With Wall Street abuzz about Goldman Sachs's strong second quarter earnings news, some context is in order. Here's one perspective:
One morning this spring, the Treasury secretary, Timothy Geithner, was sitting at a table looking up at a Democratic congresswoman peppering him with rapid-fire questions about how one New York investment bank managed to find its way into the middle of so many aspects of the federal government's unusual intervention in the financial sector. The member of the House Financial Services Committee asked about Mr. Geithner's plan to pick five asset managers to manage funds as part of the Public-Private investment program.
"Is it possible Goldman Sachs could be one of them?" she asked. "Let me tell you why I ask that. You hear a lot about the dissatisfaction about the bonuses, etc, but underneath all of this is a conversation about the linkages, and the connections, of the small group of Wall Street types that are making decisions, and I just want to ask you, because you may be able to clear some of this up. It is true that Goldman Sachs received money from AIG, is that right?…How much was that?"
She went on: "And also they received money from the TARP program, Goldman Sachs, is that right?"
Then she pointed out that both Mr. Geithner's predecessor as Treasury secretary, Henry Paulson, and Mr. Geithner's Treasury Department chief of staff, Mark Patterson, had worked at Goldman Sachs.
"Was Goldman Sachs involved with the decision that was made, that weekend, before they came to the Congress to ask for money, on the sale of Bear Stearns? Was anybody from Goldman Sachs involved in that discussion that weekend?" she asked, also pressing on whether Goldman had been involved in the decision not to support Lehman Brothers.
And then she summed up her line of questioning: "The talk is, underneath, that you may not know about, is that the small group of decision-makers, at the center of it, is Goldman Sachs, and that's what causing a lot of the distrust, because people are thinking, or believing, that Goldman Sachs, because of the connections, have had a lot to do with the decisions that are being made."
Mr. Geithner flatly rejected the accusation: "Of course I am aware of this concern. I think it's deeply unfair to the people who were part of these decisions, to suggest that they were making judgments that in their view were not in the best interest of the American people." But he also said he could comprehend why the questions were being asked. "I understand that concern, I understand that concern," he told the congresswoman.
The congresswoman asking the questions at that congressional hearing, Maxine Waters, last came to national prominence in the late 1990s, when she was ardently demanding a probe of the accusations that the Central Intelligence Agency was responsible for the crack epidemic in American inner cities. So it is easy to dismiss her as highly susceptible to conspiracy theories that, like the one about crack cocaine, turned out to be wrong. But what is remarkable about the anti-Goldman Sachs "talk," as Waters describes it, is that it has spread from the fringes of the far left to the American mainstream.
While the CIA-crack cocaine connection remained largely confined to the pages of the newspaper that launched the accusation, the San Jose Mercury News, there's hardly a mainstream newspaper or magazine in America that hasn't trafficked in one way or another in the Goldman conspiracy theory. Portfolio, Condé Nast's business magazine, got the ball rolling in its February issue with an article listing eight separate Goldman yarns, including crediting the investment bank with electing Barack Obama president ("As a group, Goldman Sachs employees were among the largest donors to the Obama presidential campaign, giving more than $884,000," the article said, calling his election, "the completion of Goldman's meticulously crafted plan to become a superpower. The firm now has the clout to impose its will on the financial markets—and the world.")
Portfolio soon went out of business, but the conclusion was picked up by Marketwatch, a site owned by Rupert Murdoch's News Corp., which in April published a column headlined, "Jack Bauer can't stop 'The Goldman Conspiracy'; 10 reasons why Wall Street has absolute power over America's democracy." Mr. Murdoch's flagship, The Wall Street Journal, piled on in May with a lengthy front-page article headlined "New York Fed Chairman's Ties to Goldman Raise Questions," pointing out that at the time that the chairman of the Federal Reserve Bank of New York, Stephen Friedman, approved Goldman's application to become a bank holding company, Friedman was a member of the Goldman board of directors, and that he owned as many as 98,600 shares of Goldman stock.
The New York Times, for its part, ran a business-page column reporting that Goldman "seems to be a part of more conspiracy theories than the Central Intelligence Agency." (Maxine Waters, take note.) "A bank tells the truth, but maybe not the whole truth," was the display copy in the Times.
