is thought about within the firm has
changed,” he says. “Banking has taken on increasing presence as the
sales force of the firm.” In other words, when Goldman advises a company
that wants to sell itself, the Goldman banker who wins that deal may
also be able to bring Goldman in as an investor, or bring Goldman
traders in to sell the company a hedge against a deterioration in a
foreign currency, and on, and on.

But not everyone sees this in such a sunny way. A former partner
explains to me that investment banks have always had conflicts of
interest. In his view, those conflicts have taken on a darker tone. For
example, a few years ago, Goldman’s bankers were told that they should
help sell more derivatives. “Say you have a client with a
foreign-exchange problem. So you bring Goldman’s foreign-exchange expert
in, and he gives you a price. I’m giving the client Goldman’s pricing,
not necessarily the best pricing, because there’s a desk at Goldman
that’s making money on it.”

This gets to the heart of the complaints about Goldman by others on Wall
Street, which are often quite bitter. When Blankfein speaks of being “so
close to clients that you can see the pattern better than anyone else,”
some worry that this means his firm is using client information in ways
that aren’t necessarily in the clients’ best interests (though few in
the business think Goldman would cross the line into illegality). In
Street parlance, a “counterparty”—i.e., the person on the other side of
a trade, as opposed to one you are representing—is like a consenting
adult, and hence the line you’ll frequently hear: The new Goldman Sachs
doesn’t have clients—it has counterparties.

These questions are particularly pronounced among hedge funds. “People
worry that they’re in my business, and they’re better than I am,” says
one money manager. Asks another hedge-fund trader, “Are they the
Yankees? No, the Yankees actually lose! Goldman never loses. And people
say they are a hedge fund! This ain’t no hedge fund. Hedge funds lose
money.” When I ask him if he does business with Goldman, however, he
replies, “Of course we do business with them. We have to. It’s like the
Mob who picks up the garbage. You pay their fees, because you need your
garbage picked up.”

Trimming the Hedges
All of this explains why Wall Street loved the battle between hedge-fund
manager Jim Chanos and Goldman Sachs executive Marc Spilker, co-head of
the asset-management division. The two are neighbors in the Hamptons and
had a dispute over widening a path that leads to the beach. While the
matter was still being litigated, Spilker hired a work crew to knock out
hedges on Chanos’s property. Chanos, who says he paid Goldman between
$40 million and $50 million in fees annually, tried to complain to
Blankfein. One of his lieutenants told Chanos that the C.E.O. wouldn’t
listen to his complaints over the issue, and furthermore Goldman didn’t
like the way he, Chanos, was handling this. Chanos saw it as a tangible
sign that, at the new Goldman, clients no longer mattered. He pulled all
his business within two weeks.

To any concerns about how Goldman treats its clients Blankfein has a
simple response, which is that Goldman’s market share is still No. 1.
And while some say they do business with Goldman because the firm’s
omnipresence means they have to, there is another reason, which even its
most bitter critics concede: Goldman is better. Why is that?, I ask a
hedge-fund manager who has just finished his own heated explanation
about how he doesn’t trust Goldman. “I can’t really tell you why it’s
better. It’s just better,” he says. “It’s six p.m. in New York City, and
Goldman will figure out how to get the right person in Hong Kong—a guy
we’ve never spoken to—on the phone to walk us through exactly what we
want to know. He’ll be fully knowledgeable.” He laughs. “Try the same
thing with Citi. They can’t even figure out what they know, let alone
how to take advantage of it.”

The Mortgage Mess
In a weird way, what happened at the start of the subprime crisis
confirmed to people at Goldman Sachs what they fundamentally believed
about themselves—that they really are better than everybody else on Wall
Street. But, for many on the outside, it offered proof instead that
Goldman put protecting its own interests ahead of protecting the
interests of clients.

In December 2006, about a year before any other Wall Street firm started
realizing the magnitude of the crisis, Goldman began betting against the
mortgage market. By August 2007—which was right after Chuck Prince, then
Citigroup’s C.E.O., famously said, “As long as the music is playing,
you’ve got to get up and dance”—Goldman Sachs was leaving the dance
floor. The firm had also begun to sell off tens of billions of dollars’
worth of the big loans on its books that had been used to finance
leveraged-buyout deals. “In retrospect, there is not a person who
wouldn’t have sold where we were selling,” says Steve Scherr. How true!

