Money and Power” might not be a particularly imaginative title for a history of Wall Street heavyweight Goldman Sachs but it does capture what the firm represents in the public perception. The problem, however, is that public image is often fashioned by the “Oliver Stone-Michael Moore” version of Wall street — of cocaine-fuelled alpha males cutting dodgy deals, shafting both competition and clients with equal and unapologetic vigour and finally buying off lawmakers with mountains of dollars and the occasional high-end hooker. How far is this depiction of Wall Street as a cesspit of venality removed from reality? In Money and Power William D Cohan tries to answer this question with a meticulously researched history of both Goldman and the world of American finance. For those who wish to understand the relationship of the Street and firms like Goldman with the rest of America – how it wields its enormous clout in the regulatory and political process – and have the patience to look beyond simplistic agitprop, this is an important book.
Cohan focuses on Goldman but places it against a broader backdrop. He offers insights into not only the evolution of Goldman but also the financial sector and the US’ economic history. Unlike the Rothschilds in Britain, who made their initial fortune by financing the British war machine and relied on a complex intelligence network to make arbitrage gains, Goldman had a less adventurous beginning. Marcus Goldman, a German Jew, emigrated to the US in 1848. He started as a clothes merchant and then went into the relatively sedate commercial paper business around 1869. As the business grew, he invited his son-in-law, Samuel Sachs, to join the business. Thus was Goldman Sachs born.
Instead of providing a dry list of events in the firm’s history, Cohan focuses on the men who shaped Goldman’s philosophy and future, making it the banking powerhouse that it is today. Instead of a string of conservative Jewish bankers that one expects, we get a parade of colourful characters, each with his idiosyncrasies and styles that have left an imprint on the firm. This begins with Waddill Catchings, a southerner who joined the firm in 1918 and could be credited with the first really risky decision that the firm took. In 1928, he created an “investment trust”, the Goldman Sachs trading corporation, an entity that looked uncannily like a modern-day hedge fund but, of course, with far fewer investment opportunities. Though clever manipulation of the corporation’s stock ensured it made exceptional returns, it went belly up in the 1929 crash, which wiped out a hefty portion of the firm’s capital. It took years for Goldman to dig itself out of the financial hole in which it had fallen.
The investment trust episode is one of many examples of the fact that despite its reputation as the high priest of Wall Street, it did not hesitate to dabble in the occult. Goldman has had its fair share of brushes with regulators and the recent face-off with the Securities and Exchange Commission (SEC) for betting against clients in the mortgage-backed securities market is not a rare lapse. Also, in 1969 it flogged commercial paper of the Penn Central company, apparently aware of the fact that the company was on the verge of financial collapse. Predictably, it also made sure that none of the papers found its way into its own proprietary books. As Penn Central defaulted, Goldman found itself facing a volley of litigation from clients and the SEC. The author points out: “Goldman’s explanation for why it did and what it did sounds eerily familiar to the one it would give forty years or so later… First the firm told the SEC that commercial paper sales were not profitable… Second, Goldman claimed that its customers were sophisticated investors.” It is perhaps easy to fathom why the firm’s officials seemed unfazed by the SEC’s 2010 litigation alleging malfeasance in the mortgage securities market. The firm had clearly been there and done that.
The ability to get away with these transgressions has to do, at least in some measure, with Goldman’s association with the government. Two of the firms’ CEOs, Robert Rubin and Hank Paulson, have been treasury secretaries to the US administration. Sidney Weinberg, who headed the firm in the 1930s and 1940s and was perhaps the firm’s most charismatic top boss, was one of Franklin Roosevelt’s closest advisers and was offered the job of ambassador to the Soviet Union. Weinberg apparently declined this offer on the grounds that he did not speak Russian.
Money and Power is one of the best histories of Wall Street and American finance that I have read. While it is eminently readable, it does not scrimp on rigour or detail. Those who might baulk at the book’s 658 pages would at least want to read the first chapter — it looks at the recent controversy of the firm’s dealings in the mortgage securities market. What is Cohan’s verdict on Goldman then? Is it really the cesspit of venality that the popular media has made it out to be in the wake of the 2008 financial collapse? The book cover features a coiled snake. That should give you a clue.
MONEY AND POWER
How Goldman Sachs came to rule the world
William D Cohan
Penguin Business and Allen Lane publishers
658 pages; Rs 599