Why I Left Goldman Sachs: A Wall Street Story (18 page)

Things would get stranger.

Over that weekend of September 13 and 14, Merrill Lynch and Lehman Brothers—both of which turned out to have been as badly exposed in the subprime mortgage market as Bear Stearns—toppled. On Sunday, Merrill Lynch was acquired by Bank of America, and in the early hours of Monday morning, Lehman Brothers filed for Chapter 11 bankruptcy. It was then (and still is) the largest bankruptcy in U.S. history. With two investment banks down, it was only a matter of time before the rest of us were in the crosshairs.

And the hits just kept on coming. The Dow lost just over 500 points on Monday the fifteenth, the biggest single drop since 9/11. Money market funds—the safest investment around, with minuscule rates of return—began notching negative returns. If you put your funds into a money market at that point, you would have gotten less back than if you’d stuck them in a mattress. The term for this is
breaking the buck
. No one thought this could ever happen. It happened.

With three investment banks gone by Monday, September 15, both our stock and Morgan Stanley’s got pummeled. On Tuesday of that week, the stock of AIG, the world’s biggest insurance company, dropped 60 percent, after already having dropped more than 95 percent from its fifty-two-week high of $70.13. AIG was an insurance institution that affected millions of lives in almost every country in the world, and because of some reckless gambling in credit-default swaps,
**
it was on the brink of collapse. The Federal Reserve stepped in and gave AIG an initial $85 billion bailout. This would grow. After people saw what was going on with AIG, the reaction was:
Holy shit!
Wall Street likes predictability, and the way the government was flip-flopping between bailing out companies and letting them fail was not helping the markets.

Uncharacteristically, we were rooting for Morgan Stanley, our closest competitor—as they were for us. We were in this together.

There was a lot of talk about mergers. People up to the highest levels in the government were saying Goldman needed to find a partner, a bank with a lot of deposits, one to make us more stable. Who was the right partner? Was it Wachovia? Washington Mutual? Citibank?

Screw the mergers
was what everyone on the trading floor was thinking.
We will survive this thing. We are Goldman Sachs.
Outsiders would probably have called us arrogant, but everyone felt that what made Goldman special would be lost if we merged.

It had been a brutal week. Lehman, Merrill, AIG—it felt like an environment where almost anything could happen. Nothing seemed out of the realm of possibility. Several of us went in to the office on Sunday evening, September 21, because a lot of news had been breaking over the weekends, and because the U.S. futures markets open at 6:30
P.M.
, New York time, on Sunday, just as the Asian markets are opening on their Monday morning. I had seen how, after the 2003 blackout, futures were the first place people looked to get a sense of whether the market was panicked. If there was any big news that weekend, the futures markets would take the financial world’s temperature on it.

My colleagues and I were phoning and e-mailing clients who were reachable on a Sunday evening, giving them updates, trying to reassure them that we were there for them if they needed us. But at the same time we were also worried about ourselves. Uncertainty hung heavily in the air. We were just trying to figure out what was going on in the world, and most of us stayed till quite late to see how the Asian markets were trading.

By 9:15
P.M.
nothing much had happened, so I left, along with a younger colleague. We got into the elevator on the fiftieth floor. As the doors were closing, a big hand reached between them, and they opened again. The hand belonged to Gary Cohn, who stepped into the car with us.

It was the strangest thing to happen at 9:15
P.M.
on a Sunday, when only a few people had been on the trading floor. The doors closed. Gary looked very tired and scruffy: he was wearing jeans and a sweater; he hadn’t shaved in a couple of days. He nodded to me—I think he recognized me from the days when Equities and FICC had first merged on the Futures desk and he used to come over and visit his friend from the old days in the commodities pits. “Crazy world we live in,” I said, in the blandest, most neutral tones I could find. It was a touchy time, and I was just trying to be friendly.

“Tell me about it. I’ve been here the whole weekend, and I haven’t gone home much,” Gary said. He looked as if he could have slept on his office couch the previous night.

I knew, and I’m sure my associate sensed, that this was the end of the conversation. We knew the world was in turmoil, and even if there wasn’t a specific reason for Gary to be there, he’d probably just been strategizing. We would very soon learn the truth.

As I got into a cab outside One New York Plaza to head back uptown to the Upper West Side, I checked my BlackBerry. A fresh work e-mail caught my eye. “The Federal Reserve Board approved the applications of Goldman Sachs and Morgan Stanley to become bank holding companies.”
Holy shit!
So that was why Gary Cohn had been working around the clock in the office all weekend. This was huge.