Goldman simply saw what everyone else could have—and should have—seen:
the prices of the securities backed by mortgages, and then of the big
loans, were declining. Each and every day, Goldman rigorously books
profits and losses based on where it can sell its positions. Because
those values were declining, Goldman was taking losses in its mortgage
business day in and day out. This made the mortgage traders nervous.
Says David Lehman, a managing director in Goldman’s mortgage-trading
group, “Whether the trade is subprime mortgages or bananas, if it’s not
going your way, you have to get smaller.”

Except that most of Goldman’s competitors did no such thing. At other
firms the mortgage traders tried to protect their fiefdoms, arguing that
declines were temporary. They held or even grew their positions—and
refused to admit they were losing money. Doubts and warnings seldom made
it to top executives, and even when they did, they were ignored in the
desire to keep the good times rolling. “There’s people’s hopes and
prayers, and then there’s the reality of the market. You can’t confuse
the two,” says Cohn today.

Goldman didn’t just sell the mortgage securities and stop doing
business, however. After a now famous meeting in David Viniar’s office
on December 14, 2006, Goldman’s traders began to protect the firm
against further declines in the market. Just as you can short the S&P
500, the traders took short positions in an index that tracked the price
of mortgage-backed securities. They also either sold assets they owned
to others at losses or dramatically marked down the price on their own
books.

In the aftermath of the crisis, criticism erupted that Goldman had
continued to sell mortgage-backed securities to its clients while
betting against those very securities for its own account. Clearly, in
the simplest terms possible, this is true: while Goldman was never the
biggest underwriter of C.D.O.’s (collateralized debt obligations—Wall
Street’s vehicle of choice for mortgage-backed securities), the firm did
remain in the top five until the summer of 2007, when the market crashed
to a halt.

Goldman argues that the buyers of their C.D.O.’s were themselves
sophisticated investors who were capable of making their own decisions.
In other words, they were counterparties. “You don’t shut your franchise
down just because you have a view of a market,” says Cohn. “When we do
an I.P.O., people don’t ask us our view of the stock market.” But a less
generous interpretation was given in a recent McClatchy Newspapers
series, which quotes an analyst report that describes Goldman as being
“solely interested in pushing its dirty inventory onto unsuspecting and
obviously gullible investors.” (A Goldman spokesperson says, “The
statement is not true. The McClatchy series was characterized by
unsubstantiated claims, innuendo, and outright falsehoods.” McClatchy,
however, stands by its work.) And so, if the old Goldman was defined by
its refusal to do hostile takeovers, the new Goldman is defined by its
skill at protecting its own interests.

With the benefit of hindsight, there is another aspect of the story that
may ultimately prove to be more troubling, and Goldman has disclosed
that it, along with other financial institutions, has received requests
for information from “various governmental agencies” relating to
“subprime mortgages, and securitizations, collateralized debt
obligations and synthetic products related to subprime mortgages.”

One new invention the Street created was something called a synthetic
C.D.O., which was sort of like making a coin: you have to have two
sides, heads and tails, long and short. In effect, the person who has
tails, or is short, makes small payments to the person with heads as
long as the securities that make up the C.D.O. are performing. If they
blow up, then a big payment goes the other way.

Investors in a C.D.O. can choose to buy a range of securities, from what
are supposedly the safest all the way down to the riskiest, or equity,
position. The person who owns the equity stands to make the most for
taking the greatest risk, but only after everyone else gets paid. So if
you owned the less risky slices, you might feel good if the equity owner
were a smart guy who only stood to get paid after you did.

Except that might not be the way it worked, because the equity owner
could also be the person who had the tails, or short, position. As
several sources have described it to me, the numbers could work so that
the equity investor would do decently if the security performed—but make
a fortune if it went bad.

The equity owner could also play a role in selecting the mortgages on
which that C.D.O. was based. So theoretically at least—and some suspect
this is not just theoretical—the equity owner could choose securities
that he thought had a good chance of going to hell. As one person says,
this is akin to “betting that your own house is going to burn down”
after you build it with highly flammable materials.

