Copyright © 2011 by William D. Cohan
All rights reserved. Published in the United States by Doubleday, a division of Random House, Inc., New York, and in Canada by Random House of Canada Limited, Toronto.
www.doubleday.com
DOUBLEDAY and the portrayal of an anchor with a dolphin are registered trademarks of Random House, Inc.
Portions of this work were previously published in Vanity Fair.
Grateful acknowledgment is made to the Columbia University Oral History Research Office Collection.
Jacket design by John Fontana
Jacket illustration by Serial Cut™
Title page photograph by Marco Di Fabio / Flickr / Getty Images
Cataloging-in-Publication Data is on file with the Library of Congress.
eISBN: 978-0-385-53497-0
v3.1_r2
TO QUENTIN, DEB, AND TEDDY
CONTENTS
Cover
Title Page
Copyright
Dedication
PROLOGUE / The Pyrrhic Victory
CHAPTER 1 / A Family Business
CHAPTER 2 / The Apostle of Prosperity
CHAPTER 3 / The Politician
CHAPTER 4 / The Value of Friendship
CHAPTER 5 / “What Is Inside Information?”
CHAPTER 6 / The Biggest Man on the Block
CHAPTER 7 / Caveat Emptor
CHAPTER 8 / The Goldman Way
CHAPTER 9 / A Formula That Works
CHAPTER 10 / Goldman Sake
CHAPTER 11 / Busted
CHAPTER 12 / Money
CHAPTER 13 / Power
CHAPTER 14 / The College of Cardinals
CHAPTER 15 / $10 Billion or Bust
CHAPTER 16 / The Glorious Revolution
CHAPTER 17 / It’s Too Much Fun Being CEO of Goldman Sachs
CHAPTER 18 / Alchemy
CHAPTER 19 / Getting Closer to Home
CHAPTER 20 / The Fabulous Fab
CHAPTER 21 / Selling to Widows and Orphans
CHAPTER 22 / Meltdown
CHAPTER 23 / Goldman Gets Paid
CHAPTER 24 / God’s Work
ACKNOWLEDGMENTS
NOTES
INDEX
Other Books by This Author
PROLOGUE
THE PYRRHIC VICTORY
Wall Street has always been a dangerous place. Firms have been going in and out of business ever since speculators first gathered under a buttonwood tree near the southern tip of Manhattan in the late eighteenth century. Despite the ongoing risks, during great swaths of its mostly charmed 142 years, Goldman Sachs has been both envied and feared for having the best talent, the best clients, and the best political connections, and for its ability to alchemize them into extreme profitability and market prowess.
Indeed, of the many ongoing mysteries about Goldman Sachs, one of the most overarching is just how it makes so much money, year in and year out, in good times and in bad, all the while revealing as little as possible to the outside world about how it does it. Another—equally confounding—mystery is the firm’s steadfast, zealous belief in its ability to manage its multitude of internal and external conflicts better than any other beings on the planet. The combination of these two genetic strains—the ability to make boatloads of money at will and to appear to manage conflicts that have humbled, then humiliated lesser firms—has made Goldman Sachs the envy of its financial-services brethren.
But it is also something else altogether: a symbol of immutable global power and unparalleled connections, which Goldman is shameless in exploiting for its own benefit, with little concern for how its success affects the rest of us. The firm has been described as everything from “a cunning cat that always lands on its feet” to, now famously, “a great vampire squid wrapped around the face of humanity, relentlessly jamming its blood funnel into anything that smells like money,” by Rolling Stone writer Matt Taibbi. The firm’s inexorable success leaves people wondering: Is Goldman Sachs better than everyone else, or have they found ways to win time and time again by cheating?
But in the early twenty-first century, thanks to the fallout from Goldman’s very success, the firm is looking increasingly vulnerable. To be sure, the firm has survived plenty of previous crises, starting with the Depression, when much of the firm’s capital was lost in a scam of its own creation, and again in the late 1940s, when Goldman was one of seventeen Wall Street firms put on trial and accused of collusion by the federal government. In the past forty years, as a consequence of numerous scandals involving rogue traders, suicidal clients, and charges of insider trading, the firm has come far closer—repeatedly—to financial collapse than its reputation would attest.