In a single weekend, the institution of the investment bank, as it had once been construed, had vanished forever. The Goldman Sachs of Sidney Weinberg, Gus Levy, and John Whitehead had vaporized—cleverly converted, through the eleventh-hour labors of desperate men (Lloyd Blankfein, Gary Cohn, and Morgan Stanley’s then-CEO, John Mack, among them), into an institution that could borrow money from the government at zero interest and then invest it at government bond rates, in essence making free money. Goldman Sachs and Morgan Stanley were now effectively getting paid by the government just to stay in business.

Out of the corner of my eye I saw Lloyd Blankfein, the CEO of the company, walking toward my group, Derivatives Sales, with a throng of people. They were on the other side of the football field–size trading floor, but steadily moving in our direction. A couple of photographers and someone with a video camera were walking along with them. This was a strange sight. You never saw photographers on the trading floor, especially not during what felt like financial Armageddon. The markets were melting down, and Lloyd was smiling from ear to ear, as was everyone in the crowd. Then I saw that the group moving closer to my desk was full of bigwigs: the global head of the Securities division, Harvey Schwartz; the head of North American sales, Enrico Gaglioti. There must have been seven or eight partners, but none of these bigwigs was as big as the man they were walking with.

The Oracle of Omaha, Warren Buffett. Indisputably the greatest investing mind of his time, and possibly of all time. His Berkshire Hathaway had become legendary in its ability to see value and generate returns for its investors year after year after year.

This was a good day for Goldman Sachs amid a storm of bad ones: Warren Buffett had come to save the firm from extinction. We were all taken by complete surprise: only two days after we had converted ourselves into a bank holding company, Buffett had extended us a lifeline, in the form of a capital injection of $5 billion. It was an incredibly attractive deal for him, one he couldn’t refuse. He would receive a 10 percent annual dividend—Goldman Sachs would pay him an extra $500 million a year above and beyond his investment—plus he had the right to buy $5 billion of additional stock in the firm at a discounted price in the future, through warrants (similar to call options) the firm had granted him. An expensive deal for Goldman, but the stamp of approval of Warren Buffett was like gold. It also gave us momentum quickly to go out and raise an additional $5 billion in capital from our clients, some of the biggest institutional investors in the world. What was more important than the Oracle’s $5 billion investment was the powerful shot of confidence it gave us, and the message it sent to the market: both the money and the gesture had made us more stable.

As the group headed down the long row that ran down the middle of the trading floor, Warren looked around, smiling; Lloyd was pointing things out to him. Then they decided to stop—directly by my desk.

“Lloyd, let me say a few words,” Buffett said.

An associate quickly scrambled and got Buffett connected to the handset at the desk directly next to mine, so he could speak over the Hoot, reaching each and every one of the six hundred traders on the floor.

The moment Buffett started talking, applause erupted. It was the kind of applause I had heard only one other time in my career: on the one-year anniversary of September 11 when everyone cheered New York’s resilience. Everyone on the floor was now standing, beaming, clapping for what felt like minutes.

“I want you to know that I have always admired Goldman Sachs,” Buffett said, holding the speaker of his handset close to his mouth and the receiver to his left ear, “from the time my dad brought me to New York City when I was ten years old and we came to visit Goldman Sachs. I met Sidney Weinberg, and I have admired the firm ever since.”

You couldn’t make this stuff up.

“Goldman Sachs has the best people, you are the best firm, and I couldn’t be prouder or more happy about my investment.”

A roar of applause erupted again. It didn’t stop until Lloyd and Warren had left the trading floor.

It was a moment I will always remember. I still have a photo that a colleague snapped on his iPhone: me, in my white shirt and bright blue tie, standing to Buffett’s right, Lloyd to his left, and dozens of my colleagues crowded around the Oracle, every single one of them beaming with pride, and some hope. For a brief moment, all was right with the world.

A few days before Buffett’s visit, treasury secretary Hank Paulson famously went to Speaker of the House Nancy Pelosi with a three-page proposal—Paulson had wanted to keep the proposal short, to facilitate its quick passage through Congress—for TARP, the Troubled Asset Relief Program, a $700 billion program to save the banks. People were stunned at Paulson’s audacity: both for requesting an unprecedented amount of money, and for doing so in such a short proposal. TARP was a way for the federal government to purchase toxic, illiquid assets from the banks in the hope that the move—in effect, the biggest bailout in financial history—would revive the catatonic capital markets. There was a lot of back-and-forth in Congress, a fuller proposal was asked for, and as the program was about to go up for a vote, the Jewish High Holy Days approached.

