Blankfein Defends Goldman, Is Flippant with Facts

In an interview with the London newspaper The Sunday Times this weekend, Goldman Sachs’ (GS) chief executive Lloyd Blankfein pulled no punches when it came to his take on the bank’s role in the global economic landscape. Goldman is “doing God’s work,” said Blankfein:

“We help companies to grow by helping them to raise capital. Companies that grow create wealth. This, in turn, allows people to have jobs that create more growth and more wealth. It’s a virtuous cycle.” To drive home his point, he makes a remarkably bold claim. “We have a social purpose.”

… He insists we should be celebrating his bank’s success, not condemning it. “Everybody should be, frankly, happy,” he says.

While these comments undoubtedly make for a lively discussion in populist political circles, it is Blankfein’s comments on the details of the various government bailout packages that are, in a sense, the most unnerving of all:

Blankfein dismisses any suggestion that Gold-man (sic) needed to be bailed out, and, by extension, rejects any notion that the firm is now profiting from public support. Sure, he took $10 billion from Washington’s Troubled Asset Relief Program (Tarp). But the bank has since repaid the cash, with healthy interest — 23%. Goldman also bene-fited (sic) from the federal bail-out of the huge US insurance firm AIG. Goldman had bought $20 billion worth of insurance from AIG and received billions of dollars — perhaps as much as $13 billion — when Washington pumped $90 billion into the stricken giant. But Blankfein insists Goldman was “hedged” against any AIG losses, in the best possible way — with cash. So even if AIG had gone under, Goldman would not have suffered.

Whatever your opinion on the issue of Goldman’s status as Almighty Creator in today’s financial environment, it is hard to see that Blankfein isn’t being a little flippant with the facts of history here. At the time of the collapse of Lehman Brothers (LEHMQ.PK), Goldman was forced to raise $10 billion of fresh capital by selling a 15 percent stake in itself to Warren Buffett and other investors. (At $123 per share, the sale was completed around 30 percent cheaper than today’s market price of $170 per share.)

Just days before the share sales — which directly allowed Goldman to stay afloat — the firm received around $12 billion in government aid. What is more, Blankfein was the only U.S. chief executive present at a September 2008 Federal Reserve meeting to discuss AIG’s $44.6 billion loan.

Presumably, if Goldman Sachs had been able to privately raise the initial $12 billion provided to it by the U.S. government, it would have done so. What seems much more likely is that the investors — including Buffett — who later agreed to commit an additional $10 billion only did so on the basis that the firm was reasonably supported by government aid. That way, they could be assured that their money was not merely serving as a stopgap to bankruptcy.

This point is all the more prescient in light of the recent bankruptcy filing of CIT Group (CIT), a small business lender. The whole reason share sales were not a viable capital raising option for CIT was because the government denied the firm’s application for government aid earlier in the year.

No one wants to be left holding common stock when a company is headed for Chapter 11. While Goldman’s near-bankruptcy experience was shorter-lived than for most financial firms, it cannot be denied that it did indeed once face the very real possibility of having to drag itself through the courts. Lloyd Blankfein ought to be honest about that, if only to show that he is aware of the real possibilities of systematic risk.

Comments

[ggscott:]

Delusional analysis. Kind of "Don't confuse me with the facts." The writer clearly needs to go to banking school before he subjects us to further drivel.

Nov 10 12:30 PM

[strawdog:]

For a more in depth view of many of the issues you mention you might enjoy this:

Not So Strange Bedfellows: The Warren Buffett - Goldman Sachs Love Affair
proudtoliveinamerica.c...

If anyone doesn't know the name Byron Trott they should. Without him GS was finished.

Nov 10 12:34 PM

[Daniel Harr...:]

How so?


On Nov 10 12:30 PM ggscott wrote:

> Delusional analysis. Kind of "Don't confuse me with the facts." The
> writer clearly needs to go to banking school before he subjects us
> to further drivel.

Nov 10 01:42 PM

[Davewmart:]

'Lloyd Blankfein ought to be honest about that, if only to show that he is aware of the real possibilities of systematic risk.'

Hilarious! Honesty and Goldman Sachs in the same sentence!
These guys are shysters who are up to any rip-off, and protected by bought and paid for politicians.
Obama bears more resemblance to Mayor Daley than Abe Lincoln - not that both parties and the Fed are not subsidiaries of Goldman Sachs.
Maddof was small beer compared to them - that is where the real loot has gone.

Nov 10 02:12 PM

[captainccs:]

If AIG was not a bank why did The Fed save AIG? Could it be as a favor to Goldman Sachs?

CIT Group was a bank, why did The Fed not save it? Could it be as a favor to Wall St. banks?

I don't know the answers but it sure smells fishy.

Nov 10 06:57 PM

[wakeup call:]

As I have stated a number of times Goldman is too powerful to be prosecuted! The facts have been in the open for almost a year. The links have been constructed for those who don't understand how the markets work. At the end of the day AIG shareholder lost almost $175 billion in market capitalization to save Goldman from having to raise $20 billion. If I were one of the many institutions that had significant holding in AIG's shares I would go after Goldman and the the ex-Goldman employees that run the Federal government. When Goldman was asked if it could assist AIG last September the greatest investmetn bank in the world said "Nope." But they sure helped themselves.

Nov 11 08:59 AM

[jbde:]

Goldman Sachs provides no worthwhile purpose.
They make nothing, they help nobody.

They trade for themselves with government money.
Ask yourself - for every $ profit they make, who did they TAKE it from?
It's simply a transfer of wealth TO THEM.

Banks should not be permitted to trade for their OWN accounts.

Plain and simple.

Nov 11 09:24 AM

[ERCaptain:]

Thanks for a good article.

Frankly, I cannot believe the mentality of the "Goldman is Evil" crowd. As they storm up the hill toward the castle with their torches abaze, Goldman makes money for it's shareholders. They have not broken the law. They have used their brains and power to stay afloat and have kept owners (stockholders) and employees in the business they were intended to carry out.

Goldman has encouraged graduates of the Goldman system to be involved in public service. Some people see this as a political ploy, but anyone who looks at their history will see this is not new.

Their bonus structure is currently politically unpopular, but it exists because they have lower "wages" and they get paid bonuses if they produce profits. There may need to be some changes to that model (they are not a partnership anymore, but continue to act like a partnership).

I am not a Goldman employee or a shareholder.

P.S. "Dark Lord Sith Blankfein, Please call me. I would like to work for you."

Nov 11 10:36 AM