Table Of ContentCopyright © 2010 by Suzanne McGee
All rights reserved.
Published in the United States by Crown Business, an imprint of the Crown Publishing Group, a
division of Random House, Inc., New York.
www.crownpublishing.com
CROWN BUSINESS is a trademark and CROWN and the Rising Sun colophon are registered
trademarks of Random House, Inc.
Originally published in slightly different form in hardcover in the United States by Crown
Business, an imprint of the Crown Publishing Group, a division of Random House, Inc., New
York, in 2010.
Library of Congress Cataloging-in-Publication Data
McGee, Suzanne.
Chasing Goldman Sachs/Suzanne McGee.
p. cm.
1. Goldman, Sachs & Co. 2. Investment banking—United States—History—21st century. 3.
Financial crises—United States—History—21st century. 4. Finance—United States—History—
21st century. I. Title.
HG4930.5.M38 2010
332.660973—dc22 2009053440
eISBN: 978-0-30746012-7
Cover design by Pete Garceau
Cover photographs: Reuters/Landov (building); Getty Images (sky)
v3.1
In memory of my grandfather
James R. Burchell
CONTENTS
Cover
Title Page
Copyright
Dedication
Foreword
Dramatis Personae
Introduction: The Chase
PART I
Dancing to the Music
1 From Utility to Casino: The Morphing of Wall Street
2 Building Better—and More Profitable—Mousetraps
3 What’s Good for Wall Street Is Good for … Wall Street: How Wall
Street Became Its Own Best Client
4 To the Edge of the Abyss—and Beyond: Flying Too Close to the Sun
PART II
Greed, Recklessness, and Negligence: The Toxic Brew
5 “You Eat What You Kill”
6 The Most Terrifying Four-Letter Word Imaginable
7 Washington Versus Wall Street
PART III
The New Face of Wall Street
8 Wanted: A New Model for Wall Street
9 Chasing Goldman Sachs?
Glossary
Notes
Acknowledgments
About the Author
FOREWORD
W
e think we’re number one, but we’ll leave that for others to decide.”
Back in 1983, when John Whitehead, then cochairman of Goldman
Sachs & Co. made that statement to a reporter from New York magazine,
the investment bank was already well on the way to becoming one of
Wall Street’s iconic firms. Its bankers proclaimed that they were “long-
term greedy”; the denizens of Goldman weren’t the type, they declared
regally, to try to capture every fraction of a penny of fees and profits,
particularly if there was even a question that they might be doing so at
the expense of a client relationship. Goldman Sachs even felt itself to be
above some businesses—no advising hostile bidders on takeover
strategies, for instance; that was far too messy. Then there were some
potential clients that a Goldman Sachs banker didn’t want to be seen
lunching with, much less transacting business with. Goldman’s clients
were the crème de la crème; preserving the firm’s name and reputation
by choosing who to deal with and what deals to do was more critical
than grabbing at an extra few thousand dollars in fees.
Occasionally, something unpleasant would happen to remind Goldman
bankers of the solid business reasons behind those lofty principles, such
as the firm’s brief but damaging relationship with Robert Maxwell. Many
Goldman partners had felt skittish about accepting the media tycoon as a
client; his checkered past included his being dubbed by a British
government inquiry as “not a person who can be relied on to exercise
proper stewardship” of a public company. But the allure of earning big
fees overrode those concerns—that is, until Maxwell vanished off his
yacht into the sea near the Canary Islands and a new investigation
revealed that he had looted a billion pounds from his employees’
pension funds. British regulators hit Goldman with a fine for its role in
the fiasco in 1993; the size of the fine was somewhat less important than
the public humiliation, however. Partners vowed that never again would
Goldman Sachs be named and shamed in such a manner.
And yet, in the summer of 2010, Robert Khuzami, head of the
enforcement division of the Securities and Exchange Commission, stood
triumphantly in front of a group of reporters and an array of television
cameras broadcasting his words globally. He announced that Goldman
Sachs had agreed to pay a fine of $550 million—the largest penalty the
SEC had ever imposed on a Wall Street firm—to settle a civil fraud case
the agency had filed only months earlier. But Khuzami and the SEC had
won more than their $300 million share of that settlement: Goldman had
agreed to acknowledge publicly that the “fundamental basis” of the
agency’s lawsuit was accurate. Goldman had failed to live up to its own
standards and disclose everything that German bank IKB might have
wanted to know about the mortgage securities deal, dubbed Abacus, that
lay at the heart of the suit. Specifically, the SEC had claimed Goldman
hadn’t fully explained to IKB and other potential investors buying the
Abacus package of synthetic mortgage-based securities that hedge fund
manager John Paulson had played a key role selecting the specific
securities in that transaction—indeed, that the deal was being done at
his initiative because he wanted to find a way to profit from what he
expected would be a big decline in the value of the securities he chose.
That’s precisely what happened: Paulson walked away a billion dollars
richer, while IKB became one of the first financial institutions to fall
victim to the global financial crisis and require a bailout.
