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.