Too Big to Fail [95]
As the current market troubles unfolded, Goldman was being mercifully spared the kinds of hits that Lehman, Merrill, Citi, and even Morgan Stanley were taking. His team was smart, but Blankfein knew that luck had played a big role in their accomplishments. “I really think we are a little better,” he had said, “but I think it’s only a little better.”
Certainly, Goldman had its share of toxic assets, it was highly leveraged, and it faced the same funding shortfalls caused by the seized-up markets as did its rivals. To its credit, though, it had steered clear of the most noxious of those assets—the securities built entirely on the creaky foundation of subprime mortgages.
Michael Swenson and Josh Birnbaum, two Goldman mortgage traders—along with the firm’s chief financial officer, David Viniar—had been instrumental in making the opposite wager: They had bet against something called the ABX Index, which was essentially a basket of derivatives tied to subprime securities. Had they not done so, things could have turned out differently for Goldman, and for Blankfein.
Blankfein couldn’t help but notice all the Mercedes clogging the streets as he walked back to his hotel room. And that was only the most visible conspicuous consumption taking place. Flush from their profits not only from gas and oil but from iron, nickel, and a host of other increasingly valuable commodities, Russia’s so-called oligarchs were buying up supersized yachts, Picassos, and English soccer teams. Ten years ago, Russia could not pay its debts; today it was a fast-growing, $1.3 trillion economy.
Goldman’s own complicated history with Russia dated back much earlier than its stunning default. Franklin Delano Roosevelt once offered to make Sidney Weinberg, Goldman’s legendary leader, ambassador to the Soviet Union. “I don’t speak Russian,” Weinberg replied in turning down the president down. “Who the hell could I talk to over there?”
After the collapse of the Soviet Union, Goldman was among the first Western banks to try to crack its market, and three years after the fall of the Berlin Wall, Boris Yeltsin’s new government named the firm its banking adviser.
Profits proved to be elusive, however, and Goldman pulled out of the country in 1994 but would eventually return. By 1998 it helped the Russian government sell $1.25 billion in bonds; when, two months later, after the default, the bonds proved to be virtually worthless, the firm again withdrew. Now it was back for a third try, and Blankfein was determined to get it right this time.
The next morning, at 8:00, the Goldman board began its session in a conference room on the ground floor of the Hotel Astoria, which had been in operation since 1912 and was named after John Jacob Astor IV. Legend had it that Adolf Hitler had planned to hold his victory celebration there the moment he forced the city to surrender, and was so confident in his triumph that he had had invitations printed in advance.
Blankfein, dressed in a blazer and khakis, gave the board an overview of the company’s performance. As board meetings go, it had been unexceptional.
But it was the following session that was perhaps the critical one. The speaker was Tim O’Neill, a longtime Goldmanite, who was virtually unknown outside the firm. But as the firm’s senior strategy officer, he was a major player within the firm. His predecessors included Peter Kraus and Eric Mindich, both of whom were considered Goldman superstars, and O’Neill definitely had Blankfein’s ear.
Board members had received a briefing book three weeks earlier and understood why this session was so vital: In it O’Neill would outline survival plans for the firm. He was effectively serving as the office’s fire marshal. Nothing was burning, but it was his responsibility to identify all the emergency exits.
The issue facing them was this: Unlike a traditional commercial bank, Goldman didn’t have its own deposits,