New Info: Goldman Really Was In Trouble
Salvation came on November 25, a few days after Goldman’s stock price plunged to $52 a share, down from the year’s high of $200 and the lowest price the company had seen since it went public. Again, the white knight was the government. It turned out that Goldman’s conversion to a garden-variety bank-holding company offered an amazing advantage: Goldman now had access to incredibly cheap money. Exploiting its new status, Goldman became the first financial institution to sell $5 billion in government-backed bonds through the Federal Deposit Insurance Corporation, which allowed Goldman to start doing deals when the markets were at a near standstill. “Goldman was desperate for it,” says a prominent Goldman alumnus. “Everybody knows it. Those FDIC notes they got were lifesaving because they couldn’t issue any debt. If it had gone on another week or two, Goldman would have failed, they would have gone the way of Lehman, and you’d be talking about Lloyd the way you talk about [Lehman CEO] Dick Fuld.”
Joe Hagan’s new piece in New York magazine brings out a lot of excellent new information, but the most interesting from my point of view is his insight about the period after the AIG bailout and before the announcement of the new FDIC lending program. It seems things were worse than even I thought at the bank, with then-COO John Winkelreid putting up his Nantucket house for sale in order to raise quick cash and management discussing taking the company private to avoid catastrophe. Hagan describes a bank that was in crisis, its share price plummeting to $47, one that was really rescued by the FDIC program, which made bank holding companies (which Goldman had just become, thanks to a hurried conversion) eligible for billions in government-backed lending.
Hagan also includes this detail, about what’s happening with recruitment at Goldman:
Now that the firm is viewed as a virtual rogue state with interests contrary to the greater good, Goldman might attract a different breed of recruit—less Robert Rubin, more Gordon Gekko. Or fewer recruits in general: A human-resources executive at Goldman Sachs, Edith Cooper, says she counted about 20 percent fewer people at recent on-campus recruitment seminars.
I should have something to add to that end of the story later this week. In the meantime, Hagan’s piece undermines a lot of the arguments Goldman has been offering in its defense of late. Of particular interest is his reporting about Goldman’s financial health at the time of the bailouts.
I was on a radio show a few weeks back with a hedge-fund manager, a Goldman apologist, who insisted on the air that Goldman would actually have made more money if AIG hadn’t been rescued, because the bank was properly hedged against AIG’s collapse. My argument in return was a weak one — all I said was something like, “Then why take the money?” — and it wasn’t until the show was over that I realized the proper response to that argument was just, “Bullshit!” Goldman has been making that argument ever since the AIG bailout, but it has never come out and identified that magical counterparty or counterparties who’d have been able to come up with $20 billion after a system-wide financial collapse.
No, the reason Goldman needed state money via the AIG bailout is that in the midst of that financial hurricane, the government was the only entity anyone could bank on being liquid enough after the storm to cover Goldman’s losses. As Hagan put it:
Not a single Wall Street executive I spoke with, including several Goldman Sachs alumni, believe those hedges would have survived an overall collapse of the financial system. A large loss would have been inevitable as lending evaporated, and Goldman Sachs would have struggled to shrink the company to a fraction of its size overnight. But the most glaring argument against Goldman is Goldman’s own: If AIG’s biggest and most important bank customer was hedged against losses in AIG, as it claims, why did the government need to pay Goldman Sachs the full $13 billion?
All of this is fodder, specifically, for the debate about the profits Goldman and other banks have just reported. If these organizations really were on the brink of collapse last year, and would have died without massive government intervention, what does that say about the giant bonuses they’re paying themselves now? I think for one it says that the state rolled over when it should have either imposed long-term compensation restrictions or simply taken these banks over temporarily (as the U.S. would have recommended in any third-world country facing similar problems). It also says that these bankers are, well, nuts. Saved from disaster, they turned the ship around and headed right back for the iceberg.