Why I Left Goldman Sachs: A Wall Street Story (17 page)

As the markets fell, Bobby’s fortunes rose. He didn’t have to call clients with ideas much; the clients were calling him, frightened, and he was charging them significant embedded spreads—which were not always transparent to the client—for the privilege of trading with us. And as his business swelled, so did his head.

He would come in at 9:00
A.M.
, when everyone else had shown up at 6:45; he would leave at 4:16
P.M.
on the dot, one minute after the U.S. equity futures markets closed. There were two young guys who backed him up on the Derivatives desk, and they always used to complain about how he would go AWOL. Plus they were doing all the hard work, yet he was getting all the glory, and the money.

But money talks. Once Bobby started bringing in all these revenues, he could come and go as he pleased. No one would ever know where he was. If anyone asked him why he’d come to work at noon, he would tell them, with a completely straight face, that he’d been at physical therapy. He was a marathon runner, so it could have been true. But it also became an inside joke: “Where’s Bobby?” “Physical therapy.” Cue eye roll. He did whatever he wanted, and the firm said nothing about it because they worried that if he left, his revenues would disappear.

Just like that, Bobby had turned from the goofy guy into the cool guy. He was on the charity benefit circuit in Manhattan and out in the Hamptons. He dated a lot of models. For Tim Connors’s wedding, he flew in a beautiful girl from London to Martha’s Vineyard as his date. I heard her accent and realized that she was from South Africa—then found out she was an Oppenheimer, the daughter of one of the richest families in the world. He rode a Vespa to work, and bought a share in the Surf Lodge, a club that was then the new hot spot in Montauk.

The partners ate this up. A few of them tried to tag along when Bobby went out (almost every night of the week), because they wanted to live vicariously through him. And he believed in his press. He had become a Master of the Universe while the financial markets were cratering, a rainmaker in the midst of a hurricane.

On March 16, 2008, I was watching my TiVo-ed recording of
Meet the Press
when I saw the news on my BlackBerry that JPMorgan Chase had bought Bear Stearns for $2 a share. At first I thought the number was a typo. As late as January 2007, Bear Stearns had been trading at $172 a share, and at $93 just the month before, in February 2008. The firm had recently erected a shiny new tower on Madison Avenue; the building itself was worth $5 a share.

But it wasn’t a typo. The background was that the Federal Reserve Bank of New York was making a $30 billion loan to JPMorgan Chase (still collateralized by Bear Stearns’s unencumbered assets) to buy the firm at $2 a share, 7 percent of its market value before the weekend.

People put two and two together and immediately realized the reason behind the fire-sale price: the assets on Bear Stearns’s balance sheet were so toxic that JPMorgan was actually taking on billions of dollars in immediate losses. But the deal had a sweetheart fragrance about it, and soon the financial world was accusing the Federal Reserve of giving Bear Stearns to JPMorgan on the cheap because of the latter firm’s robust balance sheet. Ultimately, Jamie Dimon of JPMorgan raised the purchase price to $10 a share: still pretty sweet.

Even then, though, with the subprime mortgage market teetering, the official view was that the fall of Bear Stearns had just been a glitch.

On the Goldman trading floor that Monday, the consensus was that Bear was a firm that had gotten a little over its skis. The then-chairman of the SEC, Christopher Cox, said that the cause of Bear Stearns’s demise had been a crisis in investor confidence rather than a lack of capital: in plain terms, a run on the bank. There was a certain amount of truth to this, but to be honest, on the desk, we thought Bear was a firm with an irresponsible appetite for risk, and that what had happened to it could not happen to Goldman. We were smarter and better.

Still, Bear’s fall infected the marketplace with fear that the same thing could happen to someone else. Everyone needed cash, but no one wanted to lend it. Long-term, secure borrowing costs suddenly became very expensive for the remaining pure investment banks: Lehman Brothers, Merrill Lynch, Morgan Stanley, and Goldman Sachs. Investment banks did not have depositors or offer checking accounts to Mom and Pop; nor did they have access to very cheap financing through the Federal Reserve’s borrowing window.

So, as a way to get cash in the door—to use as a security reserve to stabilize its balance sheet, or to “rehypothecate” (reallocate) for whatever business purposes the firm had in mind—Goldman Sachs (and the other banks) devised the
funding trade
.

