Friday, August 21, 2009

Goldman Sachs - The Smartest "Goodfellas" In The Room (Part 1)

It was a cold, gray day in October of 2008 as four hundred Goldman Sachs
employees filed into the massive auditorium on the 30th floor of 85 Broad Street.

For the last two weeks, the news coming from both the trading floor and the markets could be described in just one word - BAD. The overall market was in freefall - in just a matter of days it had plummeted over a thousand points. And there was worse news yet to come.

Home foreclosures, which had been steadily creeping upwards,
had skyrocketed in a matter of weeks. Fannie Mae and Freddie Mac had
just been "nationalized" by the government. Lehman Brothers - Goldman's
main competitor, had just closed its doors in bankruptcy. Merrill Lynch - the
mainstay brokerage to Main Street - had just been forced into a
shotgun marriage with Bank of America , itself on shaky ground.
And Citicorp? That huge, unwieldy "financial supermarket",
under the uninspired leadership of Vikram Pandit (privately referred to
inside GS as "Rajoo the Hindoo"), was nearing a government takeover any day now.

And in the real economy, things were worse. Layoffs were widespread -
and had doubled since last December. General Motors and Chrysler were just
days away from involuntary bankruptcy. And all of this was taking place during
an unprecedented Presidential Election campaign.

For almost everyone on the Street, these were worrisome times.

But for these chosen Four Hundred, no worries. For, regardless of rank,
these chosen few were the key to Goldman Sach's prosperity.
They weren't just employees or officers - they were Goldman's Made Men.

The first to file into the auditorium were the newest "Made Guys" - the young
traders and analysts in equities, fixed income, options, commodities and
derivatives, upon whose efforts so much of Goldman's fortunes depended.
Unlike their "non-made" counterparts, a good number of these young men
did not hail from MBA programs at Harvard and Wharton,
but from proprietary,family-run graduate programs with names like Gambino,
Provenzano, and Genovese. Known as "soldiers", these young men came in
especially handy when a Goldman client or counterparty needed "persuading"
to see things the Goldman Sachs way.

The next to file into the room, in order of precedence, were the
"linebackers" or underbosses. These gentlemen patrolled the trading floors
and client desks to ensure that whatever Goldman wanted to push that day to its
institutional clients got pushed. This group also included the Senior Analysts
who were entrusted with gathering and analyzing the material, non-public
information upon which Goldman's trading for its proprietary accounts depended.

Finally, the next to last group filed in. These were the Caporegimes -
The Managing Directors and Vice Presidents who oversaw all of Goldman's
day-to-day operations. This group also included the key Vice Presidents of
Public and Investor Relations - charged with maintaining Goldman's
all-important public image in a difficult time.

Then, the lights dimmed. And to thunderous whistles and applause, the last group
filed in to take their places on the stage behind the speaker's rostrum.
These twenty-four men - the current Goldman Sachs Board, their key
outside advisers, former Goldman Vice Chairmen and CEO's - were a
Who's Who of American Finance.

They included a former Senator, now Governor of New Jersey. Two former
and the current Secretary of the Treasury, as well as the current and
former Chairmen of the NYSE. Three Deans of the most eminent Graduate
Business Schools in America. Two Nobel Prize-winning economists.
And the remainder were equally well known, appearing daily on the financial
news networks to utter calming words of reassurance to the world's spooked markets.

These were the Dons - the all-powerful rulers of the Goldman Empire who really mattered.

And now, they all stood and applauded as Lloyd C. Blankfein, The CEO - entered
the room.

Balding, tuxedo-clad, small of stature yet imposing in manner, the son of a Bronx postal worker looked and sounded every bit like a real-life Tony Soprano.

As he proceeded towards the podium, he stopped to offer an embrace here,
a handshake there. Some of the Dons even came forward to formally kiss his
outstretched hand. After ten minutes of fervent adulation, he took the podium,
waved his arms for seats and silence, and began speaking:

" Governor, Mr. Secretary, Mr. Chairman, Distinguished Colleagues,

" I am pleased to report to you today, that despite the turmoil in the
markets right now, Goldman Sachs at this moment is stronger than ever.
Despite what is shaping up to be a challenging year, we will still be
profitable at year's end. That means, fellas, that though the bonuses will
be smaller, there will be bonuses! (standing applause)

" Now, just a side word here to some of you younger fellas. One of the
downsides of being a "Made Guy" here at Goldman is that the bonus
you receive initially is 65% stock, 35% cash. For the non-made guys, it's the
other way around. You don't get to a majority cash bonus until you are in
our service for seven years. But, unlike the others, should we send you on
assignment to government or elsewhere, your bonus continues - plus, we
make up the difference in your salary; and when you leave your
outside assignment , you are welcomed back here as if you never left.
That's why we have such loyalty. And outside service for Nostra Famiglia
is the fast-track for advancement here. Ask your division Capo or Don if
you got questions. Capece?

