A few days after the Journal’s story, a Goldman “source” told The Independent, a British newspaper, “They are very embarrassed that their names have come out. Until now, nobody had heard of them, including most of the people on the floor where they work.” Whether deliberate or not, Kelly’s story had humanized at least three of the Goldman cyborgs—an apparent violation of the unwritten rule at Goldman that for the rank and file, no matter how successful, talking to the press is against the rules.
The fact that Goldman did not lose money from mortgages in 2007—when nearly every other major firm on Wall Street did—helped Goldman and its top executives to make a fortune. The firm had record pretax earnings of $17.6 billion in 2007, some $3 billion more than in the previous year. The top five executives at the firm split among themselves nearly $400 million, with Blankfein taking home $70.3 million, Cohn receiving $72.5 million, and Viniar being paid $58.5 million. These breathtaking sums were among the highest compensation ever paid to Wall Street executives in a single year. Still, Gary Cohn liked to pretend with reporters that Goldman did not make nearly as much money in 2007 betting against the mortgage market as people think it did. “We don’t disclose segment-by-segment reporting,” he said in an interview. “But the market would be really disappointed if they saw our actual mortgage results last year, because they think we made a lot of money.” Sparks was much more honest about what happened. “The good thing we did is when we made a mistake we admitted it and did something about it,” Sparks said. “We didn’t just sit there and close our eyes and pray.”
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A FEW MONTHS after paying out these huge bonuses to its top executives, both Sparks, then forty-one, and Birnbaum, then thirty-five, left Goldman. Sparks had been a Goldman partner since November 2002. Birnbaum was a Goldman vice president, hoping to be made a partner in 2008. Reached at his home in October 2009, Sparks—who had been head of Goldman’s four-hundred-person mortgage department for some eighteen months—said in a brief telephone conversation that he does not like to talk to reporters about his experience at Goldman and why it came to such an abrupt end. He had told his colleagues he was “fond of the firm” but that it was “time to move on.” He said he had been thinking about leaving Goldman often during the previous six years and the time just became right because his business was changing rapidly—in the wake of the meltdown—and he had had to fire half of his team. He claimed to still be on good terms with Goldman and that it was supportive of him. He is the chairman of Archon Mortgage LLC, a real-estate management company in Irving, Texas, that is affiliated with Goldman. He also appears to have other company affiliations as well. Left unsaid was that, according to the Wall Street Journal, in and around January 2008, the SEC had interviewed Sparks about his role in the sale of the Timberwolf CDO. Soon after, a representative of Basis Yield Alpha Fund, an Australian hedge fund that bought $100 million of the deal, and lost money as the deal soured, told an SEC lawyer, “Our belief is the trade was portrayed in a fraudulent manner.” In March, a month before Sparks left Goldman, the SEC interviewed the Basis hedge-fund executives further about the Timberwolf deal.
Birnbaum was out the door shortly before Sparks. He is now the founder and chief investment officer at Tilden Park Capital Management, a $1 billion, New York–based hedge fund focused on “opportunities in structured products.” Jeremy Primer, the Goldman mortgage-modeling guru, works with Birnbaum at Tilden Park. Not surprisingly, Birnbaum was not shy about setting out his three goals for 2008 at Goldman: “Produce more than $1 billion in trading revenue,” “continue to strengthen the GS franchise,” and “Make Partner.”
It was not to be. Part of Birnbaum’s motivation for leaving Goldman seemed to be compensation related. He won’t say, but he probably made around $10 million in 2007, apparently less than he thought he should have made. “I guess it depends on your perspective of what’s fair, right?” he said. “If you’re a steelworker you probably think I got paid pretty well. If you’re a hedge-fund manager you probably don’t.”
Goldman won’t say why its two star traders left the firm, although a spokesman said, “We’re sorry to see Dan go. He’ll be missed,” which is of course the typical corporate happy talk dispensed when the real reasons for someone’s unexpected departure are too uncomfortable to be discussed publicly. (For instance, had Sparks been leaving unexpectedly to become, say, secretary of the treasury, Goldman might have been slightly more forthcoming.) Goldman said nothing about Birnbaum’s departure. There has been speculation that the two men were forced out of Goldman—despite having a profound role in helping to construct a series of trades that may well have saved the firm. Both of them appeared at Senator Levin’s famous April 2010 filleting of Goldman Sachs.
