The squid and the whale

Money and Power: How Goldman Sachs Came to Rule the World, by William D Cohan, Doubleday, RRP$30.50, 658 pages / Allen Lane, RRP£25, 672 pages

One telling detail in William Cohan’s exhaustive, revelatory account of the rise and rise of Goldman Sachs is why Josh Birnbaum, one of the traders who made its now infamous “big short” bet against the US subprime mortgage market in 2007, left Wall Street’s leading investment bank. Birnbaum had been given a bonus of $10m for helping to make Goldman $3.7bn that year and regarded himself as underpaid.

“I guess it depends on your perspective of what’s fair, right?” he told Cohan in an interview. “If you’re a steelworker, you probably think I got paid pretty well. If you’re a hedge fund manager, you probably don’t.” Birnbaum, one of the Goldman employees excoriated last year at a Senate hearing on the 2008 financial crisis (along with Fabrice “Fabulous Fab” Tourre, the Goldman trader who faces securities fraud charges for alleged misselling) now works at a hedge fund.

The gap between what Goldman and its partners think is fair and what other mortals do looms large throughout this very long (more than a quarter of a million words) yet engrossing book. From a steelworker’s perspective, or that of pretty much anyone outside Wall Street as well as quite a few inside, Goldman’s reputedly smooth and disciplined culture is less admirable than the bank thinks, successful though it has been financially.

Cohan is no Matt Taibbi, the Rolling Stone essayist and Goldman scourge who famously described the bank as “a great vampire squid wrapped around the face of humanity”. By nature, he is more of a sympathetic listener, at his best once he has found a few people on the inside to pump for gossip – as his previous books on Lazard Frères and Bear Stearns showed. Yet the journalist and former investment banker squares up to Goldman, a bigger and trickier target, with due scepticism.

He goes into rigorous detail not only about Goldman’s damaged reputation but its past scandals, of which there were a litany in spite of its adeptness at airbrushing history. Only occasionally does Cohan, who won the FT/Goldman Sachs Business Book of the Year award in 2007 for The Last Tycoons, his portrait of Lazard, get lulled by his former patron into taking its view at face value.

Take, for example, air travel. It is an article of faith at Goldman that its success owes much to its relentless effort to stamp out flamboyance and displays of individualism (more successfully in its lower ranks than at the top). Cohan recounts an old Goldman mantra about the strengths of its partnership culture: “Our bankers travel on the same planes as our competitors. We stay in the same hotels.”

Yet Cohan notes with empathy the hardship suffered by Hank Paulson, Goldman’s former chief executive and the former US Treasury secretary, who cut back on his use of corporate jets after Goldman got into trouble in 1994. Paulson, he writes, “recalled gruelling overseas trips flying around Europe and Asia on commercial flights, waving the Goldman flag with clients and nearly falling asleep in the meetings”.

Good Lord! Surely he was not forced to fly on the same aircraft as non-bankers? Talk about cruel and unusual punishment. This, by the way, is the bank whose former senior partner Sidney Weinberg was famed for travelling by subway in New York during the 1930s and 1940s. Goldman’s standards of asceticism have clearly altered over the years.

The story of the modern Goldman is encapsulated in the contrast between how it handled the 1994 crisis, when bond yields rose sharply and its traders in London were squeezed, and the 2008 financial collapse. In the first crisis, it still had some of the improvisational, free-wheeling quality evident in its early days as a tiny commercial paper dealer. By 2007, it was a more disciplined force and broke decisively from the Wall Street pack as a result.

Cohan recounts the “suck it and see” or “if you want to take a big position, try it” approach to risk-taking under Robert Rubin, its former joint senior partner. Rubin left to join the Clinton administration in 1993 and later became the ultimate Goldman political insider as Treasury secretary. That left Steve Friedman, a banker with less experience of – or instinct for – trading, in sole charge just as things went south in 1994.

The result was a near-fatal disaster that triggered the flight of many partners and a decade of management in-fighting. Friedman himself departed, complaining of stress and a heart flutter. It left Jon Corzine, later governor of New Jersey, running the bank with Paulson as his second-in-command. The duo did not get along and Corzine was forced out in a coup involving John Thain and John Thornton. They became Paulson’s deputies but when Thain joined the New York Stock Exchange, Paulson squeezed out Thornton and cleared the way for Lloyd Blankfein, Goldman’s current chief executive.

At the top, in other words, Goldman was very far from the image of stability and seamless partnership it projected. “First of all, who were the senior partners of the firm? John Weinberg, Bob Rubin, Steve Friedman, Jon Corzine, Hank Paulson. Five CEOs in 10 years,” one partner told Cohan. “I mean, I can’t even name a company, let alone a decent one, that’s had five CEOs in 10 years. In 1994, literally, people thought we were going bankrupt.”

