The Guys From ‘Government Sachs’
Treasury faces, from left: Steve Shafran (formerly of Goldman),
Kendrick Wilson III (ditto), Henry Paulson Jr. (you guessed it), Edward
Forst (yep) and Neel Kashkari (see a trend?).
THIS summer, when the Treasury secretary, Henry M. Paulson Jr., sought help navigating the Wall Street meltdown, he turned to his old firm, Goldman Sachs, snagging a handful of former bankers and other experts in corporate restructurings.
Treasury secretary in the Clinton administration, promoted Timothy F.
Geithner at Treasury. Mr. Geithner now leads the New York Fed.
Joshua B. Bolten, top, a former Goldman executive, is President Bush’s
chief of staff. Stephen Friedman, a former chairman of Goldman, is
chairman of the New York Fed. This fall, as part of its bailout, the
government put Edward M. Liddy, then a Goldman director, in charge of
A.I.G.
In September, after the government bailed out the American International Group, the faltering insurance giant, for $85 billion, Mr. Paulson helped select a director from Goldman’s own board to lead A.I.G.
And earlier this month, when Mr. Paulson needed someone to oversee the government’s proposed $700 billion bailout
fund, he again recruited someone with a Goldman pedigree, giving the
post to a 35-year-old former investment banker who, before coming to
the Treasury Department, had little background in housing finance.
Indeed, Goldman’s presence in the department and around the federal response to the financial crisis is so ubiquitous that other bankers and competitors have given the star-studded firm a new nickname: Government Sachs.
The
power and influence that Goldman wields at the nexus of politics and
finance is no accident. Long regarded as the savviest and most admired
firm among the ranks — now decimated — of Wall Street investment banks,
it has a history and culture of encouraging its partners to take
leadership roles in public service.
It is a widely held view
within the bank that no matter how much money you pile up, you are not
a true Goldman star until you make your mark in the political sphere.
While Goldman sees this as little more than giving back to the
financial world, outside executives and analysts wonder about potential
conflicts of interest presented by the firm’s unique perch.
They
note that decisions that Mr. Paulson and other Goldman alumni make at
Treasury directly affect the firm’s own fortunes. They also question
why Goldman, which with other firms may have helped fuel the financial
crisis through the use of exotic securities, has such a strong hand in
trying to resolve the problem.
The very scale of the financial
calamity and the historic government response to it have spawned a host
of other questions about Goldman’s role.
Analysts wonder why
Mr. Paulson hasn’t hired more individuals from other banks to limit the
appearance that the Treasury Department has become a de facto Goldman
division. Others ask whose interests Mr. Paulson and his coterie of
former Goldman executives have in mind: those overseeing tottering
financial services firms, or average homeowners squeezed by the crisis?
Still others question whether Goldman alumni leading the federal
bailout have the breadth and depth of experience needed to tackle
financial problems of such complexity — and whether Mr. Paulson has
cast his net widely enough to ensure that innovative responses are
pursued.
“He’s brought on people who have the same life
experiences and ideologies as he does,” said William K. Black, an
associate professor of law and economics at the University of Missouri and counsel to the Federal Home Loan Bank Board during the savings and loan
crisis of the 1980s. “These people were trained by Paulson, evaluated
by Paulson so their mind-set is not just shaped in generalized group
think — it’s specific Paulson group think.”
Not so fast, say
Goldman’s supporters. They vehemently dismiss suggestions that Mr.
Paulson’s team would elevate Goldman’s interests above those of other
banks, homeowners and taxpayers. Such chatter, they say, is a paranoid
theory peddled, almost always anonymously, by less successful rivals.
Just add black helicopters, they joke.
“There is no conspiracy,” said Donald C. Langevoort, a law professor at Georgetown University.
“Clearly if time were not a problem, you would have a committee of
independent people vetting all of the potential conflicts, responding
to questions whether someone ought to be involved with a particular
aspect or project or not because of relationships with a former firm —
but those things do take time and can’t be imposed in an emergency
situation.”
In fact, Goldman’s admirers say, the firm’s ranks should be praised, not criticized, for taking a leadership role in the crisis.
“There
are people at Goldman Sachs making no money, living at hotels, trying
to save the financial world,” said Jes Staley, the head of JPMorgan Chase’s asset management division. “To indict Goldman Sachs for the people helping out Washington is wrong.”
