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Doing God’s Work: How Goldman Became The Vampire Squid

In an excerpt from his new book on Goldman Sachs, entitled “Money and Power: How Goldman Sachs Came To Rule The World”, financial writer William D. Cohan explores Goldman’s reputation.

  • By William D. Cohan

The following is an excerpt from a new book on Goldman Sachs by financial journalist William D. Cohan, entitled “Money and Power: How Goldman Sachs Came To Rule The World.”

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.”

Read Steve Rosenbush's story on why the era of Goldman exceptionalism may be over.

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 thirtyone 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 with 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.

“They . . . knew as adviser to some of these companies inside information about what’s going on in these companies,” he said. “And they go and they use this inside information to trade in the market, and they call that ‘managing risk.’ That’s bullshit. That’s fucking insider trading. . . . They go, ‘Well, that’s managing our risk.’ What the fuck you mean that’s managing your risk? That is the business model . . . to use their clients— and their client relationships— to generate information off which they can trade. They’re doing that with countries. They’re doing that all the time. It just seems to me that you’ve got three businesses down there. You’ve got advisory, securities underwriting, and trading. And they have taken the securities underwriting and advisory businesses away from being separate and important units to being information sources for trading. And I don’t understand how that’s legal.”

Eliot Spitzer, the former New York State governor and attorney general, said in an interview that he has heard these charges about Goldman for years. “Front- running is illegal,” he said. “Front- running is a fraud on your client. No question about it. . . . When you have a client, you don’t give them bad research, you don’t trade in front of them, you don’t subvert their bids. It’s really simple.” But, he noted, neither he nor any other prosecutor has brought such a case against Goldman, in large part because of how difficult it would be to prove in court. “If you had a penny for every person who told you that was what they presume Goldman had done for twenty years, you’d be the richest man in the world,” he said. As attorney general, Spitzer was not shy about prosecuting Wall Street. Indeed, in April 2003, he forged a $1.4 billion settlement with a group of ten Wall Street firms— including Goldman, which paid $110 million— after he showed conclusively that the equity research Wall Street was issuing was being unduly influenced by the firms’ investment bankers looking to win more business.

But whether the evidence would stand up in court, the anecdotes about Goldman’s ruthless behavior abound. One hedge- fund manager recalled the experience his friend, at another hedge fund, had with Goldman during the recent financial crisis when Goldman was the hedge fund’s “prime broker,” responsible for executing and clearing trades as well as general administrative responsibilities related to the fund. “He had them as a prime broker, where they house all the positions,” he remembered. “The people he was trading with at Goldman, they knew exactly what he had and they were basically trying on the trading desk, in conjunction with the prime brokerage business, to squeeze him to make money themselves. Like this sort of front-running the trades that they knew he needed to do to take risk off, because the prime brokers were telling him he had to. They’re actively trying to put the guy out of business, because they thought at this juncture, this fund is worth more to us dead. We can mop up the pieces and sort of pick up a bunch of cheap things from them when they’re a stressed or a distressed seller. It’s worth more to us dead because we can make twenty million bucks more out of this than if it is alive. They had no qualms about making that sort of objective decision. Door 1 or Door 2—which has the highest present value for me? You wouldn’t want to be in the door with the lower dollar sign.”

Then there is the way the firm handles conflicts of interest, which is at the heart of what Senator Levin found so offensive. One of Goldman’s unstated business principles, according to the New York Times, is “to embrace conflicts.” Goldman “argues that [conflicts] are evidence of a healthy tension between the firm and its customers,” according to the paper. “If you are not embracing conflicts, the argument holds, you are not being aggressive enough in generating business.” Other firms are far less aggressive than Goldman in this regard. If, for instance, a firm had agreed to represent a seller of a business, it would not also represent the buyer for obvious reasons, even though many firms will also provide financing to a buyer of a company they are selling. Goldman is more willing to try to figure out a way to do both. Although the instances where Goldman represents both seller and buyer are rare, they do occur and are considered investment banking triumphs because the fee potential is doubled.

