The Sunday Times gains unprecedented access to the world's most powerful, and most secretive, investment bank
Number 85 Broad Street, a dull, rust-coloured office block in lower Manhattan, doesn’t look like a place to stop and stare, and that’s just the way the people who work there like it. The men and women who arrive in the watery dawn sunshine, dressed in Wall Street black, clutching black briefcases and BlackBerrys, are very, very private. They walk quickly from their black Lincoln town cars to the lobby, past, well, nothing, really. There’s no name plate on the building, no sign on the front desk and the armed policeman stationed outside isn’t saying who works there. There’s a good reason for the secrecy. Number 85 Broad Street, New York, NY 10004, is where the money is. All of it.
It’s the site of the best cash-making machine that global capitalism has ever produced, and, some say, a political force more powerful than governments. The people who work behind the brass-trim glass doors make more money than some countries do. They are the rainmakers’ rainmakers, the biggest swinging dicks in the financial jungle. Their assets total $1 trillion, their annual revenues run into the tens of billions, and their profits are in the billions, which they distribute liberally among themselves. Average pay this recessionary year for the 30,000 staff is expected to be a record $700,000. Top earners will get tens of millions, several hundred thousand times more than a cleaner at the firm. When they have finished getting "filthy rich by 40", as the company saying goes, these alpha dogs don’t put their feet up. They parachute into some of the most senior political posts in the US and beyond, prompting accusations that they "rule the world". Number 85 Broad Street is the home of Goldman Sachs.
The world’s most successful investment bank likes to hide behind the tidal wave of money that it generates and sends crashing over Manhattan, the City of London and most of the world’s other financial capitals. But now the dark knights of banking are being forced, blinking, into the cold light of day. The public, politicians and the press blame bankers’ reckless trading for the credit crunch and, as the most successful bank still standing, Goldman is their prime target. Here, politicians and commentators compete to denounce Goldman in ever more robust terms — "robber barons", "economic vandals", "vulture capitalists". Vince Cable, the Lib Dem Treasury spokesman, contrasts the bank’s recent record results — profits of $3.2 billion in the last quarter alone — and its planned bumper bonus payments with what has happened to ordinary people’s jobs and incomes in 2009.
It’s even worse in the US. There, Rolling Stone magazine ran a story that described Goldman as "a great vampire squid wrapped around the face of humanity, relentlessly jamming its blood funnel into anything that smells like money". In his latest documentary, Capitalism: A Love Story, Michael Moore drives up to 85 Broad Street in an armoured Brinks money van, leaps out carrying a sack with a giant dollar sign on it, looks up at the building and yells: "We’re here to get the money back for the American people!"
Goldman’s reputation is suddenly as toxic as the credit default swaps and other inexplicably exotic financial instruments it used to buy with glee. That’s bad for the one thing it values more than anything else: business. Being the prime target for popular and political outrage could put Goldman first in line for draconian new regulation. So it has, reluctantly, decided that the time has come to speak out, to fight its corner. That’s how, on one of those bright autumnal New York mornings when anything seems possible — even an invitation to break bread with the masters of the universe — I find myself walking past the security guard who held up Michael Moore and into the building with no name.
"Aha! You catch us plotting in real time," says Lloyd Blankfein, breaking away from a cabal of senior executives discussing his trip to Washington the previous day. Blankfein, 55, Goldman’s chairman and chief executive, is wearing a grey suit with a jaunty Hermès tie with little red bicycles on it. In his hand, he’s carrying one of those cups of coffee that look bigger than the human stomach. Maybe it’s the caffeine, maybe it’s the tie — a birthday present from his daughter — but he’s in a remarkably jolly mood for a man everyone seems to hate. "It’s like a safari here," he jokes. "You’ve come in to look at the animals."
Blankfein may be Wall Street’s Sun God, but, with the economic outlook stormy, he doesn’t want to advertise it, so the merest hint of a status symbol or — horror! — ostentation is airbrushed out of his life, publicly, at least. Take his office on the 30th floor. The chairs are the same ones that were there when he became CEO three years ago. There are none of the $87,000 handmade rugs or $5,000 wastepaper baskets of Wall Street lore. There’s no sign of irrational exuberance. Only coffee, which arrives cold. It sets just the right tone for the job in hand. The grand wizard of Wall Street is steeling himself for the hardest sell of his life: he’s here to argue for good ol’ capitalism, for investment banks and for Goldman Sachs.
Luckily for him and his firm, he’s a damn good salesman. He starts with a little humility. He understands that "people are pissed off, mad, and bent out of shape" at bankers’ actions. Goldman played its part in the meltdown that almost destroyed the global financial system. It, like most other banks, lent too much money, made its first quarterly loss for more than a decade last year and ended up taking bail-out cash from Washington. "I know I could slit my wrists and people would cheer," he says. But then, he slowly begins to argue the case for modern banking. "We’re very important," he says, abandoning self-flagellation. "We help companies to grow by helping them to raise capital. Companies that grow create wealth. This, in turn, allows people to have jobs that create more growth and more wealth. It’s a virtuous cycle." To drive home his point, he makes a remarkably bold claim. "We have a social purpose."
