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Goldman Sachs: Like Working with the Mob

Lloyd Blankfein—who was born poor in the South Bronx, put himself through Harvard, and became the C.E.O. of Goldman Sachs in 2006, after 24 years at the firm—is a history buff, a lawyer, a wordsmith, and something of an armchair philosopher. On a Thursday in October—the very day when the firm announced it had made $8.4 billion in profits so far this year—he speculates whether Goldman would have survived the financial conflagration in the fall of 2008 entirely on its own, without any kind of help, implicit or explicit, from the government. “I thought we would, but it was a hell of a higher risk than I was happy with,” he says, sitting in his 30th-floor office in Goldman’s old headquarters, at 85 Broad Street, in Lower Manhattan. “As a result of actions taken [by the government], we were better off than we otherwise would have been. Was it dispositive? I don’t know. I don’t think so … but I don’t know.”

He adds, “If you ask, in my heart of hearts, do I think we would have failed … ” He pauses, then pulls out his trump card: at the height of the crisis, Warren Buffett agreed to invest $5 billion in Goldman Sachs.

Buffett, the venerated Nebraska investor, is famously reluctant to put money into Wall Street firms. But he has a long history with Goldman. As a 10-year-old he went to New York with his father, a broker in Omaha, and they stopped by Goldman Sachs to visit Sidney Weinberg. As Goldman’s leader from 1930 to 1969, Weinberg helped build the firm into the powerhouse it became. “For 45 minutes, Weinberg talked to me as if I were a grown-up,” Buffett likes to recall. “And on the way out he asked me, ‘What stock do you like, Warren?’” In later years Buffett liked to cite Byron Trott, who until recently worked in Goldman’s Chicago office, as one of the few investment bankers worth his salt.

And so, when Trott asked Buffett if he would be interested in investing in Goldman during the frenetic days after Lehman Brothers’ bankruptcy, Buffett thought about it, and on Tuesday, September 23, he and Trott hammered out a deal. In a very brief—and very Buffett—call that afternoon with Blankfein, Trott, and then co-president Jon Winkelried, Buffett said he would invest $5 billion in exchange for a hefty 10 percent dividend and rights to buy additional stock over the next five years at a price of $115 a share. “I’m taking my grandkids out to Dairy Queen,” he told the Goldman men. “Call me and let me know what you want to do.”

Goldman accepted Buffett’s tough terms, and thanks to the investment was able to raise another $5.75 billion, by selling stock to other investors. Blankfein says the firm could have raised multiples of that but didn’t need more money. And Buffett has said that while no one could ever understand the balance sheet of any Wall Street firm, he has confidence that Blankfein is both very smart and very conservative. But there was another reason he invested: “If I didn’t think the government was going to act, I would not be doing anything this week,” he explained to CNBC’s Becky Quick. “I might be trying to undo things this week.”

Blankfein refers to this period as “the fog of war,” and yet at 85 Broad Street a clear story line has emerged from almost every level of the firm: it was Goldman’s much-celebrated culture and its superior ability to manage risk, not the helping hand of the government, that got it through the events of fall 2008. When I ask Gary Cohn, Goldman’s chief operating officer, and David Viniar, the firm’s chief financial officer, if, barring a financial Armageddon, Goldman would have survived without all the various forms of government intervention, Viniar says, “Yes!” almost before I can finish the question. “I think we would not have failed,” says Cohn. “We had cash.”

It’s hard to find anyone outside the firm who doesn’t see this as revisionist history. Combine that with further proof of Goldman’s worldview—namely, the huge amount of money its people will earn this year ($16.7 billion has already been set aside for compensation, which could translate into an average of $700,000 per Goldman employee)—and you get rage. Widespread rage. “Complete crap,” says a senior financier, about Goldman not needing the government’s help. “It is a bunch of bullshit,” says a former Goldman Sachs managing director. Even Neel Kashkari, a former Goldman banker, who became an assistant secretary of the Treasury last summer, told The New York Times that “every single Wall Street firm, despite their protest today, every single one benefited from our actions. And when they get up there and say, ‘Well, we didn’t need it,’ that’s bull.”

Factor in Goldman’s political connections—two of the firm’s past four leaders have served as Treasury secretaries, while another source tells me about a G-7 meeting where he counted 24 to 28 out of 32 finance officials in attendance as ex-Goldman men—and you get conspiracy theories on steroids. “this firm is pure evil” is a typical comment whenever a story about Goldman is posted on the Internet, which is almost every day now.

Goldman gets that it has a problem; people there are deeply bothered by the outcry. “There is an embattled feeling around the place,” says someone who knows the firm well. This is magnified, perhaps, because there has always been a whiff of sanctimony about the firm. It not only wants to make money; it wants to be seen as a force for good. Blankfein’s now infamous comment to a reporter at the London Sunday Times that he was doing “God’s work” was meant as a joke, but there was a ring of unintentional truth to it.

Goldman executives believe they have a public-relations problem, not a substantive one. When the firm had tarp money, there was a ban on using the corporate box at Yankee Stadium, and last fall Blankfein went on a charm offensive that showcased his humble roots to the press.

What Goldman doesn’t get is that all the murk about the ways it has benefited from public money taps into a deep fear that has long existed among those who think they know Goldman all too well. It’s a fear that, as one person puts it, Goldman’s “skill set” is “walking between the raindrops over and over again and getting away with it.” It is a fear that Goldman has the game rigged, even if no one can ever prove how, not just because of its political connections but also because of its immense size and power. And it is a belief that despite all the happy talk about clients and culture (and, boy, is there a lot of that) the Goldman of today cares about one thing and one thing only: making money for itself. Says one high-level Wall Street executive, “Why do you have a business? Because you have a customer. You have to make an appropriate profit. But is it possible that Goldman has changed from a firm that had customers to a company that is just smart as shit and makes a shitload of money?”

[Continue reading @ Vanity Fair. 6 pages in total >>]

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