RPT-BREAKINGVIEWS-Lloyd Blankfein memoir dispels Goldman's mystique

The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

By Peter Thal Larsen

LONDON, March 5 (Reuters Breakingviews) - “Its mystery is its life. We must not let in daylight upon magic.” Walter Bagehot’s famous prescription for the British monarchy could have been written for Goldman Sachs GS.N. For many years the Wall Street investment bank hid its inner workings, its clout in boardrooms and government departments, and its partners’ wealth behind a thick veil of discretion. Under Lloyd Blankfein’s leadership it reluctantly became more transparent. His new memoir blows away any remaining mystique.

Blankfein, who was chairman and CEO from 2006 to 2018, admits he is an outlier. A working-class kid from Brooklyn, his initial application to the firm was rejected. The Harvard alumnus eventually arrived at Goldman through the back door in 1982 by joining J. Aron, a commodity trading outfit the investment bank had acquired the previous year.

Self-deprecating humour and frequent references to his humble background set Blankfein apart from the intense, highly competitive types who tend to populate Goldman’s upper ranks. While previous leaders like Robert Rubin and Hank Paulson moved smoothly into the role of Treasury Secretary in the administrations of Presidents Bill Clinton and George W. Bush, respectively, Blankfein has shown little interest in higher office.

This lack of pretension helps make “Streetwise: Getting to and Through Goldman Sachs” highly readable. Blankfein recounts his upbringing and career with amusing anecdotes as well as honest and at times brutal assessments of his fellow executives. His initial evaluation of Paulson, who preceded him as CEO, is typical: “a driven and highly capable but often inarticulate Christian Scientist who drank milk and loved bird-watching.” He quotes a former colleague describing John Thain and John Thornton, the bank’s co-chief operating officers and rivals for the top job in the early 2000s, as acting like “the owner’s sons”.

Blankfein’s career spanned Goldman’s transformation from a Wall Street private partnership to a publicly traded global investment bank. In 1998 it earned revenue of $8.5 billion. Last year it brought in seven times that sum. Since listing on the stock market in May 1999, Goldman shares have risen more than 1,000%, far outpacing other big U.S. banks.

That transformation owed much to the expansion of financial activity and the breakneck growth of markets around the world after 1999. It also reflected a deliberate transition as Goldman – and its rivals – moved from acting as an adviser and broker to also trading and investing more aggressively on its own account.

Blankfein exemplified the shift to a more aggressive risk-taking mentality. The change is often attributed to the J. Aron acquisition. Yet “Streetwise” makes clear the commodity broker was a risk-averse firm which only started making big bets after Goldman absorbed it. Notable trades included an audacious scheme conceived by Gary Cohn – later President Donald Trump’s chief economic adviser – to snap up cheap aluminium due to a Russian production glut and stockpile it in a Rotterdam warehouse until prices recovered.

These proprietary bets often clashed with the interests of Goldman clients, who expected bankers to provide them with unbiased advice and traders to secure the best price for securities. Blankfein is unapologetic about those tensions, arguing that wearing multiple hats allowed Goldman to act like economist Adam Smith’s famous invisible hand. “We weren’t just serving our clients better. We were playing a primary role in the allocation of capital, to the benefit of the economy and society.” Many clients had a less charitable interpretation.

The defining period of Blankfein’s tenure was the global financial crisis that kicked off in 2007. His nose for risk and attention to detail served Goldman well as financial markets melted down. He recalls spotting early signs of liquidity drying up in mid-2007 while reading emails on his BlackBerry in the movie theatre.

Unlike many rivals, Goldman decided to hedge its exposure to U.S. subprime housing debt, in part by buying protection from American International Group AIG.N against defaults in mortgage-backed securities. When the U.S. government – with Paulson as Treasury Secretary – bailed out the insurance giant in September 2008, many on Wall Street suspected the rescue had indirectly saved Goldman. Blankfein insists that the firm, which had also taken the precaution of buying insurance against an AIG default, would have survived its counterparty’s collapse. Still, whether the banks that sold that protection could have honoured their obligations in such a meltdown remains an open question.

Yet if Blankfein nimbly guided Goldman through the storm, he stumbled in the aftermath. Intense public scrutiny and criticism from politicians came as a shock for a firm unused to being a household name. Blankfein offers a spirited defence against Goldman’s many critics. Yet he acknowledges that bailouts helped polarise public opinion, clearing the way for Trump.

A more damaging accusation is that Blankfein was slow to recognise deeper changes in financial markets. Tighter regulation meant fewer bets using the firm’s own balance sheet, while extra capital requirements made Goldman’s bond-trading operation less profitable. Arch-rival Morgan Stanley MS.N, which barely survived 2008, made an early decision under post-crisis CEO James Gorman to double down on its wealth management business instead. Its stock has comfortably outperformed Goldman’s over the past decade.

The final years of Blankfein’s tenure were marked by some damaging scandals, most notably the bank's work for 1MDB. The Malaysian sovereign fund paid Goldman suspiciously high fees for bond issues in 2012 and 2013 and then siphoned off the proceeds in an audacious fraud. The only plausible explanations are that Goldman’s fabled risk management systems failed, or that it turned a blind eye in return for a big payday. Neither reflects well on the firm. Blankfein offers the tepid excuse that Goldman’s size made it hard to be on top of everything, and that he expected the committees that vetted the transactions to make sure they were above board. The saga ended up costing Goldman more than $3 billion in regulatory fines.

Since replacing Blankfein in 2018, current Goldman boss David Solomon has focused on making the bank's earnings less volatile. The swashbuckling pursuit of lucrative trades has given way to more stable, technology-enabled operations like managing cash for corporations. Towards the end of the book, Blankfein observes that Goldman has become “a little less special”. By choosing to shine a bright and uncompromising light on the firm’s inner workings, the bank’s former boss has done his bit to dispel the magic.

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CONTEXT NEWS

“Streetwise: Getting to and Through Goldman Sachs,” by Lloyd Blankfein, was published by Penguin Press on March 3.

(Editing by Liam Proud; Production by Streisand Neto)

((For previous columns by the author, Reuters customers can click on LARSEN/peter.thal.larsen@thomsonreuters.com))