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15 Jul 2009, Daily Telegraph

 Just about everyone has heard of Goldman Sachs.

Few, until recently, had heard of Mike Morgan, a Florida-based investment adviser, just recovered from heart surgery.Over the past few months, Morgan has become one of those shooting stars of cyberspace. He set up a blog, , whose posts have included "Does Goldman Sachs run the world?" and "If Goldman Sachs robbed your house, what would you do?".

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 Aggrieved at being traduced under the devil's sign, the American investment bank ordered Morgan to take down his site. He refused. A legal spat ensued. Now, the site appears with the following disclaimer: "This website has not been approved by Goldman Sachs. This website was designed to provide information about Goldman Sachs to demonstrate [in Mr Morgan's view] how destructive this company is to our lives and the hopes and dreams of our children."



Few companies generate such vitriol. But sometimes you wonder if Goldman doesn't actually want to be hated. Just look at this week's humdinger. Fresh from repaying $10 billion (£6 billion) of rescue funding from the American taxpayer, and amid the biggest economic crisis since the 1930s, Goldman turned in record second-quarter earnings of $3.44 billion – a 65 per cent rise year-on-year.

That's only half of it, though. The upshot of these monster earnings is that Goldman's 29,400 staff are set to rake it in as never before. As if the credit crunch had never happened, the Goldmanites are on course this year for average pay, bonus and benefit packages of an eye-watering $770,000 – or £475,000 – per head. That's almost twice what President Obama earns.

The looming largesse provoked the expected brouhaha on Capitol Hill. Senator Tester hit the mood, warning: "We're not out of the woods economically. Quite frankly, they [Goldman] need to look at it from a perspective that it's not business as usual any more, and they can't continue along these lines or there will be outrage."

It's lucky that Rolling Stone magazine had already published its views on the Wall Street bank. In an excoriating piece of gonzo-journalism earlier this week, Matt Taibbi likened Goldman to "a great vampire squid wrapped around the face of humanity, relentlessly jamming its blood funnel into anything that smells like money".

In his highly readable diatribe, Taibbi took just about every conspiracy theory going and souped them up: that Goldman alumni populate every corridor of power, particularly Washington, so ensuring that government policy and financial markets are rigged in its favour; that its wizzo brains invented the dangerous financial products that exploded to cause the current crisis; and that even the banking bail-outs were fixed to favour Goldman. It's seductive stuff because there's no shortage of facts to support all manner of conspiracy theories. But there is also a more plausible and prosaic explanation for Goldman's success: it is damn good at what it does.

The latest financial figures can be explained relatively simply. As the world emerges from the worst of the downturn, blinking into the daylight, the volumes of government bonds, currencies and commodities that are being traded has risen. Meanwhile, the equity markets are bouncing back, with investment banks able to earn vast fees from underwriting fundraisings for companies, banks and authorities desperate to rebuild their battered balance sheets. Goldman's underwriting work included HSBC's $19.6 billion cash call, a $4 billion capital-raising for steel maker Arcelor Mittal and a $6.9 billion fundraising by the State of California.

Not only is there more business, though. Goldman also has far fewer competitors because so many rivals are now out of the game, either bust or retired hurt. What's more, the lack of competition has also boosted fees. Just look at the carnage. Lehman Brothers failed, Bear Stearns collapsed and was rescued by J P Morgan, Merrill Lynch has been subsumed into Bank of America in acrimonious circumstances, while neither Citigroup nor Swiss bank UBS are the forces of old. Goldman has emerged as one of the winners of this crisis alongside others, including Barclays Capital and J P Morgan.

A bigger question – and one Taibbi raises – is whether Goldman deserves to be there. Or whether it owes its recent success to carefully cultivated political connections that have earned it the soubriquet "Government Sachs".

Top of the list is its former chief executive, Henry Paulson, the man who was George Bush's last Treasury Secretary and the architect of the Wall Street bank bail-out. Paulson was only following form. Another Goldmanite, Robert Rubin, was Treasury Secretary under Bill Clinton.

