Tenacious G

Illustrations by Darrow (Goldman Sachs figure), Gluekit (small figures).Photo: Getty Images (crowd); Serge Attal/Time Life Pictures/Getty Images (crowd); Paula Bronstein/Getty Images (crowd); Harold Cunningham/Getty Images (smoke).

Thirty floors up in the black-tinted box that is Goldman Sachs headquarters on 85 Broad Street, there is a whiff of panic in the air. The Goldman of legend—pillar of the free market, breeder of super-citizens, object of envy and awe—has vanished. Ever since the bank crossed paths with U.S. taxpayers, getting saved with at least $10 billion in government aid last year and then parlaying that into $5.1 billion in profits in 2009 (so far), the firm has been seen as the ugly essence of capitalism at its most cynical—by Washington, by the public, by the financial press, even by some of its clients. Stalwart voices of Wall Street like the Financial Times and The Wall Street Journal have criticized the firm’s undue influence on government and its ruthless pursuit of risky profits. Venom is flowing from more unlikely quarters as well: A recent Rolling Stone article called Goldman “a great vampire squid wrapped around the face of humanity” and accused it of rigging every major market bubble since the Great Depression.

This is not the kind of attention Wall Street’s most vaunted financial institution is used to. Which is why I am now sitting in its wood-paneled and gold-trimmed executive suite: The famously press-averse firm has consented to a rare audience.

The man Goldman has selected to come to its defense is John Rogers, the firm’s chief of staff. Rogers is typical of the Goldman elite—doubling as a Washington power broker and confidant to James Baker, Jon Corzine, and Hank Paulson. The atmosphere is airless as Rogers sits down, his steady eyes barely blinking: a silver-haired sphinx in a sky-blue shirt. “We don’t live in a vacuum, and we’re very aware of what the general public is thinking,” says Rogers calmly. “We work in a fiercely competitive global industry, but we can’t afford to be oblivious to public opinion.”

Especially not as Goldman ramps up astronomical profits and prepares to pay its executives $11.4 billion and counting in this of all years. If the amount seems obscene to an outsider, it is justified on the inside by an article of faith: that Goldman employees are the absolute best of the breed, meant to wield the levers of power—and reap its rewards. As John Whitehead, the godfather of Goldman’s modern culture, wrote in a set of guidelines for executives: “Important people like to deal with other important people. Are you one?”

Of course, that’s not the message Goldman Sachs wants to send out at this particular moment. The goal here is to demystify the company, present it not as a nefarious organization set on world domination but as an American institution, a producer of public servants, its business synonymous with the capitalist system, its health reflective of the health of the economy as a whole.

“I think this company is essential in terms of the American capital markets,” says Rogers.

His tone is placid, soothing—until, that is, the subject of American International Group comes up. At this, his eyes widen, his face grows angry, his hands gesture in the air.

“If you didn’t like the policy,” he says of the decision to bail out AIG and pay off its debts to Goldman, “one avenue for pursuing your own interests was to attack Goldman Sachs.”

It’s a sore spot for good reason. The AIG rescue is the incident from which all other Goldman conspiracy theories spring—the original sin, in a sense, of Goldman’s current public tarring. It’s the act that first made the average man on the street sit up and say, “Hey, wait a minute. The secretary of the Treasury, who used to be the Goldman CEO, just spent $85 billion to buy a failing insurance giant that happened to owe his former firm a lot of money. Does that smell right to you?” It also seems to have the legs of a potential scandal, with Neil Barofsky, the inspector general overseeing the Troubled Asset Relief Program, conducting an audit of the buyout.

Then again, if you’ve just posted $3.44 billion in second-quarter profits in an environment where, say, Morgan Stanley just reported a $1.26 billion loss, what does it matter what people say? The answer lies in another of Whitehead’s principles: Reputation must be closely guarded, because it is “the most difficult to regain.”