The pinnacle of what this was about may have been reached in 2005, when Goldman represented both sides of the $9 billion merger between the New York Stock Exchange— then private and led by John Thain, the former president and COO of Goldman— and Archipelago Holdings, a publicly traded electronic exchange in which Goldman was the second- largest investor. Through the complex merger, the stock exchange could both become a publicly traded company and take the crucial steps needed to keep up with other exchanges that did not have brokers on floors but rather computers in offices far from the floor. The merger was all about the future of Wall Street and who was going to control it. In other words, the very kind of deal in which Goldman would be expected to have a prominent role. What shocked people was that Goldman was on both sides and everyone involved seemed to be fine with that outcome. Goldman ended up making a $100 million windfall from the merger, considering its fee for advising on the deal, the increase in the value of its stake in Archipelago Holdings, and the increase in value of its NYSE seats. “Forgetting about the trading stuff, constantly having conflicts and managing those conflicts by just kind of saying, ‘Guys, we’re above that,’ ” has always amazed him, one private- equity investor said. “Look what they were doing with the deals with the Stock Exchange, they run every side of the deal. And then people would say, ‘You can’t do that,’ [but for Goldman] it was almost like public service, they had to do that, [and then they argued] no one else was as good as they and it would be letting down the mission of furthering tranquility and stability in capital markets if Goldman Sachs didn’t actually manage conflicts.” In short, the private- equity investor was lamenting the fact that Goldman continues to rely on its tired crutch “Trust us, we’re honest.”

Goldman has also been invited to partner with one private- equity firm on a proprietary deal, only to decline the offer and then show up in the auction for the company with another private- equity firm by its side. One bank CEO told the story of how he was bidding on a failed financial institution that the FDIC was selling and that Goldman threatened to bid against his company for the bank if he did not let Goldman into the deal. He described Goldman’s bare- knuckled approach as “anything to make a buck” and as “a sense of ethics that is not compatible with mine.” One former Goldman banker who left the firm and now works at a hedge fund that trades with Goldman continues to marvel at how the firm has changed since it went public. “We trade with Goldman a lot,” he said. “I think that they very clearly went to— across all their businesses— the view that what’s right for Goldman is what matters. As much as they might say the client’s interest comes first here, there, or whatever— maybe that’s still true in investment banking— but it is absolutely not true on the trading side. Like if they could eat your lunch and screw you over, they totally would.”

Another private- equity investor put it more bluntly. “What I’m fundamentally saying is that a lot of their basic business model should be illegal,” he said. Of course, he has experienced the situation where he has asked the firm to represent him on the purchase of the company, only to be told a week later that the firm “has a conflict” and then showed up bidding against his firm for the company. “I think savvy clients now expect that from Goldman,” he said. But he had a larger concern: since Goldman trades on nearly everything these days— from commodities to mortgages to loans— the insider- trading laws, which apply to trading in equities, need to be revised to reflect new categories of trading based on proprietary, nonpublic information that floats around inside Goldman Sachs and then is used to trade. Goldman’s proprietary computer riskmonitoring system— SecDB— allows Goldman to think about risk differently from other firms. Bankers and traders actually approach potential clients and discuss the buying and selling of risk. But sometimes, they take this too far. “They view information gathered from their client businesses as free to them to trade on . . . ,” the private-equity investor said. “It’s as simple as that. If they are in a client situation, working on a deal and they’re learning everything there is to know about that business, they take all that information, pass it up through their organization, and use that information to trade against the client, against other clients, et cetera, et cetera. But it might not be insider trading as written by the Forty Act because they might not be trading in the securities of that company. But that doesn’t make it less outrageous— and it is outrageous! Doesn’t that make it an outrageous business model, where as an adviser to this company, I happen to learn everything there is about the demand for their services ahead of the rest of the market, and then I take that information, I go trade against their competitors, right? If I’m a [widget] company and I’m using Goldman and they’re analyzing my business information for a potential sale of it or an IPO of it or whatever, and they see that like my daily orders are declining before that information is released to the public on a quarterly business, well, they take that information and they go, ‘Holy shit. We need to go short the [widget] industry.’

That is their business model! To use their client— and their client relationships— to generate information on which they can trade. . . . I don’t understand how that’s legal.”

He has decided he won’t deal with Goldman anymore, as powerful as they remain. He figured that in the long run, Goldman would be very vulnerable as more and more clients resent their trading on their confidential information. “They keep doing this and over twenty years, people will start to figure it out and stop using them as advisers,” he said. “But you have to remember, most companies using them as advisers are really using them for a reason. They’re trying to access capital markets.

