All the Devils Are Here [99]
Goldman always insisted that it had something no hedge fund had: customers. And that was true. As Goldman’s chief financial officer, David Viniar, explained it on a 2003 call, “There is a small percentage of our trading that is purely proprietary and there is a small percentage that is purely customer driven. But the great majority of what we do will be driven by trading with customers where customers ask us to do a transaction, or we’ll hedge something for them and then we may hold a position for a while or we may lay it off in pieces to the market. It’s very hard to break out what is proprietary and what is customer.”
And when Blankfein insisted that nothing had changed and that Goldman recognized that its success was due to its client franchise, well, that was true in a way, too. It was customers that instigated the transactions that put Goldman at the center of the action. Goldman might earn a fee from a deal or make its money by putting its own capital to work as part of the deal, or both. It might be on the other side of a trade in order to satisfy a client, to offset another risk elsewhere in its book, or because Goldman thought the other side was where money could be made. The many facets of Goldman’s involvement might help clients, because it might get a trade done that would otherwise be difficult, or it might hurt them in ways that were hard to see from the outside. Or maybe both. At one point, Goldman’s bankers—whom Blankfein began to refer to as the “front of the house,” meaning they were the salespeople for the firm’s products—were told that they should sell more derivatives. But if a banker asked Goldman’s foreign exchange desk for a price on a currency swap, neither the banker nor the client had any way of knowing how much profit margin the trading desk was building in. Was the client still a client to whom Goldman owed some sort of responsibility, or was the client now merely a counterparty? In this new era, Goldman’s first duty was to its own bottom line, which accrued to its shareholders. Clients were a means to that end, not an end in and of themselves.
Goldman’s client franchise gave it another big advantage: customer trades gave the firm extraordinary insight into what was happening in the market. Blankfein would speak of being “so close to clients that you can see the pattern better than anyone else.” What he meant, although he didn’t put it this way, was that Goldman had become the house in the casino: it could see all the cards, whereas the other players could see only their own hands.
Goldman always defended its transformation as not only smart, but necessary. At a meeting of managing directors in London in the fall of 2007, Blankfein told the assembled crowd that, without the change, “we would have been irrelevant.” And if that was an overstatement, it was certainly true that Goldman would have been a far smaller firm. But it was also true that Goldman’s single-minded focus on maximizing profits made its partners extraordinarily wealthy. In 2003, Paulson made $21.4 million while Blankfein made $20.1 million; in 2004, the men made $29.8 million and $29.5 million respectively, according to company filings. Not very long ago, a million-dollar payday was considered a sterling year. Now bonuses of $5 million, $10 million, $15 million were not uncommon.
And the more Goldman grew, and the more the men at the top of Goldman earned, the more jealous the rest of the Street became.
There was one key way