The decision that put Goldman’s reputation in play is now almost a year old. On the weekend of September 12, 2008, as the financial system shuddered and appeared to be on the verge of lurching to a halt, two Goldman Sachs men, former CEO Hank Paulson and current CEO Lloyd Blankfein, huddled with other banking heads at the Federal Reserve Bank of New York to consider how to stave off disaster. Bear Stearns was dead. Merrill Lynch, run by another former Goldman man, John Thain, was in desperate need of a savior. And now Lehman Brothers was on the brink. As secretary of the Treasury, Paulson asked the banks to come up with a private-funding solution for Lehman before it imploded from lack of cash. But all the banks had been scrambling for cash reserves or strategic mergers to buffer against a rapid freeze in lending. No one was able, or willing, to help. And Paulson, a free-market purist, had made one thing clear up front: The government would not bail out the firm. Lehman Brothers, a longtime Goldman rival, prepared to declare bankruptcy, ending its 158-year run on Wall Street.

A composite photograph, taken over the course of two days, of businessmen emerging from Goldman Sachs.Photo: Peter Funch

By Sunday night, Paulson realized he had an even bigger problem: the insurance giant AIG. AIG had sold billions in credit-default swaps to several major banks, what amounted to unregulated insurance on risky subprime-mortgage investments, the very ones that were bringing down the economy. As the real-estate market cratered, Standard & Poor’s was preparing to slash AIG’s credit rating, meaning AIG would be swamped with collateral calls it couldn’t pay.

As it happened, Goldman Sachs was AIG’s biggest banking client, having bought $20 billion in credit-default swaps from the insurer back in 2005. The swaps were meant to offset some real-estate investments Goldman had made, specifically a bunch of mortgage bonds it had on its books. The idea was simple: If the value of the mortgage bonds went down, the value of Goldman’s AIG swaps went up, assuring Goldman was safe from all-out losses on what it feared was an upcoming collapse in real estate. In reality, this was nothing like insurance and much more like an old-fashioned hedge.

By that weekend in September, Goldman Sachs had collected $7.5 billion from its AIG credit-default swaps but had an additional $13 billion at risk—money AIG could no longer pay. In an age in which we’ve become numb to such astronomical figures, it’s easy to forget that $13 billion was a loss that could have destroyed Goldman at that moment.

Hank Paulson and then–New York Fed chief Tim Geithner called an emergency meeting for the following Monday morning at the Federal Reserve Bank, ostensibly to discuss whether a private banking syndicate could be established to save AIG—one in which Goldman Sachs and JPMorgan Chase, two of the ailing insurance giant’s clients, would play prominent roles. “It was in their interest to be part of the solution,” says Robert Willumstad, the CEO of AIG at the time, who was also part of the meetings. “Geithner called on those two banks specifically to be helpful. You get the sense that both of those guys had been close to Geithner and giving him advice.”

At the meeting, it was hard to discern where concerns over AIG’s collapse ended and concern for Goldman Sachs began: Among the 40 or so people in attendance, Goldman Sachs was on every side of the large conference table, with “triple” the number of representatives as other banks, says another person who was there. The entourage was led by the bank’s top brass: CEO Blankfein, co-chief operating officer Jon Winkelried, investment-banking head David Solomon, and its top merchant-banking executive Richard Friedman—all of whom had worked closely with Hank Paulson two years prior. By contrast, JPMorgan CEO Jamie Dimon did not attend. (Goldman Sachs has said that Blankfein left after twenty minutes, realizing he was the only chief executive present. But the person who was there says Blankfein was directly engaged in at least one full AIG meeting that Monday, appearing “ashen-faced” and “jumpy.”)

On the government side, Goldman was also well represented: Geithner himself had never worked for Goldman, but he was an acolyte of former Goldman co-chairman and Clinton Treasury secretary Robert Rubin. Former Goldman vice-president Dan Jester served as Paulson’s representative from the Treasury. And though Paulson himself wasn’t present, he didn’t need to be: He was intimately aware of Goldman’s historical relationship with AIG, since the original AIG swaps were acquired on his watch at Goldman.

