Book Review: Money and Power: How Goldman Sachs Came to Rule the World by William D. Cohan
How does the investment bank make so much money? It's actually simple
Money and Power:
How Goldman Sachs Came to Rule the World
By William D. Cohan
Doubleday 658 pp; $30.50
It's a bit scary when a 658-page history of an investment bank seems destined to be a runaway best-seller. Such is the wonder of Goldman Sachs (GS). In 2009, William D. Cohan wrote one of the financial crisis oeuvre's most memorable tomes, House of Cards, about the swift collapse of Bear Stearns. With Money and Power, he's found his way to the other side of the spectrum. And on that end, there's no shortage of Goldman clients, rivals, and former employees willing to explain how greed and recklessness—the same qualities that doomed Bear's balance sheet—led Goldman to become too big, too powerful, and even too conflicted to fail. As one Goldman alum puts it, "I saw what they did to their customers. ... They'd steal from them, rape them, anything they could do." It worked like a charm.
Given Goldman's bare-knuckled attitude, Cohan depends on a wide range of unnamed sources. Judiciously relying on their insights, he has produced the frankest, most detailed, most human assessment of the bank to date. Yet the firm winds up looking in many ways like nothing more than a slightly brighter, slightly less foulmouthed version of Bear; it's just as greedy, just as arrogant, and just as prone to mistakes. Though Cohan acknowledges the firm's extraordinary ability to recruit and indoctrinate the best and brightest, what seems to truly set Goldman apart is its ability to be a half step quicker than its rivals in correcting itself.
After all, this is a firm that periodically eviscerates those who trust it most. In the 1920s, Goldman ran a Ponzi-like scheme involving investment trusts. In the 1970s, it peddled soon-to-be-worthless commercial paper for the soon-to-be-bust Penn Central Railroad. And, in 2007, the firm that prided itself on being "long-term greedy" sold gullible clients on the merits of mortgage-backed securitieswhile simultaneously shorting some of those same debt obligations. The firm has succeeded, in part, by ignoring these nastier aspects of its past. In fact, Goldman never misses an opportunity to celebrate the holier-than-thou principles laid down by former senior partner John Whitehead. Rule No. 1: Our client's interests always come first.
Money and Power suggests the bank does possess a few special powers, starting with its remarkable ability to convince some of the world's smartest young people that touting stocks, sniffing out arbitrage opportunities, and shaking down corporate clients amount to a noble calling. One illuminating anecdote in Money and Power concerns Robert Rubin, the former Goldman head who would go on to become Treasury Secretary under Bill Clinton. During his third year at the firm, back in 1969, Rubin's career path may have hit a rough patch. Sandy Lewis, who at the time ran the arbitrage department for a rival bank, tells Cohan that Rubin approached him regarding a job opportunity. Lewis explains that Rubin had grown disgusted with the Goldman way. "It's a dishonest mess," Lewis recalls Rubin saying to him, "that's making honest people dishonest."
Whether or not Rubin was seriously looking outside the firm, he stuck around and soon led Goldman into areas that had previously been considered off-limits—such as asset management—for fear of potential conflicts with clients. A former top partner—unnamed, but in a position to judge the firm's swelling appetite for profits at any cost—says Rubin encouraged a culture of undisciplined risk taking. "A lot of these practices were set up when [Rubin] was there," he tells Cohan. "The lack of a risk committee, trusting individual partners ... and letting traders become too important and being afraid to confront them if they've been big moneymakers. All that sort of stuff built up."
As profits swelled under Hank Paulson, and then Lloyd Blankfein, Goldman was edging further into trading money for its own account—and pushing the boundaries of what had previously been considered an acceptable conflict of interest. Simultaneously, the bank became more obsessive about managing the darker side of its sprawling empire. A reputational risk department, staffed by former CIA operatives and private investigators, vetted new hires and policed employees who got out of line. While the department may have missed clues about "Fabulous" Fabrice Tourre, the firm relied on its level of diligence, and it became part of the culture. "Not that they would come to my house and beat me up or something or kill my children," a former Goldman trader says. "But certainly they would drag you through court or do something to screw up your life. If you did anything to hurt that firm in any way, all bets were off."
Meanwhile, the bank put its talent to use finding ingenious ways to divvy up risk and sell it off to unsuspecting clients. It helped develop magic tricks such as synthetic collateralized debt obligations that allowed investors to bet for or against the housing market without ever owning a single real mortgage. Most famously, Goldman created synthetic CDOs and allegedly allowed hedge fund guru John Paulson to bet against particularly rotten mortgage packages without telling the buyers on the other side of the deal.
Yet Goldman realized sooner than its Wall Street peers did that the nation's love affair with real estate was over. Cohan describes how the company nimbly dumped its mortgage-backed securities on its own clients. This created a big short position against the housing market, allowing it to reap enormous profits while the Bears of the world failed. Was this a sign of Goldman's superior intelligence, or simply its willingness to knife anybody for a dollar? Both, it seems. Cohan portrays a firm that has grown so large and hungry that it's no longer long-term greedy but short-term vicious. And that's the wonder—and the horror—of Goldman Sachs.