It Takes a Pillage: An Epic Tale of Power, Deceit, and Untold Trillions

by Nomi Prins

  In Wall Street’s corporate conquest, no one has been more dominant than the men—and yes, they are, to date, all men—of Goldman Sachs. The list is impressive: Stephen Friedman, Robert Rubin, Jon Corzine, and Henry Paulson. These are just some of the more recognizable names of men who have triumphed at Goldman Sachs, who made enormous sums of money in the process, and who, even more importantly, used their Goldman Sachs alliances to parachute into positions of enormous global political influence. If we are to understand the men behind our current mess, there is no better place to begin than the hallowed halls of the “gilded firm.”

  It’s not as if these men were a group of conspirators actively plotting to take over the world. Instead, they appeared to be instinctive opportunists. As each left for formidable careers outside of Goldman Sachs, the ones left behind had a shot at the top of the firm. They were bound by loyalty laced with a primal drive for power. One former partner called them “pragmatists.” The most prominent of these financial political barons combine to constitute the formidable base of Goldman Sachs prowess.

  During the latter part of 2008, former senior Goldmanites were liberally sprinkled across the nation’s top financial firms and federal departments. Robert Rubin was a senior adviser at Citigroup (the biggest U.S. bank until October 2008, when it was surpassed by JPMorgan Chase).1 John Thain was CEO of Merrill Lynch, and just before that, he had run the New York Stock Exchange, after serving as co-president of Goldman Sachs. Under his leadership, Merrill would be merged with Bank of America to create a new behemoth bank. Bob Steel was heading Wachovia, Jon Corzine was running New Jersey, Stephen Friedman was chairing the New York Federal Reserve (and is still on the board of Goldman Sachs), and Hank Paulson was heading the U.S. Treasury. And there was Lloyd Blankfein, who was running Goldman Sachs. These are just the Goldman elite in the United States, and we are not even counting the Goldmanites they employed.

  To a large extent, these guys have operated on the borderline of ethics, though it’s likely they don’t spend a lot of time pondering ethical quandaries. For instance, in December 2008, as Friedman led the New York Fed toward an unprecedented restructuring of the banking industry, which left Goldman in a cushy condition relative to its former competitors, he bought 37,300 shares of Goldman stock, the value of which increased by $1.7 million several months later. Although Friedman resigned on May 7, 2009, he said he had seen “no conflict whatsoever in owning [those] shares.”2 He had merely bought them because they were trading at a low price. Which is savvy investing strategy, to be sure, but borderline unethical when your decisions can influence the price of that stock.

  It may be that I have looked for Goldman links to the Second Great Bank Depression because I worked there. But it’s hard to deny their predominance. Whether it was created by luck or by design, you can decide. You know where I stand.

  Oh, the Status

  Unless you’ve been embraced into the bosom of Goldman Sachs, even for a brief spate of time, it’s hard to fully grasp its “culture of excellence.” 3 It’s like Harvard, the New York Times, the Senate, and the New York Yankees all rolled into one. Once you drink the Kool Aid and manage not to spit it out, you really do begin to think you’re better than everyone else—that the entitlement bestowed upon you is somehow your destiny. For some people, life at Goldman Sachs cultivates a subconscious sense of smug. This smugness is essential to understanding why so many of the Goldmanites in power feel above explaining their actions to the public or expressing anything that might look like contrition or humility.

  I can’t deny that when I was first offered a job there I felt that I had arrived on Wall Street. But for a select few, getting into Goldman is much more than a fleeting rush; it’s a path to extreme wealth, power, and influence over everyone else.

  Goldman prides itself on the pedigree of its people (Ivy League- educated, well-connected, Washington ties not mandatory but a plus, and so on).

  It turns out, though, I’m not much for Kool Aid.

  I did not leap from my old position at Goldman Sachs to a plum spot in the U.S. government. Henry Paulson did not call on me to run TARP. And I now make as much in one year as Lloyd Blankfein made in a few hours in 2007. So I’m a little in awe of the power that certain men from Goldman Sachs have garnered through the years. But I also find that power to be incredibly misplaced. The pursuit of power, though integral to many Wall Street firms, was so ingrained at Goldman Sachs that it made me feel disdainful more than anything else.