The Goldman domination of the meetings might not have raised eyebrows if a private solution had been forthcoming. But on Tuesday, Paulson reversed course and announced that the government would step in and save AIG, spending $85 billion in government money to buy a majority stake. The argument was that AIG was not only too big to fail but too interconnected: The loss of the billions it owed to the banks and other counterparties could collapse the global financial system. The plan was to sell off the insurer for parts and pay the banks their cash collateral.

Of the $52 billion paid to AIG’s counterparties, Goldman Sachs was the biggest recipient: $13 billion, the entire balance of its claim. The amount was surprising: Banks like Merrill Lynch that had bought credit-default swaps from failed insurers other than AIG were paid 13 cents on the dollar in deals moderated by New York’s insurance regulator. Eric Dinallo, the former New York State insurance commissioner, who was at the AIG meetings, characterizes the decision this way: AIG’s counterparties, Goldman being the most prominent, “got to collect on an insurance policy without having the loss.”

Over time, it would appear to many that Goldman Sachs had received a backdoor bailout from a Treasury Department run by the firm’s former CEO. Why did Paulson bail out the banks that did business with AIG, critics have demanded ever since, and not Lehman Brothers? Certainly executives at Lehman want to know. (As one former Lehman managing director there puts it, “The consensus is that we were deliberately fucked.”)

Goldmen: Former CEO turned Bush Treasury secretary Hank Paulson and current CEO Lloyd Blankfein.Photo: From top: Karen Bleier/Getty Images; Haraz N. Ghanbari/AP

So does former AIG CEO Hank Greenberg, the man who made the insurer into a corporate giant. Greenberg had wanted Paulson to give AIG’s clients a government-backed guarantee on the money owed rather than paying them cash and essentially liquidating AIG. Last November, while in China at a business conference, Greenberg confronted Blankfein about Goldman’s role in the demise of his company. “I couldn’t understand what went on that AIG was forced into ownership by the government at terms that were outrageous and Goldman was present at that meeting,” he says. “It’s outrageous. This whole thing is disgraceful.”

Somehow not recognizing (or perhaps not caring about) the brewing backlash, Paulson continued to appoint Goldman Sachs alumni to positions of power after the AIG decision—he named Edward C. Forst, a former head of Goldman’s investment-management division, to help draft the $700 billion Toxic Asset Relief Program (of which $10 billion went to Goldman Sachs), and then Neel Kashkari, a former Goldman V.P., as the TARP manager. And of course Edward Liddy, former Goldman board member, was already serving as the new CEO of AIG. Suddenly, everywhere you looked, men who had passed through the Goldman gauntlet of loyalty and rewards were now in key positions overseeing the rescue of the financial system.

The appearance of a government of Goldman enablers didn’t improve when Stephen Friedman, serving as both a board member at Goldman Sachs and chairman of the Federal Reserve Bank of New York, bought 52,600 shares of Goldman stock while he was supposed to be responsible for the firm’s oversight. Friedman had a temporary waiver saying he could still act as a Goldman board member, but it was hard to shake the impression that Friedman had sidestepped the rules, particularly since the subsequent rise in Goldman’s share price made him $3 million richer. (In May, he resigned from the Fed over the alleged conflict of interest.)

The company was earning its nickname: “Government Sachs.” Dating back to Sidney Weinberg, the firm’s legendary chairman who served on the War Production Board in the forties, the natural course of power for a Goldmanite has been to make money at the firm and then make a name for himself in government. The underlying rationale for the appointments has been that Wall Street people understand the economy intimately and Goldman Sachs people are the best of Wall Street. In the past, the firm’s influence was implicit rather than explicit, a quiet effort to deregulate markets. “The interest of the Street, dominated by Goldman Sachs, has been to have markets that are opaque, inefficient, and unregulated,” says Peter Solomon, chairman and founder of the investment bank Peter J. Solomon Company. “And that’s been the policy for twenty years. That’s what the world is reacting to.” In the aftermath of AIG, the firm’s government connections have come to look like a conspiracy of outrageous self-interest—the ultimate hedge protecting their investments. As one Wall Street executive at a competing bank puts it, “ ‘What about Goldman?’—that’s their natural default position.”