Compare the period leading up to the 2007 mortgage crisis, which Cohan tells largely from Birnbaum’s perspective. Blankfein, who rose through the trading ranks, had by then not only taken unambiguous managerial control but imposed a more methodical approach to risk. As a result, Goldman’s “big short” brought in so much cash that it was able to mark down its $10bn mortgage book aggressively, causing severe pain across Wall Street as others had to follow its lead.

You might think that disciplined profits were preferable to ill-disciplined losses but Goldman’s success – following the collapse of American International Group and the Wall Street bail-out – caused the biggest reputational crisis the bank has known. Its competitors resented it for, as they saw it, deliberately squeezing them to make a profit. The public loathed its wealth and regulators seized upon its sale of collateralised debt obligations while it was shorting the market.

Goldman saw nothing wrong: it was business as usual, which it had been able to conduct out of the public eye for most of its life. “We respect the market,” Gary Cohn, Goldman’s president and Blankfein’s closest lieutenant, told Cohan. “The reality is that everyone was kind of – I’m not going to say living a lie – but they were in dreamland, to a certain extent, and they weren’t willing to own up to it.”

The bank, however, carried on mismarking its position in terms of public opinion, believing that everyone else would come around to its Darwinian approach – it was the fittest and it did not matter if anyone else survived. In practice, it further alienated rivals for whom the “Goldman way” was already synonymous with exploiting information gained from its clients. Its blithe assumption that it could wiggle around conflicts of interest unravelled, culminating in the Securities and Exchange Commission charging it with securities fraud (it later settled and paid a $550m penalty).

“If I’m a widget company and I’m using Goldman and they’re analysing my information for a potential sale of it, or an IPO of it, or whatever, and they see that my daily orders are declining,” one private equity executive told Cohan, “Well, they take that information and they go, ‘Holy shit. We need to short the widget industry. That’s their business model! ... I don’t understand how that’s legal.’”

Such insights make Money and Power the most penetrating of the three major attempts to tell the Goldman story. Lisa Endlich and Charles Ellis, the authors of previous Goldman books, suffered to differing degrees from being too respectful, although Ellis dug up valuable material. Cohan was lucky – Goldman’s halo was dislodged halfway through his research and he was handed a story.

He also made the most of its weakened ability to make its junior ranks toe the company line. In 1994, its partners mostly obeyed the call to support the bank through its travails, although their life savings were at risk of being wiped out. Less than 15 years later, Birnbaum fled the now-public company before being made partner because he viewed a $10m bonus as insufficient.

It is hard to read his internal self-evaluation – “My performance in 2007 has been my best ever by any objective means” – without wondering what had become of the old Goldman, or at least the one of myth. That boastful tone, the Alpha male foghorn of self-regard, is common in the ranks of other Wall Street banks but not, surely, at the cadre-like Goldman?

Such a lapse into individualism is a bigger long-term threat to the bank than being portrayed as ruthless and evil. Even Taibbi’s conspiracy theory prompts some awe for the brute efficiency of the organisation he argues has been at the heart of a series of financial boondoggles. If Goldman’s employees are actually sole traders and their employer is, as one financier suggests, “kind of hugely mediocre”, what is there to fear? Against this, Cohan quotes one former partner who argues that Goldman remains uniquely disciplined: “They are able to sort of turn their head away from the immediacy of a trade, or a piece of business that doesn’t have all the things they are looking for, and really focus on the biggest, most important deals ... They’re always whale hunting. They’re not out to catch fish every day.”

Which view should we take more seriously? It is hard to decide from this account. Cohan revels in a good bust-up and lingers over anecdotes involving intrigue as if willing Goldman to be as ego-driven and flaky as Lazard (in its former incarnation) or Bear. He describes Paulson’s insistence on one partner retiring early as “perfectly Shakespearean”, adding: “Michael Corleone had nothing on Hank Paulson.” This attempt to fit Goldman into the same dramatic box does not quite convince.

The reader’s perspective is also limited by the lack of a sense of the world outside Goldman. Decades drift by during which Wall Street was undergoing big changes – from deregulation of securities broking in 1975 to the choices of rivals such as Morgan Stanley to merge with retail brokers and commercial banks – yet little of this penetrates the narrative’s treatment of Goldman as a world unto itself.

Cohan may have found it hard to squeeze any more material in. Once the bank decided he could not be stopped from writing about it, it seems to have adopted the canny tactic of trying to wrestle him into submission with sheer volumes of information. All the senior partners still living spoke to him, often very candidly, and only a few from the next ranks seem to have refused, notably Thornton.

That left him with a vast trove of material but a severe challenge in drawing a coherent conclusion. In the end, he lays out his research and leaves it for readers to judge which of these Goldmans is real – the cadre, the mob, the squid, or some combination of them all.

The bank that has merged from its post-crash drubbing does not appear quite so impregnable or impressive as before. But it has not lost all of its veneer, to judge by what Cohan writes about the presumably fraught (to judge by past episodes) contest to succeed Blankfein – not a word. Goldman still has some secrets.

John Gapper is chief business commentator of the FT

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