Forbes published an article blaming Goldman for "oil price manipulation" that, by the magazine's account, contributed to the bankruptcy of a privately held Tulsa, Oklahoma, oil pipeline company. The New York Observer ran an article by a former partner at Lehman Brothers, Michael Thomas, lamenting that the average pay at Goldman is $569,220, fulminating, "what Goldman is up to is disgusting," and likening the Goldman employees to the money-changers that Jesus threw out of the Temple. The Huffington Post headlined a dispatch "AIG Bonus Bombshell Raises New Questions About Goldman Sachs"; the article was written by Thomas Edsall, a veteran of the Washington Post who is now Pulitzer professor at the Columbia School of Journalism. (Goldman's general counsel is a Columbia trustee.) The Atlantic ran an article by an MIT economist talking about a "quiet coup" by financial oligarchs, naming the personnel pipeline between Goldman Sachs and Washington as one "channel of influence."
What's really going on here? Is there any truth at all to these accusations? Or is this a case of the press herd piling on against successful capitalists?
Certainly there is an element of both jealousy and scapegoating in the attacks on Goldman Sachs. The firm was under attack even when times were good. Back in December of 2006, a successful year at the firm had the political cartoonist at the New York Post depicting the Goldman bankers as common criminals, complete with bandit masks, while at the Daily News, an editorial declared, "Something is wrong when one firm's bonus pool is big enough to end poverty in America's largest city." Whatever happened to celebrating success and achievement?
And certainly there is an anti-Semitic element to at least some of the attacks on Goldman that is downright vile. When the Yahoo! Finance message board devoted to the company is rife with comments about "Jew pigs" and the "Zionist Federal Reserve," it's easy to tell that at least some of the Goldman critics are driven by motives that, to say the least, are impure.
Take the long view, and there is a lot to praise about Goldman and its traditions, which represent the best of American capitalism's meritocracy and upward mobility. The firm was built to greatness by Sidney Weinberg, a 7th-grade dropout from Brooklyn who started at the firm as a $5-a-week janitor's assistant. His duties included cleaning out cuspidors. The current chief executive, Lloyd Blankfein, grew up in the far reaches of Brooklyn, the son of a postal worker, and attended Harvard on a scholarship. Goldman bankers work hard and travel incessantly.
Nor has the firm escaped the economic crisis entirely unscathed. Though the firm's share price has recovered smartly from a low of about $47 in November of 2008, in May of this year it was still off more than 40% from its all-time highs. That said, it has outperformed many of its peers. Some of its competitors, such as Lehman Brothers and Bear Stearns, have been eliminated or badly weakened.
Examples cited that appear intended to engender sympathy for the Goldman partners can have a way of triggering resentment instead. The Wall Street Journal reported that Goldman's co-president, Jon Winkelried, was so eager to unload his beachfront Nantucket estate that he cut the asking price to $38.5 million from $55 million. The New York Times reported that Goldman was offering loans to employees who were facing liquidity issues and quoted one former partner as estimating "that a quarter of the bank's roughly 100 partners are now worth $5 million or less because of losses on their company stock and other investments."
In the cases where it looks like Goldman got special treatment or a good deal from the government, it wasn't the only firm to have benefited. The New York Fed's decision to allow Goldman to become a bank holding company is under scrutiny because of the role of Mr. Friedman, a former chairman of Goldman who also served as President Bush's top White House economic adviser from 2002 to 2004. But the other non-bank financial services company that applied for bank holding company status, Morgan Stanley, was also approved.
The Securities and Exchange Commission imposed a ban on short-selling shares of Goldman — but it also prohibited similar betting on declines in share prices of 798 other financial companies. The $10 billion in TARP funding Goldman took is the same that Morgan Stanley got, and less than half of what Citigroup, Bank of America, Wells Fargo, or JP Morgan Chase took. It's true that Goldman, as the largest counterparty to AIG, was the biggest beneficiary of the federal decision to seize control of that company without a shareholder vote, install a former Goldman director, Edward Liddy, as chief executive, and use AIG to funnel money to counterparties. But the $12.9 billion Goldman was funneled by the feds through AIG isn't that much more than the $12 billion the combination of Merrill Lynch and Bank of America sucked in through AIG, the $11.9 billion taken in by Société Générale, or the $11.8 billion taken in by Deutsche Bank. Goldman has claimed it had insurance against a failure of AIG, though it is possible that the insurers themselves would have failed to pay off in full had they been caught up, too, in a panic spawned by AIG's failure.
Even an attempt to blame Goldman for producing the personnel that created the economic crisis would be misguided. Sure, Mr. Paulson, a former Goldman CEO, and President Bush's chief of staff, Joshua Bolten, a veteran of Goldman's London office, were involved in economic policymaking, but surely some of the blame also lies with Mr. Bush himself and with the chairmen of the Federal Reserve, who are not Goldman alumni. Sure, a former Goldman co-chairman, Robert Rubin, helped ruin Citigroup, but surely there, too, there is plenty of blame to share with other Citi executives and directors without any Goldman ties.