I’m not extremely religious, but I have always been traditional, and the Jewish holidays are important to me. I had always taken off work and gone to shul on Rosh Hashanah and Yom Kippur, with no questions asked by my managers. My girlfriend’s family, who lived in Dallas, had invited the two of us down to celebrate the Jewish New Year. Nadine and I had been dating for two years by now, and would alternate holidays between my cousins in Chicago and her family in Dallas. Nadine had left already that weekend, but I changed my ticket so I could wait until the last possible moment. Now, however, the earth was shaking. It was Monday, September 29, 2008. Rosh Hashanah was to start at sundown, and Congress was to vote on Paulson’s proposal that afternoon.

I went to an observant Jewish managing director on the floor to get some guidance. Should I leave the ship when it felt like it was sinking?

“I need your advice, man,” I said. “I’m supposed to leave now to catch a flight to Dallas for Rosh Hashanah. It feels like the whole financial system as we know it could collapse any minute and take us down with it. I have never worked on
Yontif
before, but are these exceptional circumstances? Do I stay?”

He didn’t hesitate. “It’s not even a choice,” he said. “I don’t care if Goldman Sachs goes bankrupt this minute; you and I are not going to change the outcome. Rosh Hashanah is the biggest day of the Jewish year. Go.”

He had put the world into perspective for me. I got in a cab and headed to the airport.

I was running late for my flight, and the whole way, I was on the phone with my associate on the desk, asking her how the markets were looking ahead of the congressional vote. “It’s looking okay,” she said. “The market is holding in; the market is expecting TARP to pass.”

I got to the airport and rushed through security, worried I was going to miss my flight. I made it through. Running to the gate, I phoned my associate again. TARP was the only thing the market was hanging its hat on to instill some stability and provide a way forward. “So, what’s the latest?” I asked.

“You’re not going to believe this,” she said. She repeated it: “You are not going to believe this.”

“What? What?” I said.

She sounded stunned: “They did not pass the bill.”

Now, this was very unexpected. Everyone thought Congress had realized that the patient was about to die, and that TARP was essential. But the House Republicans had revolted, had changed their minds at the last minute and voted down the bill.

“Holy shit,” I said. “What’s the market doing?”

“It’s tanking, it’s tanking, it’s tanking,” my associate said. She meant the S&P 500: between our two phone calls, it had fallen something like 6 percent. A bad day on Wall Street is a drop of 1 or 2 percent, which doesn’t happen often. A terrible day is a drop of 3 percent, which happens maybe a few times a year. Markets don’t drop 6 percent while you are on a five-minute conversation. This was panic. The Dow Jones Industrial Average dropped 777.68 points that day—its single largest point drop in history.

When I got to the gate, I had to turn off my phone, which, in one respect, was a good thing (since I could now spend three and a half hours unplugged from the anxiety), but in another respect, was bad (since I could think about little else). When I landed in Dallas, I checked on the markets, which had since closed. Blood in the streets.

I got on a train to Nadine’s parents’ house, in the Dallas suburbs. As I stared out the window at the unfamiliar landscape, my phone rang. I jumped, then smiled when I heard the voice of my best friend Lex on the other end.

After Stanford, my path and Lex’s had diverged: while I had gone to Goldman Sachs, Lex had stayed in Palo Alto, worked for and founded various start-ups, and done well for himself as an entrepreneur. Despite the fact that he was an atheist, he always called me on Rosh Hashanah, to wish me
Shanah Tovah
—Happy New Year. And while this Rosh Hashanah was anything but happy, I was comforted to hear from him.

Ever since the financial world had started coming unglued, I’d been getting a lot of texts and e-mails from friends wanting to make sure I was okay. “I hope you’re surviving,” one friend had texted me the day before. Everybody knew I was in the center of the storm, sitting in the front row. After acknowledging the holiday, Lex asked the same question. I told him I was hanging in there.

Then the conversation took a turn.

Instead of saying what I wanted to hear from him in the brief time we had to chat—which was basically “I hope everything turns out okay with Goldman and that things calm down”—Lex started firing questions at me.