John Rogers, whom Paulson offered a job in the Treasury three years ago, tries to dismiss the influence of Goldman’s many ex-employees in Washington. “In reality, it ends up hurting us,” he argues. “People from here who serve in government bend over backwards to avoid even the suggestion that their behavior might be thought of as inappropriate, and we are certainly constrained in our ability to talk with them.”

Both Rogers and Paulson (who’s publishing a book this fall that will presumably attempt to justify his decisions and save his damaged legacy) have argued that the AIG decision was about saving the system as a whole, not Goldman in particular. Specifically, they say that buffering the foreign banks was more important because their dissolution threatened the economies of entire countries. “There was an immediate misunderstanding of what was involved in it,” says Rogers.

They also argue, in a bit of circular logic, that the government couldn’t have saved Goldman Sachs because Goldman Sachs didn’t actually need saving. Goldman only accepted the Treasury’s $10 billion TARP loan—which came with certain strings attached, like requiring the firm to convert to a more garden-variety bank-holding company and promise taxpayers a return on their investment—because Paulson essentially forced it to take the money in his effort to gird the entire market. Goldman, after all, had a reputation for consistently outmaneuvering and outperforming its competitors. While everyone went left, Goldman Sachs tacked right, covering its bases, hedging its bets, outplaying the board. Goldman Sachs was on the winning side of trading positions that ended up blowing a $10 billion hole in Morgan Stanley. Similarly, they say, when it came to AIG, the firm was “prudent” in hedging its bets, buying credit-default swaps from Bank of America, JPMorgan, Société Générale and other banks in case AIG failed to pay the money it owed Goldman—in effect, hedging its hedge against the mortgage market. Goldman Sachs had no “material exposure” to AIG, they argue. One senior executive goes so far as to suggest the firm might even have benefited from AIG’s demise. “We might have done very well,” he says, “but I wouldn’t be so presumptuous as to say that. Who knows?”

Not a single Wall Street executive I spoke with, including several Goldman Sachs alumni, believe those hedges would have survived an overall collapse of the financial system. A large loss would have been inevitable as lending evaporated, and Goldman Sachs would have struggled to shrink the company to a fraction of its size overnight. But the most glaring argument against Goldman is Goldman’s own: If AIG’s biggest and most important bank customer was hedged against losses in AIG, as it claims, why did the government need to pay Goldman Sachs the full $13 billion?

Lost in the haze of Goldman’s recent record profits is the fact that the firm nearly went under even after the AIG bailout last fall. As the market continued to plunge and Goldman’s stock price nose-dived, people inside the firm “were freaking out,” says a former Goldman executive who maintains close ties to the company.

Many of the partners had borrowed against their Goldman stock in order to afford Park Avenue apartments, Hamptons vacation homes, and other accoutrements of the Goldman lifestyle. Margin calls were hitting staffers up and down the offices. The panic was so intense that when the stock dipped to $47 in intraday trading, Blankfein and Gary Cohn, the chief operating officer, came out of the executive suite to hover over traders on the floor, shocking people who’d rarely seen them there. They didn’t want staffers cashing out of their stock holdings and further destroying the share price. (Even so, many did, with $700 million in employee stock liquidated in the first nine months of the crisis.)

Meanwhile, there were huge losses for Goldman’s clients in souring investments, many of which Goldman executives and their network of alumni were also vested in. Its premier hedge fund, Global Alpha, which had already been crushed in 2007, was getting pummeled again. Its Whitehall real-estate funds suffered $2.4 billion in losses, hammering not only clients but also employees, including COO Jon Winkelried. In a panic, Winkelried put his $55 million estate in Nantucket up for sale and likely would have had to liquidate his stock to raise funds. To avoid that outcome, Goldman agreed to buy Winkelried out of his investment, paying him $19.7 million. Another of the higher-ups, the firm’s general counsel Greg Palm, was covered for $38.3 million. (Winkelried has since resigned. His Nantucket estate is still on the market, at a reduced asking price.)