Each of these previous threats changed Goldman in some meaningful way and forced the firm to adapt to the new laws that either the market or regulators imposed. This time will be no different. What is different for Goldman now, though, is that for the first time since 1932—when Sidney Weinberg, then Goldman’s senior partner, knew that he could quickly reach his friend, President-elect Franklin Delano Roosevelt—the firm no longer appears to have sympathetic high-level relationships in Washington. Goldman’s friends in high places, so crucial to the firm’s extraordinary success, are abandoning it. Indeed, in today’s charged political climate, which is polarized along socioeconomic lines, Goldman seems particularly isolated and demonized.
Certainly Lloyd Blankfein, Goldman’s fifty-six-year-old chairman and CEO, has no friend in President Barack Obama, despite being invited to a recent state dinner for the president of China. According to Newsweek columnist Jonathan Alter’s book The Promise, the “angriest” Obama got during his first year in office was when he heard Blankfein justify the firm’s $16.2 billion of bonuses in 2009 by claiming “Goldman was never in danger of collapse” during the financial crisis that began in 2007. According to Alter, President Obama told a friend that Blankfein’s statement was “flatly untrue” and added for good measure, “These guys want to be paid like rock stars when all they’re doing is lip-synching capitalism.”
Complicating the firm’s efforts to be better understood by the American public—a group Goldman has never cared to serve—is a long-standing reticence among many of the firm’s current and former executives, bankers, and traders to engage with the media in a constructive way. Even retired Goldman partners feel compelled to check with the firm’s disciplined administrative bureaucracy, run by John F. W. Rogers—a former chief of staff to James Baker, both at the White House and at the State Department—before agreeing to be interviewed. Most have likely signed confidentiality or nondisparagement agreements as a condition of their departures from the firm. Should they make themselves available, unlike bankers and traders at other firms—where self-aggrandizement in the press at the expense of colleagues is typical—Goldman types stay firmly on the message that what matters most is the Goldman team, not any one individual on it.
“They’re extremely disciplined,” explained one private-equity executive who both competes and invests with Goldman. “They understand probably better than anybody how to never take the game face off. You’ll never get a Goldman banker after three beers saying, ‘You know, listen, my colleagues are a bunch of fucking dickheads.’ They just don’t do that the way other guys will, whether it’s because they tend to keep the uniform on for a longer stretch of time so they’re not prepared to damage their squad, or whether or not it’s because they’re afraid of crossing the powers that be, once they’ve taken the blood oath … they maintain that discipline in a kind of eerily successful way.”
——
ANYONE WHO MIGHT have forgotten how dangerous Wall Street can be was reminded of it again, in spades, beginning in early 2007, as the market for home mortga
ges in the United States began to crack, and then implode, leading to the demise or near demise a year or so later of several large Wall Street firms that had been around for generations—including Bear Stearns, Lehman Brothers, and Merrill Lynch—as well as other large financial institutions such as Citigroup, AIG, Washington Mutual, and Wachovia.
Although it underwrote billions of dollars of mortgage securities, Goldman Sachs avoided the worst of the crisis, thanks largely to a fully authorized, well-timed proprietary bet by a small group of Goldman traders—led by Dan Sparks, Josh Birnbaum, and Michael Swenson—beginning in December 2006, that the housing bubble would collapse and that the securities tied to home mortgages would rapidly lose value. They were right.
In July 2007, David Viniar, Goldman’s longtime chief financial officer, referred to this proprietary bet as “the big short” in an e-mail he wrote to Blankfein and others. During 2007, as other firms lost billions of dollars writing down the value of mortgage-related securities on their balance sheets, Goldman was able to offset its own mortgage-related losses with huge gains—of some $4 billion—from its bet the housing market would fall.
