Money and Power

William D. Cohan, “Money and Power: How Goldman Sachs Came to Rule the World” Kindle Version, 2011, 672 pps

This is the third book I have read written by this author; all are well worth it.
Goldman Sachs publicity department and most employees generally state that their culture is different and much more ethical than others. William Cohan documents how this is not true, people just don’t seem to remember the relevant history, past and present. In 1929-1930, Goldman created Goldman Sachs trading corporation that nearly bankrupted all the investors that invested in it; it was a bit of a Ponzi scheme. In the 1940s the firm was involved in an antitrust lawsuit by the Justice Department that could have put it out of business had the decision gone the other way, and it was also involved in the bankruptcy of Penn Central railroad in 1970, continuing to sell Penn Central commercial paper even after Goldman’s was aware the company would be filing for bankruptcy (much like 2007 when they were selling mortgage securities while betting against their solvency after deciding in December, 2006, to get out of the mortgage business). Additionally, because so many of its former bankers have gone into government work, Goldman Sachs has an unflattering nickname — Government Sachs. Many feel Goldman’s gets preferential treatment from their alumni in government. For instance: Goldman Sachs received $14 billion, or everything AIG owed it at 100 cents on the dollar; this was their portion of the $85 billion the federal government had poured into AIG to keep it from bankruptcy. In the last thirty-five years, Goldman’s has went from a firm focused almost exclusively on trying to help its clients, for a fee, to one that finds new ways to compete with its clients on almost a daily basis. Insider trading laws only apply to equities and need to be revised to reflect new categories of trading based on proprietary, nonpublic information that floats around inside Goldman and then is used to trade.

My notes:

Pg. 3: A reminder of how dangerous Wall Street can be was provided beginning in early 2007 as the market for home mortgages in the U.S. imploded leading to the demise or near demise a year or so later of several large Wall Street firms—including Bear Stearns, Lehman Brothers, and Merrill Lynch—as well as other large financial institutions such as Citigroup, AIG, Washington Mutual, and Wachovia. Although it underwrote billions of dollars of mortgages securities, Goldman Sachs avoided the worst of the crisis thanks to the “big short” a group of Goldman traders Josh Birnbaum, Dan Sparks, and Michael Swenson put together in betting that the Mortgage industry would implode.

Pg. 6: There is little doubt that Goldman’s dual decisions to establish ‘the big short’ and then to write down the value of its mortgage portfolio exacerbated the misery at other firms. Mark-to-market then required all firms to write down the value of their holdings and add more capital to their balance sheet-capital they did not have.

Pg. 8: On September 1, 2008 both Goldman and Morgan Stanley voluntarily agreed to give up their status as securities firms to become bank holding companies, which allowed them to obtain short-term loans from the Federal Reserve but, in return, required them to be more heavily regulated than they had been in the past. Goldman and Morgan Stanley made the move as a last-ditch effort to restore the market’s confidence in their firms and stave off their own bankruptcy filings. The plan worked. Within days of becoming a bank-holding company, Goldman raised $5 billion in equity from Buffett and another $5.75 billion from the public. Weeks later Treasury Secretary Paulson ordered Goldman’s and eight other CEOs of surviving Wall Street firms to sell a total of $125 billion in preferred stock to the Treasury, the funds for the purchase coming from the $700 billion TARP program. Paulson forced Goldman to take $10 billion of TARP money as a further step to restore investor confidence. Blankfein never believed Goldman needed the TARP funds and earned Obama’s ire when he said so publically.

Pg. 11: Goldman’s Fabriςe Tourre put together a CDO with hedge fund manager John Paulson’s input so that Paulson could the bet against the CDO whose mortgages he bet would fail. As the SEC later revealed this CDO, known as ABACUS 2007-AC1, 83 percent of the mortgage securities had been downgraded by the rating agencies six months after assembled. John Paulson’s bet had paid off to the tune of $1 billion dollars in nine months. Surprisingly, Goldman itself lost $100 million on the deal because the firm got stuck holding a piece it could not sell to investors.

