The magazine's story on our new millennial G-men (no Elliot Ness here!) talks about leverage, layoffs and the firm's "essential" position in the American capital markets.
Some key quotes include:
On the tarnish now seen on Goldman's gleam:
"Ever since the bank crossed paths with U.S. taxpayers, getting saved with at least $10 billion in government aid last year and then parlaying that into $5.1 billion in profits in 2009 (so far), the firm has been seen as the ugly essence of capitalism at its most cynical—by Washington, by the public, by the financial press, even by some of its clients. Stalwart voices of Wall Street like the Financial Times and The Wall Street Journal have criticized the firm’s undue influence on government and its ruthless pursuit of risky profits. Venom is flowing from more unlikely quarters as well: A recent Rolling Stone article called Goldman “a great vampire squid wrapped around the face of humanity” and accused it of rigging every major market bubble since the Great Depression.
This is not the kind of attention Wall Street’s most vaunted financial institution is used to. Which is why I am now sitting in its wood-paneled and gold-trimmed executive suite: The famously press-averse firm has consented to a rare audience.
The man Goldman has selected to come to its defense is John Rogers, the firm’s chief of staff. Rogers is typical of the Goldman elite—doubling as a Washington power broker and confidant to James Baker, Jon Corzine, and Hank Paulson. The atmosphere is airless as Rogers sits down, his steady eyes barely blinking: a silver-haired sphinx in a sky-blue shirt. “We don’t live in a vacuum, and we’re very aware of what the general public is thinking,” says Rogers calmly. 'We work in a fiercely competitive global industry, but we can’t afford to be oblivious to public opinion.'
Especially not as Goldman ramps up astronomical profits and prepares to pay its executives $11.4 billion and counting in this of all years. If the amount seems obscene to an outsider, it is justified on the inside by an article of faith: that Goldman employees are the absolute best of the breed, meant to wield the levers of power—and reap its rewards. As John Whitehead, the godfather of Goldman’s modern culture, wrote in a set of guidelines for executives: 'Important people like to deal with other important people. Are you one?'"
On the importance of the AIG bailout to Goldman's survival:
"As it happened, Goldman Sachs was AIG’s biggest banking client, having bought $20 billion in credit-default swaps from the insurer back in 2005. The swaps were meant to offset some real-estate investments Goldman had made, specifically a bunch of mortgage bonds it had on its books. The idea was simple: If the value of the mortgage bonds went down, the value of Goldman’s AIG swaps went up, assuring Goldman was safe from all-out losses on what it feared was an upcoming collapse in real estate. In reality, this was nothing like insurance and much more like an old-fashioned hedge.
By that weekend in September, Goldman Sachs had collected $7.5 billion from its AIG credit-default swaps but had an additional $13 billion at risk—money AIG could no longer pay. In an age in which we’ve become numb to such astronomical figures, it’s easy to forget that $13 billion was a loss that could have destroyed Goldman at that moment."
On the unusual terms granted to Goldman Sachs as a result of the AIG deal:
"Of the $52 billion paid to AIG’s counterparties, Goldman Sachs was the biggest recipient: $13 billion, the entire balance of its claim. The amount was surprising: Banks like Merrill Lynch that had bought credit-default swaps from failed insurers other than AIG were paid 13 cents on the dollar in deals moderated by New York’s insurance regulator. Eric Dinallo, the former New York State insurance commissioner, who was at the AIG meetings, characterizes the decision this way: AIG’s counterparties, Goldman being the most prominent, “got to collect on an insurance policy without having the loss.”
Over time, it would appear to many that Goldman Sachs had received a backdoor bailout from a Treasury Department run by the firm’s former CEO. Why did Paulson bail out the banks that did business with AIG, critics have demanded ever since, and not Lehman Brothers? Certainly executives at Lehman want to know. (As one former Lehman managing director there puts it, “The consensus is that we were deliberately fucked.”)"
AIG leader Hank Greenberg, on the AIG bailout:
"So does former AIG CEO Hank Greenberg, the man who made the insurer into a corporate giant. Greenberg had wanted Paulson to give AIG’s clients a government-backed guarantee on the money owed rather than paying them cash and essentially liquidating AIG. Last November, while in China at a business conference, Greenberg confronted Blankfein about Goldman’s role in the demise of his company. 'I couldn’t understand what went on that AIG was forced into ownership by the government at terms that were outrageous and Goldman was present at that meeting,” he says. “It’s outrageous. This whole thing is disgraceful.'"
