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Broke Bankers

When the liquidity crisis gets personal.

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On the evening of July 25 last year, as global markets trembled, Jon Winkelried, Goldman Sachs’ co–chief operating officer, rode Ricochet Rascal, one of his many horses, into a show ring in Texas. Winkelried, wearing a cowboy hat, was taking part in the National Cutting Horse Association’s amateur championship.

Winkelried did not win the event, which requires riders to separate cows from a herd using their mounts, but he placed a decent eighth, picking up a $4,190 prize. He needed more than that.

Last week, the 49-year-old Winkelried left Goldman after one of the most bizarre episodes in the company’s history: One of its wealthiest employees on paper, Winkelried was nonetheless facing a liquidity crisis last fall and had to be bailed out by Goldman, to the tune of $19.7 million. Despite having millions of dollars in assets, he had run out of cash.

Winkelried’s “retirement” has prompted both embarrassment and amusement inside buttoned-down Goldman. He was a star in the company and might have succeeded Lloyd Blankfein as chief executive. He owns $318 million worth of Goldman shares, $40 million in Goldman hedge and private-equity funds, a Nantucket estate, and a ranch in Colorado. But with most of his money tied up in long-term investments, Winkelried relied on his annual cash bonus ($27 million for 2007) to pay for his homes and ranching hobby. His Marvine Ranch, a cattle and horse operation, required a particularly large amount of liquidity (Winkelried had paid $460,000 for a breeding mare in 2005). When it became clear last fall that Goldman’s annual bonuses would not be paid out this year, Winkelried placed the Nantucket home on the market for $55 million. It didn’t move. He could have sold his Goldman shares, but that would have been publicly disclosed and might have panicked investors. And so instead, Goldman offered cash in exchange for a third of his stake in the internal funds.

The fact that a senior executive of a bank that prizes discretion should have been brought down by his rodeo-horse habit is astonishing. But Winkelried was not alone in feeling the pinch. Goldman reached a similar bailout deal with Gregory Palm, its general counsel, and has offered loans to 1,000 of its employees who invested in its funds.

Across Wall Street, many bankers are now going through a liquidity crisis similar to the one that afflicts the institutions that employ them. They relied on bonuses to support lavish lifestyles, and now do not have enough in their checking accounts to meet their household bills. This same short squeeze has been dragging down the stock market since October, as hedge funds and mutual funds have had to sell shares quickly to meet investors’ demands for cash. It exposed Bernie Madoff in December, when he no longer had any assets to turn around and sell.

Funding illiquid long-term investments by short-term borrowing—that is, having mismatched assets and liabilities—is the oldest financial trap of all. It took down Bear Stearns and Lehman Brothers, and now it is squeezing the bankers themselves. Even the rich can be repossessed.

Gapper is a columnist for the Financial Times.

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