Goldman
concurs. “We’re proud of our alumni, but frankly, when they work in the
public sector, their presence is more of a negative than a positive for
us in terms of winning business,” said Lucas Van Praag, a spokesman for
Goldman. “There is no mileage for them in giving Goldman Sachs the
corporate equivalent of most-favored-nation status.”
MR. PAULSON himself landed atop Treasury because of a Goldman tie. Joshua B. Bolten, a former Goldman executive and President Bush’s chief of staff, helped recruit him to the post in 2006.
Some
analysts say that given the pressures Mr. Paulson faced creating a SWAT
team to address the financial crisis, it was only natural for him to
turn to his former firm for a capable battery.
And if there is
one thing Goldman has, it is an imposing army of top-of-their-class,
up-before-dawn über-achievers. The most prominent former Goldman banker
now working for Mr. Paulson at Treasury is also perhaps the most
unlikely.
Neel T. Kashkari
arrived in Washington in 2006 after spending two years as a low-level
technology investment banker for Goldman in San Francisco, where he
advised start-up computer security companies. Before joining Goldman,
Mr. Kashkari, who has two engineering degrees in addition to an M.B.A.
from the Wharton School of the University of Pennsylvania, worked on
satellite projects for TRW, the space company that now belongs to
Northrop Grumman.
He was originally appointed to oversee a $700
billion fund that Mr. Paulson orchestrated to buy toxic and complex
bank assets, but the role evolved as his boss decided to invest
taxpayer money directly in troubled financial institutions.
Mr.
Kashkari, who met Mr. Paulson only briefly before going to the Treasury
Department, is also in charge of selecting the staff to run the bailout
program. One of his early picks was Reuben Jeffrey, a former Goldman
executive, to serve as interim chief investment officer.
Mr.
Kashkari is considered highly intelligent and talented. He has also
been Mr. Paulson’s right-hand man — and constant public shadow — during
the financial crisis.
He played a main role in the emergency sale of Bear Stearns
to JPMorgan Chase in March, sitting in a Park Avenue conference room as
details of the acquisition were hammered out. He often exited the room
to funnel information to Mr. Paulson about the progress.
Despite
Mr. Kashkari’s talents in deal-making, there are widespread questions
about whether he has the experience or expertise to manage such a
project.
“Mr. Kashkari may be the most brilliant, talented
person in the United States, but the optics of putting a 35-year-old
Paulson protégé in charge of what, at least at one point, was supposed
to be the most important part of the recovery effort are just very
damaging,” said Michael Greenberger, a University of Maryland law professor and a former senior official with the Commodity Futures Trading Commission.
“The
American people are fed up with Wall Street, and there are plenty of
people around who could have been brought in here to offer broader
judgment on these problems,” Mr. Greenberger added. “All wisdom about
financial matters does not reside on Wall Street.”
Mr. Kashkari
won’t directly manage the bailout fund. More than 200 firms submitted
bids to oversee pieces of the program, and Treasury has winnowed the
list to fewer than 10 and could announce the results as early as this
week. Goldman submitted a bid but offered to provide its services
gratis.
While Mr. Kashkari is playing a prominent public role, other Goldman alumni dominate Mr. Paulson’s inner sanctum.
The
A-team includes Dan Jester, a former strategic officer for Goldman who
has been involved in most of Treasury’s recent initiatives, especially
the government takeover of the mortgage giants Fannie Mae and Freddie Mac. Mr. Jester has also been central to the effort to inject capital into banks, a list that includes Goldman.
Another
central player is Steve Shafran, who grew close to Mr. Paulson in the
1990s while working in Goldman’s private equity business in Asia.
Initially focused on student loan problems, Mr. Shafran quickly became involved in Treasury’s initiative to guarantee money market funds, among other things.
Mr.
Shafran, who retired from Goldman in 2000, had settled with his family
in Ketchum, Idaho, where he joined the city council. Baird Gourlay, the
council president, said he had spoken a couple of times with Mr.
Shafran since he returned to Washington last year.
“He was
initially working on the student loan part of the problem,” Mr. Gourlay
said. “But as things started falling apart, he said Paulson was relying
on him more and more.”
The Treasury Department said Mr. Shafran and the other former Goldman executives were unavailable for comment.
Other
prominent former Goldman executives now at Treasury include Kendrick R.
Wilson III, a seasoned adviser to chief executives of the nation’s
biggest banks. Mr. Wilson, an unpaid adviser, mainly spends his time
working his ample contact list of bank chiefs to apprise them of
possible Treasury plans and gauge reaction.
