Bought and Paid For (26 page)

Yet his friends say he's charming in private, and don't let that dopey look on his face fool you. Blankfein is one of the savviest players on Wall Street. After graduating from Harvard Law School, he went to work for a big law firm, Donovan, Leisure, Newton & Irvine, and then decided to make his fortune on Wall Street, which he did nearly from the moment he joined Goldman's commodities trading unit, then known as J. Aron, as a gold salesman in 1981. Over the next thirty years, Blankfein became one of the richest men in America, with an estimated net worth of close to $500 million.

But for all his wealth and pedigree of success, Blankfein's story is about as Horatio Alger as you can get: He grew up working class in a Brooklyn housing project and worked his way through Harvard, just as he worked his way through the brutal meritocracy at Goldman Sachs, where professionalism, teamwork, and most of all, making money for the firm, are the keys to success.

And under Blankfein, Goldman flourished like never before. When Blankfein and his trading-desk associate Gary Cohn took over Goldman in 2006, they did two things: First, they transformed the firm from a place that coddled its blue-chip clients—mainly large companies, big pension funds, and the superrich—into a casino. While the firm won't disclose exactly how it makes its money, some analysts estimate that nearly 70 percent of its profits come from trading, often, it is charged, against its own clients. For instance, one of Goldman's clients might want to take a given position, say, buying some housing bonds betting that prices would go up. If Goldman's internal research indicated the opposite, rather than tell the client to watch out, Goldman might sell the client those bonds—and take the opposite position itself. That way it would profit twice: first from the fee on selling the client the position it wanted, and second from the trade itself, which it hoped would decline in value. Thus, Blankfein and Cohn made Goldman more profitable than ever before, thanks to an aggressive, almost Darwinian trading style, where a firm that had once relished its strong relationships with clients openly and brazenly began taking advantage of those same clients in the markets.

Second, even though the firm had always tended to give a bit more to Democrats, under Blankfein Goldman has moved even further to the left.

In 2009 Goldman gave nearly four times as much to Democrats as to Republicans, and its support for Obama was particularly strong. People who know Blankfein will tell you he was doing what he loves to do: pick winners. But those same people will also say that being a Democrat is in his blood, both because of his humble background and because of where he has put himself on Wall Street, which flourishes when Big (and Bigger) Government becomes the law of the land.

And that strategy was paying off, at least for a while, as Obama took office. Wall Street even managed to dole out some $20 billion in total bonuses for the bailout year of 2008. Seated with Wall Street's favorite Treasury secretary, Tim Geithner, President Obama, known during the campaign as “No Drama Obama” for his calm and cool demeanor, even managed a little righteous indignation, calling the payouts “shameful.”

If Geithner was sending strong messages to Wall Street about its postbailout behavior, no one seemed to care.

During the first nine months of Obama's presidency, Blankfein had Goldman's flacks and lobbyists spread throughout Washington, focusing mainly on the Democrats, who were in power, to push the Street's agenda, which focused on limiting whatever “reform” legislation Congress and the president were now promising and making sure that the firm could continue to pay its bankers and traders as it had in the past. Goldman, which plucks the best and the brightest for its trading desk, plucked the most politically connected people to run its lobbying department. Politics had become just as important as interest rates for its—and any Wall Street firm's—bottom line. Whereas in the past Goldman would make sure it had contacts on both sides of the political aisle, now many of its top lobbyists were former staffers for lawmakers like Barney Frank, the Massachusetts Democrat who served as the powerful head of the House Financial Services Committee, which, given all the subsidies flowing to Wall Street from Washington, could make or break the firm with a single edict.

Or to be more precise, could divert the firm from its scheduled massive taxpayer-supported bonus bonanza.

As early as January 2009, just weeks after the worst of the financial crisis had ended, Goldman began to take full advantage of the programs that had been set in place during the Bush and now Obama administrations, and it began to develop its press strategy to mask the true source of these profits.

As Lucas van Praag and Goldman's other media handlers (it also relied on a PR firm named Public Strategies, with connections to the Bush administration, for advice) continued arguing, the myriad bailouts and benefits that Goldman had received (which included everything from being declared a bank, thus protected from failure by the Fed, to being lent billions in bailout money, receiving near-zero interest rates, getting a backdoor bailout via the AIG bailout, and having its debt guaranteed by the federal government) were really beside the point. It was Goldman's tradition of excellence that allowed the firm to profit so handsomely just a couple of months after being bailed out.

Despite the growing backlash, Blankfein is said to have ordered Van Praag to continue spinning (some would say lying about) the source of the firm's enormous wealth: Goldman made money because it was smart, Van Praag would smugly counter anyone who questioned the firm's business practices, and it took the bailout money because it had to. End of story.