CHAPTER 24
GOD’S WORK
Goldman’s recent public-relations nightmares began in earnest in March 2009 when the firm appeared at the top of the list of counterparties that had received billions of dollars in payments funneled through AIG by the U.S. government as part of the second phase of the 2008 $182 billion bailout of AIG. The counterparty list had been kept secret for months and was only released after much public outcry. A narrative quickly developed in the zeitgeist that Goldman had somehow received a special benefit along with its $14 billion, thanks to its numerous Washington connections, including Hank Paulson; Steve Friedman, a Goldman board member who was then chairman of the board of the Federal Reserve Bank of New York and a former head of the National Economic Council under George W. Bush; and Josh Bolten, a former Goldman partner who was President George W. Bush’s chief of staff. Blankfein later acknowledged as much in a speech he gave to Goldman’s 470 partners in January 2011. “Our history of good performance through the crisis became a liability as people wondered how we performed so well and whether we’d received favorable treatment from well-placed alumni,” he told his partners. “This was not only a poor place to be, it was a dangerous place to be.”
Soon after the release of the AIG counterparties list, Goldman snatched one public-relations defeat after another from the jaws of its financial victory. “I think there are a lot of things, as a firm, we do really, really well,” Blankfein said, “but there are other things that we clearly could have been better at for us to be in the position that we were in. I don’t think we’ve done a very good job of explaining what Goldman Sachs does.” The opening salvo in this ongoing battle came a few days after the release of the AIG counterparty list, on March 20, when Viniar led an unprecedented—by Goldman’s standards—forty-five-minute call with journalists “to clarify certain misperceptions in the press regarding Goldman Sachs’s trading relationship with AIG.” The gist of Viniar’s argument was that Goldman had hedged itself against a collapse of AIG as well as the securities it had asked AIG to insure. “That is why we are able to say that whether it failed or not, AIG would have had no material direct impact on Goldman Sachs,” he said.
The call seemed to raise more questions than it answered—among the very people it was designed to pacify: the journalists listening in on behalf of the American people. That frustration—and confusion—showed up first in a July 2009 issue of Rolling Stone magazine in a now-classic bit of conspiracy-theory journalism written by reporter Matt Taibbi. “The first thing you need to know about Goldman Sachs is that it’s everywhere,” Taibbi wrote. “The world’s most powerful investment bank is a great vampire squid wrapped around the face of humanity, relentlessly jamming its blood funnel into anything that smells like money.” Taibbi blamed Goldman for a multitude of financial sins, including the Great Depression, the Internet bubble, the housing bubble, the explosion in the per-gallon price of gasoline, as well as for “rigging the bailout” to its advantage.
The metaphor of Goldman being a “great vampire squid” soon became so ubiquitous that even Blankfein could not ignore it. “That Rolling Stone article oddly enough tapped into something,” he said in an interview in August 2009. “I thought it was so over the top that I actually read it as
a gonzo piece of over-the-top kind of writing that some people found fun to read. That’s how I saw it. But then you had other people sort of taking stuff as if Goldman Sachs burned down the Reichstag, fired on Fort Sumter, shot the archduke Ferdinand, all that kind of stuff.”
Goldman’s gold-plated image suddenly seemed to tarnish overnight. A few weeks later, Joe Hagan, at New York magazine, followed up Taibbi’s screed with a more sober analysis of how and why things were going so wrong at the mighty Goldman. In Capitalism: A Love Story, the filmmaker Michael Moore, full of vim, vigor, and irony, drove up to 85 Broad Street in a Brinks truck, hopped out, and yelled: “We’re here to get the money back for the American people!” before being ushered from the premises without getting inside.