Social purpose? Those who have lost their jobs or seen their pay slashed thanks to bankers who flogged dodgy mortgages and dreamt up investments so complex not even they understood them, would gladly tell him where to stick his social purpose. But the problem is, Blankfein is a good advertisement for wealth creation. His own. He is no scion of privilege, dispensing plummy-voiced homilies to raw capitalism from his 30th-floor eyrie. Born in a tough neighbourhood in the Bronx, the son of a postal worker and a receptionist, he was the first in his family to go to college and used financial aid to go to Harvard.
Even though he proudly pays himself more in a year than most of us could ever dream of — $68m in 2007 alone, a record for any Wall Street CEO, to add to the more than $500m of Goldman stock he owns — he insists he’s still "a blue-collar guy".
But what about the charge sheet? Bankers brought the world to the brink of bankruptcy and instead of doing the decent thing and jumping out of the nearest window, they turned up cap in hand to governments to hoover up taxpayers’ money to save their skin. Now, just one year on, they are carrying on as if nothing has happened, gambling, and winning, handsomely, with our cash. Goldman’s profits in the second quarter were a record $3.4 billion. Most of the money is being made in trading in bonds, currencies and commodities.
Goldman is coining it again for two reasons. First, global markets are booming — up 50% from the credit-crunch lows, as new money, much of it from governments, has gushed into the financial system. Second, with Lehman Brothers and Bear Stearns off the street, Merrill Lynch a crippled shadow of its former self, and neither Citigroup nor UBS the forces of old, Goldman has a bigger slice of a growing pie. "We didn’t f*** up like the other guys. We’ve still got a balance sheet. So, now we’ve got a bigger and richer pot to piss in," is how one Goldman banker puts it. Small wonder the bank is on course to set aside over $20 billion for salaries and bonuses.
So far, so lucrative. But isn’t it simply unfair? Isn’t Goldman acting as the modern equivalent of war-time profiteer, taking advantage of global crisis and emergency government action to mint millions? Even the veteran financier George Soros says the big profits made by Wall Street banks are "hidden gifts" from the state.
Blankfein dismisses any suggestion that Gold-man needed to be bailed out, and, by extension, rejects any notion that the firm is now profiting from public support. Sure, he took $10 billion from Washington’s Troubled Asset Relief Program (Tarp). But the bank has since repaid the cash, with healthy interest — 23%. Goldman also bene-fited from the federal bail-out of the huge US insurance firm AIG. Goldman had bought $20 billion worth of insurance from AIG and received billions of dollars — perhaps as much as $13 billion — when Washington pumped $90 billion into the stricken giant. But Blankfein insists Goldman was "hedged" against any AIG losses, in the best possible way — with cash. So even if AIG had gone under, Goldman would not have suffered. Critics say that had AIG gone bust, the entire financial system could have collapsed, taking Goldman with it. What’s more, at the height of the crisis, the Federal Reserve broke with an 80-year-old tradition and let Goldman turn itself from a pure investment bank into a bank holding company. This meant it could borrow funds at the same cheap rate as commercial banks for as long as it wanted. Blankfein says Goldman changed status not for the money, but because it had become clear, following the collapse of Bear Stearns and Lehman, that the market had lost faith in the ability of the US Securities and Exchange Commission to regulate investment banks. Being regulated by the central bank, the Federal Reserve, would help to restore confidence in the financial system as a whole.
Whatever the truth behind the bail-out, not even the smartest Goldmanite can deny that it is only thanks to government aid that the bank still has a financial system to work with. Washington has bolstered the US economy and banks to the tune of $12 trillion. Does Blankfein not acknowledge that it is maddening for most of us to watch Goldman gobble up so much cash while we struggle? Quite the opposite. He insists we should be celebrating his bank’s success, not condemning it. "Everybody should be, frankly, happy," he says. Can he be serious? Deadly. Goldman’s performance, he argues, is the firmest indication of a nascent economic recovery that will benefit not just him and his firm but all of us. "The financial system led us into the crisis and it will lead us out."
Blankfein goes on to say something equally audacious. We should welcome the return of titanic paydays at Goldman. Goldman is exempt from President Barack Obama’s cap on bonuses because it has paid back bail-out cash. Paying top dollar to recruit and retain the best bankers won’t sink the system, he claims, but save it. Performance-related pay is a guarantee of high-quality responsible banking. "If you examine our practices on compensation, you will see a complete correlation throughout our history of having remuneration match performance over the long term. Others made no money and still paid large bonuses. Some are not around any more. I wonder why."
Many disagree, arguing that in the new, flatter economic landscape, megabucks pay is no longer necessary. Lucian Bebchuk, professor of law, economics and finance at Harvard Law School, says: "These days, it’s easier for banks to keep their employees from being raided. The outside opportunities are less attractive now than in 2007."