There are many permutations of this trade. Some people believe that
Goldman engaged in versions of it, and that it facilitated them for
hedge funds. Goldman defends this. “We own equity, we buy a credit-
default swap, and we are hedging ourselves,” says Cohn. As for selecting
the collateral, he says, “It’s no different. Our clients are smart,
sophisticated institutions. They should know that’s the case.”

He has a point. As long as no one explicitly misrepresented where their
interests lay—and there is no evidence of that—supposedly sophisticated
investors have a duty to understand what they’re buying, not to base
their decision on what the “smart guy” is doing.

And if the mortgage market hadn’t collapsed—and there’s no way anyone
could have known for sure that it would—then these deals wouldn’t have
been so profitable, and no one would care. But when I ask one
knowledgeable person about what happened to some of the deals that
Goldman is rumored to have done, he responds with one word: “Torched.”
Or as another person says about the bigger picture of the crisis,
“Goldman’s management team was almost flawless in its execution. But how
many people needed government help because of the things Goldman sold
them?”


Trade with the Taxpayer
As a lot of people know now, Wall Street firms are fragile entities,
needing the market to finance themselves. Because it is cheaper for them
to borrow short-term money than to borrow long-term money, during the
bubble years they all, to some degree, began to rely on short-term money
—which they’d use to buy assets such as real estate or entire companies
that couldn’t be sold immediately. It’s as if you bought a house and the
bank at any time had the right to demand payment in full—tomorrow.
Goldman managed its balance sheet more conservatively than many of its
peers, and it grew more conservative after Bear Stearns’s overnight
lenders pulled the plug in March 2008. By the time the crisis hit 85
Broad Street, six months later, Goldman had $114 billion in cash, and
very little funding that needed to be paid off in less than 100 days.

This is a big part of why Goldman’s treasurer, 40-year-old Liz Beshel,
says that “rumors of our death were greatly exaggerated.” She adds that
the demands for cash never grew larger than what Goldman had planned
for. Overall, the firm conveys an attitude of dispassion about the whole
affair. When I ask Gary Cohn if he was worried about Goldman’s stock
price, which plunged from $207.78 in February 2008 to $47.41 in
November, he says, “It wasn’t scary at all.”

“Complete and utter nonsense,” says someone who knows Cohn well. Indeed,
a falling stock price can become a self-fulfilling prophecy, because as
the stock plummets, confidence evaporates. And as another high-level
Wall Street executive says, “No matter what the balance sheet says, if
you can break confidence, the money is going to leave the institution.”
Or as another person who knows Goldman well says about the firm’s
models, “In an environment like that, the model doesn’t mean shit.”

There is evidence that as the stock price tumbled in fall 2008 the 30th
floor of 85 Broad Street was not quite the haven of calm Goldman now
suggests. By September 14, the weekend when Lehman went bankrupt, John
Mack, of Morgan Stanley, and John Thain, by then the C.E.O. of Merrill
Lynch, were urging the Securities and Exchange Commission to ban
short-selling, in which investors bet that a stock is going to decline.
Blankfein was opposed. After all, Goldman Sachs is a believer in the
market, in which stocks should go down as well as up, and in its trading
business, it regularly shorts securities of all kinds.

But that week, as the crisis escalated, Blankfein changed his mind. When
Mack and Blankfein spoke on Tuesday, Blankfein said, “You’re right. We
have to do something about this.” He then told S.E.C. chairman
Christopher Cox, whose agency can use emergency powers to ban a lawful
activity, that he was for the ban. “I’m for markets,” says Blankfein,
who today describes the situation as “tricky.” “But when it felt like it
had gotten abusive, when it was free money to short-sellers who were
piling on, it felt less like the market and more like it was being
manipulated.” He adds, “I crossed over.”

“It was entirely a question of where you sit,” says one person familiar
with events. “If you thought the wolf was at your door, then you were
for the ban. If not, you had a principled view. It was a direct measure
of how panicked the C.E.O. was at that moment about losing his firm.”

