Andrew Sorkin - Too Big to Fail - The Inside Story of How Wall Street and Washington Fought to Save the FinancialSystem--and Themselves

Being in Russia did bring back some anxious memories. It was here in 1998 that things went very wrong for Goldman when the Kremlin caught the world unawares by suddenly defaulting on the nation’s debt, sending markets around the world into a tailspin. They called it a contagion: Soon afterward, Long-Term Capital Management was struck.

The chain of events caused Wall Street firms to rack up enormous trading losses, and the damage at Goldman was eventually so severe that it had to push back its plans to go public.

As the current market troubles unfolded, Goldman was being mercifully spared the kinds of hits that Lehman, Merrill, Citi, and even Morgan Stanley were taking. His team was smart, but Blankfein knew that luck had played a big role in their accomplishments. “I really think we are a little better,” he had said, “ but I think it’s only a little better.”

Certainly, Goldman had its share of toxic assets, it was highly leveraged, and it faced the same funding shortfalls caused by the seized-up markets as did its rivals. To its credit, though, it had steered clear of the most noxious of those assets—the securities built entirely on the creaky foundation of subprime mortgages.

Michael Swenson and Josh Birnbaum, two Goldman mortgage traders—along with the firm’s chief financial officer, David Viniar—had been instrumental in making the opposite wager: They had bet against something called the ABX Index, which was essentially a basket of derivatives tied to subprime securities. Had they not done so, things could have turned out differently for Goldman, and for Blankfein.

Blankfein couldn’t help but notice all the Mercedes clogging the streets as he walked back to his hotel room. And that was only the most visible conspicuous consumption taking place. Flush from their profits not only from gas and oil but from iron, nickel, and a host of other increasingly valuable commodities, Russia’s so-called oligarchs were buying up supersized yachts, Picassos, and English soccer teams. Ten years ago, Russia could not pay its debts; today it was a fast-growing, $1.3 trillion economy.

Goldman’s own complicated history with Russia dated back much earlier than its stunning default. Franklin Delano Roosevelt once offered to make Sidney Weinberg, Goldman’s legendary leader, ambassador to the Soviet Union. “I don’t speak Russian,” Weinberg replied in turning down the president. “Who the hell could I talk to over there?”

After the collapse of the Soviet Union, Goldman was among the first Western banks to try to crack its market, and three years after the fall of the Berlin Wall, Boris Yeltsin’s new government named the firm its banking adviser.

Profits proved to be elusive, however, and Goldman pulled out of the country in 1994 but would eventually return. By 1998 it had helped the Russian government sell $1.25 billion in bonds; when, two months later, after the default, the bonds proved to be virtually worthless, the firm again withdrew. Now it was back for a third try, and Blank fein was determined to get it right this time.

The next morning, at 8:00, the Goldman board began its session in a conference room on the ground floor of the Hotel Astoria, which had been in operation since 1912 and was named after John Jacob Astor IV. Legend had it that Adolf Hitler had planned to hold his victory celebration there the moment he forced the city to surrender, and was so confident in his triumph that he had had invitations printed in advance.

Blankfein, dressed in a blazer and khakis, gave the board an overview of the company’s performance. As board meetings go, it had been unexceptional.

But it was the following session that was perhaps the critical one. The speaker was Tim O’Neill, a longtime Goldmanite, who was virtually unknown outside the firm. But as the firm’s senior strategy officer, he was a major player within the firm. His predecessors included Peter Kraus and Eric Mindich, both of whom were considered Goldman superstars, and O’Neill definitely had Blankfein’s ear.

Board members had received a briefing book three weeks earlier and understood why this session was so vital: In it O’Neill would outline survival plans for the firm. He was effectively serving as the office’s fire marshal. Nothing was burning, but it was his responsibility to identify all the emergency exits.

The issue facing them was this: Unlike a traditional commercial bank, Goldman didn’t have its own deposits, which by definition were more stable. Instead, like all broker-dealers, it relied at least in part on the short-term repo market—repurchase agreements that enabled firms to use financial securities as collateral to borrow funds. While Goldman tended to have longer term debt agreements—avoiding being reliant on overnight funding like that of Lehman, for example—it still was susceptible to the vagaries of the market.

That arrangement was something of a double-edged sword. It could bet its own money utilizing enormous amounts of leverage—putting up $1, for example, and using $30 of debt, a practice common in the industry. Bank holding companies like JP Morgan Chase, which were regulated by the Federal Reserve, faced far more restrictions when it came to debt-fueled bets on the market. The downside was that if confidence in the firm waned, that money would quickly evaporate.

Blankfein sat nodding in approval as O’Neill made his case. What had happened to Bear, he explained, was not just a one-off event. The independent broker-dealer was considered a dinosaur well before the current crisis had begun. Blankfein himself had watched Salomon Smith Barney be absorbed by Citigroup, and even Morgan Stanley merge with Dean Witter. Now, with Bear gone and Lehman seemingly headed in that direction, Blankfein had good reason to be worried.

Blank fein’s own rise to the top at Goldman underscored for him just how fast things could change: A decade earlier he had been the short, fat, bearded guy who wore tube socks to the firm’s golf outings. Today he was the head of the smartest and most profitable firm on Wall Street.

In one sense the arc of his career was classic Goldman Sachs. Like the firm’s founders and its longtime leader Sidney Weinberg, Blankfein was the son of working-class Jewish parents. Born in the Bronx, he grew up in Linden Houses, a project in East New York, one of the poorest neighborhoods in Brook lyn. In public housing you could hear neighbors’ conversations through the walls and smell what they were making for dinner. His father was a postal clerk, sorting mail; his mother was a receptionist.

As a teenager Blankfein sold soda during New York Yankees games. He graduated as valedictorian of his class at Thomas Jefferson High School in 1971, and at the age of sixteen, with the help of scholarships and financial aid, he attended Harvard, the first member of his family to go to college. His perseverance revealed itself in other ways. Because he was then dating a Wellesley student from Kansas City, he took a summer job at Hallmark to be near her. The relationship, however, did not last.

After college came Harvard Law School, and after graduating in 1978, he joined the law firm of Donovan, Leisure, Newton & Irvine. For several years he practically lived on an airplane flying between New York and Los Angeles. On the rare weekends he found time to relax, he would drive out to Las Vegas with a colleague to play blackjack. They once left their boss a memo: “If we don’t show up Monday it’s because we’ve hit the jackpot.”