Goldman Sachs’s role in the Greek financial crisis has further dented the Wall Street giant’s image
Iain Dey and Dominic Rushe
From The Sunday Times
February 28, 2010
Senator Chris Dodd was preparing for one of the biggest meetings of his career last Thursday. The Democrat has been at the forefront of the battle over President Barack Obama’s polarising healthcare reforms and for weeks had been preparing for a bipartisan summit at the White House. First, however, he had something else to do: stick the knife into Goldman Sachs, the investment bank that Washington loves to hate — and now has been likened by a Harvard academic to Darth Vader, the villain from Star Wars.
On his way to the crucial meeting on health, Dodd stopped in at the Senate banking committee, which he chairs. It was to be addressed by Ben Bernanke, chairman of the Federal Reserve.
After his opening remarks, Dodd told the committee he wanted to “abuse his chairmanship” by jumping straight in with a question about Goldman’s involvement in Greece’s economic woes. The answer was to pile yet more pressure on the beleaguered bank.
Bernanke replied: “We are looking into a number of questions related to Goldman Sachs and other companies and their derivatives arrangements with Greece. Using these instruments in a way that intentionally destabilises a company or a country is counterproductive, and I’m sure the SEC [America’s top financial watchdog] will be looking into that.”
Barely a week goes by without Goldman coming under attack in Washington. Of all the banks blamed for the financial crisis, it attracts the most anger. Its rapid return to extraordinary profits and its perceived arrogance have made it the lightning rod for public and political fury. When a $9m (£6m) share bonus for Lloyd Blankfein, its chief executive, was portrayed as a gesture of restraint, the bank looked even more out of touch with public opinion.
The bank’s alumni were once welcome additions to the political class. Today having Goldman on your CV is like sticking a label on your backside reading “kick me”.
The ire is spreading. European regulators are now probing currency deals struck by Goldman that helped Greece mask the true state of its public finances. If anyone did anything wrong, it was probably the Greek government. Nonetheless, it’s Goldman that can expect to take the heat.
While Bernanke faced questions in Washington last week, Goldman Sachs was being grilled in London. Gerald Corrigan, chairman of Goldman Sachs Bank, was facing the full glare of the Commons Treasury committee. Again, the Greek issue was top of the agenda. Did Goldman help Greece to “fiddle the books”, asked Michael Fallon, the senior Tory on the committee.
“It is true that currency swaps entered into by Goldman and Greece did produce a small reduction in the debt to GDP ratio at the time,” Corrigan admitted. “With the benefit of hindsight, it seems very clear that standards of transparency could have been and should have been higher.”
Transparency is a word that is not normally associated with Goldman. To the outside world, it is the secretive organisation that seems to have a hand in every deal of any significance. Or, as Rolling Stone magazine famously put it, the firm is considered as a “great vampire squid wrapped around the face of humanity, relentlessly jamming its blood funnel into anything that smells like money”.
Of course, every other bank is attempting to do the same thing. Goldman is just better at it than its rivals, which means it makes bigger profits, pays bigger bonuses and draws more flak.
Corrigan’s key defence against the Greek allegations was that every bank was cooking up deals with European governments — not just Greece. It’s no lie: JP Morgan and Deutsche were structuring deals for the Greeks, along with Morgan Stanley, UBS, BNP Paribas and Schroder Salomon Smith Barney (now part of Citigroup). The deals involved everything from revenues from the Greek lottery, to payments to boatyards for building warships.
The purpose was broadly the same: to find ways to keep the public debt as low as possible. The Italians and Portuguese were up to similar tricks with the same array of international finance houses. Britain has used the private finance initiative and other “off-balance sheet” schemes to massage the state of the public finances.
Initial enquiries suggest the banks did nothing wrong — it was the governments that did not disclose what was happening. Once again, however, it looks like the big banks have had a hand in upsetting the financial system. Even so, every other bank on Wall Street is happy to let Goldman take the heat. “The public hate them, the US government hates them and they have become the whipping boy of Europe, but every single investment bank has been in on these deals with Greece,” said one hedge-fund manager.
John Quelch at Harvard Business School said there are three main reasons why Goldman is public enemy No1. “First, their unparalleled web of influence. Their alumni are persistently appointed to leadership roles from Washington to Wall Street.
“Second, their stock market float — their corporate culture and public relations have not adjusted to the demands of being a high-profile, publicly listed company.
“And third, their lack of retail presence. Because Citi, Chase and Bank of America have retail branch networks, they seem more human, more down to earth. Their branch employees could be your neighbours. Goldman Sachs, by contrast, is unfamiliar and therefore takes on a Darth Vader image,” he said.
Goldman’s web of influence is impressive. Darth Vader has a habit of recruiting former establishment figures into the imperial star fleet once their time in office is up. Corrigan, for example, was previously head of the New York Federal Reserve.
