So far, so lucrative. But isn’t it simply unfair? Isn’t Goldman acting as the
modern equivalent of war-time profiteer, taking advantage of global crisis
and emergency government action to mint millions? Even the veteran financier
George Soros says the big profits made by Wall Street banks are "hidden
gifts" from the state.
Blankfein dismisses any suggestion that Gold-man needed to be bailed out, and,
by extension, rejects any notion that the firm is now profiting from public
support. Sure, he took $10 billion from Washington’s Troubled Asset Relief
Program (Tarp). But the bank has since repaid the cash, with healthy
interest — 23%. Goldman also bene-fited from the federal bail-out of the
huge US insurance firm AIG. Goldman had bought $20 billion worth of
insurance from AIG and received billions of dollars — perhaps as much as $13
billion — when Washington pumped $90 billion into the stricken giant. But
Blankfein insists Goldman was "hedged" against any AIG losses, in
the best possible way — with cash. So even if AIG had gone under, Goldman
would not have suffered. Critics say that had AIG gone bust, the entire
financial system could have collapsed, taking Goldman with it. What’s more,
at the height of the crisis, the Federal Reserve broke with an 80-year-old
tradition and let Goldman turn itself from a pure investment bank into a
bank holding company. This meant it could borrow funds at the same cheap
rate as commercial banks for as long as it wanted. Blankfein says Goldman
changed status not for the money, but because it had become clear, following
the collapse of Bear Stearns and Lehman, that the market had lost faith in
the ability of the US Securities and Exchange Commission to regulate
investment banks. Being regulated by the central bank, the Federal Reserve,
would help to restore confidence in the financial system as a whole.
Whatever the truth behind the bail-out, not even the smartest Goldmanite can
deny that it is only thanks to government aid that the bank still has a
financial system to work with. Washington has bolstered the US economy and
banks to the tune of $12 trillion. Does Blankfein not acknowledge that it is
maddening for most of us to watch Goldman gobble up so much cash while we
struggle? Quite the opposite. He insists we should be celebrating his bank’s
success, not condemning it. "Everybody should be, frankly, happy,"
he says. Can he be serious? Deadly. Goldman’s performance, he argues, is the
firmest indication of a nascent economic recovery that will benefit not just
him and his firm but all of us. "The financial system led us into the
crisis and it will lead us out."
Blankfein goes on to say something equally audacious. We should welcome the
return of titanic paydays at Goldman. Goldman is exempt from President
Barack Obama’s cap on bonuses because it has paid back bail-out cash. Paying
top dollar to recruit and retain the best bankers won’t sink the system, he
claims, but save it. Performance-related pay is a guarantee of high-quality
responsible banking. "If you examine our practices on compensation, you
will see a complete correlation throughout our history of having
remuneration match performance over the long term. Others made no money and
still paid large bonuses. Some are not around any more. I wonder why."
Many disagree, arguing that in the new, flatter economic landscape, megabucks
pay is no longer necessary. Lucian Bebchuk, professor of law, economics and
finance at Harvard Law School, says: "These days, it’s easier for banks
to keep their employees from being raided. The outside opportunities are
less attractive now than in 2007."
Okay, forget bail-outs, forget bonuses, forget all the money stuff, if you
can. Surely Blankfein cannot dodge the playwright David Hare? Through his
latest work, The Power of Yes, which tackles the issue of the credit crunch,
Hare argues that it is "blackmail" to say that there cannot be a
recovery unless we let bankers get on with what they have always done and
pay themselves squillions. It’s like what the miners did in the 1970s, only
this time the National Union of Mineworkers is the City and Wall Street.
Blankfein has no time for such soft talk. Bankers are not miners. "I’ve
got news for you," he shoots back, eyes narrowing. "If the
financial system goes down, our business is going down and, trust me, yours
and everyone else’s is going down, too."
Like a patient who has survived a near-death experience, for Blankfein the
credit crunch has rekindled his innate passion for moneymaking. Talking to
him is like talking to a man who has greenbacks, not blood, running through
his veins. He believes he’s good at what he does and what he does is good.