They’re trying to underwrite securities. I think at most large companies, the managements are temporary and the banking relationships are temporary. As long as they think Goldman can deliver a high- yield deal or if they think they’re best off working with Goldman, they will go with that and worry about the damage later to the extent there is any because they’ll probably be gone. So, in essence, Goldman’s model takes advantage of the short- term nature of client relationships on Wall Street today. That’s something that I don’t think people quite get. People will use Goldman if they think that gives them an ‘in’ with somebody. All these webs of relationships— if you give them plenty of time— might give them an ‘in’ in the short run. In the short run, to get that ‘in,’ they’ll do that. Then by the time somebody is tipped off about the next thing, it will be a new management team.”

None of this comes as a surprise to Sandy Lewis, a former Wall Street merger arbitrageur who had many dealings with Goldman during his years on Wall Street and whose father, Cy Lewis, was the senior partner at Bear Stearns and a close friend of Gus Levy. “My take on the whole firm is that it’s done a masterful job of integrating various parts of the business, which if you study the rules carefully should not be integrated,” he said. “They simply shouldn’t be integrated. They can talk about Chinese walls. That might exist in China. I’m not so sure it exists in any of these firms, including Goldman Sachs.”

A former Goldman partner said that of course Goldman has changed, and will continue to change as long as it is around. One of the firm’s great strengths, he said, is the ability to adapt to changing circumstances with alacrity and still make money. “The firm is not the same now as it was before it went public,” he said. “It’s, in fact, not the same as it was two years ago or even three years ago. It’s constantly changing. The reason for its success is that it has an incredible ability to gauge what’s going on in the outside world and respond to it very, very fast. You combine that with a ferocious competitiveness— the competitiveness is astonishing when you see what these people, how much these people want to win, I’ve never seen anything like it— and that virtually assures that Goldman will continue to be around and continue to excel.”

He said that despite “all the negative publicity”—some of which he thought was deserved, some of which he thought was not—“Goldman is being criticized for being successful. If every investment bank in the United States had done what Goldman had done, there would not have been a financial crisis. That’s what Lloyd Blankfein should have said up in front of the Senate. If I have any criticisms of Lloyd, it’s that Goldman went into the hearing in a defensive mode. What he should have said was, ‘Listen, you’re criticizing us for making all the right decisions. If everyone had done what we did, we wouldn’t be sitting here today. We wouldn’t have had a trillion-dollar meltdown.”

Wondered the former Goldman partner, “Is Lloyd the best person to be dealing with the public, honestly? Probably not. He probably knows that. He’s not a natural public face of Goldman. But is he the right person to be running the firm right now? I think probably, because he understands risk profiles better than anybody else. That’s what matters the most.”

For his part, Blankfein is not immune to the criticism. “In a crisis, you have to deal not only with how you got there, but you have to deal with the legacy of the past,” he said in an interview. “So clearly we have things that we’re going to have to work our way through. There’s the SEC suit, the hearings, the media scrutiny, and you have to at least say there’s certainly a bit of a disconnect between how a lot of people see us and how we see ourselves.” In the wake of the Levin hearing, Blankfein appointed an internal fifteen- member committee, headed by Goldman partners E. Gerald Corrigan, a former president of the New York Federal Reserve Bank, and J. Michael Evans, a vice chairman and a rumored potential successor to Blankfein, to review the firm’s business practices, particularly relating to client relationships, conflicts of interest, and the creation of exotic securities.

The internal committee released its report during the second week of January 2011; its sixty- three pages reveal an extraordinary combination of chutzpah— in that such a document would be produced at all, as clearly no other Wall Street firm would (or has) undertaken such a project— and an Orwellian beehive, where one official- sounding committee after another has been, or will be, formed to make sure that Goldman, despite its DNA, continues to try to adhere to Whitehead’s princi ples (a complete set of which was featured on the report’s first page). According to the report, there are now— or soon will be— at 200 West Street, Goldman’s new, $2 billion world headquarters near Ground Zero (tax breaks included), something like thirty separate groups and committees— with names such as “Firmwide New Activity Committee” and “Firmwide Suitability Committee”—that Blankfein and Cohn will use to run the firm. “Goldman Sachs relies heavily on committees to coordinate and apply consistent business standards, practices, policies and procedures across the firm,” the report explained. “The firm’s committee governance structure should serve to enhance our reputation, business practices and client service. In this way, committees serve as a vital control function.” Of course, the “Business Standards Committee,” which produced the report, recommended that a new committee be formed— the “Firmwide Client and Business Standards Committee”—that will replace the Business Standards Committee in the future and also have responsibility for “the primacy of client interests and reputational risk.” Gary Cohn will head up the new committee, which will “function as a high- level committee that assesses and makes determinations regarding business practices, reputational risk management and client relationships.”