  To give you an example of the mind set: two days after 9/11, Goldman’s then CEO Paulson sent out a corporatewide voice mail. In a deep throaty tone that would five years later be known to all of America, he stressed how “the people of Goldman Sachs” would persevere. As if the company was a country.

  It’s not that other Wall Street firms don’t breed the same propensity for excess among their anointed executives or rung climbers; it’s simply that Goldman Sachs bred it better and spread it wider. How else can one explain why Goldman’s former copresident John Thain spent $1.2 million on his new office at Merrill Lynch? On second thought, who doesn’t need a $87,000 area rug, a $26,000 pedestal table, or a $68,000 nineteenth-century credenza, not to mention a $1,400 “parchment waste can,” when you want to give your new office that “home-like” ambience ?4 Oh wait, Thain bought all that junk while the firm was combusting.

  Thain, Paulson’s protégé, shot into the top slot at Merrill Lynch in December 2007, the first time in Merrill’s history that an outsider nabbed that job.5 But the firm had just posted a record $8.4 billion of write downs, plus, it had already laid off 3,300 people that fall.6 That Thain thought a colossal office renovation would be a fitting first task merely underscores his mental separation from reality.

  Six months later, under Thain’s tutelage, Merrill Lynch racked up its fourth consecutive quarterly loss, of $4.9 billion. From July 2007 to July 2008, Merrill Lynch lost an average of $52 million a day.7 You’d think that would concern the man in charge. The only thing Thain forgot to buy was a fiddle to play while Merrill was burning.

  Genius or Really Lucky?

  Recent events have only solidified Goldman’s superior status and comparatively high stock price relative to its competitors. In late 2006, Goldman CFO David Viniar laid down the gauntlet to lessen Goldman’s exposure to risk, stressing the need to reduce its mortgage related securities positions and buy insurance protection against future losses.8 The firm bought protection in the form of credit default swaps, whose costs increased as demand for them did; in that way, Wall Street sensed a crisis before it became widely known to the rest of the world and the industry’s regulators. As it turned out, many were purchased from the notorious AIG.9

  Viniar’s decision was prescient, though, because in two years these securities would ruin several of Goldman’s key competitors. Akin to giving the finger to its rivals, Goldman stock hit its stride the day after Merrill’s CEO E. Stanley O’Neal got thrown to the corporate curb with a securities and retirement package worth $161.5 million.10 O’Neal snagged a board director spot less than three months later with Alcoa, the global aluminum producer.11

  In late 2007, just as many firms became more and more entangled with collateralized debt obligations (CDOs)—those alluring agents of our country’s financial meltdown—Goldman took the opposite tack, sort of. Its mortgage department was still churning out CDOs to clients while the trading group was selling similar products to get them off its books. In other words, Goldman was creating with one hand the very securities that the other hand was trying to dump.

  Two Goldman traders in the structured products trading group, Michael Swenson and Josh Birnbaum, backed by their boss, Dan Sparks, had bet that the value of subprime related securities would drop. They booked $4 billion on that bet, which made up for half of the mortgage related losses the firm was facing that year.12

  Also, in 2007, while Citigroup and Merrill Lynch were tossing out their chief executives, Goldman hit record profits and paid Lloyd
Blankfein a total compensation worth $70.3 million—the second-highest ever for a Wall Street CEO.13 (John Thain topped the chart that year, having worked for only one month at the helm of Merrill Lynch. His total compensation, including stock and option awards, was valued at $83 million.)14 Goldman generated record earnings of $11.6 billion.15

  Goldman continued to leave its competitors in the dust during 2008, although its profits certainly took a hit as the credit crisis deepened and liquidity in the trading markets dried up. When Bear Stearns collapsed in March 2008, investors kept their faith in Goldman shares.16 Goldman was like the roadrunner—unstoppable. Even as Goldman’s quarterly earnings per share plummeted 53 percent versus the same quarter a year earlier, and the firm wrote off $2 billion in residential mortgages and leveraged loans, it still managed to maintain its competitive sheen.17