As more employees were hit, the company started a loan program to bail out more than a thousand staffers. Rogers says very few ended up taking loans from the company. “Only a handful of people had difficulties,” he says. “I wouldn’t describe it as a crisis … It was a stressful time for everyone, and some people might have questioned whether they had made the right career choice.”

The stress was compounded by the fact that the company had laid off 10 percent of its employees, about 3,000 people. A person with close ties to the firm says employees were escorted to the elevators with their belongings by security guards. The company also purged its partnership—the elite circle of about 443 senior executives who share in a special bonus pool. So-called de-partnering is considered a humiliating event at Goldman Sachs. “They were quite harsh,” says a person familiar with Goldman Sachs’s personnel activities. “This was one of the most traumatic by far.” Regardless, Blankfein announced that top executives would receive no bonuses anyway, only their $600,000 base salaries, because the firm had performed poorly. Soon Goldman would report its first quarterly loss as a public company. With the market crash threatening the stock price and compensation, several Goldman alumni discussed with top management the possibility of taking the company private to escape further distress to the firm.

Salvation came on November 25, a few days after Goldman’s stock price plunged to $52 a share, down from the year’s high of $200 and the lowest price the company had seen since it went public. Again, the white knight was the government. It turned out that Goldman’s conversion to a garden-variety bank-holding company offered an amazing advantage: Goldman now had access to incredibly cheap money. Exploiting its new status, Goldman became the first financial institution to sell $5 billion in government-backed bonds through the Federal Deposit Insurance Corporation, which allowed Goldman to start doing deals when the markets were at a near standstill. “Goldman was desperate for it,” says a prominent Goldman alumnus. “Everybody knows it. Those FDIC notes they got were lifesaving because they couldn’t issue any debt. If it had gone on another week or two, Goldman would have failed, they would have gone the way of Lehman, and you’d be talking about Lloyd the way you talk about [Lehman CEO] Dick Fuld.”

The FDIC had intended to stimulate lending to consumers with the bonds, but Goldman had no street-level banking, nor did it intend to fundamentally alter its business model. But it could certainly have used the bonds to create leverage and maximize its trading profits. (A Goldman spokesman insists the company had “ample reserves” without the bonds.)

Before the market crashed, Goldman Sachs was betting 28 times its underlying capital. After the events of the fall, it bet half that: $14 for every dollar it had on hand. But that was still more than its nearest competitor, Morgan Stanley, was willing to gamble. And it appeared to be more than enough to spawn a massive turnaround. Even before its first-quarter results, the firm announced it was prepared to pay down its TARP loan and throw off the regulatory cap on the compensation it could pay its employees.

There is no evidence that Goldman was directly gambling with taxpayer money. But it seems clear that none of this would have been possible without government intervention—without the AIG bailout, the TARP money, the FDIC bonds, the fact that without Lehman Brothers it had one less competitor in the field.

This doesn’t sit right with some. “Much of their recent profits seemed to be derived from ‘trading,’ which typically means gambling—not lending,” says Joseph Stiglitz, the Nobel Prize–winning economist who teaches at Columbia University. “It is lending which is required if our economy is to be revived; it was gambling that got our financial system into trouble.”

Even Goldman alumni were struck by the company’s shameless posture in ramping up the leverage again so soon after the government bailouts. “It’s a statement of arrogance,” says one former executive. “What they’re saying by keeping leverage high is, ‘We’re smarter than anybody else.’ ”

On a recent tour of the company’s 50th-floor trading office in One New York Plaza, the place has the feel of being back to business as usual. A sea of twenty- and thirtysomethings in pink and blue button-down shirts huddle around screens, discussing strategies for trading stocks and bonds. As I pass through the acre of computer terminals accompanied by a nervous PR handler, the overheard dialogue is narrow: “Tom made a lot of money,” says one young trader to another. “The bar is super-high,” says a man on a cell phone who still has a store tag stapled to the back of his pants. “Not a little bit high—super-high.” In a small back office, a bald trader with sleeves rolled to his elbows hovers over a table of men at computers, repeatedly slapping his hand with a wooden cricket bat. They don’t seem superhuman exactly, just singularly focused.