If it takes its responsibilities seriously, Cohn’s new committee will be plenty busy. One of the few self- critical observations in the report was that, according to an independent survey conducted for Goldman, the firm’s clients have been a bit miffed at the firm lately. “Clients raised concerns about whether the firm has remained true to its traditional values and [b]usiness [p]rinciples given changes to the firm’s size, business mix and perceptions about the role of proprietary trading,” the report explained. “Clients said that, in some circumstances, the firm weighs its interests and short- term incentives too heavily.” This led the Business Standards Committee to call for a firmwide rededication to Whitehead’s core principles, including a “need to strengthen client relationships which, in turn, will strengthen trust,” to “communicate our core values more clearly,” and also to “communicate more clearly about our roles and responsibilities in particular transactions.” The real question is why Goldman continues to promote a list of principles and behaviors that the firm seems to have abandoned years ago. In the end, is Goldman really all that different from the other firms on Wall Street it believes it is superior to?

Clayton Rose, a former head of investment banking at JPMorgan and now a professor of management practice at Harvard Business School, predicted that regardless of the outcome of the legal process, Goldman will be changed by the current financial crisis. “I think the big challenge for Goldman is internal and it’s cultural,” Rose said. “They have been, for several generations now, so used to having clients deal with them in an unquestioned way, having access to regulators and government officials in a somewhat unquestioned way, and having played the kind of ‘Government Sachs/Goldman Sachs’ revolving door and so forth, that having their business ethics, their business culture, their business model challenged at a very core level— and the kind of compensation that results from that as well— is going to cause a bunch of people there to think about whether they’re going to want to be part of whatever the new iteration of Goldman is going to be.”

That’s what Blankfein should be most worried about, he said. “Will it be a great firm?” he wondered. “Probably. But will it be a different firm? Yes, and as we know from the way the markets and capitalism work, Goldman’s not guaranteed a place in that kind of pantheon of firms in perpetuity. The biggest danger I think they face is within, not without.”

Charles Elson is both a lawyer and the chairman of the John L. Weinberg Center for Corporate Governance at the University of Delaware. Since his think tank is named after one of Goldman’s most admired former senior partners, Elson has taken a keen interest in the recent events at the firm. “The fundamental problem [for Blankfein and Goldman],” he said, “is you’ve made a lot of money when everyone else hasn’t, you know? People are angry about it, and frankly, your competitors disappeared, and you were the last person standing, and as the last person standing, you get a bigger piece of, albeit, a smaller pie. But because there are fewer others taking out of the pie, your share gets larger. And you’re in a very tough situation where the government allowed the others to fail, yet allowed you to succeed. He is in— they are in— an almost impossible position, and I don’t know who could’ve done it differently. That being said, obviously, the response [so far] hasn’t worked out so well.”

Jim Cramer, too, is convinced Goldman has flubbed its response so far but also that it is not too late for Goldman to admit to and apologize for its mistakes, to acknowledge the extraordinary lifeline the American people provided to the firm in a time of crisis and then to donate the totality of the 2009 bonuses—$16.2 billion— to a worthy cause, such as to the people of Haiti. “You settle with the SEC at all costs,” he said, “at all costs you settle with the SEC”—which the firm did during the summer of 2010. “You also say, ‘Look, you know, we’ve been thinking a lot about what happened here and we were very defensive because we thought we did it right. And we thought the people recognized that maybe it was because of our smarts that we did okay, but, you know, as we’ve reviewed the era and what happened we realized we made some mistakes and what we’re going to do— we made mistakes, not mistakes were made— and what we’re going to do is we’re going to review what we did and we’re going to forgo those bonuses even though it’s going to be at a tremendous cost because we paid taxes on those bonuses. But we’re not going to ask for refunds and we’ve heard what the American people said and we’re in this business for the long term and we love our country and we feel very blessed that this country allowed us to make this money so what we’re going to do is retroactively make these changes. And you know what? We don’t even care if you think it’s right. We don’t care. We in our hearts know it’s right. We look at ourselves in the mirror every day, this is what we should have done— it’s never too late to do the right thing. You may think it’s deeply cynical— we know it’s the right thing.’ And then move on.” (With the 2009 bonuses long gone, the firm could still follow Cramer’s advice for the 2010 bonuses, which were $15.4 billion.)

