How Goldman Sachs came roaring back

We have been around for 140 years, and intend to be here for another 140 years, a senior London-based Goldman Sachs banker informed me the other day. Amid the carnage among the global investment banks, Goldman has emerged from the credit crisis least damaged and most defiant.

Like the other global broker-dealers, Goldman almost came to grief after Lehman Brothers failed on September 15, 2008. Goldman’s share price went into freefall and money fled. The bank, under the guidance of chairman Lloyd Blankfein in New York and Michael Sherwood, London-based director of its Europe, Middle East and Africa divisions, plotted a route back to safety.

This involved three steps. The first was to grant the legendary “Sage of Omaha”, Warren Buffett, $5bn in preference shares, on which it agreed to pay a hefty 10 per cent coupon; the second was to accept a $10bn bailout from the US Treasury; and the third was to change its status from broker to bank holding company.
The latter allowed Goldman direct access to funds from the Federal Reserve’s discount window on a permanent rather than temporary basis.

Like all the other financial groups which had taken the government dollar, Goldman’s days as a money making machine for its senior executives and staff looked to be over. With the Federal Reserve’s Ben Bernanke looking over his shoulder and the anger against bankers on Capitol Hill in Washington, it faced tougher regulation of activities and pay.

Yet Goldman had different ideas. Its goal was to get the government off its back as soon as possible and take advantage of an investment banking marketplace where the competition had been devastated and the margins — the profits on doing business — had soared.

The Goldman recovery was not without hitches. The claim has been made that it could not have been achieved without the helping hand of the company’s diaspora, which reaches into every arm of government, central banking and finance around the world. Indeed, it is this network of connections which was to form the basis of a lengthy and highly critical article in Rolling Stone magazine by journalist Matt Taibbi.

It described Goldman as “giant vampire squid wrapped around the face of humanity, relentlessly jamming its blood funnel into anything that smells like money.

In fact the history of the recent financial crisis, which doubles as the history of the suddenly swindled dry American empire, read’s like a Who’s Who of Goldman Sachs graduates”. Like much so called ‘gonzo’ journalism, Taibbi’s assault was over the top.

Moreover, the use of the “vampire” and “blood funnel” analogy is not without its problems for a bank with distinctly Jewish origins. Some would see such language as akin to that used against Jewish bankers in Germany in the 1920s and 1930s.

Putting that to one side, the Rolling Stone writer does have a point about the Goldman Sachs network of connections. At the time of the rescue last year, the US Treasury Secretary Hank Paulson was a former Goldman Sachs chairman. The chairman of the Federal Reserve Bank of New York was also a Goldmanite. As were John Thain, the chief executive of Merrill Lynch which was sold to Bank of America; Robert Rubin at Citigroup; the banker brought in to clean up the mess at the insurer AIG; the President of the World Bank; the heads of the Italian and Canadian central banks and the boss of the New York Stock Exchange.

Here at home, Goldman was the bank chosen by Gordon Brown (whose special assistant, Sue Nye, is married to former Goldman chief economist Gavyn Davies) as the adviser on how to deal with Northern Rock, the first UK casualty of the credit crunch.

Conspiracy? Probably not. Goldman tells me that having friends in high places can be a disadvantage because it means that they could not be seen to be doing their old house any favours. This is almost certainly true but arms length behaviour is difficult when the limbs are so entwined.

Helped or not, Goldman and its senior executives have emerged from the crisis looking stronger than ever. In the second quarter of this year the great vampire squid sucked $3.44bn out of the system — around half of which will be shared among executives and staff in payments and bonuses.

It has paid the government back in full, ratcheted down the levels of borrowing on its balance sheet and left Warren Buffett as the biggest winner of all with a $2bn paper profit.

How did Goldman achieve this? At every juncture of the crisis it has been smarter than the rest. It saw sub-prime and the toxic debt coming and took a giant hedge — insurance contract — against it. When insurer AIG was rescued by the US government, Goldman was first in the queue, collecting $13bn directly from the American taxpayer. Nice going.

The founders, the German-Jewish immigrant Marcus Goldman and his son-in-law and partner Samuel Sachs, would be proud. This year, the 29,400 staff, some 5,600 in London, are heading for mouth watering bonuses of on average $770,000 each.

Those high up the tree like Blankfein and Sherwood are entitled to countless millions, if they decide to take them. Hopefully, the firm’s tradition of giving something back to society will remain as intact as its money making skills.

Alex Brummer is City Editor of the Daily Mail

    Last updated: 10:56am, July 30 2009