“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.
Yet his friends say he’s charming in private, and don’t let that dopey look on his face fool you. Blankfein is one of the savviest players on Wall Street. After graduating from Harvard Law School, he went to work for a big law firm, Donovan, Leisure, Newton & Irvine, and then decided to make his fortune on Wall Street, which he did nearly from the moment he joined Goldman’s commodities trading unit, then known as J. Aron, as a gold salesman in 1981. Over the next thirty years, Blankfein became one of the richest men in America, with an estimated net worth of close to $500 million.
But for all his wealth and pedigree of success, Blankfein’s story is about as Horatio Alger as you can get: He grew up working class in a Brooklyn housing project and worked his way through Harvard, just as he worked his way through the brutal meritocracy at Goldman Sachs, where professionalism, teamwork, and most of all, making money for the firm, are the keys to success.
And under Blankfein, Goldman flourished like never before. When Blankfein and his trading-desk associate Gary Cohn took over Goldman in 2006, they did two things: First, they transformed the firm from a place that coddled its blue-chip clients—mainly large companies, big pension funds, and the superrich—into a casino. While the firm won’t disclose exactly how it makes its money, some analysts estimate that nearly 70 percent of its profits come from trading, often, it is charged, against its own clients. For instance, one of Goldman’s clients might want to take a given position, say, buying some housing bonds betting that prices would go up. If Goldman’s internal research indicated the opposite, rather than tell the client to watch out, Goldman might sell the client those bonds—and take the opposite position itself. That way it would profit twice: first from the fee on selling the client the position it wanted, and second from the trade itself, which it hoped would decline in value. Thus, Blankfein and Cohn made Goldman more profitable than ever before, thanks to an aggressive, almost Darwinian trading style, where a firm that had once relished its strong relationships with clients openly and brazenly began taking advantage of those same clients in the markets.
Second, even though the firm had always tended to give a bit more to Democrats, under Blankfein Goldman has moved even further to the left.
In 2009 Goldman gave nearly four times as much to Democrats as to Republicans, and its support for Obama was particularly strong. People who know Blankfein will tell you he was doing what he loves to do: pick winners. But those same people will also say that being a Democrat is in his blood, both because of his humble background and because of where he has put himself on Wall Street, which flourishes when Big (and Bigger) Government becomes the law of the land.
And that strategy was paying off, at least for a while, as Obama took office. Wal
l Street even managed to dole out some $20 billion in total bonuses for the bailout year of 2008. Seated with Wall Street’s favorite Treasury secretary, Tim Geithner, President Obama, known during the campaign as “No Drama Obama” for his calm and cool demeanor, even managed a little righteous indignation, calling the payouts “shameful.”
If Geithner was sending strong messages to Wall Street about its postbailout behavior, no one seemed to care.
During the first nine months of Obama’s presidency, Blankfein had Goldman’s flacks and lobbyists spread throughout Washington, focusing mainly on the Democrats, who were in power, to push the Street’s agenda, which focused on limiting whatever “reform” legislation Congress and the president were now promising and making sure that the firm could continue to pay its bankers and traders as it had in the past. Goldman, which plucks the best and the brightest for its trading desk, plucked the most politically connected people to run its lobbying department. Politics had become just as important as interest rates for its—and any Wall Street firm’s—bottom line. Whereas in the past Goldman would make sure it had contacts on both sides of the political aisle, now many of its top lobbyists were former staffers for lawmakers like Barney Frank, the Massachusetts Democrat who served as the powerful head of the House Financial Services Committee, which, given all the subsidies flowing to Wall Street from Washington, could make or break the firm with a single edict.
Or to be more precise, could divert the firm from its scheduled massive taxpayer-supported bonus bonanza.
As early as January 2009, just weeks after the worst of the financial crisis had ended, Goldman began to take full advantage of the programs that had been set in place during the Bush and now Obama administrations, and it began to develop its press strategy to mask the true source of these profits.
As Lucas van Praag and Goldman’s other media handlers (it also relied on a PR firm named Public Strategies, with connections to the Bush administration, for advice) continued arguing, the myriad bailouts and benefits that Goldman had received (which included everything from being declared a bank, thus protected from failure by the Fed, to being lent billions in bailout money, receiving near-zero interest rates, getting a backdoor bailout via the AIG bailout, and having its debt guaranteed by the federal government) were really beside the point. It was Goldman’s tradition of excellence that allowed the firm to profit so handsomely just a couple of months after being bailed out.
Despite the growing backlash, Blankfein is said to have ordered Van Praag to continue spinning (some would say lying about) the source of the firm’s enormous wealth: Goldman made money because it was smart, Van Praag would smugly counter anyone who questioned the firm’s business practices, and it took the bailout money because it had to. End of story.
What was odd about Goldman was that it didn’t stray from this spin even when it became clear it wasn’t working. People close to the firm blamed the strategy of Blankfein, who might be smart when it comes to trading but knew almost nothing about the press, the media in general, or its shifting role in the financial business. Blankfein was running Goldman as if it weren’t 2009 but 2006, when the firm never had to care about Middle America or the press because its clients—the megarich, big institutional investors, and Fortune 500 companies—didn’t care how the firm made money. But that was before the bailout, and before Goldman made its vast fortune through government handouts. Now Middle America did matter for Goldman; the same Ohio construction worker who could never have his small savings managed by a Goldman broker could now influence his local congressman to call Lloyd Blankfein to testify before his committee and demand to know why he should be paid $100 million while the construction worker remained out of work.