Okay, forget bail-outs, forget bonuses, forget all the money stuff, if you can. Surely Blankfein cannot dodge the playwright David Hare? Through his latest work, The Power of Yes, which tackles the issue of the credit crunch, Hare argues that it is "blackmail" to say that there cannot be a recovery unless we let bankers get on with what they have always done and pay themselves squillions. It’s like what the miners did in the 1970s, only this time the National Union of Mineworkers is the City and Wall Street. Blankfein has no time for such soft talk. Bankers are not miners. "I’ve got news for you," he shoots back, eyes narrowing. "If the financial system goes down, our business is going down and, trust me, yours and everyone else’s is going down, too."
Like a patient who has survived a near-death experience, for Blankfein the credit crunch has rekindled his innate passion for moneymaking. Talking to him is like talking to a man who has greenbacks, not blood, running through his veins. He believes he’s good at what he does and what he does is good. He has his supporters. Vanity Fair awarded him the coveted No 1 spot in its 2009 New Establishment list, its league table of the 100 top power players in the information age, above such luminaries as the Apple boss, Steve Jobs, and the Google founders, Sergey Brin and Larry Page. Others, such as the New York Times columnist Andrew Ross Sorkin, argue that the public "cannot have it both ways". At the height of the crisis last year, Sorkin recalls, "many crossed their fingers, hoping Goldman and the rest of Wall Street would be saved to halt the downward spiral. But now when the banks finally get back on their feet, we want them to fall flat again".
Like it or loathe it, one thing is unarguable: "Tenacious G" does seem to draw the winning hand in good times and, as we have seen recently, in bad. It begs one simple question. How? What’s in the special sauce? To try to find the answer, you have to leave Blankfein’s office and take the lift to the 17th floor. On the way, you hear investment bankers, traders, "strats" — strategists — and "quants", the mathematical lizard brains who dream up whizzy trading formulae, discussing "interest rate swaps", "no credit defaults", "exotic and vanilla options", "bid-ask spreads", "bunds", "bobls" and goodness knows what else. You can’t see the cash whizzing around 85 Broad Street as you walk through the place, but you can feel it being shuffled 24 hours a day between central, commercial and investment banks, vast companies, Russian oligarchs, Middle Eastern movers and sheikhers, Texas oilmen and secretive billionaires in Bermuda and the Cayman Islands.
In an office with an ink stain on the carpet, sits Liz Beshel. She’s the first ingredient of Goldman’s witches’ brew. The firm only hires the very, very brightest and they don’t come much sparkier than Beshel. The 40-year-old single mother talks so fast, and with such insight into financial markets, you practically need a degree from Harvard Business School to keep up. She was snapped up by Goldman straight from college and managed to get an executive MBA from Columbia University, New York, "on Fridays". As you do. She rose quickly though investment banking to become the firm’s youngest-ever global treasurer, the keeper of the cash. Today, every pound the firm invests, every yen it borrows, every dollar that flows on and off its balance sheet, is under her watchful eye, all $1 trillion a day of it. How much cash does the bank have right now? I ask. "$164.2 billion in cash or cash equivalents," she replies without pausing for thought or breath.
It is thanks to rat-tat-tat intellects like Beshel that Goldman Sachs not only has so much money, but tends to be good at hanging onto it. Staff rigorously price — "mark to market", in the jargon — the bank’s assets every day, down to the last cent, and forensically examine daily profit and loss. This helps the bank to see market trends clearly and early and, it believes, to manage risk better than most other banks. "We think we make better decisions," says Beshel. There’s evidence to support the claim. Take the sub-prime mortgage sector, the ticking toxic debt bomb that detonated the economic crisis. One year before bad home loans brought down Lehman and Bear Stearns, forced shotgun marriages of Merrill Lynch to Bank of America and HBOS to Lloyds, and made Royal Bank of Scotland a national joke, Goldman’s daily valuations revealed it had suffered modest losses in its mortgage holdings for just over a week. At most banks, the losses might have gone unnoticed or been dismissed as a rounding error, but Goldman convened a meeting of senior bankers to try to find out what was going on. Even though the housing and mortgage markets were still buoyant, the bank did not like what it saw and began reducing its exposure. When the credit crunch hit, its losses in the mortgage sector were only $1.7 billion, lower than any other big investment bank. UBS lost $58 billion.
Being smarter than the average bear is one thing, but to be a Goldmanite you have to work harder than the average bear too. Ask Sarah Smith, 50, a former convent schoolgirl from Bromley in Kent who left Britain to become Goldman’s chief accountant. "It’s a 24/7 culture," she says. "When you’re needed, you’re here. And if you’re needed and you’re not answering your phone, you won’t be needed very long."
Smith, whose office is a BlackBerry throw away from the Embassy Suites hotel where Goldman staff go for an hour or two’s sleep when they have been up so long that they start sleepwalking along the hallways, only had a few days’ holiday last year. How many weeks off does she get a year?
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