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Weekend book choice

Book choice: Money and Power: How Goldman Sachs Came to Rule the World

Contrary to the subtitle, William D. Cohan does not argue that Goldman Sachs rules the world. A judicious author, Cohan avoids hyperbole in “Money and Power,” a definitive account of the most profitable and influential investment bank of the modern era.

In the wake of the financial crisis of 2008, some may question whether he shows too much deference to Wall Street. Cohan, a former investment banker and a regular contributor to the Opinionator blog on NYTimes.com, implicitly accepts a social order in which a tiny elite pays itself fabulously for esoteric pursuits far removed from the provision of ordinary products and services. But his lack of populist resentment heightens Cohan’s credibility as a Goldman critic. What can seem at times like excessive solicitousness turns out to be a wise strategy of allowing the firm’s deeds to speak for themselves.

In an earlier work, “House of Cards,” Cohan told the tale of Bear Stearns, the investment bank that collapsed during the crisis as a result of sheer recklessness. Goldman fared very differently. Demonstrating extraordinary discipline, it hedged risks and made piles of money even as the real estate bubble burst and credit froze worldwide. How did this happen? Are Goldman’s people smarter than everyone else? These are the issues at the core of “Money and Power.”

Marcus Goldman, a former clothing merchant from Burgpreppach, Germany, opened his doors at 30 Pine Street in Lower Manhattan in 1869. Working from a cellar office next to a coal chute, he bought accounts receivable from local businessmen at a discount. His clients got quick cash and were saved what at the time was an “arduous trip uptown” to a commercial bank. The maturation of what became Goldman Sachs offers a fascinating narrative of turn-of-the-century New York and its German Jewish establishment. The Goldman firm branched out to help arrange the public sale of shares on behalf of Sears, Underwood and Studebaker; Woolworth, Goodrich and Continental Can. Cohan recounts these events capably, drawing on the work of historians like Stephen Birmingham. Where “Money and Power” begins to make a more original contribution is in explaining Goldman’s cultivation of a reputation for brilliance unique even in the rarefied precincts of Wall Street.

Part of the mystique derived from truly exceptional leaders, men like the senior partner Sidney Weinberg, who at dicey moments in the 1930s could consult privately with his friend the president, Franklin D. Roosevelt. Another ingredient was the esprit de corps that Weinberg and his successors nurtured among their subordinates. By demanding utter loyalty and rewarding it richly, Goldman invariably stayed on message and exuded a singular confidence. A private-equity executive who competes as well as invests with Goldman tells Cohan that “you’ll never get a Goldman banker after three beers” saying that his colleagues are a bunch of duplicitous and unpleasant people.

Image control and self-correction have been central to Goldman’s ability to weather catastrophe. During the Great Depression, the firm lost much of its capital in a swindle of its own invention. In the late 1940s, it was one of 17 Wall Street banks accused of illegal collusion by the federal government. More recently, Cohan notes, it has survived “rogue traders, suicidal clients and charges of insider trading.” Goldman, he adds, “has come far closer — repeatedly — to financial collapse than its reputation would attest.”

In the run-up to the crisis of 2008, Goldman underwrote billions of dollars of toxic mortgage securities — the sort of irresponsible financial engineering that helped destroy Bear Stearns and Lehman Brothers. But a small group of Goldman traders realized sooner than most others on Wall Street that the industry had gone overboard wagering that real estate ­prices would rise indefinitely. In December 2006, this trading team began betting that the market would crater. Their billions in winnings allowed Goldman to more than offset its mortgage losses and emerge in 2009 stronger than ever.

Goldman’s willingness in 2007 to mark down the value of its mortgage-related inventory gave it a sober sense of its financial position while rivals were clinging to delusions. As word spread that Goldman was taking write-offs, investors lost faith in the accounting of other financial institutions, hastening the demise of several of Goldman’s key competitors.

The author acknowledges Goldman’s undeniable talent for self-preservation without idealizing the firm. He explains that by underwriting those ill-advised mortgage securities, Goldman played a deplorable role in stoking the nationwide real estate insanity. He shows how far removed this activity was from raising money to build legitimate businesses and advising the executives of those companies — once, but no longer, the bedrock of Goldman’s franchise.

While Goldman corrected course earlier than others, it still barely avoided what Cohan calls “the tsunami-like repercussions of the crisis.” With its entire industry trembling in the fall of 2008, the firm increasingly had trouble borrowing the money it needed to finance its daily operations. Goldman and Morgan Stanley transformed themselves from securities firms into bank holding companies. The move subjected them to more regulation but made available short-term loans from the Federal Reserve. “Goldman and Morgan Stanley,” Cohan writes, “made the move as a last-ditch, Hail Mary pass to restore the market’s confidence in their firms and stave off their own — once unthinkable — bankruptcy filings.” In other words, taxpayers essentially rescued the investment bankers in the name of warding off a second Great Depression.

The final episode in “Money and Power” concerns the fraud lawsuit that the Securities and Exchange Commission filed last year, accusing Goldman of deceiving clients to whom it had sold “synthetic” mortgage securities (don’t ask). While the ostensible victims, a pair of large European banks, were betting that mort­gages would pay off, Goldman was assisting yet another client, an American hedge fund operator who had bet that the same mortgages would default. One client put its chips on red; another, on black. Only one could win.

The S.E.C. alleged that Goldman, the casino proprietor, failed to disclose to the banks that the hedge fund operator had actually helped select the flimsy mort­gages, which did, in fact, default. Goldman’s main defense was that this is merely business as usual on Wall Street. The European banks, it added, were sophisticated investors capable of looking out for themselves. Without admitting guilt, Goldman settled the case, coughing up its $15 million fee and paying a record civil penalty of $535 million — pocket change for a firm that handed out $15.4 billion in bonuses in 2010.

Cohan dispassionately gives readers the information they need to ponder whether investment banking has moved in a constructive direction since the days when Goldman helped Sears and Continental Can grow. He falters on just one peripheral point, when he suggests that perhaps the crisis of 2008 will leave Goldman’s reputation tarnished. But, as he says, in January of this year, after all the Wall Street mayhem and recrimination, Lloyd Blankfein, Goldman’s chairman and chief executive, was invited to the White House for a state dinner in honor of President Hu Jintao of China. Goldman, it seems, still casts its spell on America.

Source: New York Times

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