He has his supporters. Vanity Fair awarded him the coveted No 1 spot in its
2009 New Establishment list, its league table of the 100 top power players
in the information age, above such luminaries as the Apple boss, Steve Jobs,
and the Google founders, Sergey Brin and Larry Page. Others, such as the New
York Times columnist Andrew Ross Sorkin, argue that the public "cannot
have it both ways". At the height of the crisis last year, Sorkin
recalls, "many crossed their fingers, hoping Goldman and the rest of
Wall Street would be saved to halt the downward spiral. But now when the
banks finally get back on their feet, we want them to fall flat again".
Like it or loathe it, one thing is unarguable: "Tenacious G" does
seem to draw the winning hand in good times and, as we have seen recently,
in bad. It begs one simple question. How? What’s in the special sauce? To
try to find the answer, you have to leave Blankfein’s office and take the
lift to the 17th floor. On the way, you hear investment bankers, traders, "strats"
— strategists — and "quants", the mathematical lizard
brains who dream up whizzy trading formulae, discussing "interest rate
swaps", "no credit defaults", "exotic and vanilla options",
"bid-ask spreads", "bunds", "bobls" and
goodness knows what else. You can’t see the cash whizzing around 85 Broad
Street as you walk through the place, but you can feel it being shuffled 24
hours a day between central, commercial and investment banks, vast
companies, Russian oligarchs, Middle Eastern movers and sheikhers, Texas
oilmen and secretive billionaires in Bermuda and the Cayman Islands.
In an office with an ink stain on the carpet, sits Liz Beshel. She’s the first
ingredient of Goldman’s witches’ brew. The firm only hires the very, very
brightest and they don’t come much sparkier than Beshel. The 40-year-old
single mother talks so fast, and with such insight into financial markets,
you practically need a degree from Harvard Business School to keep up. She
was snapped up by Goldman straight from college and managed to get an
executive MBA from Columbia University, New York, "on Fridays". As
you do. She rose quickly though investment banking to become the firm’s
youngest-ever global treasurer, the keeper of the cash. Today, every pound
the firm invests, every yen it borrows, every dollar that flows on and off
its balance sheet, is under her watchful eye, all $1 trillion a day of it.
How much cash does the bank have right now? I ask. "$164.2 billion in
cash or cash equivalents," she replies without pausing for thought or
breath.
It is thanks to rat-tat-tat intellects like Beshel that Goldman Sachs not only
has so much money, but tends to be good at hanging onto it. Staff rigorously
price — "mark to market", in the jargon — the bank’s assets
every day, down to the last cent, and forensically examine daily profit and
loss. This helps the bank to see market trends clearly and early and, it
believes, to manage risk better than most other banks. "We think we
make better decisions," says Beshel. There’s evidence to support the
claim. Take the sub-prime mortgage sector, the ticking toxic debt bomb that
detonated the economic crisis. One year before bad home loans brought down
Lehman and Bear Stearns, forced shotgun marriages of Merrill Lynch to Bank
of America and HBOS to Lloyds, and made Royal Bank of Scotland a national
joke, Goldman’s daily valuations revealed it had suffered modest losses in
its mortgage holdings for just over a week. At most banks, the losses might
have gone unnoticed or been dismissed as a rounding error, but Goldman
convened a meeting of senior bankers to try to find out what was going on.
Even though the housing and mortgage markets were still buoyant, the bank
did not like what it saw and began reducing its exposure. When the credit
crunch hit, its losses in the mortgage sector were only $1.7 billion, lower
than any other big investment bank. UBS lost $58 billion.
Being smarter than the average bear is one thing, but to be a Goldmanite you
have to work harder than the average bear too. Ask Sarah Smith, 50, a former
convent schoolgirl from Bromley in Kent who left Britain to become Goldman’s
chief accountant. "It’s a 24/7 culture," she says. "When
you’re needed, you’re here. And if you’re needed and you’re not answering
your phone, you won’t be needed very long."
Smith, whose office is a BlackBerry throw away from the Embassy Suites hotel
where Goldman staff go for an hour or two’s sleep when they have been up so
long that they start sleepwalking along the hallways, only had a few days’
holiday last year. How many weeks off does she get a year?
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