Money and Power: How Goldman Sachs Came to Rule the World, William D. Cohan, First Anchor Books, 2011, pp. 658
Reading notes / September 1, 2022
In “The Politician” chapter of the book, Cohan deals with the legendary Goldman partner and long-time CEO Sidney Weinberg. Weinberg led Goldman Sachs for 39 years, emerging after Catchings was fired and despite his role in the Trading Corporation fiasco that nearly bankrupted Goldman. His rags to riches life, reminiscent of Horatio Alger’s novels, is something many try to replicate or associate themselves to. Lloyd Blankfein, for example, likes to emphasize that he was a son of a postal worker and a receptionist who grew up in the housing projects in Brooklyn. While never directly associating himself to Weinberg, the parallels are uncanny. Weinberg, a graduate of Public School 13 and one of eleven children of a bootlegger, left school at 15 and worked odd jobs such as selling newspaper at ferry terminals and running random errands. At 16, he was drawn to the tall buildings of Wall Street and stumbled upon Goldman’s offices on the third floor of 43 Exchange Place, walked in and asked if they needed a boy. He was then hired as a janitor for $3 a week. He caught the eye of one of the Sachs’ when he was asked to carry a flagpole to their house on public transit. Appreciative, Paul Sachs advised Weinberg to take evening classes and paid for his education at New York University and for some classes at Columbia. After a short stint in the Navy as a cook, he returned and became a securities trader with a seat at the New York Exchange. However, throughout his career that Cohan describes, his financial prowess was second to his social acumen and ability to manage relationships with powerful people. Although a board member and a director of numerous companies, Weinberg’s rise to power was due to his ability to leverage those positions to do favors for men in power. He supported Roosevelt’s efforts to raise money and made him more palatable to Wall Street when Roosevelt sought to shut them down. He also chaired various commissions tasked with organizing the war effort and raising capital for it and bringing in business royalty on those boards. He seems more a fixer than an investment banker, whose statute and public image was built up by the titles he carried and the men he surrounded himself with and who sought his opinion rather than any financial wizardry. Arguably, his relationships were what allowed Goldman to thrive.
Reading notes / August 31, 2022
Cohan details the early history of Goldman Sachs, starting with Marcus Goldman’s migration to the US from Germany and his becoming a clothing merchant in Philadelphia before entering the money business of buying and selling IOUs. He’d buy discounted commercial paper and sell it on to banks, keeping the difference as profit. Goldman took no partners until 1882, when he invited his daughter’s husband, Samuel Sachs, to join his business. Sachs came from a well connected background, with family friends being the Lehmans, Cullmans, and Loebs. Quickly Marcus and Samuel’s business grew to become M. Goldman & Sachs and then Goldman, Sachs & Co. after Henry Goldman and another son-in-law joined the partnership. By 1896, the firm’s capital stood at $1.6 million. After Marcus Goldman’s death, the sons expanded the business into “underwriting” as raising capital was called then and worked closely with Lehman Brothers, even underwriting $30 million for Sears in its infancy. Financial success caught the eye of the White House and Henry Goldman’s, Marcus’ successor, views were sought at the White House by the Wilson administration in their design of the Federal Reserve. As Cohan says: “at the inception of the government’s regulation of Wall Street, Goldman Sachs was already advising politicians how to do the job.” He played a role in the Federal Reserve Bank of New York becoming the most powerful and best capitalized bank in the system.
Cohan describes an interesting rift between Goldman and Sachs over their supporting different sides in the First World War, with Goldman being pro-German and Sachs pro-Allies. Disagreements over the war effort led to Henry Goldman leaving the partnership and the firm’s collaboration with Lehman ending, though the breakup of Goldman and Lehman had to do with their rising ambitions more than in-fighting. Goldman hired its first employees from outside the family in 1912, Henry Bowers and Waddill Catchings, who brought on companies that later became Kraft Foods, Maxwell House Coffee and Jell-O into Goldman’s ambit. Catchings was also the one who took Goldman into the business of investment trusts alongside Sidney Weinberg who together created the Goldman Sachs Trading Corporation in 1928 that played an important role in the events leading up the Great Crash of 1929.
Investment trusts were proto hedge funds where investors’ capital was pooled together and invested in a variety of shares which were then re-sold at a premium to profit the investors. Goldman was found to have been buying shares on the open market, driving the value of the shares it was holding up. It collaborated with others to buy trusts and used them to buy stock in companies it was already holding. its activities created a massive bubble that led to the crash. Once these trusts crashed in 1929, Goldman lost tens of millions and was beset with a flood of stockholder litigation. Catchings was fired, but Sidney Weinberg stayed on, despite his role in the combinations.
Reading notes / August 30, 2022
After finishing Too Big Too Fail by Andrew Ross Sorkin a few days ago, a book that details day by day of what was happening at the height of the financial crisis and between financial institutions and the government as well as between the banks themselves, I was curious to find out more about the histories of these financial behemoths and how they came to occupy such positions of power in the society. I placed a few holds in the library, mainly journalistic accounts of Merril Lynch’s near-death experience and the ultimate demise of Lehman Brothers, but settled on Money and Power by Cohan.
In his opening pages, Cohan looks at the way Goldman positioned itself to avert the crisis or minimize its impact by shorting the housing market and simultaneously marking down the value of its mortgage portfolio, which pushed its competitors to bankruptcy due to their inability to offset losses with profits. Goldman’s “big short” allowed it to profit off the crisis and push others over the precipice. Despite their position and after the collapse of Lehman, struggles of Merrill Lynch and impending AIG bankruptcy before being bailed out by the government, Goldman’s shares continued to suffer, dropping down to historic lows before the government stepped in with TARP and propped up the banks. Cohan looks to portray Goldman as not being immune from the crisis, contrary to the image its executives were trying to convey to the public. Sorkin’s book also confirms the worries Goldman’s executives had about the company’s future at the height of the crisis, with the company desperately trying to prop itself up by switching to a bank holding company which allowed it access to the Fed’s discount window and short-term funding which they claimed they never needed.
He also frames the ensuing investigation into the firm by mentioning the SEC’s investigation of Goldman’s practices, such as the sale of ABACUS and Timberwolf to investors despite knowing that these securities were destined to fail and misleading them into purchasing them to get them off their books while also establishing short positions on them. The SEC’s civil lawsuit also alleged that GS was picking winners in the market, as was the case in the deal between John Paulson and ACA Management where Paulson chose the securities that GS packaged together in a CDO that was sold to ACA. The lawsuit contended that GS failed to disclose to ACA that Paulson was its client and further made misleading statements that led ACA to believe that Paulson’s and its interests were aligned rather than opposed. GS was effectively exploiting its reputation and position in the market to the detriment of its customers.