Pg. 16: Senator Levin’s April 24, 2010 press release: ‘Investment banks such as Goldman Sachs were not simply market-makers, they were self-interested promoters of risky and complicated financial schemes that helped trigger the crisis. They bundled toxic mortgages into complex financial instruments, got the credit rating agencies to label them as AAA securities, and sold them to investors, magnifying and spreading risk throughout the financial system, and all too often betting against the instruments they sold and profiting at the expense of their clients.’
Senator Levin believed that once Goldman’s made the decision to short the market in December 206, the firm should have stopped selling mortgage-related securities, such as ABACUS or Timberwolf or other mortgage-backed securities, and let its clients know it was increasingly worried.

Pg. 24: The story of Goldman’s success and long history underscore one of the great political truths: the scandal is not what’s illegal, it’s what’s legal. And no firm, through many crises and decades, had developed more skill in walking that fine line.

Pg. 31: At the start of the twentieth century, the task of raising capital—dubbed ‘underwriting’—became one of the most crucial roles Wall Street would perform for corporate clients eager to expand their workforces and their factories, and led to the creation of American capitalism, one of the country’s most important exports.

Pg. 48: Trading on material nonpublic inside information was not banned in the U.S. until 1934 and not criminalized until decades later.

Pg. 260: The typical arbitrage would be—once a deal was announced—to buy the stock of the company being acquired and sell short the stock of the company doing the buying.

Pg. 286: In 1991 on the Friday before Memorial Day weekend, forty investment banking newbies were told to report to a conference room at 5PM. Hour after hour passed without the partner who had told them all to be there showing up. By 8:30 they became restless, at 9PM three of the restless ones left. At 10 p.m. the partner appeared, passed around a sheet of paper, and asked everyone there to sign his or her name on it. He then said ‘So, today’s lesson is about waiting patiently for those who are more important than you. Someday you may be in the lobby of a billionaire, and he or she may make you wait. Your job as a representative of Goldman Sachs is to sit there. We are in the client service business. The three who had left, were fired the next Tuesday.

Pg. 297: Forbes Magazine 1992: ‘Under the reign of Friedman and Rubin, Goldman seems to be putting less emphasis on serving clients and more on dealing for its own account.’ The magazine went on to note that all other firms were doing this as well but that it was a departure for Goldman. (It was later revealed how all these firms, including Goldman’s, had provided large bonuses to their research analysis for writing favorable reports about the stocks of the Internet companies these firms were underwriting to take public (p428.)

Pg. 376: By 1996, Goldman was the only major Wall Street securities firm that still operated as a private partnership, and there was no longer any doubt that the firm needed more capital to compete and also needed a new corporate structure to shield the partners from potential catastrophic liabilities.

Pg. 476: By the first quarter of 2004, the market for mortgage-backed securities was $6.9 trillion, some 40 percent larger than the market for U.S. corporate debt, which was $5 trillion, and the market for U.S. Treasury debt, which was $4.9 trillion. The mortgage market had more than doubled in ten years.

Pg. 478: Before the creation of the ABX index in January 2006, if the mortgage-backed securities market sold off, no one really knew for sure by how much. But with the creation of the ABX, thee was now a published index that people could observe and, more important, could short to hedge whatever risks they perceived existed in the mortgage market.

Pg. 524: Birnbaum at Goldman’s was under constant pressure in early 2007 to reduce his short bets against the mortgage securities because the VAR computer model was flagging the activity as adding too much risk even though his desk had just made $1 billion in a given month and still owned the same short positions it owned the previous month. (pg. 591: According to one internal Goldman report, Birnbaum’s desk made $3.7 billion for the fiscal year 2007; had the VAR police been less demanding, he said he believes he could have made two to three times more profit. Birnbaum left Goldman’s shortly after receiving his bonus which he felt was inadequate.).

Pg. 533: One of the problems created by Goldman continuing to package mortgages and to sell them as securities in the market at the same time that Birnbaum was implementing ‘the big short’ was that sometimes Goldman’s message to the marketplace got muddled. Pg. 547: The decision to mark down significantly its own residual mortgage-related portfolio in the spring of 2007 would reverberate the most profoundly through the metaphorical canyons of Wall Street, touching off one conflagration after another for the next eighteen months until Wall Street itself nearly collapsed in September and October 2008.

Pg. 556: To get the JPMorgan takeover of Bear done, American taxpayers agreed to absorb losses on $29 billion of ‘toxic securities’ that JPMorgan did not want. AS of September 30, 2010, those securities were worth $27 billion, according to the New York Fed.