Others, especially former Goldman partners on the banking— as opposed to the trading— side of the business, agree with Elson and Cramer about Goldman’s response to date and wonder whether Blankfein is the right guy to lead the firm through the current morass. What’s needed is a wartime consigliere, they argue, and Blankfein is not that guy. “This is not a good role for Lloyd,” one former partner said. “It’s like having Russell Crowe do a romantic comedy.” He said he feared Blankfein was not being well served “by the people around him but, then again, he chose his people.” (Some even wondered why the Business Standards Committee included no former Goldman partners, like Whitehead or Friedman or Rubin, who might have been able to convey to the current leaders of the firm how things used to be in the good old days.)

A recurring criticism of Blankfein is that he has surrounded himself with like- minded trader types and that he could benefit greatly from having at the top of the firm a more diverse group of senior partners with different perspectives. “Both Lloyd and Gary are valuable guys, but you also need other guys at the top with a different ethic,” another former partner explained. “Then you debate decisions out and you have balance. That has been lost.” He continued, “The guys who succeed in this industry are the guys who say, ‘I care about the reputation of the firm. I care about my reputation. I care about doing the right thing. I care about having a great firm. I care about attracting and retaining the best people. If I do all of these things and do good business, eventually I’ll be fine.’ But in this top five, there is nothing about making money. The guys for whom making money is in the top three almost always get themselves into trouble. And this is the essence of how Goldman has changed.”

Blankfein has little patience for these arguments, especially from an anonymous group of former partners. He seems inclined to continue to fight his critics. Blankfein thinks Goldman is plenty diverse at the top of the firm and then names one senior executive after another who came to the forty- first floor from areas of the firm other than trading. He said he “reads” more like “a lawyer, banker type” and very rarely did he do any trading, in any event. He laments as “at least ironic, and in some sense disproportionate,” the fact that Goldman’s mortgage business— which never generated more than 2 percent of the firm’s revenues and is much smaller than the mortgage business at other firms— has become such a lightning rod for criticism. But “one of the things you learn in law school is,” he said, “and also you learn this being a parent, if you’re criticizing somebody’s behavior they shouldn’t be able to defend themselves by saying other people behaved the same way, and get yourself out of it. It’s not exculpatory to do that. You learn that it’s not a defense in law and it’s not a defense by your kids.”

The ultimate test of his own and the firm’s longevity will be whether Goldman’s clients choose to stand by it in its hour of need. So far, so good, Blankfein said. “Look, we’re getting great support from our clients,” he said, a point conceded by people as diverse in their views about the firm as Schwarzman and Cramer.

But Blankfein said his agita has not diminished one iota. “I feel bad that I need— we’re supposed to support them, not the other way,” he said of the firm’s clients. “Nobody puts a gun to your head to take the job. Part of the job evolved in the way it did to deal with the scrutiny of the firm, and it’s not exactly what I expected when I became CEO. I want people to come here and feel really, really good about working here and being proud of the firm, which I think they really do. But to the extent that there’s a burden on that, that’s my responsibility. I want clients to be proud of the fact that they’re working with Goldman Sachs, not to explain it. I feel the weight of that, I do. I have a sense of duty about these things, and so I’m in.”

All in?

“Look, I have to be,” he concluded.

With that, Blankfein put on his suit jacket and a beefy security guard escorted him, via a hidden staircase, to the firm’s private dining area one floor above to meet with an unnamed dignitary, whom, he said, “I can’t be late for.” And then he was gone and the secret door closed behind him.

William D. Cohan is a former investment banker and the author of the New York Times bestsellers House of Cards and The Last Tycoons, which won the 2007 FT/Goldman Sachs Business Book of the Year Award. He is a contributing editor at Vanity Fair and writes for the New York Times, The Financial Times, the Atlantic, and the Washington Post, among other publications. You can purchase his new book here.

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