The frenzy seemed to reach what in retrospect looks like a false peak in early November 2009 when the august Sunday Times, in London, weighed into the fracas with its own lengthy treatise of how Goldman had become “the best cash making machine that global capitalism has ever produced, and, some say, a political force more powerful than governments.” The usual tropes about Goldman were trotted out—including those about it being a collection of the hardest-working, smartest, and richest kids on the block—but questions were also raised about its plethora of conflicts and its ability to manage them. Then there was the question, posed to Blankfein, about whether there can ever be—should ever be—any limit to the firm’s ambitions, or the ambitions of the people who work there. “I don’t want people in this firm to think that they have accomplished as much for themselves as they can and go on vacation,” he answered. “As the guardian of the interests of the shareholders and, by the way, for the purposes of society, I’d like them to continue to do what they are doing. I don’t want to put a cap on their ambition.” Blankfein’s comment seemed to be a direct jab at the ongoing efforts of the Obama administration during its first year to mitigate the growing discrepancy between rich and poor in the country.
As difficult to digest as Blankfein’s comment might have been for most readers, it was his off-the-cuff comment on the way out the door that he was just a banker “doing God’s work” that set off a new round of firestorms at the firm. Once again, Goldman found itself on the defensive, trying to explain an example of Blankfein’s self-deprecating sense of humor, which was ill timed and had fallen terribly flat. Ten days later, Jeffrey Cunningham, of Directorship magazine, which would soon name Blankfein its 2009 “CEO of the Year,” interviewed Blankfein about the “God’s work” comment. “It’s nice to be entrapped by you so early in the game,” Blankfein quipped. “No, it was obviously a joke. If you asked me now if I wish I hadn’t said it, no of course. I’m always warned when I leave, by my handlers, ‘Now remember, Lloyd, whatever you do, don’t be yourself.’ So I walked out and I was talking to a reporter, and the questions were running along the lines of ‘How much did your tie cost?’ and ‘Do you know how much a quart of milk costs?’ And I knew where the trend was going, and as I was leaving, we’d gotten into a back and forth on the themes he was projecting, and I was leaving, I said and meant in an ironic way, ‘Now I’m off to do God’s work.’ He laughed, I laughed, but guess what? He got the last laugh. And so, I would say that if anybody has any allergies and you sneeze, and I don’t say, ‘God bless you,’ understand it’s because I’ve learned my lesson.”
Despite the gaffe, from other quarters plaudits for Blankfein continued to roll in. How could anyone ignore the firm’s extraordinary 2009 profits? Vanity Fair named him as its number 1 most powerful and influential person on its annual Vanity Fair 100 list. The Financial Times named Blankfein its 2009 “Person of the Year” but made clear, in the accompanying article, that it was grudgingly bestowed. “This is not an unalloyed endorsement of either Mr. Blankfein or Goldman,” columnist John Gapper wrote, “which the FT has sometimes criticised in the past year. Instead, it is a recognition that Mr. Blankfein and his bank have taken the leading place in the world of finance, while others have fallen by the wayside.”
Like the 2004 Red Sox, though, in the first quarter of 2010, the other Wall Street banks seemingly left for dead began to show signs of life, fueled by a combination of the gift of nearly free money from the Federal Reserve—the rocket fuel of the banking sector—and an economy that had been pulled back from the brink. For the first time since before the 2008 crisis became manifest, other firms, besides Goldman, began to make big money again. Even the beleaguered Citigroup showed a profit—of $4.4 billion—after years of losses. Goldman made $3.3 billion in the first quarter of 2010.
Finally, it seemed, the intense spotlight was no longer focused on Goldman Sachs. Wall Street’s sudden return to profitability seemed to signal the return to normalcy that the architects of the TARP envisioned, and no one could have been happier about that than Lloyd Blankfein. By all rights, 2010 should have been Blankfein’s triumphal moment. But Blankfein could not catch a break.
In the wake of the SEC’s lawsuit and Senator Levin’s hearing, a rash of new civil lawsuits were filed against the firm. The SEC was reportedly studying another Goldman synthetic CDO marketed and sold in the fall of 2006: the $2 billion Hudson Mezzanine Funding 2006-1, where Goldman stated in marketing materials related to the deal that its interests were aligned with the buyers—“Goldman Sachs has aligned incentives with the Hudson program by investing in a portion of equity,” according to an internal Goldman marketing document—but that, in fact, according to Senator Levin and Goldman documents, Goldman had actually been the sole, $2 billion investor on the short side of the deal, betting the security would collapse. When it did, in September 2007, Goldman made $1 billion. “Goldman Sachs profited from the loss in value of the very CDO securities it had sold to its clients,” Senator Levin said. The Justice Department was also said to be investigating Goldman on criminal charges, which if brought would be the firm’s death knell, as no financial services firm has ever survived a criminal indictment against it.