Mostly, the brain drain works in the opposite direction. Robert Rubin left a top job at Goldman to become Bill Clinton’s Treasury secretary in 1992. Hank Paulson was coaxed to leave his role as chairman and chief executive of Goldman to become President George W Bush’s Treasury secretary in 2006 — and then led the bailout of Wall Street. Josh Bolten, another Goldmanite, was already Bush’s chief of staff.
As Paulson staffed up an under-manned Treasury department to deal with the crisis, the ranks of former Goldman staff stretched wider. With the world on its knees, there was no time for formal interviews or recruitment processes.
Paulson drew fire in late 2008 when he allowed Goldman and Morgan Stanley to change their status from broker-dealers, regulated by the SEC, to banks, regulated by the Fed. The move allowed the pair to receive bailout cash — which Paulson said was necessary to save the system.
Inquiries into the financial crisis have raised questions about the number of calls that Paulson and his officials made to Blankfein and other Goldman executives, compared with other banks’ bosses.
During the week when AIG, the insurer, was bailed out, for example, Paulson spoke to Blankfein two dozen times. A number of American senators have raised questions about this. When it emerged that Goldman was the main beneficiary from the bailout of AIG, the questioning became more intense. Everyone involved in those calls has insisted that nobody cared about anything other than saving the system.
However, in a recent US congressional hearing, Paulson and his successor Tim Geithner, chairman of the New York Federal Reserve at the time, were accused of allowing banks to “loot the corpse” of AIG.
Goldman’s connections to the global establishment don’t stop at the White House. Robert Zoellick, head of the World Bank, is part of Goldman’s alumni network. As are Mark Carney, head of the Canadian central bank, and Mario Draghi, governor of Italy’s central bank and head of the global committee leading the reform of bank regulation. The list goes on.
Goldman alumni argue that the links with the political world are only natural and stem partly from the culture of the firm. As the most elite bank in the world, it accepts only the brightest graduates from the world’s top universities. Its people are taught from an early age that they are special, and need to behave accordingly.
As such, moving into public service after a stint at the firm is viewed almost as a duty. Aside from that, if Goldman really does have the best brains on the planet, it is a logical place for governments to recruit from. With the new mood in Washington, however, Goldmanites may no longer find it so easy to enter the corridors of power.
GOLDMAN’S ATTACK DOG BITES OFF MORE THAN HE CAN CHEW
HARDLY a day goes by without a new attack on Goldman Sachs, writes Dominic Rushe. Once the gold standard of investment banking, it is the target of political scorn and public ire on two continents. Now the man charged with managing the public face of Goldman is making headlines himself.
Lucas van Praag, Goldman’s British-born communications chief, is being blamed for a public relations policy that is “basically a stiffly extended middle finger, waved in the air for all to see,” according to the New York Observer.
Van Praag, 60, seems to want to make his rebuttals as memorable as the charges Goldman is facing.
His sharp tongue, however, is attracting the wrong kind of headlines. New York magazine speculated that Van Praag had arrived at Goldman “via Hogwarts, Slytherin House”, and compiled a list of his put-downs.
“It is preposterous that The Wall Street Journal would even consider publishing such effluent,” Van Praag said about a story that Lloyd Blankfein, Goldman’s chief executive might resign. Accusations of market manipulation were “nothing more than a chimera produced by a febrile mind”.
Van Praag has been the lightning rod for the criticism of Goldman because of his public defence of the deals that have made Americans and their politicians angriest — in particular Goldman’s links with AIG, the insurance group that only survived after a massive infusion of taxpayer funds.
When the New York Times wrote articles about Goldman’s exposure to AIG, van Praag responded that they were “seriously misleading,” because “our exposure to AIG was, and is, not material”. Goldman had in fact hedged all its trades with AIG, meaning it was not at risk of financial loss, the bank said.
When Goldman’s name came top of the list of AIG counterparties — that is, the companies with which AIG was trading, the Financial Times responded: “For the record then, it certainly was not the NYT that was ‘seriously misleading’". Goldman insisted its original statement was accurate - the hedging meant the exposure was not material. The American government decided to pay out on the trades, handing $12.9 billion to Goldman.
Wall Street rivals have watched Van Praag’s growing profile with glee. “He’s just like the bank — too clever for his own good,” said one.
Friends argue that he’s right to give as good as Goldman gets. “A lot of what’s being said about Goldman is crap. It’s Lucas’s job to fight back,” said one.
Now some suggest that he is heading for the exit — a possible victim of Goldman’s even-year cull of partners. Insiders dismiss the idea — although Van Praag might now be alarmed to see New York magazine’s website now has a “Save Lucas” page.
http://business.timesonline.co.uk/tol/business/industry_sectors/banking_and_finance/article7043827.ece