  The media’s enthusiasm for the firm certainly didn’t hurt. CNBC’s Mad Money host, Jim Cramer, who began his career on Wall Street in the 1980s at—drum roll, please—Goldman Sachs, held Goldman stock in his charitable trust and promoted the stock on his buy list as late as March 24, 2008.18 Of course, Cramer was infamously bullish on Bear Stearns a couple of weeks before its demise. In response to a viewer question about the firm on March 11, 2008, he responded—or rather, in his inimitable style, he yelled—“Don’t move your money from Bear! That’s just being silly. Don’t be silly!”19

  Five days later, JPMorgan Chase agreed to take over Bear Stearns, for $2 per share.20 As I explained earlier, this takeover only happened thanks to strong arming from Paulson’s Treasury Department, coupled with the Federal Reserve agreeing to back Bear’s worst assets.21 As Bear Stearns was plunging into a financial abyss, many employees clambered for spots at Goldman Sachs, in a Wall Street version of the movie Sleeping with the Enemy. Needless to say very few Bear Stearns alumni made it into the gilded firm—yes, Wall Street gerrymandering is war. Even fewer Bear alums—namely, zero—have become treasury secretary of the United States. Of course, not all of Wall Street’s animals are created equal. As the pigs make clear in Orwell’s Animal Farm, “Some animals are more equal than others.”22

  Mentors and Kings

  Goldman’s influence during the Second Great Bank Depression spans a number of its former leaders who are still very active in federal politics. Robert Rubin began his career at Goldman in 1966.23 Stephen Friedman joined the firm the same year and became a partner seven years later. From there, Friedman ascended to the vice chairman and co-chief operating officer spot in 1987 beside Rubin. Friedman then served as cochairman, again alongside Rubin, from 1990 to 1992 and as sole chairman from 1992 to 1994 after Rubin left to become President Clinton’s first director of the National Economic Council.24 Friedman would later occupy the same post under George W. Bush.25 The parallel paths of the two men, which would take them through the company’s ranks and into the top realms of politics, are illustrative of Goldman’s fundamental importance to the current crisis.

  In January 2008, Friedman became chairman of the board of directors at the New York Fed, the branch of the Federal Reserve Bank that has the closest relationship with Wall Street.26 As we have seen, these two institutions have been going steady for a while. As I’ve mentioned, the relationship is so tight, in fact, that while Friedman chaired the New York Fed, he was on the board of directors of Goldman Sachs.27 For the first year of the Second Great Bank Depression, he was also the boss of soon-to-be treasury secretary Timothy Geithner, who was then president of the New York Fed.28 Though not in the limelight during the bailout proceedings, Friedman did have a front row seat, given his position and relationships with the bailout’s key players, including his onetime protégé, former treasury secretary Paulson.29 Friedman was also heavily involved in selecting Geithner’s replacement at the New York Fed, William C. Dudley, another Goldman alum. Which makes Friedman one of several Goldmanites in a position to continue to shape the future of Wall Street.

  Back in the day, Paulson had challenged Friedman to a wrestling match at a corporate off site event (business speak for “a boondoggle”). Friedman, a Cornell wrestling team Hall of Famer and Eastern Champion in 1959, pinned Paulson, even though Paulson was bigger and heavier.30 Perhaps Paulson wisely let his mentor win, especially considering that after Friedman left the helm at Goldman, Paulson ascended to take his old post and the two men remained colleagues during Paulson’s Treasury years.

  When I was at Goldman Sachs, there was a ritualistic mentee mentor part of the job. As a managing director, you were assigned someone to mentor. The idea of pulling people up through the ranks and indoctrinating them with your experiences and philosophy is very much a part of Goldman’s culture and extends to the greater political arena.

