( Continued From Part 1)
Capo Di Tutti Capi Blankfein took a sip from a glass of water and continued:
" After the others left, it was getting late and I suggested that Don Enrico, Ben,
Geithner and I needed to have a private sit-down to decide the issue. It was
truly up to us; if we didn't do something, it could be 1929 all over again.
It was almost dinner time - nothing like a good meal to get everyone
settled down and everyone's brains working again. The meeting had been
quite contentious - everybody blaming everyone else for the problems and
Geithner, Don Enrico and I having to shout everyone down and keep order.
And now the Press was out - someone had tipped them off about the big meeting
and they were waiting for us. We had to get out of Manhattan quickly together
without being seen.
" So I got on the phone and I had the pool send over Don Giovanni's
stretched armored Cadillac Limo with our best driver and two
soldiers for security. I told them to come in the armored car entrance of the Fed
and go immediately to the bottom level to pick us up. In the meantime,
Don Enrico and I suggested to Ben and Tim Geithner - he's a smart, coolheaded
kid who'll go places, by the way, that they join us for dinner. Geithner actually
suggested that going to any of our usual places without attracting
attention might be difficult and that we should probably dine right there at his
private dining room. I thanked him, but said I thought it best that we get away
from the Press- I motioned him to the window and pointed at the TV
trucks parked right outside. And then I said: "Tim, I got a car coming,
with security. And I know just the place. A Great Italian Restaurant just outside
Jersey City. The chef there used to cook for Silvio Berlusconi. Very upscale,
quiet, great food, everybody minds his own business - and the security?
Real Made Guys. It's perfect for us. "
" Just then, the doors parted and Don Giovanni himself strode into
the room. For those of you who don't already know him, he's our head of
Security and Special Operations - runs our KGB, if you know what I mean.
He came right up to me, kissed my hand and whispered in Italian:
" Padrino, come presto he sentito le notizie, mie sono venuto.
Per favore, Padrino, con permiso che io introdurre e mei soci"
" I was astounded. Only rarely am I privileged to be called "Godfather".
I was touched by this extraordinary courtesy under the circumstances.
And so Don Giovanni, as you are here today, allow me to say in your
native tongue:
"Mio caro amico, molte grazie per suo servizio al suo Padrino quella notte"
" And he took charge right away. Escorted by two of the fiercest-looking
goombahs I've seen this side of the Sopranos, he hustled us all down the
service elevator and into his personal stretched Cadillac limo. He got
behind the wheel himself. When I asked if he knew where we were going,
he said, again in Italian, "Godfather, I know already. Jersey City."
He swung us out, right past the Press , and handled the five-ton car like a
Ferrari through Midtown and into the Holland Tunnel.
" One of the soldiers passed out shot glasses and some chilled grappa,
and I gotta tell you, poor Timmy Geithner thought it was vodka and
damn near choked! Anyway, everybody started to relax and loosen their ties,
and we began to seriously discuss the situation.
" In about twenty minutes, we got to the restaurant - beautiful, real quiet,
even though the place was packed. The proprietor, Salvatore - they call him
"Sally Bananas" in the New Jersey Comizione - whisked us all into his private
dining room and in the blink of an eye, drinks were in our hands.
We were hungry - and when Don Salvatore told us the veal had been flown over
from Italy just that morning, it sounded great.
" Over a great antipasto accompanied by a magnificent Orvieto, we finally
got down to business. Don Giovanni and his fellas got up without a word,
closed the sliding door and posted themselves outside. We were alone,
just the four of us, and we could finally speak frankly.
" I looked Ben Bernake straight in the eye and said "How could you let
this happen? If what I'm reading is right, Lehman isn't gonna last long enough
to get this piece of shit statement published. And when they fold, Greenberg's
shop is next - every counterparty Lehman's got is going to be lined up on the
sidewalk outside AIG waiting to get paid, all before the TV cameras.
And by the time Mr. and Mrs. Middle America see this on CNN or
CNBC, there'll be a run on the banks like you won't believe - FDIC
doesn't have one-tenth of what is needed if that happens.
In just the few days since you briefed me before I went to London,
Lehman's negative net worth has DOUBLED.
" Ben calmly nodded and said: "That's mark-to-market accounting for you.
On a historical basis, they're shaky, but not as bad as it looks. Remember, we
injected fourteen big against their Treasuries just two weeks ago, so we can still
keep them on life support"
" I said HOW? They're gonna blow through that like shit through a goose.
Even the Fed can't lend against this mortgage CDO shit guaranteed by
an insurance company that will itself be bankrupt as a result. And when you talk
about the market for CDO's AND their derivative securities, we're it!
Our exposure right now is thirteen BIG - and if we don't get to the front of
the line at AIG when this shit hits the fan, it's not just us that's screwed - it's everybody!
" Now Ben, let me gently remind you how this all got started. Last March,
when the Bear was getting sick, you and I both agreed that the cause of the
problem was theirexcessive exposure to these mortgage CDO's .
We also agreed that they were, in your words, "too big to fail".
You asked me to intervene, and I did two things. First, I agreed to
make market, to take over, as long as I was covered. AIG wasn't a problem then.
At that time, their reserves were twice the market's collective exposure.
I had been reducing Goldman's exposure since last December, so I thought OK.
We'll get some fee income, and we can wind this whole thing down safely so
nobody gets hurt too bad. The fundamentals of residential real estate have been
out of whack for the last eight years - and if we can just gradually
deflate this thing, we'll get over it. If you remember the eighties and
the RTC, we took some hits - but everyone who matters survived.