For all Goldman’s tough talk, when the market made a judgment on Goldman
itself, the firm blinked. (It is possible that short-sellers were
illegally manipulating the market, although no evidence of that has come
to light.) “I would cop a plea to hypocrisy if you get rid of all the
other charges,” says Blankfein.

The ban on short-selling, which went into effect on September 19, 2008,
was a sign that the government was going to do what it had to do to
protect the nation’s financial-services companies. But even that wasn’t
enough to break the fear, and after a brief rebound Goldman’s stock
began falling again. That Saturday, Tim O’Neill, a longtime Blankfein
confidant who has held a variety of roles at the firm, called David
Heller, a co-head of the global securities division, and said, “I think
we built a house that can withstand a Cat 5 hurricane. It looks like a
Cat 5 hurricane.”

But the storm never really hit, because that Sunday night, Goldman and
Morgan Stanley issued press releases: With the blessing of the Federal
Reserve, they were going to transform themselves into bank-holding
companies. Because such banks are regulated by the Fed, there is a
U.S.-government seal of approval that comes with the designation, and
the fact that Morgan and Goldman were granted it so quickly (as Lehman
had not been)—over a weekend—was a solid sign to the market that the
United States would not let them fail.

And later, in October, after Buffett’s investment, Goldman took $10
billion more as part of tarp. Then, in the middle of the month, the
Federal Deposit Insurance Corporation began a program under which banks
could issue debt guaranteed by the federal government. Goldman
eventually issued $28 billion of such debt, close to the limit of $35
billion the F.D.I.C. had set for it. As Goldman acknowledged in its
public filings, the firm was “unable to raise significant amounts of
long-term unsecured debt in the public markets, other than as a result
of the issuance of securities guaranteed by the FDIC.”

Maybe it’s true that Goldman didn’t need the government’s help, but,
nevertheless, the firm availed itself of all the help offered. What
seems lost on Goldman executives is that questioning the necessity of
that help from the safety of today’s vantage point smacks of trying to
have your cake and eat it, too. And when they claim they would have done
things differently had they anticipated the resulting criticism, it
would be tempting to give them a taste of their own medicine: Goldman
Sachs, you’re a smart, sophisticated investor—you did the trade! Now
live with it.

In the wake of the crisis, one Goldman executive made the decision not
to live with any of it anymore. In February 2009, Goldman announced the
surprising departure of Jon Winkelried. Because he had put his Nantucket
mansion on the market for $55 million and been allowed to cash out of a
part of his interest in several Goldman Sachs–run funds for $19.7
million, there was widespread speculation that he was caught in a cash
squeeze.

The explanation given by people close to Winkelried is, in some ways,
more telling. Indeed, he had kept almost all of the money he had made in
his 27-year career at Goldman in the firm’s stock or in its
private-equity funds. As the crisis intensified, he wanted to raise
cash, in case, “God forbid, something happened to Goldman,” as he
confided to one friend. Because the terms of Buffett’s investment
forbade Cohn, Winkelried, Viniar, and Blankfein from selling 90 percent
of their holdings until three years after the deal, Goldman—in effect,
in exchange for Winkelried’s helping to save the firm by agreeing to
Buffett’s tough terms—allowed him to cash out of a part of the funds at
a discount from their value at the time.


Bailing Out A.I.G.—or Goldman?
Inside Goldman, there is an overwhelming sense of pride in how the
company weathered the crisis, and great admiration for Blankfein. “He is
the right man at the right time,” says O’Neill.

And some clients have a new appreciation for Goldman: “When the shit was
hitting the fan, Goldman acted very responsibly,” says one client, by
which he means it didn’t try to prey on the weakness of other firms.
Another client points out that while other firms stopped answering their
phones at the height of the crisis, Goldman both dealt with its own
problems and tried to help clients deal with theirs.

It’s possible that what many see as Goldman’s revisionist history
wouldn’t cause so much rage if it weren’t for the taxpayer bailout of
the giant insurer American International Group, which many see simply as
a “backdoor bailout” of A.I.G.’s creditors, including Goldman Sachs, as
Representative Darrell Issa, the ranking member of the Committee on
Oversight and Government Reform, put it in a recent letter to the New
York Federal Reserve. But the question goes beyond the money that
changed hands.