  From December 2002 to December 2004, Friedman served as director of the National Economic Council under President Bush.31 On the other side of the political fence, he retained his position as chairman of the president’s Foreign Intelligence Advisory Board and of the Intelligence Oversight Board under President Obama.32 (One of the joys of our postpartisan era!)

  In 1994, Jon Corzine, a protégé of Robert Rubin and, by many internal accounts, one of the “nicer” execs who came from Goldman Sachs, succeeded Friedman as CEO. It was a post that Jon Corzine held comfortably for more than four years, until he started to lose money and talk about taking the firm public. That annoyed the investment bankers, who didn’t think they needed public money to put deals together and didn’t like the idea of a public anything. So, once Jon Corzine made some more mistakes in 1998, such as extending $300 million toward the bailout of Long Term Capital Management and pushing Goldman Sachs to create a charitable foundation that was more ambitious in size than his partners would have liked, his days were numbered.33 In a heartbeat, Corzine’s friends became his adversaries. As one former Goldman partner put it, “the knives came out.”

  Corzine’s descent was aided by the concurrent rise of the very same investment bankers he had pissed off. During the early and mid 1990s, mergers and acquisitions (M&A) became one of the key moneymaking ventures on Wall Street. The deregulated energy and telecom and banking industries propelled certain M&A specialists on Wall Street to the top of the bonus charts.

  Those deals also catapulted a very powerful investment banker, Henry Paulson, to the CEO position at Goldman. Paulson had been the number two man in the firm, reporting to Corzine. He was also a longtime opponent of taking the firm public.34 Paulson supported Corzine toward the end of his reign only when Corzine agreed to make him a cochairman and co CEO in June 1998. The two shared ruling honors for a whopping seven months, but things were too crowded for Paulson.35

  After an ugly power struggle, Paulson pushed Corzine out the door, aided in the hostile takeover by ace dealmaker John Thornton.36 In January 1999, Paulson assumed the sole CEO slot, propped up by people in the investment banking division who hadn’t seen the point of going public. Paulson had agreed with them at first, when it benefited—and solidified—his ascent, but perhaps sensing the need for public money to compete with the growing books of commercial mega-banks, he changed his mind. In exchange for Thornton’s assistance, Paulson named him co president and co-chief operating officer.37 Thornton took the spots alongside another ambitious young man named John Thain, Corzine’s onetime protégé who had defected to join Paulson’s coup.38 (Corzine might have been tempted to be angry about a friendship so shallow that it cost him his job, but it’s probably hard to stay mad when the boot came with hundreds of millions of dollars.) Paulson described the management shakeup as an “orderly transition,” and by the spring of 1999, Goldman became the Hank, John, and John show.39

  There was simply no better position in the global banking community than partner at Goldman Sachs as it turned from a private 130 year old, blue-blood firm to a public company, through a $3.6 billion initial public offering (IPO) on May 4, 1999. On that beautiful, money scented day, Goldman’s shiny new 69 million shares soared from a 53 open to a 70 3/8 close.40 This meant that the
top 221 partners owned 264 million shares, netting about $63 million per partner.41 A little more than a week later, on May 13, Robert Rubin resigned his post as Clinton’s treasury secretary.42 Five months after that, he headed back to the private sector, ultimately landing at Citigroup.43 Perhaps he was envious of his Goldman friends, now rendered cartoonlike with dollar signs for eyeballs.

  The IPO itself was done with an air of superior detachment. No media were invited to the usually public glee-fest when Paulson rang the opening bell at the New York Stock Exchange that morning. The only cameras present were from Goldman, and the shocking profits were kept in house, too. The partners retained 48.3 percent of the shares. Despite having been booted, Corzine remained the single biggest shareholder; his take was $305 million.44 That fortune came in handy when he mounted one of most expensive Senate campaigns in the country’s history to date, 95 percent of which was self financed.45 Corzine served as New Jersey senator from January 2001 to 2005, before he became governor, defeating Republican candidate Douglas R. Forrester to take the seat vacated when James E. McGreevey resigned.46