Paulson, it is widely known, could not stand Dick Fuld, the former boss of Lehman Brothers. So, the conspiracy theory goes, Paulson was happy to let Lehman go to the wall – the one major bank that America declined to rescue. Even so, it stretches it a lot to say that allowing Lehman to collapse was all part of a grand design to help Goldman.

As one Wall Street banker puts it: "Lehman almost brought down the entire financial system, forcing Goldman to go cap in hand to the Treasury for $10 billion of Tarp funds" – the bail-out under the US government's Troubled Assets Relief Programme. "If Paulson had been trying to help his old bank, he would have let Bear go rather than Lehman."

Two controversies feed the conspiracy theories. First, after Lehman fell, Goldman and the remaining US investment banks found it impossible to finance their businesses. So, the US government allowed chief executive Lloyd Blankfein to turn Goldman into a bank holding company, regulated by the US Federal Reserve – a move also followed by Morgan Stanley. This enabled Goldman, which was now constituted as a commercial bank, to gain access to fresh – and cheap – funding from the Fed.

The second is that, thanks to Washington's bailout of AIG, Goldman was able to recoup a $13 billion exposure to the failed insurer – though Goldman insiders insist the matter is much more complicated than it appears.

On top, there is the issue that without these leg-ups from the US administration, Goldman would not have been able to attract $5 billion of funding from the legendary investor Warren Buffett. It is Buffett's billions that partly gave Goldman the confidence to return its Tarp funds early – a move that technically removes the stick the Obama administration could have used to beat up Goldman over the looming mega pay-outs to staff.

It is debatable whether Goldman would be quite where it is today without this helping hand from its friends in high places. But it is not the whole story: something in the culture of the bank makes it fit and always likely to survive and thrive. The bank was founded in 1869 by a German immigrant, Marcus Goldman. He built it up with his son-in-law, Samuel Sachs, lending short-term money to Manhattan merchants in a forerunner of today's commercial paper market.

Their legacy is a partnership culture that survived Goldman's decision to list its shares on the New York Stock Exchange in May 1999. Bankers sweat 16-hour days to make it to the 400-strong band of partners, who have their own money on the line. They arrive some time in their mid-30s, but have an average tenure of only eight to 10 years as they are encouraged to make way for hungrier blood.

"By their mid-40s, they are encouraged to move on, which is why so many of them end up in powerful positions in politics, the arts or philanthropy," says Lucas van Praag, Goldman's corporate communications chief. "The structure exists because we want a culture that is collegiate not parochial, where people are working for the benefit of the firm. It also has the advantage of encouraging honest debate and dissension. In some other firms, nobody disagrees with the boss. Lloyd Blankfein would say that's not a luxury he enjoys."

The partners earn so much money that an abiding tale from the height of the boom was that of Joyti De-Laurey. She was the secretary who stole more than £4 million from three partners, spending it on UK property, a £750,000 sea-front villa in Cyprus, luxury cars and flying lessons for her husband. The partners – Jennifer Moses, Moses's husband Ron Beller and Scott Mead – were so rich that none of them noticed.

Even allowing for their riches, the partnership culture may explain why Goldman was relatively quick to spot the credit crisis, liquidating its exposure to sub-prime mortgages, for example, faster than some of its rivals. But neither has the culture impinged on an appetite for risk that is evident in the latest figures.

City analysts latched on to the jump in VAR – or value at risk – per day from $184 million to $245 million as a sign that Goldman was already taking bigger risks on its proprietary trading desk. Blankfein insists that is not the case, arguing that almost all such trading was on behalf of clients.

It is the sort of distinction likely to get drowned out, however, in the looming row over Goldman bonuses. Blankfein himself criticised Wall Street's past pay practices as "self-serving and greedy". This time round, he must know that it is not only bloggers in Florida who may be out to get him.


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