Another Goldman
veteran, Edward C. Forst, served briefly as an adviser to Mr. Paulson
on setting up the bailout fund but has since left to return to his post
as executive vice president of Harvard.
Robert K. Steel, a former vice chairman at Goldman, was tapped to look
at ways to shore up Fannie Mae and Freddie Mac. Mr. Steel left Treasury
to become chief executive of Wachovia this summer before the government took over the entities.
Treasury
officials acknowledge that former Goldman executives have played an
enormous role in responding to the current crisis. But they also note
that many other top Treasury Department officials with no ties to
Goldman are doing significant work, often without notice. This group
includes David G. Nason, a senior adviser to Mr. Paulson and a former
Securities and Exchange Commission official.
Robert F. Hoyt,
general counsel at Treasury, has also worked around the clock in recent
weeks to make sure the department’s unprecedented moves pass legal
muster. Michele Davis is a Capitol Hill veteran and Treasury policy
director. None of them are Goldmanites.
“Secretary Paulson has
a deep bench of seasoned financial policy experts with varied
experience,” said Jennifer Zuccarelli, a spokeswoman for the Treasury.
“Bringing additional expertise to bear at times like these is clearly
in the taxpayers’ and the U.S. economy’s best interests.”
While
many Wall Streeters have made the trek to Washington, there is no
question that the axis of power at the Treasury Department tilts toward
Goldman. That has led some to assume that the interests of the bank,
and Wall Street more broadly, are the first priority. There is also the
question of whether the department’s actions benefit the personal
finances of the former Goldman executives and their friends.
“To the extent that they have a portfolio or blind trust that holds Goldman Sachs stock, they have conflicts,” said James K. Galbraith, a professor of government and business relations at the University of Texas.
“To the extent that they have ties and alumni loyalty or friendships
with people that are still there, they have potential conflicts.”
Mr.
Paulson, Mr. Kashkari and Mr. Shafran no longer own any Goldman shares.
It is unclear whether Mr. Jester or Mr. Wilson does because, according
to the Treasury Department, they were hired as contractors and are not
required to disclose their financial holdings.
For every
naysayer, meanwhile, there is also a Goldman defender who says the
bank’s alumni are doing what they have done since the days when Sidney
Weinberg ran the bank in the 1930s and urged his bankers to give
generously to charities and volunteer for public service.
“I give
Hank credit for attracting so many talented people. None of these guys
need to do this,” said Barry Volpert, a managing director at Crestview
Partners and a former co-chief operating officer of Goldman’s private
equity business. “They’re not getting paid. They’re killing themselves.
They haven’t seen their families for months. The idea that there’s some
sort of cabal or conflict here is nonsense.”
In fact, say some
Goldman executives, the perception of a conflict of interest has
actually cost them opportunities in the crisis. For instance, Goldman
wasn’t allowed to examine the books of Bear Stearns when regulators
were orchestrating an emergency sale of the faltering investment bank.
THIS summer, as he fought for the survival of Lehman Brothers, Richard S. Fuld Jr.,
its chief executive, made a final plea to regulators to turn his
investment bank into a bank holding company, which would allow it to
receive constant access to federal funding.
Timothy F. Geithner, the president of the Federal Reserve Bank of New York,
told him no, according to a former Lehman executive who requested
anonymity because of continuing investigations of the firm’s demise.
Its options exhausted, Lehman filed for bankruptcy in mid-September.
One week later, Goldman and Morgan Stanley were designated bank holding companies.
“That
was our idea three months ago, and they wouldn’t let us do it,” said a
former senior Lehman executive who requested anonymity because he was
not authorized to comment publicly. “But when Goldman got in trouble,
they did it right away. No one could believe it.”
The New York
Fed, which declined to comment, has become, after Treasury, the
favorite target for Goldman conspiracy theorists. As the most powerful
regional member of the Federal Reserve
system, and based in the nation’s financial capital, it has been a
driving force in efforts to shore up the flailing financial system.
Mr.
Geithner, 47, played a pivotal role in the decision to let Lehman die
and to bail out A.I.G. A 20-year public servant, he has never worked in
the financial sector. Some analysts say that has left him reliant on
Wall Street chiefs to guide his thinking and that Goldman alumni have
figured prominently in his ascent.
After working at the New York
consulting firm Kissinger Associates, Mr. Geithner landed at the
Treasury Department in 1988, eventually catching the eye of Robert E. Rubin,
Goldman’s former co-chairman. Mr. Rubin, who became Treasury secretary
in 1995, kept Mr. Geithner at his side through several international
meltdowns, including the Russian credit crisis in the late 1990s.