So what are the fair criticisms of Goldman Sachs, if any? There's a case to be made that the firm has gotten too close to Communist China. In his 2008 book about Goldman Sachs, "The Partnership," a consultant who has done work for the firm, Charles Ellis, reports that as a Goldman partner, before becoming the firm's CEO, Mr. Paulson coached China's vice premier, Zhu Rhongji, on how to answer questions from a bond rating agency. Paulson's chief operating officer, John Thornton, left Goldman when the Chinese government appointed him to a full professorship at Tsinghua University's business school. The Ellis book reports that when Paulson left Goldman to join the Bush administration, the banker held a "substantial" personal stake in the Industrial and Commercial Bank of China; Fortune reported that the Chinese bank's chairman's daughter worked as a summer intern for Goldman in New York.
In 2004, while Mr. Paulson was CEO, Goldman agreed to a $2 million fine by the Securities and Exchange Commission to settle charges that it had illegally promoted the stocks of four Asian companies, including PetroChina's $2.9 billion initial public offering. The Washington Post reported that among the statements at issue in the SEC case were Goldman's efforts to allay concerns about PetroChina's role in Sudan. Goldman pocketed hefty fees for underwriting the PetroChina IPO in 2000, but in the years that followed, institutional investors such as Harvard, Stanford, and the California state pension system have divested PetroChina stock, citing its role in the genocide in Darfur. A New York Times article focused on what it called "an unusual horse trade" crafted by Mr. Paulson in 2003, in which Goldman made a $67 million "donation" to cover investor losses at a failed Chinese brokerage firm it had nothing to do with. In exchange, the Chinese government let Goldman set up shop in Beijing.
The case for American banks to do these deals in Communist China is at least in part that American values — capitalism, rule of law — are imparted to the Chinese. Better the Chinese absorb Goldman Sachs values than those of the Swiss or German or French bankers who would be doing the deals if America stayed away, this argument goes. Reasonable enough. But there's a risk — not a certainty, but at least a risk — that some of the values flow back in the other direction and that instead of Goldman exporting capitalism and the rule of law to China, China ends up exporting Communist-style state ownership, arbitrary government decision-making, and cronyism back to America, using Goldman as the "culture carrier," to use a popular Goldman phrase.
The firm itself hasn't been hesitant to play hardball with American politicians and taxpayers when it suits its own interests, extracting subsidies estimated at $500 million for a new $2 billion headquarters in Lower Manhattan.
Goldman seems to have navigated better than most of its competitors through the ad hocracy that is the Paulson-Geithner economic policy. But an economy that is based not on the rule of law but on arbitrary government decisions can pose real long term risks to a company whose most important asset is its people. When I asked an executive at a Goldman competitor whether he gave any credence to the Goldman conspiracy theories, he said no. It wasn't political connections that had enabled Goldman to emerge from the financial crisis relatively unscathed, he said: "They're just smarter." Goldman, he said, was a far better-run company than its competitors. Riven by less internal infighting, Goldman bet against the housing market at a time when a lot of its competitors were holding onto sub-prime mortgage-backed securities. (Though the firm did not avoid sub-prime entirely, and agreed to a $60 million settlement with the Massachusetts attorney general.)
Becoming "just smarter" doesn't happen by accident. When Bill Gates was running Microsoft, he used to call Goldman Sachs his chief competitor. It wasn't a software company, but it competed when it came to recruiting the smartest people coming out of colleges and graduate schools. The toll the financial crisis has taken on Goldman Sachs can be measured by the fact that in the Reputation Institute's annual 2009 survey of American companies, Goldman Sachs slid in the ranks down to 148 on a list of 153 firms. It was far less popular than such popular punching bags as Wal-Mart. It was less popular than the drug companies. It even had a worse reputation than Altria, a tobacco company. In another survey, of 60,000 American undergraduates, Goldman Sachs's ranking slid to the 21st most desirable employer in 2009, from its rank as sixth in the 2008 survey, Businessweek reported.
The risk to Goldman is that smart people won't want to go work there anymore, because whatever they achieve won't be attributed by those outside the firm to hard work, skill, and talent but to government connections. And that is the real vitiating thing about an economic policy where Washington picks winners and losers arbitrarily, rather than one in which the government sets transparent rules and lets companies compete freely. In the end it has a way of sapping the strengths of even the companies, like Goldman, that appear to be the winners.