Goldman earned a net profit in 2007 of $11.4 billion—then a record for the firm—and its top five executives split $322 million, another record on Wall Street. Blankfein, who took over the leadership of the firm in June 2006 when his predecessor, Henry Paulson Jr., became treasury secretary, received total compensation for the year of $70.3 million. The following year, while many of Goldman’s competitors were fighting for their lives—a fight many of them would lose—Goldman made a “substantial profit of $2.3 billion,” Blankfein wrote in an April 27, 2009, letter. Given the carnage on Wall Street in 2008, Goldman’s top five executives decided to eschew their bonuses. For his part, Blankfein made do with total compensation for the year of $1.1 million. (Not to worry, though; his 3.37 million Goldman shares are still worth around $570 million.)
Nothing in the financial world happens in a vacuum these days, given the exponential growth of trillions of dollars of securities tied to the value of other securities—known as “derivatives”—and the extraordinarily complex and internecine web of global trading relationships. Accounting rules in the industry promote these interrelationships by requiring firms to check constantly with one another about the value of securities on their balance sheets to make sure that value is reflected as accurately as possible. Naturally, since judgment is involved, especially with ever more complex securities, disagreements among traders about values are common.
Goldman Sachs prides itself on being a “mark-to-market” firm, Wall Street argot for being ruthlessly precise about the value of the securities—known as “marks”—on its balance sheet. Goldman believes its precision promotes transparency, allowing the firm and its investors to make better decisions, including the decision to bet the mortgage market would collapse in 2007. “Because we are a mark-to-market firm,” Blankfein once wrote, “we believe the assets on our balance sheet are a true and realistic reflection of book value.” If, for instance, Goldman observed that demand for a certain security or group of like securities was changing or that exogenous events—such as the expected bursting of a housing bubble—could lower the value of its portfolio of housing-related securities, the firm religiously lowered the marks on these securities and took the losses that resulted. These new, lower marks would be communicated throughout Wall Street as traders talked and discussed new trades. Taking losses is never much fun for a Wall Street firm, but the pain can be mitigated by offsetting profits, which Goldman had in abundance in 2007, thanks to the mortgage-trading group that set up “the big short.”
What’s more, the profits Goldman made from “the big short” allowed the firm to put the squeeze on its competitors, including Bear Stearns, Merrill Lynch, and Lehman Brothers, and at least one counterparty, AIG, exacerbating their problems—and fomenting the eventual crisis—because Goldman alone could take the write-downs with impunity. The rest of Wall Street squirmed, knowing that big losses had to be taken on mortgage-related securities and that they didn’t have nearly enough profits to offset them.
Taking Goldman’s new marks into account would have devastating consequences for other firms, and Goldman braced itself for a backlash. “Sparks and the [mortgage] group are in the process of considering making significant downward adjustments to the marks on their mortgage portfolio esp[ecially] CDOs and CDO squared,” Craig Broderick, Goldman’s chief risk officer, wrote in a May 11, 2007, e-mail, referring to the lower values Sparks was placing on complex mortgage-related securities. “This will potentially have a big P&L impact on us, but also to our clients due to the marks and associated margin calls on repos, derivatives, and other products. We need to survey our clients and take a shot at determining the most vulnerable clients, knock on implications, etc. This is getting lots of 30th floor”—the executive floor at Goldman’s former headquarters at 85 Broad Street—“attention right now.”
Broderick’s e-mail may turn out to be the unofficial “shot heard round the world” of the financial crisis. The shock waves of Goldman’s lower marks quickly began to be felt in the market. The first victims—of their own poor investment strategy as well as of Goldman’s marks—were two Bear Stearns hedge funds that had invested heavily in squirrelly mortgage-related securities, including many packaged and sold by Goldman Sachs. According to U.S. Securities and Exchange Commission (SEC) rules, the Bear Stearns hedge funds were required to average Goldman’s marks with those provided by traders at other firms.