There’s been a lot of head-scratching of late about how it is that Goldman does what it does, namely make more money than anyone else.

“People say, ‘What’s the secret sauce?’ ” says Rogers. “Well, one of the most important ingredients in the sauce is the culture.”

The firm’s culture has been compared to, variously, the Army, the KGB, the Mafia, Skull and Bones, a cult. It’s not just about attracting the best and brightest but transforming them into a giant, perfectly synchronized trading machine. Staffers tend to socialize together, reside in the same apartment buildings in Manhattan, have summer homes around the same ponds in the Hamptons, send their kids to the same private schools. Fitting in is of the utmost importance. Subtle social tics—a bow tie, a mustache, a colorful personality—can eliminate you from the club.

“The cult of the individual, which I think has been a disadvantage to so many of the firm’s competitors, really doesn’t exist here,” says Lucas van Praag, the British-born communications director. “The more you have acceptance, the easier it is to be effective.”

As another Wall Street veteran familiar with the firm’s mores puts it: “The god is Goldman. You subjugate yourself to that god, and in return we will make you a gazillionaire.”

But the groupthink is only a social manifestation of the giant hive mind that really makes Goldman tick. Because it transacts deals both as a trading house for huge institutional investors and as a fee-based adviser to the companies being traded, the firm has become a huge repository for information, with a view into what everyone is doing. So if a big investor wants to buy into, say, the energy market, Goldman Sachs, by virtue of its knowledge of what other big investors are trading and what its corporate energy clients are doing (on Goldman’s own advice), can offer a highly accurate view of what’s likely to happen with the energy market. It can also do damned well on its own energy trades—in fact, before the market crashed, the firm made vast profits on “proprietary trading,” bets made on its own balance sheets.

On Wall Street, there are two interpretations of this business model: Either the firm is so brilliant at making near-riskless bets that it continually attracts more clients, who don’t mind being used for the golden database if it means more profits for them—or it’s a giant casino in which the house has gamed the system by knowing every hand at the table and using that information to enrich itself at the expense of others.

“If you’re able to use information and share it, you have a huge advantage over anybody but the energy companies themselves in their own trading businesses,” observes Frank Suozzo, a Wall Street analyst who spent ten years covering Goldman Sachs for AllianceBernstein. “That is Goldman’s advantage. Basically, it is legal card-counting, which most clients accept as a necessary evil to deal with the company with the most information.”

Goldman claims that there is a Chinese Wall between the advisory business and the trading business. “There are rules and laws regarding information sharing, and we scrupulously follow them,” says a company spokesman.

But two former clients told me they had observed firsthand how Goldman traded against their interests to improve its own bottom line—one who didn’t like it, the other accepting it with a shrug and saying, admiringly, that Goldman’s ability to convince the world that it is a “client-oriented” business was its most masterful PR coup.

Goldman’s profiting from this ethical gray area was exemplified by the real-estate market and the subprime-mortgage collapse: Goldman Sachs sold subprime-mortgage investments to its clients for years, but then in 2006 began trading against subprime on its own balance sheet without informing its clients, a hedge that ultimately let it profit when the real-estate market cratered. For some, this was a prescient call; for others, a glaring conflict of interest and inherently dishonest, since the firm let its clients take the fall.

Goldman’s penchant for playing all sides has been business as usual for years, but no one really paid much attention—partly because the economy was booming and there seemed to be plenty of profit to go around. But what once seemed like ruthless laissez-faire capitalism now looks like a rigged market in which Goldman Sachs has far too much control. Earlier this month, Goldman had an ex-employee arrested for allegedly stealing computer codes that could be used, as the prosecutor noted, “to manipulate markets in unfair ways.” Some hedge-fund traders and financial bloggers have speculated that Goldman itself could have been using the codes for the same purpose.