Mr. Rubin, now senior counselor at Citigroup, declined to comment.
A
few years later, in 2003, Mr. Geithner was named president of the New
York Fed. Leading the search committee was Pete G. Peterson, the former
head of Lehman Brothers and the senior chairman of the private equity
firm Blackstone. Among those on an outside advisory committee were the
former Fed chairman Paul A. Volcker; the former A.I.G. chief executive Maurice R. Greenberg; and John C. Whitehead, a former co-chairman of Goldman.
The
board of the New York Fed is led by Stephen Friedman, a former chairman
of Goldman. He is a “Class C” director, meaning that he was appointed
by the board to represent the public.
Mr. Friedman, who wears
many hats, including that of chairman of the President’s Foreign
Intelligence Advisory Board, did not return calls for comment.
During
his tenure, Mr. Geithner has turned to Goldman in filling important
positions or to handle special projects. He hired a former Goldman
economist, William C. Dudley, to oversee the New York Fed unit that
buys and sells government securities. He also tapped E. Gerald
Corrigan, a well-regarded Goldman managing director and former New York
Fed president, to reconvene a group to analyze risk on Wall Street.
Some
people say that all of these Goldman ties to the New York Fed are
simply too close for comfort. “It’s grotesque,” said Christopher
Whalen, a managing partner at Institutional Risk Analytics and a critic
of the Fed. “And it’s done without apology.”
A person familiar
with Mr. Geithner’s thinking who was not authorized to speak publicly
said that there was “no secret handshake” between the New York Fed and
Goldman, describing such speculation as a conspiracy theory.
Furthermore, others say, it makes sense that Goldman would have a presence in organizations like the New York Fed.
“This
is a very small, close-knit world. The fact that all of the major
financial services firms, investment banking firms are in New York City
means that when work is to be done, you’re going to be dealing with one
of these guys,” said Mr. Langevoort at Georgetown. “The work of
selecting the head of the New York Fed or a blue-ribbon commission —
any of that sort of work — is going to involve a standard cast of
characters.”
Being inside may not curry special favor anyway,
some people note. Even though Mr. Fuld served on the board of the New
York Fed, his proximity to federal power didn’t spare Lehman from
bankruptcy.
But when bankruptcy loomed for A.I.G. — a collapse
regulators feared would take down the entire financial system — federal
officials found themselves once again turning to someone who had a
Goldman connection. Once the government decided to grant A.I.G., the
largest insurance company, an $85 billion lifeline (which has since
grown to about $122 billion) to prevent a collapse, regulators,
including Mr. Paulson and Mr. Geithner, wanted new executive blood at
the top.
They picked Edward M. Liddy, the former C.E.O. of the insurer Allstate.
Mr. Liddy had been a Goldman director since 2003 — he resigned after
taking the A.I.G. job — and was chairman of the audit committee.
(Another former Goldman executive, Suzanne Nora Johnson, was named to
the A.I.G. board this summer.)
Like many Wall Street firms,
Goldman also had financial ties to A.I.G. It was the insurer’s largest
trading partner, with exposure to $20 billion in credit derivatives,
and could have faced losses had A.I.G. collapsed. Goldman has said
repeatedly that its exposure to A.I.G. was “immaterial” and that the
$20 billion was hedged so completely that it would have insulated the
firm from significant losses.
As the financial crisis has taken
on a more global cast in recent weeks, Mr. Paulson has sat across the
table from former Goldman colleagues, including Robert B. Zoellick, now president of the World Bank;
Mario Draghi, president of the international group of regulators called
the Financial Stability Forum; and Mark J. Carney, the governor of the
Bank of Canada.
BUT Mr. Paulson’s home team is still what draws the most scrutiny.
“Paulson
put Goldman people into these positions at Treasury because these are
the people he knows and there are no constraints on him not to do so,”
Mr. Whalen says. “The appearance of conflict of interest is everywhere,
and that used to be enough. However, we’ve decided to dispense with the
basic principles of checks and balances and our ethical standards in
times of crisis.”
Ultimately, analysts say, the actions of Mr. Paulson and his alumni club may come under more study.“I
suspect the conduct of Goldman Sachs and other bankers in the rescue
will be a background theme, if not a highlighted theme, as Congress
decides how much regulation, how much control and frankly, how punitive
to be with respect to the financial services industry,” said Mr.
Langevoort at Georgetown. “The settling up is going to come in Congress
next spring.”
No comments:
Post a Comment