It worked this way: a client—say, a German or Dutch or U.S. asset manager or pension fund, or an Asian or Middle Eastern sovereign wealth fund—would commit a substantial amount of cash (say $500 million) to the firm for one year. In exchange, the firm would guarantee to pay the client the returns of whatever benchmark the client chose (say, the S&P 500 Index, or the Russell 2000 SmallCap Index), plus an additional, very large (say, 2 percent) “coupon,” a rate the client would not be able to get elsewhere. In effect, Goldman was getting to borrow large amounts of money at 2 percent or so, as opposed to real borrowing costs of, say, 4 percent.

That was the upside for Goldman; the catch for clients was that they were taking what’s called
counterparty risk
—completely fair in the Lloyd Blankfein, we’re-all-big-boys world of investment banking, but dicey nonetheless. The risk was simply this: if Goldman Sachs went bankrupt, the client’s money might vaporize.

And what were the chances of Goldman Sachs—
Goldman Sachs
—going bankrupt? Wasn’t going to happen. Bear Stearns had been foolish to tie up so much of its business in subprime mortgages. (What had been
really
foolish was betting so much
on
subprime mortgages, rather than against them…)

I told my clients, “Look, you have to make a determination. Do you think Goldman Sachs is going to go bankrupt? If the answer to that is yes, you should not do this funding trade. However, if you believe that in a year’s time Goldman Sachs will still be around, you should do this trade, because you will outperform your benchmark by two percent, and that two percent will make your year.” It was easy for me to make this pitch with a straight face back in the winter of 2008. Despite what had happened to Bear Stearns, I thought Goldman had as much chance of going down as the sky did of falling. Other dominoes might tumble, but we would be the last one standing.

Many of the clients who did the funding trade would come to regret doing so before the year was out. In the depths of the crisis that fall, as each week saw a new financial institution circling the drain, a number of clients wanted their cash back early. Some banks took a measured approach, telling their clients, in effect, “We’ll give you the money back at seventy-five to eighty cents on the dollar—we will make some money on this to reflect the turmoil in the world, but we’re not going to rip your eyeballs out.” Goldman Sachs made it much harder, almost impossible, for clients to get their money back. Putting an extremely stringent interpretation on the “break clauses” in the funding trade contracts, Goldman offered the clients far less than the other banks. This burned bridges with a number of important institutional clients. Even today, there are large clients across Europe, the U.S., and Asia who hold a grudge against the firm because of its behavior then.

“Our assets are our people, capital, and reputation. If any of these is ever diminished, the last is the most difficult to restore.” That is Goldman Sachs’s second business principle. But a comment made during the crisis by a European partner summed up the latter-day evolution of Goldman’s business principles. A number of sales colleagues had grown frustrated with our traders’ unwillingness to make a fair price for clients who wanted out during the teeth of the crisis, so they approached one of the partners in charge. “If I have to choose between my reputation and my P&L, I choose my profit-and-loss,” the partner said back to them. “Because I can ultimately recover my reputation, but if I lose a lot of money, I can’t recover that.”

In April 2008, a couple of weeks after the fall of Bear Stearns, I got on a plane and flew across the Pacific to visit several important clients in Asia. I traveled with another Goldman VP and with a partner named Brett Silverman. Brett had joined Goldman after business school and had made his name trading blue-chip technology stocks, such as Microsoft, during the peak of the Internet bubble. He was a culture carrier who had made partner by age thirty-seven.

After the customary formal greeting, we met with the first set of clients in their offices, high above the Asian capital, with amazing panoramic views all around. As usual, the clients—five of them in all, heads of portfolio management and risk management among them—lined up on one side of the table. The three of us were on the other side. We waited for them to sit down before taking our seats.

The head of the fund seemed uncertain. “What does Goldman Sachs think?” he asked Silverman. “Are we out of the woods? Is the worst over?”

Brett looked the client in the eye. “I’m very bullish,” he said. “I think this is an anomaly. I think things are going to get much better. I’d be buying the market if I were you.”

Meaning he’d be buying stocks.

