Goldman Sachs' Long History Of 'Money And Power'

Originally published on July 14, 2011 8:42 pm

Goldman Sachs has long been one of the most powerful and respected banks in the country, but its reputation has taken a serious hit since the financial crisis. The firm's CEO, Lloyd Blankfein, has been publicly flogged by lawmakers and recently testified in an insider trading case.

William Cohan, author of Money and Power: How Goldman Sachs Came to Rule the World, says the Wall Street firm's involvement in financial scandals isn't anything new, even if people don't seem to remember past incidents.

"For many years, the firm was constantly in and out of trouble," he tells Renee Montagne on Morning Edition. "In 1929-1930, they created the 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, Cohan says, 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.

"I would say its reputation for pristine excellence — the envy of Wall Street, if you will — has really been in and around since the 1980s," Cohan says.

The scandal that many people do remember nowadays comes from the financial crisis of 2008. In September of that year, it looked like "all of Wall Street was literally imploding overnight," Cohan says, with Goldman Sachs and Morgan Stanley the last two remaining firms. The Federal Reserve decided to make those two bank holding companies, an unprecedented move that gave them access to the resources of the Federal Reserve.

Because so many of its former bankers have gone into government work, Goldman Sachs has an unflattering nickname — Government Sachs. One of the founding partners of the firm, Henry Goldman, was asked by the Cabinet members who would create the Federal Reserve system in 1913 how he would go about doing it, Cohan says, and they mostly followed his lead.

Cohan also points to Sidney Weinberg, a longtime Goldman Sachs partner, who advised presidents from Franklin D. Roosevelt to Eisenhower on financial matters. One day on the subway, Weinberg came up with the name of a man he thought should be Treasury secretary, Cohan says. Weinberg told Eisenhower, who had never heard of the man, and the president appointed him right away.

"This had been going on for a very, very long time, and just continued through every senior partner of Goldman Sachs up until Hank Paulson, as we know, when he was named Treasury secretary," Cohan says.

Unlike other firms that encourage their partners to stay around longer, Goldman Sachs has what Cohan calls an "up and out" mentality that encourages employees to leave after five to seven years.

"They talk about public service, giving something back...and [having] a responsibility to make available their talents in many different parts of our society. And one of the ways to do that is of course through government service, and that is very different than other firms," Cohan says.

He acknowledges that all of Wall Street in general exerts a tremendous influence over Washington, D.C., in terms of helping to write the regulations of financial systems, but he argues that Goldman Sachs in particular has used its power.

"Goldman Sachs especially has been very, very good at getting right up against that line of wrongdoing. They know exactly where that line is, and they're very careful most of the time to just stay on this side, and they help influence the way regulations are enforced," he says.

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Now in a new, critical history of the bank, financial writer William Cohan examines Goldman's influence over government and the financial system. The book is called "Money and Power," and William Cohan joined us from our New York bureau to talk about it. Good morning.

MONTAGNE: Good morning, Renee.

MONTAGNE: Give us a reminder of what happened, during or just after the financial crisis, to damage Goldman Sachs' name.

MONTAGNE: A few days prior to that, the government had also rescued AIG, the big insurance company, to the tune of something like $180 billion. And over time, people were wondering, where did all that money go? Finally, the New York Federal Reserve Bank revealed that Goldman Sachs, among others, got something like $13 billion from the bailout of AIG - directly into their pockets. And that created a huge controversy.

MONTAGNE: So what was Goldman Sachs' image up until the financial crisis?

MONTAGNE: In the 1970s, the firm was involved in a very serious matter involving the Penn Central Corporation, which was a large railroad that went bankrupt in 1970. So the firm has been in and out of trouble for a very long time, which people forget. I would say its reputation for pristine excellence - the envy of Wall Street, if you will - has really sort of been in and around since the 1980s.

MONTAGNE: In becoming what one might call the gold standard on Wall Street over the last - say, 30 years, how did that image come about? Was it cultivated? Was it thought out?

MONTAGNE: Well, I think it was cultivated in as much as Goldman set about assembling the best people it could possibly find, at every turn of the road. Its success, its - the reason other firms envied Goldman Sachs for so long, and probably still do, is because they continue to be the leading firm on Wall Street in terms of underwriting the most, advising the most, trading the most, having huge amounts of capital. And that gives them huge cache, huge prestige, and huge power.

MONTAGNE: Goldman Sachs has sent many of its bankers into the government - I mean, so many that the company has been called, jokingly, Government Sachs. How much influence has Goldman Sachs had on the government? In your book, you describe Henry Goldman's role during the creation of the Federal Reserve System. I mean, that was nearly a hundred years ago.

MONTAGNE: And so this had been going on for a very, very long time, and just continued through every senior partner of Goldman Sachs up until Hank Paulson - as we know - when he was named Treasury secretary.

MONTAGNE: Now, is Goldman Sachs unique in its influence over government? In a world where money means power, and bankers often do have sway over what the government does, has Goldman had that much more influence than other banks?

MONTAGNE: I think Wall Street has always had a tremendous influence - and it's not just Goldman Sachs - but Wall Street generally has had a tremendous influence over Washington. They helped write the regulations; they're help - writing the regulations now. They know what they can and can't do, and they - and Goldman Sachs, especially, has been very, very good at getting right up against the line of wrongdoing. They know exactly where that line is, and they're very careful of - most of the time - to stay just on this side. And they help influence the way the regulations are enforced.

MONTAGNE: Are you asserting, in your book, that Goldman Sachs is sending its graduates, if you will, into the government - that this is deliberate policy on Goldman's part?

MONTAGNE: And one of the ways to do that is, of course, through government service. And that is very different than other firms. And you know, by the way, it's not just government service. They're leaders in philanthropy; they're leaders in education, at this point. You know, their tentacles are everywhere, and they're very powerful.

MONTAGNE: Thanks very much for talking with us.

MONTAGNE: Thank you, Renee.


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