What was odd about Goldman was that it didn't stray from this spin even when it became clear it wasn't working. People close to the firm blamed the strategy of Blankfein, who might be smart when it comes to trading but knew almost nothing about the press, the media in general, or its shifting role in the financial business. Blankfein was running Goldman as if it weren't 2009 but 2006, when the firm never had to care about Middle America or the press because its clients—the megarich, big institutional investors, and Fortune 500 companies—didn't care how the firm made money. But that was before the bailout, and before Goldman made its vast fortune through government handouts. Now Middle America
did
matter for Goldman; the same Ohio construction worker who could never have his small savings managed by a Goldman broker could now influence his local congressman to call Lloyd Blankfein to testify before his committee and demand to know why he should be paid $100 million while the construction worker remained out of work.

But that wasn't all, and not by a long shot. Goldman had moved from the financial pages to be a mainstream story. The firm was now the subject of story after story in local newspapers and on local television stations. From coast to coast, in small-town America and in major cities, Goldman Sachs had become the very face of an inequitable system that rewarded the bad guys with government grants and guarantees while most of the country suffered.

To be fair, Goldman wasn't the only bank to take advantage of the system, but it did push the limits in using these measures to bolster its bottom line. While other firms, like Morgan Stanley, were cutting back on risk after the financial collapse and lowering their profit margins as they refined their business models to provide more advice to clients, Goldman, in the face of growing public unrest, did just the opposite as executives like Blankfein discovered that the various government protections and guarantees were a traders' dream.

Goldman could go out in the market, borrow at next to nothing because of the Fed's low-interest-rate policy and its protected status as a bank, and simply buy everything from Treasury bonds to mortgage-backed securities, which were now enjoying a little-known renaissance because the Fed had been supporting the market with purchases of the same bonds that Goldman had been buying and holding, and that sent prices soaring.

For all the populist fervor in the country today, most Americans believe in free markets and don't begrudge the wealthy their money—it's the fact that anyone, even a humble gold salesman who grew up in the projects in Brooklyn, can make their fortune here that has brought this country so much success.

But the big financial firms aren't racking up most of their profits by financing the next new cancer-fighting drug or finding seed capital for a new business that will employ thousands of workers. They're doing it by trading bonds and borrowing huge sums of money to enhance their winnings, a practice known as leverage. Historically, the big banks have been addicted to leverage—it's a drug they can't stop using, because at any given time their balance sheets contain enormous amounts of stocks, bonds, and more exotic financial instruments that were all bought with borrowed money. That money is borrowed from the firms' customers—big financial institutions, pension funds, hedge funds, and so on—with the understanding that the customers can call in their loans if they desire.

So when firms start to lose access to that money—when the customers start to pull their lines of credit because they've lost faith in the firm—that's the beginning of a death spiral for the financial firm in question. It's what brought down Bear Stearns and Lehman Brothers at the height of the crisis, and as much as Goldman likes to insist this wasn't the case, it's what was beginning to happen to Goldman, JPMorgan Chase, Morgan Stanley, and the other firms after Lehman went down.

It was only the bailout money provided by hardworking American taxpayers that kept those firms from following Bear and Lehman to the grave.

And after a brief spell following the financial collapse, the firms were borrowing and trading just as in the good old days. They say they're borrowing less (instead of borrowing $30 dollars for every $1 of cash on hand, they tell me they borrow just $15), and that might be true. But they are still borrowing, still using leverage to enhance their esoteric trades, and still counting on the federal government to bail them out when they lose.

“Who the fuck do these guys think they are?” said Steve Davis, a cop turned private investigator.

It was early February 2010 and we were eating dinner at a Manhattan restaurant called Campagnola, a place, incidentally, where many bankers and traders conduct their after-work schmoozing and socializing. Davis spent three decades in the New York City police department. He retired a captain, and he understands a thing or two about con jobs. The tip-off for most cons is that the phony investment being offered is too good to be true.

Steve Davis would have smelled a crook like Bernie Madoff a mile away.

When Davis exploded with profanity (expressing what so many Americans were thinking and feeling) that night at Campagnola, his point was that just a year after being bailed out, publicly shamed as riverboat gamblers playing on the public's dime, Wall Street was enriching itself again, just as it had before the crisis. To him it seemed like an impossible feat—a crime.

I said that while it might
seem
illegal and certainly might feel morally suspect (at best), much of the profit taking was entirely legal. The Obama government had propelled Wall Street earnings by leaving in place nearly all the bailout mechanisms created by Bush and his Treasury secretary, Hank Paulson, the former CEO of Goldman Sachs, right down to their support of Federal Reserve chairman Ben Bernanke and his policy of keeping interest rates near zero.

This, combined with other government guarantees—and the all-important too-big-to-fail status—gave Wall Street benefits that small businesses and entrepreneurs could only dream of. Wall Street could borrow nearly free of charge to conduct its business of trading and brokering, while small businesses couldn't get a loan.

An avid reader of the financial press, Davis was pissed off by all of this. He lives in a place where taxes are out of control (for a middle-class New York City resident the combined federal, state, and city taxes can easily reach 40 percent—and go up from there the more you make) and are likely to rise higher given New York's budget mess. His business was in decent shape, but because of the great recession not as decent as it once had been. And yet there he was, surrounded by all these Wall Street bankers and traders, standing around him drinking $20 martinis or sitting at the white-linen-covered tables in the swank restaurant eating expensive pasta and guzzling costly wines and making out like bandits.