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The confounding thing, of course, is that after the bailout of AIG, Goldman got $12.9 billion from AIG in the form of collateral that Goldman already had in its possession and a cash settlement of ongoing margin disputes. "The fact of the matter is, we already had the collateral," Blankfein says. "If AIG had defaulted, guess what — we would have kept the collateral from AIG and from the banks we'd bought protection from. The government's decision to bail out AIG was about the risks to the system. It wasn't about Goldman Sachs."
Still, an AIG default could have been catastrophic for Goldman, although Goldman claims to have been perfectly hedged against an AIG bankruptcy. "If AIG would have gone bankrupt, it would have affected every institution in the world, because it would have had a big effect on the entire financial system," explains David Viniar, Goldman's CFO. He countered, though, that Goldman would have most likely figured out how to make money trading in such a volatile environment.
Nevertheless, critics have feasted on the Paulson connection as just another example of how Goldman Sachs benefits from "Government Sachs" — the propensity of Goldman alums to turn up in top federal financial posts after they leave the firm.
To Blankfein, the criticism seems distorted. "Something that was a virtue now looks like a vice," he says. "I don't think we're going to go far in this country if we make it a bad thing for people to migrate from business into other activities like writing or philanthropy or public service." Goldman, he notes, has already paid back the $10 billion — plus $318 million in dividends and an additional $1.1 billion to buy back warrants (at above-market value, he adds) — that Paulson forced it to take last October from the $700 billion Troubled Asset Relief Program. Taxpayers' annualized return on their nine-month investment in Goldman Sachs? A cool 23%.
If anyone shoulders the "blame" for Goldman's golden performance, it is Blankfein. Self-deprecating and seemingly unassuming, the former gold salesman has been ruthlessly ambitious for his firm and its continued success. "He takes it very personally when people act against the firm or show disloyalty," says a former Goldman executive.
After taking the reins of the company when Paulson went to Treasury in July 2006, he accelerated Goldman's transformation from a firm that depended on its clients for investment-banking revenue — fees generated from advising on deals to underwriting debt and equity securities — to one whose clients are driving a resurgent trading and risk-taking business. Goldman has a tradition of taking trading risks. In the postwar era, the firm's DNA has always combined the interlocking strands represented by two of the world's foremost risk arbitrageurs — first Gus Levy and later Robert Rubin — with the investment-banker pedigree of former senior partners, including Sidney Weinberg, John Weinberg, John Whitehead, Stephen Friedman and Paulson. "We would never let our reputation as the key M&A adviser ebb in favor of being a principal," Blankfein says. "We're very self-conscious that our franchise hinges on our client relationships and the business that those relationships generate."
In an era of derivative-driven innovations and massive leverage, Blankfein is the firm's chief advocate for taking risks but also its chief risk watchdog. He has a far different perspective from that of most of the previous Goldman bosses. In December 2006, Viniar led a meeting of senior Goldman executives to examine ongoing daily losses in the firm's mortgage portfolio. Goldman had already underwritten and sold billions of dollars' worth of mortgage-backed securities, much of it labeled investment grade by ratings agencies. It was, in fact, junk. But Goldman realized earlier than most that rot was setting in and famously decided to pull back from the mortgage market. The firm then shorted various mortgage-securities indexes — betting that prices would fall — at the very moment that other firms were still making big long bets on the securities. Goldman avoided losses while other firms infected themselves with the cancerous securities.
Blankfein's deftness under pressure impressed his partners. "He is a totally independent-minded guy," says another senior Goldman official. "Ten years ago, I think most people would have said that it is highly unlikely that Lloyd would be CEO and highly unlikely that he would succeed. But he has done both, and it seems like a dream in this environment ... It's a bit of a miracle. It was unpredicted."