Here's a Gilded Frame for that Lovely Picture They've Created...

In the year since the crash, Goldman Sachs has been very busy, as you would expect of the financial giant. The company has paid back its TARP loan (with interest!) and, after some haggling, paid the full amount the fed wanted for its warrants (good citizenship!)

And it's been very clear that it never needed the $12 bil that it got from AIG via the feds.

Apparently, according to Gary Cohn, Goldman president, Goldman didn't need any of the extraordinary financial interventions it received in the last year. He's quoted in a NY Times story last August:

"'We did not have a near-death experience,' said Gary D. Cohn, Goldman’s president. The government saved the financial industry as a whole, but it did not save Goldman Sachs, he said."

And Goldman has also stated publicly that it has not changed the way it does business, and in fact, has profited hugely by the current business climate, the climate that seems quite chilly and foreboding to so many millions who do not work at Goldman. Here's Cohn again, quoted in that August NY Times story:

"'Our risk appetite continues to grow year on year, quarter on quarter, as our balance sheet and liquidity continue to grow,' Mr. Cohn said."

Now Spiegel Online talks to Lloyd Blankfein about the current economic crisis. And it's a fascinating interview.

The reporter certainly didn't hold back any punches - opening with a frank discussion of Mr. Blankfein's $67.9 million bonus from two years back:

"SPIEGEL: Mr. Blankfein, two years ago, your $67.9 million bonus was the largest ever paid to a Wall Street banker. You recently said that you could understand the anger that people are expressing over inflated bonuses. How are we to understand this?


Blankfein: I think people legitimately question whether compensation is tied to performance and, looking back, they see that some people were enriched but did not seem to have any alignment with their shareholders. A large part of the compensation paid to our senior people, including mine, is paid in shares, which may be worth less or more depending on our performance well after they were granted. This is what our shareholders want and we are convinced of this alignment of interests."

And Blankfein makes it clear that he has no choice in the amount of compensation the board wants to pay him, thus the issue of compensation is out of his hands:

"SPIEGEL: Still, $67.9 million is an astronomical sum. Is there any way to justify this?

Blankfein: Our board of directors sets the pay of our most senior executives, including mine. They tie pay to the firm's performance and I believe we have established a strong track record of correlating growth in revenues to growth in compensation. The real test is whether compensation is reduced when performance changes. For example, in 1994, the firm made a loss and the partners had to pay money back to the firm so that the staff could be paid. And, in 2008, which was a very difficult year as you know, I was paid no bonus, even though the firm was profitable.

SPIEGEL: That all sounds very rational. But don't such payments promote greed as the primary motivator?

Blankfein: I think we all know that greed can drive behavior, but it tends to be short term and ultimately destructive. Our leadership team stands out because most of our people have built their whole career at the firm and stayed through many years and many changes in the market. When our people leave they tend to go on to other positions -- whether in government or other forms of public service -- that no one would do if their were motives were financial. Those characteristics don't make me think of "greed."

With regard to the crisis, there is plenty of blame to go around - and Blankfein offers his ideas of who is responsible:

"SPIEGEL: This week in Pittsburgh, the G-20 will discuss stricter regulation of bonus payments. Based on what you have said, you believe that such efforts will do nothing to prevent future crises?

Blankfein: That is not what I said. The incentive aspect played a role in the crisis, but it was not the primary cause -- I think you have to look at the macroeconomic backdrop, the concentrations of risk in certain institutions and the fact that many, including regulators, should in hindsight have had better information and acted sooner to address capital and liquidity shortfalls."

I am intrigued by the idea that regulators should have had better information and that they should have acted sooner to address capital and liquidity shortfalls. I should have thought that such items would have been on the agenda of those in the C-Suites of the banking firms that stacked up enormous piles of debt on the off balance books - but apparently, that was the responsibility of regulators.

Lloyd Blankfein is clearly a man who feels ostentation is inappropriate.

"SPIEGEL: One gets the impression that the issue of bonuses is mostly a problem of image for you. A few weeks ago, you called on your employees to act more modestly, in order not to draw undue attention to themselves in a time of government bailouts for banks. "Spend like a pauper," was the headline in one US newspaper.

Blankfein: That's not exactly true -- I didn't send that message then, but it almost doesn't matter. We are in the public spotlight. And, in any event, I think it is bad form to be ostentatious."

Here's his take on Goldman's biggest mistake:

"SPIEGEL: You say that Goldman did things better than many others in advance of the crisis. What was your biggest mistake?

Blankfein: Goldman Sachs has traditionally been strong in business with mergers and acquisitions. We also provide financing for acquisitions by companies ...

SPIEGEL: ... and through private equity funds, which shortly before the crisis financed corporate takeovers at astronomical prices using almost exclusively borrowed money.

Blankfein: When this market for so-called "leveraged finance" was booming, we wanted to remain competitive and maintain our market share. We extended even larger lines of credit to our clients and did so at the same time as lending terms were getting easier. When companies like Chrysler began to falter, we acted quickly, but we did not act quickly enough, which was a mistake.

SPIEGEL: Was that your only mistake?

Blankfein: Another area where we didn't act fast enough was real estate. We recognized that property markets were eroding, but we didn't realize how bad things would get or how quickly the decline would happen.

SPIEGEL: How did the massive excesses in the real estate market come to be in the first place?

Blankfein: Owning a home is part of the American way of life. And the dream of home ownership was furthered politically, through tax deductions for mortgage payments and the easing of credit terms, to give two examples."

What caused the crash, according to Blankfein, was debt:

"Blankfein: This crisis was not just caused by complex derivatives.

SPIEGEL: What caused it, then?

Blankfein: Too much money was lent to people who had bitten off more than they could chew. When the bubble burst and recession hit, default rates went through the roof."

So the man smart enough to earn a $67.9 million bonus was caught off guard by the collapse. Somehow, he hadn't heard of NINJA loans or no-doc loans. He didn't realize that money was being handed out all across America to people with no hope of paying back the loan.

How could he know that? He was busy running the operations of one of the largest, most successful investment banks in the world. But does that mean we should diminish the size of the banks? Of course not.

"Blankfein: So what is 'too big to fail'?

SPIEGEL: When a bank is so large that in the event of insolvency, it could take the entire financial and the entire economic system along with it into the abyss. The state would then rescue the financial institution with taxpayer money.

Blankfein: The size of the bank is not the most important factor. Whether a certain risk is bundled at a single bank or spread across several is completely irrelevant. That doesn't diminish the size of the risk. In fact, this would only change the problem from 'too big to fail' to 'too many to fail.'"

Blankfein notes that risk is the key factor - not the size of bank. And for risk managers to misunderstand the risk they're working with - that's not the fault of bankers who earn millions to manage risk. That's the fault of the borrowers and the regulators and the American dream of home ownership (and the tax deduction that goes with it.)

The images the men of Goldman Sachs have left us with this year are very powerful. And in this interview, Lloyd Blankfein frames the picture they've painted with an appropriately gilded frame.

When the system goes belly-up, the bankers who earn millions for their wisdom and knowledge get bailed out - even if they claim they don't need it - and they get to point fingers at everyone else for the collapse. That our financial sector accumulated so much risk/leverage/toxicity that it brought down the economy is not at all the fault of bankers at all.

Now pay them their bonuses for a job well done.