In an irony that surely Blankfein can appreciate, the SEC’s lawsuit and the Senate hearing emboldened both the firm’s supporters, who believe the firm has been wrongly singled out for persecution, and the firm’s harshest critics, who believe Goldman embodies all that is wrong with Wall Street and its current mores.
Warren Buffett is among Goldman and Blankfein’s most ardent boosters (and the firm’s largest individual shareholder). He said he backed the firm “100 percent” and that if Blankfein were to resign, or be replaced, “If Lloyd had a twin brother, I would vote for him” to be Goldman’s new CEO. Old hands on Wall Street say Buffett was just “talking his own book,” since he has a large financial stake in the firm. On the other hand, Steve Schwarzman, the billionaire founder of the Blackstone Group, competes with Goldman in a number of businesses. So when, a few days after Senator Levin’s hearing, Schwarzman told the Financial Times that for the twenty-five years Blackstone has been around “we never had any circumstance where there was any question about ethical character or behavior,” his words had more resonance. “We are a major client of Goldman’s and we will continue to remain a major client,” he said.
In an interview recently in a conference room off his office thirty-one floors above Park Avenue, Schwarzman said he thought Goldman was unfairly caught in the crosshairs of Obama’s populist, antibusiness rhetoric and the American public’s ire at having to bail out Wall Street for its own mistakes, only to watch as bankers and traders—especially at Goldman Sachs—were once again reaping big financial rewards while the economic suffering in many quarters remained palpable. “Goldman became a symbol of prosperity in the time where there was no prosperity,” he said. “And Obama ran on a platform to decrease the [disparity] between prosperous people and middle-class people. That’s like his touchstone. And so Goldman became the mega-symbol because they outearned everybody, right? I think for Obama this was the nail that was too far out of the board and it was going to get hammered down into the board. They just went out about trying to hammer it down. And from talking wi
th Lloyd at different points during this evolution, it was not clear what would feed this monster.” He said that Goldman has become for the Obama administration “either subliminally or purposefully … some kind of symbol … of the society that Obama wants to change, modify, or destroy.” (On the other hand, Henry Kravis, Schwarzman’s rival at KKR who once tried to get a job in Goldman’s arbitrage department and was a summer intern at the firm, has watched the firm’s evolution during the past thirty-five years from one focused almost exclusively on trying to help its clients, for a fee, to one that finds new ways to compete with its clients on almost a daily basis. “That stress between KKR as a principal and Goldman Sachs as a principal was always enormous,” said one former Goldman banker. “You should talk to Henry about the firm, too, if you haven’t. He has a very, very good view of it. We had a good relationship when I was there. They still have a very good relationship. It goes in and out.” Alas, Kravis declined numerous requests to be interviewed.
Others are far less sanguine and forgiving about Goldman and its business practices than either Buffett or Schwarzman appears to be. They hope that Goldman has finally been caught in the web of its own making. There have been long-standing rumors on Wall Street that Goldman engages in “front-running,” where the firm becomes privy to a client’s confidential trade or interest and uses that information to its financial advantage. Some even think Goldman did this when it put on its “big short” in early 2007, privy as it was to John Paulson’s trading patterns, but that it was one example among many. “They view information gathered from their client businesses as free to them to trade on,” explained one Goldman competitor. “They don’t view that as, ‘Hey, that’s my client’s information. I’m not supposed to be knowing that in terms of trading on my own book.’ It’s as simple as that.” He gave the example of Goldman being hired by, say, a medical supply business on a potential sale or IPO and discovering as part of its due diligence on the company that the demand for the company’s services was declining daily and then relaying that information to traders, who would then short the medical supply industry or the securities of companies in the industry.
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