Now, I also realize that the smaller bonuses may put you in a slight cash bind
when it's time to make another payment on that weekend place in the Hamptons
or your Upper East Side condo. I've been hearing noises about people selling
their Goldman stock to make ends meet. I don't need to tell you that those are
noises I don't like hearing. If anything, you need to be buying Goldman stock
- right here, on the inside. But, I understand. I was a young guy once.

" So, for those of you who might be tempted to sell, Don Gary and Caporegime
Dominic, at my direction, have set up a program where you'll be able to borrow
up to 100% of either the market value or the vesting price of your Goldman
shares - whichever is higher - to bridge yourselves, at the 90-day treasury
rate plus 10bp. Can't do it interest-free, guys - there would be tax consequences
if we did that. So if you need the money, it's there. But don't sell the stock .
There are things we're doing, right now, so that six months from now
you'll be glad you didn't sell.

" Now, I want to go over some of the things that have made this a challenging
year for us. I don't think it was a surprise to anyone in this room that these
Mortgage CDO's became an unholy mess. I wouldn't wipe my butt with
this paper and neither would anyone else in this room. But, I don't think
anyone thought that the Structured Financial Products Division of AIG
would go bat-shit crazy and insure absolutely every stupid issue anyone
could come up with.

" Where our exposure came is, that, as you know, we were making a market
in this stuff - otherwise, all these instruments would have been totally illiquid
and the collapse would have come sooner. That's the problem with CDO's -
even first-year MBA's know they're illiquid - and CDO derivatives are
not tradeable at all unless someone with deep pockets will make a
private market in this crap. As you know, this is something we were asked to
do, over my objections, and we made a lot of money at it. But, when the shit
hit the fan over at AIG, we were stuck for Thirteen Big on our worthless
inventory. Now, this wouldn't have put us under, but it could have meant
we'd have become a lot smaller and less powerful awfully damn quick."

" But, that's why we have the Friends we do," The Capo Di Tutti Capi continued.

" That's why we have Don Enrico, our former CEO and esteemed Consigliere,
as Treasury Secretary. And I have to hand it to him. Between him and Old Ben
at the Fed, they came up with EIGHTY Big to keep AIG alive long enough for
us to get out - whole. The other stuck counterparties - Paribas, Credit Suisse -
they got bailed out too. Some of the Dons wanted us to cut a deal with these
damn Euros - like, take them out for fifty cents on the dollar and cash in for
full value. But, I said no. Too risky. If it ever got out that our hands were all
over this AIG bailout, we'd never live it down. It'd cause a diplomatic crisis.
Even our friends and appointees couldn't help us. But, we were able to guide
our European friends through the AIG mess for a small cut - about two and a half
big. Not bad for a few days work. "

" But I would be lying to you if I said that an ill wind doesn't blow some good.
The Dickie Fuld and Lehman Bros.situation for example. I saw this
coming in late 2007, when those fools started really loading up on all this
subprime mortgage nonsense. Bear Stearns too. That's when I said no more
for us, except for what we needed for the market-making operations.
And I wanted that wound down ASAP too. "

" But when Bear went down in March, the transition to JP Morgan went
fairly smooth. We didn't have to get involved. Lehman was another story,
though. When things first got shaky, The Bank of Korea took a look - but once
the Korean regulators saw the ABS portfolio, they said nothing doing.
Barclay's also was set to do a deal, but once the UK Regulators and The
Bank of England took a look, they started to go wobbly. At this point, as
you know, Lehman sent emissaries to us for help-but "Dickie" never showed up.
Can you believe that? Here's this schmuck - making a multiple of what anyone
here earns - including myself - and he won't show the respect, won't come to us
personally as a friend in an hour of need. Instead - he sends five
errand boys to ask for our help. My first instinct was to politely decline;
but, knowing the stakes involved for everyone and after talking with
Don Enrico, Don Lorenzo, Don Giovanni and the others, I decided to see
what we could do.

"First off, we had a little bit of an in with the Brits that Dickie Fuld did not have.
I've known Mervyn King, the Governor of the Bank of England, for
twenty-five years. He was a professor at LSE when I was a fixed-income guy
for Goldman in London. I even lectured in some his seminars. And,
he and Old Ben at the Fed were economics professors together at MIT before that.

