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Tenacious G

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Goldmen: Former CEO turned Bush Treasury secretary Hank Paulson and current CEO Lloyd Blankfein.  

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?”


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