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.”