" And, Lord Turner at the UK FSA is an old friend. He was at McKinsey &Co.
when I was in London and I helped him get hired later at Merrill Lynch Europe.
The bottom line is that because of those friendships, both the BOE and
FSA are full of Goldman guys - mostly young, British as well as American,
learning central banking and regulation, getting that all-important exposure
before they get Made. And they were all willing to help.

" I went over to London and took a few of our brightest fellas on the Lehman
situation with me. Two of our Dons from London and our European Capos of
M&A and Institutional met us at the airport. One of them whispered to me
that a hefty advisory fee from Lehman had landed in our City account
that morning. We had nothing signed from Lehman at this point,
but since we'd been paid, I decided to go ahead.

" We worked all night to come up with a plan and then we were off to
Threadneedle Street to meet Mervyn King, Lord Turner, and the Barclay Boys.
I won't bore you with the details, but they were blown away with what
we proposed. We were going to hive off all the garbage into an SPV,
and fund it with a mandatory assessment on all the other players in the
CDO market. We'd make the first contribution. I figured that if everyone
took a small haircut now, we'd all avoid getting scalped later.
Pretty much of a replay of the 1998 Long Term Capital Management fiasco.
Had it stopped there, we might have avoided all this.

" But, Lord Turner said he couldn't approve the deal unless we could
get Alistair Darling, The Chancellor of the Exchequer, and possibly the
PM himself to go along. They had been bit hard last year by the failure of
their largest mortgage lender, and had had to bail them out to the tune of
Twenty Big in Sterling (about $34B US). Plus, they had this mess with the
Icelandic internet banks to deal with. I could see what these guys wanted
- political cover.

" At this point, I was starting to give up hope. But - I figured we would have to
make a case to Ten and Eleven Downing Street sooner or later, so it might
as well be sooner.

" Prime Minister Brown met us personally at the door and escorted us in.
For the next two hours, he and Darling listened without saying a word as
we went through the whole dog-and-pony show again. At the end, Darling
stood up, thanked us all for our time, but said he couldn't justify going ahead
unless we could get the SPV built and bring the funds from our side of the
pond to the table first. The PM nodded at this. He told us that as a financier and
an economist, he understood what we were trying to do and he understood the
gravity of the situation. He also reminded everyone that time was of the essence.

" But he also said that the UK was getting bailout-weary and that they were as
impacted with bad CDO paper as we were. Unless we could completely "remove
the rubbish", as he put it, there was no point in going further. Barclays
would have to get a completely clean Lehman, or there'd be no deal at all.

" We knew now we'd have to move quickly. We left straight for the airport,
and on the way I called Ben, Don Enrico, and that kid at the NY Fed, Geithner.
I told them I wanted a sit-down on the Lehman situation first thing
the next morning, with all the heads of the banks in attendance.
Ben said he'd be there. Don Enrico too. Geithner would host and chair
the meeting. I also told Geithner that Dickie Fuld had better be there too
or there'd be hell to pay, after all the trouble I'd been to.

" Well, when we got to the sit-down, everyone was there - except Dickie, of
course. But he had sent over his CFO with their preliminary
third-quarter numbers. I took a quick look and Don Gary and I just about
had a heart attack. It wasn't just bad - it was worse than we could have
ever imagined. Had we known how bad, we'd have never left the States.
Even if everyone around the table had come up with the max, we'd be about
FORTY BIG short of where we needed to be. I let everyone in the room digest
the numbers, say a few words, and then I said: "It's hopeless. This is going
to have to be a matter for the Fed and the government to solve. Now fellas,
I'm going to use every bit of influence I have to get this thing done.
But I'm going to have to ask you to keep quiet - maybe even for a few days,
so I can try to get this stitched together. I don't think I have to remind you what's
at stake here - if this gets out, and the mortgage CDO market crashes, some of
you in the room here may no longer be with us. We all have exposure to this stuff,
but if it's handled right, we just might be able to ride it out. So, that's it, guys, I
want to thank you for coming - and remember, the Press is waiting downstairs -
your only comment is NO COMMENT. "



  1. I did a similar post on this subject a little while ago and an accompanying photoshop if you're interested in snatching it up its located here
    good work on this post thus far btw TTN :)

  2. Dear Ray:

    Thanks for the props. If you liked Parts I and II, wait until you see Parts III and IV!

    In the same vein "Tyler Durden" over at Zero Hedge had a "Tombstone" notice about HFT
    Protection (sorry but I can't find the link -
    I have the original saved in my documents and I'll send it to you)

    Keep up YOUR good work -always a good read - :)