Some myths refuse to die—like the one brewing now about Goldman Sachs pulling strings in the market meltdown and bailout. Here’s why.
The current rage on what passes for Wall Street these days is to pin as much of the blame as possible for the world's credit crisis squarely on to the wide shoulders of Goldman Sachs. The logic being that since Goldman Sachs—and its loyal alumni—now effectively rule the world, the firm and its offspring do everything they can to make that world better and safer for Goldman Sachs. Everyone else be damned.
The logic of the conspiracy theorists in this regard is, of course, impeccable: Goldman alumnus Josh Bolten runs the White House, while his former boss, Hank Paulson, runs the Treasury. They both speak regularly to former Treasury Secretary Bob Rubin, now over at Citigroup, who ran Goldman before Paulson and who keeps Paulson and Bolton dangling like puppets on a string. They all supposedly touch base with the heads of the Italian and Canadian central banks—both Goldman alumni—and with Robert Zoellick, head of the World Bank, ex Goldman. What's more Paulson is now getting his advice on how to handle the crisis from Ken Wilson, the recently retired Goldman partner and financial-institutions M&A banker, who Paulson just recruited to Washington to help him out. Already at Treasury were Goldman alumni Dan Jester, Anthony Ryan, David Nason and Bob Hoyt, the department's general counsel.
Even if you have the nicest house on the block, if the block is burning down that is of little importance.
And—the conspiracy crowd can't help but point out—Neel Kashkari, 35, a former vice-president at Goldman who Paulson recruited as assistant secretary of international affairs in 2006, has just been appointed—by Paulson—to run, on an interim basis, the new $700 billion bailout fund. Harder to explain is why Robert Steel, the ex-Goldman partner and Treasury official, left Treasury in July for Wachovia after helping push Bear Stearns into the arms of JPMorgan. If Steel was so smart and connected, why did Wachovia promptly go belly up after Steel invested $16 million of his own money on one million shares of Wachovia's stock?
The conspiracy is bunk, of course. "It's preposterous and laughable to say that we're involved in a conspiracy theory with certain select groups of clients to try and take down a firm on Wall Street that we actively did business with every day of the week," explained Goldman Sachs co-president Gary Cohn, in a recent interview. "I need these guys to survive. We all live in the same neighborhood. Right now, I'm the only guy that's got a nice house. My gutters are attached. My windows aren't broken. My shutters are on. But at the house to the right and the house to the left, there are broken windows and shutters. So it doesn't matter how nice my house is. It's worth less than if those houses are nice."
Notwithstanding Cohn's credible explanation, the stature of the myth continues to grow. After Bear's demise last March, newly retired CEO Jimmy Cayne blamed Goldman Sachs, among others, for hastening its death. And at least one former Lehman Brothers banker, Jarett Wait, who left the firm earlier this year for hedge fund Fortress Investment Group, reported back to the senior executives at Lehman, on July 22, that after just a few weeks at Fortress that "it is very clear that GS"—Goldman Sachs—"is driving the bus with the hedge fund [c]abal & greatly influencing downside momentum [at] Leh[man] & others!" according to an email message that Thomas Humphrey, the head of global fixed income sales at Lehman, sent to among others Bart McDade, the president of Lehman. McDade then passed the email on to Dick Fuld, the CEO of Lehman. Fuld responded a few hours later: "Should we be too surprised. Remember this though—I will."
When Fuld testified Monday in front of California Rep. Henry Waxman's Committee on Oversight—ostensibly to explain the chain of events that led up to Lehman's historic Chapter 11 bankruptcy filing on September 15—Rep. Peter Welch, D-Vermont, asked Fuld about the email from McDade and about the idea that Goldman Sachs had a role in bringing down Lehman and its Wall Street brethren. "I have no proof of that at all," Fuld responded.
Welch dropped the line of questioning. But Rep. Dennis Kucinich, D-Ohio, continued to pursue the thread. Before Fuld appeared at the hearing, Kucinich, who abandoned his quest for the Democratic presidential nomination earlier this year, asked Luigi Zingales, a professor of finance at the University of Chicago, why he thought Paulson had decided to rescue insurer AIG and not Lehman. "Gretchen Morgenson of the New York Times wrote a column about the decision to rescue AIG," Kucinich said to Zingales. "She said that Secretary Paulson, a former CEO of Goldman Sachs, made this decision after consulting with Lloyd Blankfein, the current CEO of Goldman Sachs. She also wrote that Goldman Sachs could have been imperiled by the collapse of AIG because Goldman was AIG's largest trading partner. She said Goldman had a $20 billion exposure to AIG. Professor Zingales, when you hear that a decision was made to let Lehman go down and Goldman Sachs is still standing, are you concerned, given these facts, that there is an apparent conflict of interest by the Treasury Secretary in permitting a principal of a firm that he was the CEO with to be involved in these discussions about the survival of Lehman?"
Zingales responded that he was "certainly concerned by that" and also by the role all of AIG, Goldman Sachs and JPMorgan played in the credit default swaps market, perhaps necessitating the rescue of AIG but not Lehman. Not fully placated yet, Kucinich asked Zingales, "If you throw Lehman Brothers overboard, does that help what competitive position may have remained with respect to Goldman Sachs?" To which the professor replied, "I think it's clear that Goldman Sachs benefits from Lehman going under, yes."
By the time Fuld appeared, Kucinich was loaded for bear on the topic. "Does any part of you feel that you were double-crossed by the Secretary [of the Treasury] and he was playing you off against, let's say, Goldman Sachs?" he asked Fuld. Fuld replied, diplomatically. "I would sincerely hope that was not the case," he said. That answer closed the matter for Kucinich for a few minutes.
But when he emerged from the hearing room, he went right up to the assembled bank of cameras. "There are serious questions that were raised by the testimony today about the role of Secretary of the Treasury in the demise of Lehman Brothers," he said, without citing any.
"Today, a former Goldman Sachs employee who works at Treasury was named to oversee the fixes that will come as a result of the $700 billion bailout," he continued. "Goldman Sachs' fingerprints are all over this. My concern, and what I want to get at is, did the Treasury Secretary use his position as a former head of Goldman Sachs to push Lehman Brothers off the cliff? That's what I'm interested in and people have to know how this thing was perpetrated. Today is just the beginning. Mr. Paulson now has effective control over $700 billion. We've got to get deeper into this. There is something rotten going on and we've got to stay on it."
Some myths refuse to die.