Inside Lloyd Blankfein's Head
The Daily Beast's Wall Street shrink, Doug Hirschhorn puts the Goldman CEO on the couch.
I watched the entire Goldman Sachs/Senatorial hearing yesterday. The two groups really are speaking different languages. The senators' hearts are in the right place: they're trying to defend the American public. That's their job, and that's what we pay taxes for. But it was almost embarrassing to see them asking the same question over and over.
Now, I'm not defending Wall Street. It certainly has plenty of flaws. But I understand how Wall Street operates, and most people do not. And what the senators don't understand is how Goldman Sachs—and Blankfein—can feel remorseless about selling a product that they themselves are betting against.
He knew he was the smartest guy in the room—smart enough to know that he shouldn't convince people of that.
Blankfein sat in the hearing for almost four hours and he acted like an elite athlete, with impeccable composure. He stumbled a little bit with the occasional 'ums' and 'uhs'—personally, I think that was for show—but was very thoughtful in his responses. He wasn't arrogant; he acted humble, appearing more like an unassuming accountant. Under tremendous pressure, he didn't sweat once. That's how you get to that level of the game: by playing that role with quiet confidence.
• Watch Highlights from Goldman’s Testimony• Tunku Varadarajan: The Hearing from HellHe knew he was the smartest guy in the room—smart enough to know that he shouldn't convince people of that. There wasn't a single second where he had to throw his weight around and say, ' You guys are just idiots.' He wasn't condescending, but I'm sure he was thinking, ' The people that have the power in this country really don't understand how the system operates.' Even more disturbing is that they—meaning the U.S. government—created the system.
Here's what Blankfein, a creature of trader culture, was probably thinking—" Senators, you're asking me the wrong questions. You're thinking linearly rather than systematically."
Goldman provides liquidity. As Blankfein said: "We're a shop that sells stuff. That's our business. You can buy from us, you can buy from Barclays, you can buy from anyone. It's not like we're trying to get you to buy it, it's not like we're marketing it or soliciting you. We're saying, 'It's your choice. If you want to buy from me for this price, then I'll sell it to you.'"
Here's the thing that most people don't understand: Because Goldman has sold it, they don't own it anymore, but still need to buy it back at some point. Which means they're now short that product.
The senators made it sound like Goldman duped the consumer. Blankfein tried to explain was that there are two sides to his business. One side is straightforward: If you want to buy it, we'll sell it to you. If you want to sell it, we'll buy it. That's the franchise, principal or market-making part of the business, which provides liquidity. The bank gets paid a commission for it.
But the senators didn't seem to end the second part. 'I understand I had to buy something from you, and you had to buy it back,' the senators told Blankfein. 'But you, Goldman Sachs, KNEW it was a crappy product.'" Senator Levin, the subcommittee chairman, kept comparing Wall Street to a car dealership that sold a customer the wrong car. Sorry Senator, wrong analogy.
"'I didn't sell you the wrong car," Blankfein essentially replied. "You ASKED for that car. Whether I think it's a bad car is irrelevant and not the role you asked me to fill. In this situation, Goldman Sach's was not acting as an advisors to our clients, we were only providing liquidity by making a market for this product."
The senators have their agenda: they want him to admit something that's out of context. And he's saying, 'I'm trying to explain this to you but I'm not doing a good job."
Two separate languages.
The most interesting moment, to me: Explaining synthetic CDOs, a function of smart people creating smart products to make creative or exotic investments with something called derivatives. They didn't exist 50 years ago. It was clear from the look on Blankfein's face that when the senator brought up synthetics, Blankfein wanted to say, ' Yeah, you're right. The world would be OK without synthetics. The markets operated just fine without them.'
He really didn't have a good defense. As he was explaining them you could see the wheels churning: He realized that they sound ridiculous.
No matter. In the end, it was clear that Blankfein truly believes that Goldman Sachs didn't do anything wrong. They provided a market—liquidity—for that specific side of the business. He convinced me. As the next round begins, we'll see if he convinced the SEC as well.
Dr. Doug Hirschhorn is one of the premier trading coaches on Wall Street, whose client list includes Deutsche Bank and numerous billion-dollar hedge funds. The co-author of The Trading Athlete and 8 Ways to Great, he is a former columnist for Trader Monthly, and a regular commentator on CNBC.