19 Apr 2010
'Long-term greedy” was the phrase that Sidney Weinberg, Goldman Sachs’s legendary managing partner from the 1930s to the 1960s, used to describe the American investment bank’s overarching strategy. Such a pious mission statement from a corporate titan would make a modern audience balk. However the phrase neatly encapsulates the way that Goldman Sachs has operated over the past 80 years, a period in which it has risen from being a little-known, slightly scrubby broker to the world’s most profitable, powerful and controversial financial institution.
When Lloyd Blankfein, Goldman Sachs’s current chairman and chief executive, was caught saying last year that the bank was doing “God’s work”, the contrast between Goldman Sachs’s own view of its business and what the rest of the world thought of it was vividly demonstrated.
His comments came just weeks after the firm was memorably described in an article in Rolling Stone magazine as a “vampire squid wrapped around the face of humanity relentlessly jamming its blood funnel into anything that smells like money”. Doing God’s work is the last thing most think Goldman Sachs is up to.
As Philip Pullman writes in his latest book, The Good Man Jesus and the Scoundrel Christ, “As soon as men who believe they’re doing God’s will get hold of power, whether it’s a household or a village or in Jerusalem or in Rome itself, the devil enters into them.”
Last Friday, those who believed that the devil was running the show at Goldman Sachs finally received the news they had been waiting for. America’s Securities and Exchange Commission (SEC) said that it was investigating the bank for misleading investors in so-called collateralised debt obligations, a complex financial product sold by the bank during the boom years of the Noughties.
Goldman Sachs immediately hit back, saying that it would “vigorously” contest the case. However some will have found it hard to hide a feeling of Schadenfreude that at last a bank that at its peak was worth more than $100 billion (£65 billion) was finally being brought to heel.
The story of the bank over the past decade has been one of inexorable rise. In the 1980s Salomon Brothers, now part of the American banking behemoth Citigroup, was the bank to beat on the global stage. In the 1990s a cluster of largely American firms vied for supremacy after the demise of Salomon’s, brought down in part by being found guilty of rigging bond market auctions. The 2000s, however, undoubtedly belonged to Goldman Sachs.
In whichever market observers cared to look at, whether it be share trading, bond trading, corporate advisory or securities underwriting, Goldman Sachs was either at the top or running a close second. Its success was born of a combination of brutally hard work, an undoubted ability to attract the best young minds and that undefinable X-factor that comes from being acknowledged as the best game in town.
“No one ever got fired for hiring Goldman Sachs” is still one of the markets’ mantras. Indeed it has been said that the bank was often hired by companies to advise them only because they were afraid that it might end up working for a rival.
For all its reputation, there has always been at least a hint that some of Goldman Sachs’s success had less to do with its market nous and more to do with its connections. After Lehman Brothers was allowed to file for bankruptcy in September 2008, Goldman Sachs, along with Morgan Stanley, was allowed to convert itself into a bank holding company just weeks later. This gave it access to tens of billions of dollars of government lending. One did not need to be a conspiracy theorist to point out that US Treasury Secretary Henry “Hank” Paulson – the man in charge of the bail-out – was the bank’s former chief executive.
This impression was not helped when Mr Paulson selected Neel Kashkari, a youthful former Goldman Sachs executive, to run the American government’s Troubled Asset Relief Programme, the equivalent of Britain’s Asset Protection Scheme. The move put him in charge of hundreds of billions of dollars of American taxpayers’ money. Again, Goldman Sachs was a beneficiary.
The American authorities’ case against Goldman Sachs prominently features another young Goldman Sachs banker, a French-born 31-year-old called Fabrice Tourre. Mr Tourre, who referred to himself in emails published by the SEC as “the fabulous Fab”, is alleged to have sold a debt product that he knew would fail to a group of investors, mainly large banks, including ABN Amro, now part of Royal Bank of Scotland.
Mr Tourre is alleged to have allowed another Goldman Sachs client, American hedge fund Paulson & Co, to select the complex bonds that were put inside the product. The SEC alleges that Goldman Sachs did this so that Paulson & Co could make money by betting that the bonds would fall in value (Paulson & Co has not been accused of any wrongdoing).
Goldman Sachs’s strong links with hedge funds have always aroused suspicion; however, the bank has argued that it has highly effective internal “Chinese walls”, barriers that stop employees from sharing information that might allow them or a client to trade on insider information.
The significance of the latest allegations is twofold. First, they suggest that Goldman Sachs was favouring one client over another. This is particularly resonant as Paulson & Co was one of the most high-profile success stories of the financial crisis and recently the subject of a best-selling book, The Greatest Trade Ever. The book detailed how Paulson & Co founder John Paulson made billions of dollars shorting the American sub-prime market.
Second, the allegations imply that Goldman Sachs made money from the travails of its own customers. It is often pointed out that the bank makes far more money from trading with its own money than it does from advising its clients. This so-called proprietary trading involves the firm putting billions of dollars of its own capital at risk by buying stakes in assets as diverse as golf courses – the firm was once the largest owner of golf courses in Japan – to oil and ships.
In the case of the sub-prime market, it is now well-known that Goldman Sachs, unlike almost all of its Wall Street rivals, took an early decision around 2006 to begin betting against the American housing market.
The SEC’s allegations suggest that these trades might have involved not just canny positioning by the bank, but actively putting its clients into trades that it knew would lose them money.
What this means for the future of Goldman Sachs is still too early to say. At best, the bank will be one of many financial institutions that become embroiled in a series of investigations relating to this issue – Britain’s own Financial Services Authority is already reported to be starting its own investigation into the matter. Finding safety in numbers would allow Goldman Sachs to argue that it was just doing what everyone else was.
It would be more serious, however, if the SEC’s investigation remained an isolated incident. If this was the case it could mark the beginning of the end for Goldman Sachs, going the same way as other investment banks that sailed too close to the wind and sank. Who now, aside from those with a long memory and an interest in markets, remembers Salomon Brothers or Drexel Burnham Lambert?
As one Goldman Sachs partner, quoted in Charles Ellis’s history of the bank The Partnership, said: “Only looking back could we see the real risk – the risk of arrogance. We didn’t see it then, but it was there and it was growing.
“The firm was at the top. We had always been the best – always the top students and the best athletes and the class leaders. And now we were the best firm – in our self-appraisal. But that was the first step towards arrogance.”