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Goldman Sachs' Long History Of 'Money And Power'
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. Copyright 2011 National Public Radio. To see more, visit http://www.npr.org/.
RENEE MONTAGNE, host:
Goldman Sachs has long been one of the most powerful and respected banks in the country. But since the financial crisis, Goldman Sachs' reputation has taken a serious hit. Its CEO, Lloyd Blankfein, has been publicly flogged by lawmakers and recently testified in a big government insider trading case.
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.
Mr. WILLIAM COHAN (Author, "Money and Power: How Goldman Sachs Came to Rule the World"): Good morning, Renee.
MONTAGNE: Give us a reminder of what happened, during or just after the financial crisis, to damage Goldman Sachs' name.
Mr. COHAN: Well, you have to remember that in September 2008 it looked like all of Wall Street was literally imploding over night. And Goldman Sachs and Morgan Stanley were sort of the last two remaining soldiers on the firing line, and then, virtually overnight, the Fed agreed to make them bank holding companies, which was incredibly unprecedented and gave them huge access to the resources of the Federal Reserve.
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 Sach's image up until the financial crisis?
Mr. COHAN: For many years, the firm was constantly in and out of trouble. I mean, in 1929 and 1930, they created something called the Goldman Sachs' Trading Corporation that nearly bankrupted all of the investors who invested in it. It was a bit of a Ponzi scheme, if you will.
In the 1940s, Goldman Sachs, like a number of other Wall Street firms, was the subject of a Justice Department anti-trust law suit, had it gone against them, would have put the firm, likely, out of business as well.
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?
Mr. COHAN: 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 is 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.
Mr. COHAN: Well, basically you're absolutely right, Renee. It goes back nearly a century to Henry Goldman, one of the founding partners of the firm who was asked by the cabinet members who were tasked with putting together what became the Federal Reserve System in 1913 and 1914, how he would go about doing it. And then basically, he gave a prescription for which was pretty much what they followed.
And you know, beyond that, I also write in the book about Sidney Weinberg, who of course was the long-time senior partner of Goldman Sachs. This is a fellow who had an eighth grade education, grew up in Brooklyn, but had tremendous power over every president from FDR on, but he played a tremendous behind the scenes role during the Eisenhower administration. He came up with who the Secretary of Treasury should be one day when he was taking the subway from downtown to midtown and came up with a name, told Eisenhower, Eisenhower had never heard of the fellow, and appointed him Treasury Secretary.
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 in what the government does? Has Goldman had that much influence than other banks?
Mr. COHAN: Well, they've had much more influence in terms of positions of power, whether it was Bob Rubin or Steve Friedman at the National Economic Council, whether it was Bob Rubin or Hank Paulson at the Treasury, disproportionate number of senior partners from Goldman Sachs have gone into government. And one of the reasons is, by the way, because Goldman is very much and an up and out mentality. You have your five to seven years in the sun and then they push you out and, you know, you're a young person - generally still young and wanting to make a contribution. Other firms' people stay around a lot longer. So they've always had great influence. It's in their DNA to have great influence. It goes back to Sidney Weinberg and Franklin D. Roosevelt, and it's been, you know, continued on through much of the twentieth and now the twenty-first century. 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 wrong doing. 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?
Mr. COHAN: Well, I think it's one of the very powerful messages that is delivered continuously at the firm. Now they couch it in much more gentile terminology. They talk about public service, giving something back - to whom much is given, much is expected - and have a responsibility to make available their multiple 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 from 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 have are everywhere and they're very powerful.
MONTAGNE: William Cohan is author of the news book "Money and Power: How Goldman Sachs Came to Rule the World."
Thanks very much for talking with us.
Mr. CHOAN: Thank you, Renee.
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MONTAGNE: This is NPR News. Transcript provided by NPR, Copyright National Public Radio.