I sat there surprised, thinking about the strangeness of Brett’s statement: from all I’d seen and heard, there was not a lot of evidence to suggest such optimism.

Was he being naïve? Strange to apply that word to a Goldman Sachs partner, a man ten levels above me, making (at a guess) at least $5 million a year, but that was how it seemed to me at the time.
One of the five biggest investment banks in America has just been swallowed alive, and you’re giving clients the all-clear?
It made no sense to me.

If he truly was being sincere, and I think he might have been, he couldn’t have been more wrong, given what would happen that fall.

I was on the road with Silverman for two days, and he seemed genuinely (if not strangely) calm. That night, he took me and the other VP and a couple of Asian clients out to dinner at a traditional restaurant in the capital. We sat at a low table, on floor mats. Before the clients arrived, Brett took out his iPhone. (This was not long after the iPhone had first come out, and being able to watch a video on one was still a novelty.) He had something very special to show us. Every year, he was the partner who made a famous prank video—an elaborately produced hoax, along the lines of
Candid Camera
or Ashton Kutcher’s
Punk’d
—that was screened at the Goldman holiday party in December. What he showed us now was one of the funniest things I had ever seen and was definitely worth watching again while we had some time to kill.

For the prank, Brett had planted hidden cameras in one of the firm’s conference rooms and brought in a professional actor impersonating a major potential hire for Goldman to be interviewed by several partners (including Matt Ricci) who were not in on the joke. The scenario was that the “candidate” had just made $100 million for another bank, and we were trying to lure him away. Brett had told all the partners that this was a terrific guy, and that we really needed to hire him. But when the partners came in, the “candidate” acted like a complete asshole, propping his feet up on the desk, interrupting the interview to ask if he could order some food. When he got a sandwich, he tucked his napkin into his shirt. These were very senior partners, and they began to get flustered, red-faced, and angry.

One of them asked the guy, “What are your goals?”

“My ideal lifestyle would be to have two helicopters,” the guy said, with a completely straight face. “I’d like to be at a ski slope and have one helicopter at the bottom of the mountain to take me to the top, and then, after I ski down, another to take me back up.”

Finally the interview came to an end. “Do you have any questions for us?” one of the partners asked.

“I have a lot of mental health problems,” the guy said. “How’s the firm’s psychiatric coverage?”

By the time the clients showed up to the restaurant, the three of us were rolling on the floor. We had a wonderful, lighthearted dinner—with little in the way of business discussed. Maybe everything was all right after all.

The markets went into a weird period of calm in the summer of 2008. Everyone was waiting for the other shoe to drop; no one—including Treasury Secretary Hank Paulson and New York Federal Reserve President Tim Geithner—knew what was going to happen next. In hindsight, Paulson and Geithner should have been doing some more intensive contingency planning. There were research analysts on the Street predicting a chain reaction in which the markets would go after each bank, one by one, from the smallest and weakest to the biggest and strongest. Some even foresaw which dominoes would fall next.

By Friday, September 12, 2008, everyone knew it was the day of reckoning for Lehman Brothers—either it would go bankrupt or someone would save it. Deep down, I didn’t think it would be allowed to go bankrupt, but part of me thought this may have been the right thing to happen. Dying animals should be allowed to die. I left the office that day knowing that the events of that weekend would be crucial, but that there was nothing I or any of the other hundreds of thousands of people on Wall Street could do but stay glued to the TV and our BlackBerrys. We were awaiting news from the New York Fed, where the heads of the country’s most powerful financial institutions were huddled with Paulson and Geithner trying to solve the hardest brainteaser of their lives.

That Saturday night, September 13, Nadine and I were out to dinner with another couple, at a favorite Italian place of mine called Supper, in the East Village. It was a schlep from the Upper West Side, but this was a weekend for good, rustic Italian food. The other couple also worked in finance: he in private equity, she at a hedge fund. The mood wasn’t one of panic; it was one of astonishment. We all couldn’t stop saying how surreal the world we were living in had become. It felt as if we were in a movie. I remember saying that night that if you had told me a few years ago that Bear Stearns and Lehman Brothers could both vaporize within months of each other, I would have called you crazy. This was the stuff of the weirdest science-fiction movie any of us could think of.