Money and Power: How Goldman Sachs Came to Rule the World by William D. Cohan

Author:William D. Cohan
Language: eng
Format: mobi, epub
Tags: Investments & Securities, Economics, Finance, Goldman, Financial crises - United States - History - 21st century, General, Investment banking - United States - History, Sachs & Co, Finance - United States - History, Banks & Banking, Business & Economics
ISBN: 9780385523844
Publisher: Knopf Doubleday Publishing Group
Published: 2011-04-11T10:00:00+00:00

CHAPTER 15

$10 BILLION OR BUST

From the outset, Corzine and Paulson had to figure out ways to apply tourniquets to the blood rushing out of the Goldman Sachs corpus. The trading losses continued in September, October, and November. “Big losses, hundreds of millions [of dollars] in a big part of the firm,” one partner said. Some partners attributed the ongoing losses to Winkelman shutting down after he realized he was not going to be running Goldman Sachs. “Mark Winkelman was literally dysfunctional because he wasn’t running the firm,” explained another partner. “I don’t know if it was a nervous breakdown or whatever. You just have to talk to him and have him tell you what he went through.” (Winkelman declined repeated requests to be interviewed.) The problem with Winkelman was compounded by the fact that he was still head of fixed-income and Corzine, his former partner in running fixed-income, did not want to micromanage Winkelman after he became the head of the firm. “For a long time he just sort of sat in his office,” one partner said of Corzine. “He would sit in his office breaking out in tears at various times while the firm was losing all this money.”

Goldman’s ongoing losses, of course, ate into the firm’s finite capital, and since the firm was highly leveraged—at that time nearly 50 to 1, meaning that roughly $100 billion of assets were being supported by roughly $2 billion in partners’ capital—the risk of financial disaster started looming larger and larger. “There’s two sets of issues,” Paulson said, speaking about the firm’s problems in 1994. “There’s leverage and the lack of permanent capital. Then there’s liquidity. Now when banks and investment banks die they die quickly because of liquidity problems.” In 1994, liquidity was not a problem for Goldman, but there were factors that could make it one in a hurry.

One ongoing threat to the firm’s liquidity at that time was the partners themselves. If they decided to leave, they could take out their accumulated capital—albeit over time—and deplete the firm’s finite overall capital. As the losses in 1994 mounted, many partners became increasingly nervous that the firm was at risk. They personally might lose the wealth they had accumulated at the firm, wealth that remained out of their grasp while they remained general partners. The abrupt departure of a large group of partners—all demanding their capital at the same time—could have resulted in a run on Goldman Sachs. “Jon and I made a huge effort to persuade partners to sign up,” Paulson said. “To stay and not leave.… We had some people who got very scared and left.”

A lot actually. Some forty partners left Goldman at the end of 1994, the first time anything like that many partners had voted with their feet. “People resigned out of fear,” one partner said. “That should tell you something.” A number of the departures were very upsetting and cut through the muscle of the firm into the bone. Howard Silverstein, the partner in charge of Goldman’s Financial Institutions Group, left.

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