“The god is Goldman. You subjugate yourself to that god, and in return we will make you a gazillionaire.”

Now attention is turning to Goldman’s dominance of trading on the New York Stock Exchange—as the exchange’s biggest high-speed program trader as well as a provider of liquidity to other traders—and whether that ubiquity has afforded the firm undue advantage. If Goldman’s database knows nearly every trade that is about to be made, sophisticated computer codes could, theoretically, instantly execute fail-safe trades on Goldman’s behalf milliseconds beforehand. This, some are insisting, is where the company is manipulating the markets and making hundreds of millions of dollars a day.

Goldman executives characterize such theories as “distortions” by paranoid people who see “black helicopters” hovering over the company’s every move, those who subscribe to the “witches’ brew of conspiracy,” as van Praag puts it. The company’s sensitivity to its negative press is extraordinarily high: When an investor in Florida named Mike Morgan built a tiny website called goldmansachs666.com, a clearinghouse for negative Goldman Sachs news, the company threatened to sue him for trademark infringement. (Morgan has since sued Goldman Sachs.) And when Matt Taibbi of Rolling Stone called the company the root of all evil, Goldman executives actually seemed hurt. “We are painfully conscious,” van Praag told the New York Post, “of the importance in being a force for good.”

It’s possible that the jig is up for Goldman Sachs. The increased scrutiny, the damaged reputation, the populist outrage—the events of the past year could put a crimp in how the firm does business.

Historically, Goldman has been able to translate its reputation into financial leverage. “It’s the difference between charging 3 percent on a deal and 4 percent on a deal,” says a person who has dealt with the firm. Over time, that difference has added up to the edge Goldman has over its rivals. It also helped the firm attract the best talent—the “chosen ones,” as one former staffer put it, who thought of Goldman as a higher calling and had an eye toward a future Treasury post.

Now that the firm is viewed as a virtual rogue state with interests contrary to the greater good, Goldman might attract a different breed of recruit—less Robert Rubin, more Gordon Gekko. Or fewer recruits in general: A human-resources executive at Goldman Sachs, Edith Cooper, says she counted about 20 percent fewer people at recent on-campus recruitment seminars. A Wharton graduate who interned at Goldman Sachs says many fellow finance majors are looking elsewhere. “Before, it had this aura: finance, Goldman,” he says. “[Now] it seems to be a little less the case.”

Several high-profile executives have left the firm in recent months, including Byron Trott, the Chicago-based banker who had managed one of the firm’s most important relationships, namely Warren Buffett, who invested $5 billion in the company during last year’s tribulations. Trott was a major figure at the firm, and his departure signaled that he might actually do better without the Goldman brand.

What Goldman Sachs executives fear most is that the firm will go from a special institution to just another bank. Two managing directors at the company express regret over how the culture has changed recently. Infighting over business deals—and the financial rewards that go with them—is more prevalent now, say these people. In the past, “it was about we, not I,” complains one unhappy Goldman executive. “It was a place where we all got rewarded on the overall success of firm … It’s gradually becoming like everybody else.”

“They’re never going back to the old days,” says one Goldman alumnus. “They’re going to be under an increased level of scrutiny. People are going to look at their compensation.”

Indeed, Goldman’s return to massive profits has made it a natural target for arguments over new regulatory policies and whether Congress is serious about reforming the rules that govern the firm.

Blankfein has tried to mitigate the potential damage, calling members of Congress the week Goldman’s second-quarter profits were about to be posted to assure them that the firm would be responsible about how it compensated executives at the end of the year. The move echoed a long speech he gave in April arguing for Goldman’s responsible self-governance, acknowledging that executive pay looked “self-serving and greedy in hindsight” but also warning against an overly aggressive regulatory response “that is solely designed to protect us against the 100-year storm.” It was hard to forget, however, that Blankfein had recently rewarded himself with the highest payouts in Wall Street history, $53 million in 2006 and $68 million in 2007.