Given the leverage used by the hedge funds, the impact of the new, lower Goldman marks was magnified, causing the hedge funds to report big losses to their investors in May 2007, shortly after Broderick’s e-mail. Unsurprisingly, the hedge funds’ investors ran for the exits. By July 2007, the two funds were liquidated and investors lost much of the $1.5 billion they had invested. The demise of the Bear hedge funds also sent Bear Stearns itself on a path to self-destruction after the firm decided, in June 2007, to become the lender to the hedge funds—taking out other Wall Street firms, including Goldman Sachs, at close to one hundred cents on the dollar—by providing short-term loans to the funds secured by the mortgage securities in the funds.
When the funds were liquidated a month later, Bear Stearns took billions of the toxic collateral onto its books, saving its former counterparties from that fate. While becoming the lender to its own hedge funds was an unexpected gift from Bear Stearns to Goldman and others, nine months later Bear Stearns was all but bankrupt, its creditors rescued only by the Federal Reserve and by a merger agreement with JPMorgan Chase. Bear’s shareholders ended up with $10 a share in JPMorgan’s stock. As recently as January 2007, Bear’s stock had traded at $172.69 and the firm had a market value of $20 billion. Goldman’s marks had similarly devastating impacts on Merrill Lynch, which was sold to Bank of America days before its own likely bankruptcy filing, and AIG, which the government rescued with $182 billion of taxpayer money before it, too, had to file for bankruptcy. There is little doubt that Goldman’s dual decisions to establish “the big short” and then to write down the value of its mortgage portfolio exacerbated the misery at other firms.
——
UNDERSTANDABLY, GOLDMAN DOES not like to talk about the role it had in pushing other firms off the edge of the cliff. It prefers to pretend—even in sworn testimony in front of Congress—that there was no “big short” at all, that its marks were not much lower than any other firm’s marks, and that its profits in 2007 from its mortgage trading activities were de minimis, something on the order of $500 million, Blankfein later testified, which is chump change in the world of Goldman Sachs. (Goldman officials preferred to talk about their mortgage business as having lost $1.7 billion in 2008, and therefore for the two-year period, Goldman lost $1.2 billion in its mortgage business.) Rather than crow—as would be typical on Wall Street—about its trading prowess in 2007, a prowess that probably saved the firm, Goldman has been taking the opposite tack in pub
lic lately of obfuscating and suggesting that it was just as stupid as everyone else. For a firm where Blankfein once said of his job, “I live ninety-eight percent of my time in the world of two-percent probabilities,” this argument may seem counterintuitive. But in a political and economic environment where the repercussions of the financial crisis are still reverberating and blame is still being apportioned, Goldman’s preference for appearing dumb rather than brilliant may be the best of its poor options.
Consider this exchange, from an April 27, 2010, U.S. Senate hearing, between Senator Carl Levin, D-Michigan, the chairman of the Permanent Subcommittee on Investigations, and Blankfein:
LEVIN: The question is did you bet big time in 2007 against the housing mortgage business? And you did.
BLANKFEIN: No, we did not.
LEVIN: OK. You win big in shorts.
BLANKFEIN: No, we did not.
This disconnect with Senator Levin had followed Blankfein’s opening statement, where he denied the firm had made a bet against the housing market in 2007. “Much has been said about the supposedly massive short Goldman Sachs had on the U.S. housing market,” he said. “The fact is, we were not consistently or significantly net-short the market in residential mortgage-related products in 2007 and 2008. Our performance in our residential mortgage-related business confirms this. During the two years of the financial crisis, while profitable overall, Goldman Sachs lost approximately $1.2 billion from our activities in the residential housing market. We didn’t have a massive short against the housing market, and we certainly did not bet against our clients.”
In a separate interview, Blankfein said the decision to mitigate the firm’s risk to the housing market in December 2006 has been “overplayed” and was just a routine decision. “It’s what you do when you’re managing risk, and a huge part of risk management is scouring the P&L every day for aberrations or unpredicted patterns,” he said. “And when you see something like that, you call the people in the business and say, ‘Can you explain that?’ and when they don’t know, you say, ‘Take risk down.’ That’s what happened in our mortgage business, but that meeting wasn’t significant. It was rendered significant by the events that subsequently happened.”
Money and Power Page 1