Goldman Sachs, the envy of Wall Street, now found itself under
scrutiny for all the wrong reasons. Instead of its peers and rivals trying
to figure out what it was doing to earn the astonishing rates of return it
delivered like clockwork to its investors, regulators and legislators were
putting its business under a microscope. To insiders, it seemed as if
everything for which Goldman was once famous and lauded—its
creativity in devising and structuring new products; its risk management
prowess; the market insight displayed by traders deploying the firm’s
own capital to generate returns; the firm’s ability to develop
relationships with power players in Washington as well as on Wall Street
—now rendered it infamous. Suddenly, everyone was asking what
Goldman Sachs had done to earn the gargantuan profits in recent years;
profits that had left other Wall Street CEOs green-eyed with envy and
fuming at their own inability to measure up.
But this book—conceived in early 2008, as Bear Stearns collapsed and
Wall Street waited, holding its breath, for the next shoe to fall—is not
the story of the transformation of Goldman Sachs from Wall Street’s
most envied to its most reviled power. Rather, it’s the tale of the ways in
which Goldman and the other Wall Street firms that sought to emulate
its success underwent a fundamental transformation, and the impact of
those changes for Wall Street, its clients, and the financial system as a
whole. That transformation—which led to Wall Street being run solely in
the interests of Wall Street entities themselves, with clients now viewed
as counterparties—paved the way for the financial crisis whose ripple
effects continue to reverberate on both Wall Street and Main Street. For
the latter—indeed, for most of us—Wall Street’s value lies in its role as a
financial utility or intermediary. But as the financial results of Goldman
and its rivals demonstrated all too clearly, that’s not where the profit
lay. And ever-bigger profits were what Wall Street’s own investors—the
shareholders who bought stock in Goldman Sachs, Merrill Lynch,
Lehman Brothers, and other firms—demanded, loud and clear.
The SEC’s fraud lawsuit against Goldman Sachs simply made public
what many Wall Street insiders had long known: clients need to be able
to look out for themselves. Wall Street firms are dealing cards from the
bottom of the deck to their friends, while saving the low-value cards for
other clients. In case there was any doubt of what Goldman bankers
really thought of the deals they were taking to their clients, investigators
rapidly made public a series of embarrassing e-mails and other
documents. In one, top Goldman banker Tom Montag wrote of another
mortgage-backed securities transaction—Timberwolf—that it was “one
shitty deal.” Certainly by the time John Paulson came knocking on its
door, Goldman knew that being “long” subprime real estate in the spring
of 2007 was likely to be a risky bet for anyone agreeing to take the other
side of the trade that Paulson wanted to do; after all, the firm was
pushing its team to unload their own exposure to others as rapidly as
possible. In an e-mail to a friend, Fabrice Tourre, the banker who
structured the deal (and who has not yet been able to settle the SEC’s
charges against him) wrote of the CDO transactions he was crafting, “the
whole business is about to collapse any time now … Only potential
survivor, the fabulous Fab!” In another e-mail, the head of Goldman’s
structured products correlation trading desk warned Tourre that “the cdo
biz is dead” and that “we don’t have a lot of time left.” None of that
gave Goldman Sachs bankers a reason to stop, it seems. Even Bear
Stearns had turned away John Paulson, concerned at the ethical
implications of allowing a hedge fund manager to choose which
securities he would bet against and thus which securities Bear would
have had to coax a client to buy outright.
“In the old days, we would never have done business with just anyone
who showed up on our doorstep,” insists one former Goldman Sachs
partner, who says the revelations left him “shocked and dismayed.” In
the old days, before Goldman Sachs sold stock to the public and its
culture began to change irrevocably, “the question would have been
‘John Who? Do we know this guy? What is he asking us to do? What are
the consequences of this? Is this someone we want and need a
relationship with?’ Above all, we were always prepared to say ‘no.’ ”
But by the dawn of the twenty-first century, saying “no” to deals
wasn’t how Wall Street worked anymore. From the mortgage brokers
who underwrote the now-notorious “no income, no-docs” home loans all
the way up to the investment bankers who just couldn’t turn away a
John Paulson, even when they had ethical reservations or, as Fabrice
Tourre admitted, the securities that they were creating for their investors
were “monstrosities”; the very word “no” seemed to have vanished from
the lexicons of those toiling within the financial system. And the
pressure was on to say “yes” to any deal that could generate a few
pennies a share in quarterly earnings, because each and every
investment bank and commercial bank was well aware of the extent to
which its own return on equity fell short of that being generated by the
Midas-like bankers at Goldman Sachs. Swiss banking giant UBS hired a
consulting firm to advise it on the best way to generate profits; Goldman
alumnus Robert Rubin, who had moved on to work for Citigroup, only
reluctantly acknowledged to colleagues that his new firm had neither the
trading skills nor the risk management prowess to beat Goldman at its
own game. (That didn’t stop Citigroup from trying, of course.) Top
bankers at Merrill Lynch & Co. knew to steer clear of their
temperamental CEO Stan O’Neal on days that Goldman Sachs released
its earnings. “Why can’t we earn numbers like that?” he demanded of
one subordinate in mid-2005.
The problem for Wall Street wasn’t what Goldman Sachs did. It was
the attitude that lay behind those actions, combined with the fact that its