Popping the GS bubble about its ability to thrive without government intervention:
"Not a single Wall Street executive I spoke with, including several Goldman Sachs alumni, believe those hedges would have survived an overall collapse of the financial system. A large loss would have been inevitable as lending evaporated, and Goldman Sachs would have struggled to shrink the company to a fraction of its size overnight. But the most glaring argument against Goldman is Goldman’s own: If AIG’s biggest and most important bank customer was hedged against losses in AIG, as it claims, why did the government need to pay Goldman Sachs the full $13 billion?
Lost in the haze of Goldman’s recent record profits is the fact that the firm nearly went under even after the AIG bailout last fall. As the market continued to plunge and Goldman’s stock price nose-dived, people inside the firm “were freaking out,” says a former Goldman executive who maintains close ties to the company.
Many of the partners had borrowed against their Goldman stock in order to afford Park Avenue apartments, Hamptons vacation homes, and other accoutrements of the Goldman lifestyle. Margin calls were hitting staffers up and down the offices. The panic was so intense that when the stock dipped to $47 in intraday trading, Blankfein and Gary Cohn, the chief operating officer, came out of the executive suite to hover over traders on the floor, shocking people who’d rarely seen them there. They didn’t want staffers cashing out of their stock holdings and further destroying the share price. (Even so, many did, with $700 million in employee stock liquidated in the first nine months of the crisis.)
Meanwhile, there were huge losses for Goldman’s clients in souring investments, many of which Goldman executives and their network of alumni were also vested in. Its premier hedge fund, Global Alpha, which had already been crushed in 2007, was getting pummeled again. Its Whitehall real-estate funds suffered $2.4 billion in losses, hammering not only clients but also employees, including COO Jon Winkelried. In a panic, Winkelried put his $55 million estate in Nantucket up for sale and likely would have had to liquidate his stock to raise funds. To avoid that outcome, Goldman agreed to buy Winkelried out of his investment, paying him $19.7 million. Another of the higher-ups, the firm’s general counsel Greg Palm, was covered for $38.3 million. (Winkelried has since resigned. His Nantucket estate is still on the market, at a reduced asking price.)
As more employees were hit, the company started a loan program to bail out more than a thousand staffers. Rogers says very few ended up taking loans from the company. “Only a handful of people had difficulties,” he says. “I wouldn’t describe it as a crisis … It was a stressful time for everyone, and some people might have questioned whether they had made the right career choice.”
The stress was compounded by the fact that the company had laid off 10 percent of its employees, about 3,000 people. A person with close ties to the firm says employees were escorted to the elevators with their belongings by security guards. The company also purged its partnership—the elite circle of about 443 senior executives who share in a special bonus pool. So-called de-partnering is considered a humiliating event at Goldman Sachs. “They were quite harsh,” says a person familiar with Goldman Sachs’s personnel activities. “This was one of the most traumatic by far.” Regardless, Blankfein announced that top executives would receive no bonuses anyway, only their $600,000 base salaries, because the firm had performed poorly. Soon Goldman would report its first quarterly loss as a public company. With the market crash threatening the stock price and compensation, several Goldman alumni discussed with top management the possibility of taking the company private to escape further distress to the firm.
Salvation came on November 25, a few days after Goldman’s stock price plunged to $52 a share, down from the year’s high of $200 and the lowest price the company had seen since it went public. Again, the white knight was the government. It turned out that Goldman’s conversion to a garden-variety bank-holding company offered an amazing advantage: Goldman now had access to incredibly cheap money. Exploiting its new status, Goldman became the first financial institution to sell $5 billion in government-backed bonds through the Federal Deposit Insurance Corporation, which allowed Goldman to start doing deals when the markets were at a near standstill. 'Goldman was desperate for it,' says a prominent Goldman alumnus. 'Everybody knows it. Those FDIC notes they got were lifesaving because they couldn’t issue any debt. If it had gone on another week or two, Goldman would have failed, they would have gone the way of Lehman, and you’d be talking about Lloyd the way you talk about [Lehman CEO] Dick Fuld.'"
Those are just a few of the nuggets exposing the G-men for what they truly are, the biggest and most profitable welfare recipients in the history of the United States....