“There’s so much negative feeling toward what Lloyd got paid,” says a prominent Goldman Sachs alumnus. “Yes, it’s a good firm, but what does it do for society?”

That’s the question facing Congress, where Tim Geithner’s proposed financial reforms are currently facing Representative Barney Frank, of Massachusetts, the leader of the House Financial Services Committee. Frank has positioned himself as a populist ready to bring a firm like Goldman Sachs—“the poster boy for the bill”—to heel. Interestingly, Goldman Sachs has already prepared a prudent hedge against Frank, hiring a former top staffer from Frank’s office, Michael Paese, to run the firm’s government-affairs office. “Yes, I am well aware of that,” says Frank, mentioning that he has not met with Paese in his new role and was surprised that he took the job. “And I will be absolutely careful with my staff, that nobody thinks there’s the slightest bit of advantage to be gained by hiring them.”

Out of political necessity, all of Washington appears to be turning a cold shoulder toward Goldman. A senior Obama-administration official close to Tim Geithner declares that “Goldman has left the building.” Onetime Goldman lobbyist and now Treasury chief of staff Mark Patterson has taken a public beating for his connection to the firm. And John Thornton, a former president at Goldman Sachs, was passed over as ambassador to China because his relationship to the firm “concerned” the Obama administration, says a person familiar with the situation. “It used to be if you were a senior Goldman person and you were considered for a position, you’d have an advantage,” this person says. “Now it’s clearly a disadvantage.”

Of course, it will take a lot more than that to truly dampen Goldman’s influence in Washington. As financial writer Michael Lewis recently said, the Obama administration, led by Geithner and the White House’s National Economic Council director, Larry Summers, continues to operate from an economic worldview shaped by people who “believe that the world can’t function without Goldman Sachs.” Goldman also has a key ally in Obama’s chief of staff, Rahm Emanuel, a former investment banker and onetime adviser to Goldman Sachs who frequently solicited campaign funds from the firm while working with the Clintons. And in mid-July, the week Goldman Sachs announced its massive second-quarter profits, the administration quietly hired Robert Hormats, another Goldman executive, as an economic adviser to Secretary of State Hillary Clinton.

Ultimately, Goldman Sachs probably still has the nod and the wink it needs to continue to rake in profits with impunity. And even if tighter regulations do pinch the firm, it has a long history of figuring out how to prevail in any regulatory environment. “If [you] looked at the history of regulatory changes that have happened,” says Rogers, “they’ve improved the markets by and large, and Goldman Sachs actually benefited historically from all those changes.”

The idea that things might just go back to the way they’ve always been on Wall Street is, of course, infuriating to those who had hoped the financial meltdown would be an opportunity for reform. A few days after Goldman reported its second-quarter profits, Eliot Spitzer, a critic of the AIG bailout, tells me: “If all we are getting are newly empowered and capital-rich hedge funds that benefit from market volatility, then we are not only rebuilding the same edifice, but we’re contributing to the underlying rot in our economy.”

In the end, Goldman’s reputation is a luxury they may well be able to do without. Robert Rubin has been privately critical of how the firm has handled the threats to its prestige, and Rogers recently addressed the firm’s reputation in seminars with Goldman staff. But a person who frequently talks to senior executives at Goldman sums up the company’s attitude this way: “If we can push the envelope without D.C. punishing us, we don’t care about our Main Street reputation.” Blankfein in particular is said to be dismissive of the firm’s critics. According to a person close to him, the CEO believes Goldman’s internal problems will disappear once compensation comes back. In other words, money will solve everything.

With enough money, perhaps he can even get the taxpayers off his back. Last week, Blankfein took a stab at assuaging public anger by paying a $1.1 billion return on the government’s $10 billion investment last fall—not a bad profit. It was a shrewd move, a prudent PR investment that prompted a round of stories about the firm’s “generosity to taxpayers.” Feel better?

Tenacious G