" Now, Lehman Bros. is half Bear Stearn's size. You can't tell me that
they're small enough to fail. If we could get the Bear packed away safely,
we can surely get this done. If we can clean this up somehow, I've got
a buyer for Lehman - all I have to do is clean up this balance sheet some
FORTY BIG worth, and Barclay's will do the deal - I've got the word of
the Prime Minister of Great Britain on this.
" Here's what we gotta do. Everybody on this side of the pond has got to
step up for twenty big. I'll get that done. I'll get these assholes in line.
The Fed has got to guarantee the remainder. Ben - all you gotta do is
make the phone call to Mervyn ,your old colleague - and it's done.
Game over. Economy saved. You're a hero.
" Ben replied; "Lloyd, it's not that simple. To clean up Bear, we had
to lay off all that CDO garbage anywhere we could. You know that.
We spread the manure far and wide. And you know who bought?
Dickie Fuld. He bought out the positions of almost everyone we placed
that shit with. What was a problem then is a worse problem now
because it's all concentrated. We laid off Bear's trash at 30 cents
on the dollar - he BOUGHT at fifty, thinking he'd get made whole
either because of AIG or RE market fundamentals. And it's a leveraged
bet - he used borrowed money off-balance-sheet to do it. I didn't know
until today - I swear. I didn't say anything earlier because Jamie Dimon
and the Hindoo would have run right to their trading desks and let
the cats out of the bag.
" I told Ben, "I understand now. It explains everything, including
why Dickie never showed, never returned my calls. Ben, are you
telling me that including the off-balance-sheet borrowing,
it's even worse? "
"Ben said: " Yup. Offhand, I'd say it's in the neighborhood of
eighty to ninety big, maybe more. In my opinion, Lehman's
toast - the best we can do is have them file Chapter 11 right
now, give us some time - Lipton's their law firm, I can call them
in the morning - and in the meantime, we'll have to have some
help from Treasury. Henry, what can you guys do? "
" Don Enrico spoke next. He said, "Being in Washington, I
have to let you know political realities. Bush, as you know,
is an unpopular lame duck. McCain is up in the polls, but Obama
is closing fast. This whole thing is going to tank the economy.
What I would do is get a Troubled Assets Liquidation Facility going-
set up a Treasury-sponsored SPV to buy up all this crap. Hopefully,
the taxpayer will recoup. RTC did the same thing sixteen years ago.
" But if we do this, and the banks get spooked, it's all over. Right
now, the thing that's driving down CDO's is foreclosures - the flippers
who took out all those NINJA loans. But if we start getting to major layoffs
and mass unemployment because the banks won't roll over trade credit,
all bets are off. Even the prime CDO tranches will be affected. This will drive
down home values like nothing we've ever seen. And some folks will wind up
under water and figure it's better to walk away than keep paying - even if
they still have a paycheck."
" In short, Don Enrico continued, "you'll have a huge negative feedback loop
going - things will be circling the drain at an ever-increasing rate. The best
we can do is to put Lehman into BK right now, try to prop up AIG -
because that's the immediate problem - and hope for the best.
But that's not all. If we bail out all the CDO holders - everyone else is going
to come up to Capitol Hill wanting a bailout - the car makers,
the commercial banks - everyone. And the politicians will do it - because
if they don't, they won't get re-elected. All this could tip the election to Obama -
because McCain doesn't know shit about economics and has said as much."
"The bigger problem we have, though, is that we've done a pretty good job
keeping the American worker out of the prosperity loop for the last ten years.
Through immigration, outsourcing, and job exportation, all of which we in
the Investment Banking industry have encouraged, people just have not
been able to earn enough to keep up even a modest standard of living.
They've had to make up the difference by borrowing - mostly
against their homes. And if we knock out home values - and they
lose their jobs - we're screwed. Consumer demand is going to fall through
the floor - another negative feedback loop - and who knows where it will stop?
Now, Goldman has donated pretty heavily to the Democrats this cycle - including
Obama - but just to cover our bets. If that sbirri actually gets into office,
who knows what will happen? But, I can get W. to go along with some aid -
he's a Harvard MBA after all - enough at least to liquidate Lehman in an
orderly manner and keep AIG alive long enough to cover the counterparties."
" After some more discussion along these lines, we got the plan together.
Lehman was toast. They'd be shut down in a few days. Chapter 7. Timmy
Geithner would deliver the bad news to Dickie personally. Don Enrico
would provide as much as was needed to keep AIG alive until all the
CDS counterparties could get out. He'd take the responsibility for
bringing Dubya on board. And, he'd also do something about the
GSE's - Fannie and Freddie - which he blamed more than any of
us on the Street for causing this mess. Ben agreed to provide whatever
liquidity the market required to make this happen, at concessionary
rates. No discount penalties, and all agreed that in the event of any
disputes while this was going on, I would be the final arbiter.
" And as we all know, that's exactly what happened. Now, we know
things are gonna be tough for a while. But the biggest thing we gotta
deal with is uncertainty. In a few months, there's gonna be a new
Administration in Washington. Neither guy is going to give us the
free rein we've had for the last eight years. We actually might be
better off with Obama than McCain because he's a newbie and
we'll be better able to place the right people around him. Both
guys are complete amateurs when it comes to finance and economics;
which, if you'll reflect a minute, works hugely in our favor. In my opinion.
no matter what, we're good.
" So, that's all I've got right now. Let's finish this year strong, tighten
things up, and we'll be OK. We'll have another meeting in a few months,
and by then, I guarantee, you're all gonna be very happy campers here at
Camp Goldman. "
And with that, to cheers and applause, the Capo Di Tutti Capi left the room.
( Continued in Part 3)
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,
Gentlemen:
" 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. "
(TO BE CONTINUED)
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