Lloyd C. Blankfein has a story about the cataclysm that nearly brought down all of Wall Street. It goes something like this: One by one, lesser banks were swept away by the financial storm of 2008. And as the flood waters rose, no one, not even Goldman Sachs, seemed safe.
The question, in Blankfein’s eyes, was how high the water would rise. But Washington stepped in with all those bailouts before the surge reached Goldman. The story, which was recounted by many friends and colleagues, represents a sobering private admission from Blankfein, Goldman’s chief executive.
Publicly, it is a different story. Now that Goldman is minting money again, the bank insists that it was never in any real danger. Blankfein, in an email message on Tuesday, disputed his private account, saying Goldman’s survival was never in doubt. Other Goldman executives reject the notion that the bank was rescued at all.
Drawing scrutiny: Lloyd C. Blankfein, CEO, Goldman Sachs. Bharath Sai / Mint
“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.
Rarely has the view from inside a company been so at odds with the view outside it. Could Goldman Sachs have lived if all those other giant banks had failed? Could it alone survive financial Armageddon?
Goldman executives are dismissive, even defiant, when critics argue the bank is playing a heads-we-win, tails-you-lose game with American taxpayers. And yet the questions keep coming. Last month, the story of Goldman’s post-crisis success—and conspiracy theories surrounding it—leapt from the business pages to the cover of Rolling Stone.
The idea that nothing has changed for Goldman Sachs strikes many outsiders as absurd. In this era of mega-bailouts, Goldman is widely perceived, on Wall Street and in Washington, as too big and important to fail. If its bets pay off, Goldman profits and its employees get rich. If its bets go bad, ultimately taxpayers will have to pick up the bill.
“Many observers on the market believe that Goldman and others of its size now have a free insurance policy,” said Elizabeth Warren, chairwoman of the congressional oversight panel for the $700 billion (Rs33.3 trillion) bailout fund. “Whether they do or notis less important than the fact that many in the market believe they do. That means at some level, Goldman is playing with the American taxpayers’ future.”
Is Goldman gambling at America’s expense? Of course not, Cohn said. Should it change its business strategy in the wake of the gravest financial crisis since the Depression? No. Is Goldman taking big risks to make big profits? Courting more outrage over Wall Street pay with its plans to pay lavish bonuses? Throwing its weight around in Washington?
No, no, no.
Goldman executives dispute suggestions that high-stakes market gambles are behind its big profits—$3.4 billion in the second quarter. And they are dumbfounded when people such as Warren suggest companies such as Goldman, which paid back its bailout money last month, now operate with an implicit taxpayer guarantee.
After so many wrenching changes on Wall Street and in the economy, it might come as a surprise that the post-bailout Goldman is virtually indistinguishable from the pre-bailout one. The bank has strengthened its capital base and reduced its use of leverage—the borrowed money thatturbo-charges profits on the way up and can prove devastating on the way down. But Goldman sees little reason to change the way it does business. In fact, its executives are surprised that anyone would suggest it should.
Even Goldman’s conversion to a traditional banking company at the height of the crisis—a step many predicted would clip Goldman’s gilded wings—has been deftly sidestepped. It is, in other words, business as usual at Goldman—and what a business it is. Quarter after quarter, Wall Street executives scour Goldman’s results hoping to figure out how the bank makes so much money. Cohn and other executives, in recent interviews, sketched the broad outlines of an answer. Blankfein declined to be interviewed for this story.
During the second quarter, Goldman bet correctly that the financial markets would calm down. It wagered that market volatility would decline and that certain securities tied to the troubled home mortgage market would revive. Its securities underwriting business bounced back too.
The vast majority of profits came from trading on behalf of clients such as big mutual funds, pension funds and endowments, rather than from staking Goldman’s own money in the markets, Cohn said. Proprietary trading now accounts for about 10% of profits, down from 20% in 2005. Goldman dominated institutional trades linked to changes in a closely watched stock market index, the Russell 2000, and is benefiting because old competitors such as Bear Stearns and Lehman Brothers Holdings Inc. are no longer around.
“We don’t have to outsmart the market today,” said Cohn. “We just have to do what our clients want us to do.”
But unlike some of its rivals, Goldman is not shy about taking risks. The bank stood to lose as much as $245 million on any given dayduring the second quarter, basedon a common measureknown as value at risk (VAR). That was up from $184 million in mid-2008. But VAR captures only about a fifth of Goldman’s market risks andexcludes investments that are difficult to value.
“Our risk appetite continues to grow year on year, quarter on quarter, as our balance sheet and liquidity continue to grow,” Cohn said. He and other executives say Goldman carefully manages its risks, which, for the most part, it has.
Goldman’s latest quarterly disclosures to the Securities and Exchange Commission, filed on Wednesday, provide another glimpse into the bank’s activities. Aided by cheap credit, Goldman generated at least $100 million in daily revenue from trading on 46 separate days during the second quarter—a record.
Some of Goldman’s recent practices are drawing scrutiny from government officials. In its filing on Wednesday, Goldman said various government agencies had enquired about its compensation practices, as well as its role in the market for credit derivatives, which fuelled the financial crisis.
But overall, the events of the past year have not changed the way Goldman views or manages the risks its takes, said David A. Viniar, Goldman’s chief financial officer.
Cohn acknowledges his bank is systemically important, meaning that its failure would probably send financial shock waves around the world. But he said that the implications of this status were unclear and that Goldman had no government backing.
David A. Moss, a professor at Harvard Business School, disagrees. He says the painful lessons of the financial crisis show the federal government now stands behind all systemically important financial institutions.
“We’re in a situation where we’ve extended important guarantees, both explicit and implicit, to almost all major financial institutions, yet we don’t have the regulations in place to control the excessive risk-taking that could result,” said Moss, the author of When All Else Fails: Government as the Ultimate Risk Manager.
©2009/THE NEW YORK TIMES