The bare facts are these: Goldman bought what was effectively insurance
from A.I.G. (in the form of credit-default swaps) on some $20 billion
worth of slices of C.D.O.’s made up of mortgage securities. The deal was
structured so that A.I.G. had to turn over cash in real time as the
value of the securities deteriorated. By the summer of 2007, A.I.G. and
Goldman had begun to fight bitterly about how much cash A.I.G. owed.
Because there was a gap between what A.I.G. had paid and what Goldman
thought it was owed, Goldman bought additional insurance from other Wall
Street banks, which would pay off in the event that A.I.G. defaulted on
its obligations.

Viniar shows me a piece of paper, which he calls his “Bible.” It lays
out what all of this looked like on the Monday night before the federal
government stepped in to take over A.I.G. At that point, the subprime
securities had declined in value by $9.4 billion. Goldman had collected
$7.5 billion in cash from A.I.G., and it had another $2.9 billion from
the other Wall Street banks. Since Goldman had some small additional
exposure to A.I.G., the net effect of this was that Goldman was “flat.”

Viniar was much mocked for telling analysts on a September 16, 2008,
call that Goldman’s exposure to A.I.G. was “immaterial,” but under that
narrow definition, it’s true. While you could argue about what would
have happened if Goldman’s remaining $10 billion of A.I.G. securities
had declined in value following an A.I.G. bankruptcy, the question
probably would have been moot, because there may not have been a
financial system at all.

After the government bailout of A.I.G., in order to end the collateral
calls on the insurance giant, the New York Federal Reserve—whose
chairman at the time was former Goldman chairman Steve Friedman—decided
to purchase a slew of the securities that A.I.G. had insured, including
$14 billion of those on which Goldman had purchased insurance. The
government—meaning taxpayers—did so at full price, although according to
a recent Bloomberg story, there had been negotiations with A.I.G. to do
so at a 40 percent discount. Goldman says that the New York Fed broached
the topic of a discount only once. The firm’s response: a flat no. While
no one will ever know what would have happened had A.I.G. gone under,
the essence of what did happen is perfectly clear. As a recent report by
the Office of the Special Inspector General for tarp put it, the
decision to pay full price “effectively transferred tens of billions of
dollars of cash from the Government to A.I.G.’s counterparties.” Or to
put it another way: because Goldman felt it was owed its billions by
A.I.G., the firm took it from taxpayers instead.

The more interesting question may be the role that Goldman played in
A.I.G.’s near destruction. Goldman says that it was largely an
intermediary between A.I.G. and clients it won’t name. So when, after
the government bailout and the Fed’s decision to pay full price, it
received $8 billion from A.I.G., Goldman used that money, plus the
billions in collateral it already held, to purchase A.I.G.-insured
securities from their owners and deliver them to A.I.G., which had
wanted to take them in exchange for canceling the insurance.

But outsiders say Goldman’s dealings with A.I.G. look more complicated
than that. A memo written by Joseph Cassano, the former head of the
A.I.G. financial-products division, shows that some of the securities
Goldman insured with A.I.G. were created by none other than Goldman
itself. Janet Tavakoli, a structured-finance expert who runs her own
consulting firm in Chicago and wrote a book on C.D.O.’s in 2003, notes
that Goldman’s deals also figure prominently in the list of C.D.O.’s
upon which other firms bought insurance. Which is why, she says,
“Goldman was responsible for huge systemic risk, and now they’re trying
to pretend they weren’t.” Finally, on November 17, as criticism mounted,
Blankfein issued a public apology: “We participated in things that were
clearly wrong and have reason to regret.”


Wall Street Versus Main Street
An e-mail that made its way around Wall Street right after Goldman
announced its third-quarter profits observed, “$17 Billion in comp
Year-to-date 2009 vs. $11B during the same period of 2008—Not bad for a
government sponsored entity!” The e-mail concluded, “Global economic
Armageddon and the near imminent failure of the company was clearly the
best thing that ever happened to [Goldman]!”

