3 Aug 2009

Where next for the wizards of Goldman Sachs?

Rising out of the carnage of the credit storm is the new gleaming headquarters of the titan of post crisis American banking. Goldman Sachs has emerged richer and more powerful than ever, but the Goldman glow is being replaced by a Goldman glare.

It has without doubt been the most significant shift I have noticed in my month in the US. The vitriol piled on Wall Street’s elite financial institute was strong, even before it announced remarkable second quarter results.

Rolling Stone’s meticulous angry historical takedown of Goldman’s aura – ‘a vampire squid sucking on humanity’ responsible for six disastrous financial bubbles – was being excitedly pinged around Wall Street and the City by financiers.

Then Goldman announced a record second quarter, $3.44bn in profit and that it was making provisions for a record bonus pot, and there was an explosion of annoyance from all directions. Elaborate spider’s webs of the firm’s alumni connections with US politics littered the screens.

Remarkably, even bibles of capitalism, such as the Wall Street Journal, joined in.

In the interviews we were doing for completely separate stories with serious players from former Clinton officials to ex IMF chief economists, Goldman was repeatedly raised. In Washington, Obama-approved plans by Congress to tax households earning over a million dollars to fund healthcare are referred to as the ‘Goldman Sachs tax’.

In short, its open season on Goldman Sachs, the high priests of high finance. Robert Shiller, probably the foremost housing economist in the world says he’s worried about the ‘intensity of the anger’ that it harks back to a desire for ‘simpler times’.

Now at GS towers I’m sure they’d prefer this than the fate that became of Lehman Brothers. They acknowledge the extra attention given to the remarkable fanning out of their alumni in the corridors of power.

Nonetheless, they say that this is correlation not causation. That Goldman picks the brightest and the best, so it is understandable if Washington hoovers the same people up later in their career. A Goldman partner’s career will often be over by their late 40s anyway, so you see the Goldman scions try to devote their remaining years to public service.

The list is remarkable.

Forget the commodities regulator, deputy Treasury chief and Presidential chief connections. Take just four former chairman. Friedman: Bush economic adviser. Resigned as NY Fed boss (and simultaneously GS board member and chief regulator) after it emerged he had bought millions of dollars of GS shares last December.

Robert Rubin: the Clinton Treasury Secretary who deregulated complex financial markets including derivatives markets. John Corzine: New Jersey’s Democratic Governor close to President Obama. And Hank Paulson: President Bush’s Treasury Secretary famously responsible for the controversial bailout.

The Paulson bailout has clearly worked out well for Goldman. Lehman, a huge competitor died. AIG, to which GS had a $20bn notional exposure, was saved days later. GS say it had no material exposure because of countervailing trades it had made.

It did end up receiving $13bn of the US taxpayer’s $85bn AIG bailout, much of it the Credit Default Swaps which became widely traded after Robert Rubin’s reforms. Hank Paulson would have known about the extent of any exposure: he was in charge of Goldman Sachs at the time it struck many of the deals with AIG.

Fascinatingly, Mr Paulson was aware of the potential for a conflict of interest in those decisions so he went to the lawyers. “It would have been wrong to rescue myself, so I got a waiver from the ethics agreement from the Government ethics office,” he recently told Congress, in little-reported remarks.

A former Clinton appointee to the Commerce Department, David Rothkopf, says he now thinks that there hasn’t been a private company with Goldman Sach’s influence over US public policy since the days of Standard Oil. In some ways, he says it’s even more powerful.

For Goldman’s part, it is damned either way. It has played the hand it has been given to perfection. Having survived the storm, it was facing much less competition for lucrative investment banking work, its margins on basic trading had shot up. In short, there was no need to help conjure complex financial products. Plain vanilla investment banking has been lucrative for any one still in the game.

The problem is that their performance and the likely hundreds of million and multimillion dollar bonuses have at some level been earned with US taxpayer help. All this at a time when US unemployment is likely to top 10 per cent. Yes, they have now repaid the direct government stake at profit to the taxpayer.

But there are outstanding government guarantees on billions of dollar of its bonds. It borrows from the Federal Reserve because it reinvented itself as a bank in the middle of the storm. Yet it is not capitalised like a conventional bank.

And underlying all of its actions is the fact that there is a tacit guarantee that the US government would bail it out in the event of another calamity. Goldman’s may not like to think of itself as public property. But it is a potential public liability.

The unease is reaching the highest levels. Clearly there’s some relief that some banks are making profit again. It’s seen as a positive sign. But I was in the White House when President Obama said: ‘I’d like to think that people would feel a little remorse and feel embarrassed and would not get million-dollar or multimillion-dollar bonuses.’

He wasn’t referring to Goldman Sachs specifically, but the firm was clearly in the back of his mind. (Though it’s worth noting that the remorse did not stretch to 1,756 of Goldman’s top executives, who earned million-plus bonuses in the year of the market meltdown.

Even the rhetoric is remarkable from the man who is leader of the Land of the Free. Wall Street’s wizards are finding their spells no longer work on the American public. Perhaps London might tempt them?