“Do you think TARP is justified?” he asked. “After all, wasn’t it the banks who took such irresponsible risk and got us into this mess?”

“Yes, Lex, but that isn’t us. Goldman Sachs didn’t have the same kind of toxic assets on our books. We made smarter decisions.”

I was looking for someone to be on my side, not for questions.

“What about the people whose 401(k)s are getting decimated? Where’s their bailout coming from?”

“I don’t know, Lex. I’m right in the middle of this thing.”

Now, Lex is one of the most decent, moral people I know. But he is also a very analytical guy—hence the atheism. So at the moment, Lex was just being Lex. He always likes to try to find a counterargument to every argument. Later he admitted that, to a certain extent, he was playing devil’s advocate. His questions were good ones, but not necessarily the best questions from your best friend at that moment.

“And what about Lehman Brothers?” he said. “What were they up to?”

“Lehman Brothers went down because there was a witch hunt,” I told him. “People were speculating that Lehman was running out of cash, therefore it became reality. People started pulling their money out; it became a run on the bank. That’s all it was.”

“Well, was this a run on the bank or was Lehman Brothers taking bad risks? I read that they had some really bad stuff on their books.”

I knew about that, too, but I felt that the whole disaster was still too fresh for anyone to make snap judgments. “Lex, I’m right in the middle of all this right now,” I repeated, “and I’m really stressed out. I can’t believe some of the stuff I’m seeing. I’m worried.”

I meant it. My whole career was in the balance; my future was in the balance. And not just my future. Over the summer I’d helped my sister move in for her freshman year at college in Illinois—an education I was very proud to be able to pay for. I was also trying hard to convince my mother to move to America from Johannesburg, where the crime rate seemed to be rising every day. (My dad was already planning to come over to take his pharmaceutical exam and work here afterward.) That, too, would take money—money I was glad to have, for now. If Goldman Sachs went belly-up, so would all my plans. What about my relationship with Nadine? I loved America and wanted to stay here. Could I get a visa to work somewhere else? Would I have to go back to South Africa?

Also, as corny as it may sound, I was worried about the firm. I was very proud of Goldman Sachs, and I did not want it to go down. In my mind, that would have been a terrible, unimaginable thing. Even though I knew that the financial crisis was not life or death, it felt as if we were fighting a war.

“Lex,” I said. “We have only five minutes on the phone—I don’t need an inquisition. I need you to be a friend.”

He apologized. If I had nothing else, I thought, I would still have friends and family.

In mid-October, Hank Paulson summoned to Washington the heads of the nine biggest banks and told them that, whether they liked it or not, the government was going to give them a lot of money: more than $100 billion on that day alone. The banks were, in the phrase that became famous, “too big to fail.” Some of them—including Goldman Sachs, in the person of Lloyd Blankfein—told Paulson they didn’t need the cash. Paulson told Lloyd and the others that whether they thought they needed it or not, they were going to take it.

And take it they did—all of them. The rationale was that if some banks took the money and others didn’t, the TARP funds could be seen as a stigma for those that accepted them:
This bank is in such deep trouble that it needs a bailout
, the world could think. Treasury figured the best way to keep the playing field level was simply to make everyone take the funds. (Most of these banks would also pay their executives substantial bonuses that December—on the backs of taxpayers, many taxpayers felt.) And what the world wanted to know was, wasn’t the fact that the government had to give hundreds of billions of dollars to banks that had made a lot of bad investments not just a bad thing, but a
really
bad thing?

Throughout the mayhem, there was a sense of pride on the trading floor about one of our own being appointed to head Treasury. Because of his background at the helm of Goldman Sachs, I think there were few people in the world who would have been better equipped to make real-time decisions on such difficult financial problems as Hank Paulson. At times I have shuddered at the thought of what it would have been like for either John Snow or Paul O’Neill, Paulson’s two immediate predecessors, to have been running Treasury during the peak of the financial crisis. I think history will judge Hank well.

As the markets continued to crater that fall and winter, it continued to feel as though the whole financial system might fail at any minute. A persistent feeling of doom hung over the trading floor, where very little trading was going on. To their credit, Lloyd Blankfein and Gary Cohn were proactive in trying to rally the troops during the crisis: they were frequently present on the trading floor, and they showed strong leadership. But true leadership was coming from only the very top of the firm. Our immediate leaders, the partners, were a completely different story. Many seemed to be holed up in their bunkers.