Goldman’s press releases about its spectacular earnings never mention
government assistance of any kind. In June, the firm paid back the $10
billion in tarp funds it had taken. Taxpayers got a 23 percent return.
As for the $21.6 billion in funds guaranteed by the F.D.I.C. that
Goldman still has outstanding, a recent Congressional report estimates
that it will save Goldman $2.4 billion over the life of the debt. But
Cohn argues that that is actually costing the firm, in fees to the
F.D.I.C. and interest, because it is excess liquidity. (When I repeat
that to another Wall Streeter, he closes his eyes and says, “Please tell
me Gary didn’t say that.”) Cohn also says that issuing the F.D.I.C. debt
was “the single biggest mistake we made.”

In fairness, one of the reasons Goldman is making so much money is that,
while its remaining competitors huddled in their bunkers, Goldman got
back to work. “The Goldman Sachs team deserves great credit to go
through what they went through and get back on their feet and make
money,” says an observer.

But because so many of Goldman’s competitors were gone or disabled,
spreads—the difference between the price at which you sell and buy a
variety of securities—were wider than they had been in years, meaning
that Goldman could practically mint money. By acting at the moment it
did, with Lehman out and Merrill Lynch down for the count, the
government enabled this situation. “The U.S. government unwittingly
created an oligopoly in most markets, and, for Goldman, a near monopoly
in some,” Scaramucci says. “They tied down Rockefeller and Gates, but
they unwittingly unleashed Goldman!”

The other reason for Goldman’s profits is that the government has
flooded the system with money, not just the money it used to rescue the
financial system but hundreds of billions more in stimulus, in support
of the housing market, and in the Federal Reserve’s purchases of
securities. Analyst Meredith Whitney calls “government manipulation” the
“strongest, most important theme of the capital markets in 2009.” You
cannot fault Goldman for taking advantage of that, but it’s also true
that, as National Economic Council director Larry Summers said, “there
is no financial institution that exists today that is not the direct or
indirect beneficiary of trillions of dollars of taxpayer support for the
financial system.”

Ultimately, the big question is this: Do Goldman’s profits signify that
good times are coming for the rest of the country? Jeff Verschleiser, a
Goldman partner who joined the firm from Bear Stearns, says that, while
Main Street may lag Wall Street, ultimately the outcomes will be
“synched.” And Blankfein professes no doubt. “I’m charged with managing
and preserving the franchise for the good of shareholders, and while I
don’t want to sound highfalutin, it is also for the good of America,” he
says. “I’m up-front about that. I think a strong Goldman Sachs is good
for the country.”

When Goldman repaid the $10 billion in tarp funds, Blankfein wrote a
very gracious letter to Representatives Barney Frank and Spencer Bachus.
“Our return of the government’s investment does not, in any way, end our
obligations to the public interest,” he wrote.

The problem is that there are few concrete signs that Goldman is acting
in accordance with that patriotic letter. One place to look is the
debate in Washington, D.C., over derivatives legislation. As it
currently stands, the billions of dollars in profit in the derivatives
business are basically controlled by the biggest dealers, including J.
P. Morgan and Goldman. Critics say that those profits are protected by
the opacity of the market, because no one can see the pricing. It’s as
if your only source for the price of a share of IBM were whatever the
dealer told you it was. Today, everyone, but everyone, advocates more
transparency in the name of preventing the hidden tangle of risk that
almost destroyed the financial system. As Blankfein says, transparency
is “motherhood and apple pie.”

But the devil is in the details. In what one person describes as
“hand-to-hand combat” in the dark alleys of D.C., Goldman and the other
big dealers are seeking exemptions to some proposed new requirements
that would help shine a big spotlight on derivatives trading—thereby
hoping to keep the market murky. “Every time we go into a member of
Congress’s office, they already have a Goldman Sachs white paper on
this,” marvels another person who is active in Washington. The dealers,
including Goldman, argue that they are trying to preserve their clients’
profits, not their own.

All in all, Goldman executives seem to be gambling that the current
mood, in which the rest of us are rethinking the system that brought us
to the very edge, and maybe into the depths, of a vast black pit, will
blow over. And they may be right.

Meanwhile, to steal a line from Blankfein’s boss (Luke 12:48): From
those who have been given much, much will be demanded.

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