But that wasn’t all, and not by a long shot. Goldman had moved from the financial pages to be a mainstream story. The firm was now the subject of story after story in local newspapers and on local television stations. From coast to coast, in small-town America and in major cities, Goldman Sachs had become the very face of an inequitable system that rewarded the bad guys with government grants and guarantees while most of the country suffered.
To be fair, Goldman wasn’t the only bank to take advantage of the system, but it did push the limits in using these measures to bolster its bottom line. While other firms, like Morgan Stanley, were cutting back on risk after the financial collapse and lowering their profit margins as they refined their business models to provide more advice to clients, Goldman, in the face of growing public unrest, did just the opposite as executives like Blankfein discovered that the various government protections and guarantees were a traders’ dream.
Goldman could go out in the market, borrow at next to nothing because of the Fed’s low-interest-rate policy and its protected status as a bank, and simply buy everything from Treasury bonds to mortgage-backed securities, which were now enjoying a little-known renaissance because the Fed had been supporting the market with purchases of the same bonds that Goldman had been buying and holding, and that sent prices soaring.
For all the populist fervor in the country today, most Americans believe in free markets and don’t begrudge the wealthy their money—it’s the fact that anyone, even a humble gold salesman who grew up in the projects in Brooklyn, can make their fortune here that has brought this country so much success.
But the big financial firms aren’t racking up most of their profits by financing the next new cancer-fighting drug or finding seed capital for a new business that will employ thousands of workers. They’re doing it by trading bonds and borrowing huge sums of money to enhance their winnings, a practice known as leverage. Historically, the big banks have been addicted to leverage—it’s a drug they can’t stop using, because at any given time their balance sheets contain enormous amounts of stocks, bonds, and more exotic financial instruments that were all bought with borrowed money. That money is borrowed from the firms’ customers—big financial institutions, pension funds, hedge funds, and so on—with the understanding that the customers can call in their loans if they desire.
So when firms start to lose access to that money—when the customers start to pull their lines of credit because they’ve lost faith in the firm—that’s the beginning of a death spiral for the financial firm in question. It’s what brought down Bear Stearns and Lehman Brothers at the height of the crisis, and as much as Goldman likes to insist this wasn’t the case, it’s what was beginning to happen to Goldman, JPMorgan Chase, Morgan Stanley, and the other firms after Lehman went down.
It was only the bailout money provided by hardworking American taxpayers that kept those firms from following Bear and Lehman to the grave.
And after a brief spell following the financial collapse, the firms were borrowing and trading just as in the good old days. They say they’re borrowing less (instead of borrowing $30 dollars for every $1 of cash on hand, they tell me they borrow just $15), and that might be true. But they are still borrowing, still using leverage to enhance their esoteric trades, and still counting on the federal government to bail them out when they lose.
“Who the fuck do these guys think they are?” said Steve Davis, a cop turned private investigator.
It was early February 2010 and we were eating dinner at a Manhattan restaurant called Campagnola, a place, incidentally, where many bankers and traders conduct their after-work schmoozing and socializing. Davis spent three decades in the New York City police department. He retired a captain, and he understands a thing or two about con jobs. The tip-off for most cons is that the phony investment being offered is too good to be true.
Steve Davis would have smelled a crook like Bernie Madoff a mile away.
When Davis exploded with profanity (expressing what so many Americans were thinking and feeling) that night at Campagnola, his point was that just a year after being bailed out, publicly shamed as riverboat gamblers playing on the public’s dime, Wall Street was enriching itself again, just as it had before the crisis. To him it seemed like an impossible feat—a crime.
I said that while it might seem illegal and certainly might feel morally suspect (at best), much of the profit taking was entirely legal. The Obama government had propelled Wall Street earnings by leaving in place nearly all the bailout mechanisms created by Bush and his Treasury secretary, Hank Paulson, the former CEO of Goldman Sachs, right down to their support of Federal Reserve chairman Ben Bernanke and his policy of keeping interest rates near zero.
This, combined with other government guarantees—and the all-important too-big-to-fail status—gave Wall Street benefits that small businesses and entrepreneurs could only dream of. Wall Street could borrow nearly free of charge to conduct its business of trading and brokering, while small businesses couldn’t get a loan.
An avid reader of the financial press, Davis was pissed off by all of this. He lives in a place where taxes are out of control (for a middle-class New York City resident the combined federal, state, and city taxes can easily reach 40 percent—and go up from there the more you make) and are likely to rise higher given New York’s budget mess. His business was in decent shape, but because of the great recession not as decent as it once had been. And yet there he was, surrounded by all these Wall Street bankers and traders, standing around him drinking $20 martinis or sitting at the white-linen-covered tables in the swank restaurant eating expensive pasta and guzzling costly wines and making out like bandits.
What Steve Davis couldn’t understand was the same thing millions of Americans were grappling with as well: a system that rewarded the miscreants at the expense of those who played it straight. As most Americans were taking care of their families, starting businesses, working in factories, and trying to make ends meet, Wall Street was gambling like mad, and now those gamblers were being given a second chance to gamble, a fresh bankroll from the taxpayers, with few, if any, personal consequences.
Bought and Paid For Page 17
