Too Big to Fail [98]
During the Clinton administration’s first term, Congress was working on the legislation that would repeal the Glass-Steagall Act of 1933, tearing down the walls dividing banks, brokers, and other financial businesses. At the time, lobbyists for Goldman actually persuaded the committee writing the bill—which became the Gramm-Leach-Bliley Act of 1999—to include a minor amendment they had sought in the event that they ever wanted to become a bank holding company. That provision allowed any bank that owned a physical power plant to continue to own it as a bank holding company. Of course, Goldman was the only bank that owned a power business.
Blankfein reflected on this history as O’Neill finished his presentation with a series of questions: Do we need to become a commercial bank? What does it mean if we become a commercial bank? How can we use deposits? How do we build a deposit base?
Blankfein was quick to speak up afterward to encourage discussion. “Deposits provide funding only for certain activities,” he reminded the group.
Gary Cohn tried to explain the situation in greater detail, saying that they wouldn’t be allowed to make bets with all of the deposits and advising them that they would “have to go out and buy some mortgages or go into the credit card business or originate mortgages.” These were businesses in which Goldman had no experience, and entering them would mean changing the company in a fundamental way.
Sitting beneath twenty-foot-high chandeliers in the conference room, the directors and executives batted around a number of different ideas—developing an Internet bank, growing the firm’s private-wealth-management business. After an hour of debating alternatives, O’Neill shifted the discussion in another direction by proposing a different alternative: buy an insurance company.
Insurance might have seemed, at first glance, an even more radical departure for Goldman than becoming a commercial bank. But Blankfein made the case that the two industries were more similar than dissimilar. Insurers use premiums from ordinary customers, just as bankers use deposits from customers, to make investments. It was no accident that Warren Buffett was a big player in the industry; he used the float of premiums from his insurance companies to finance his other businesses. Similarly, what was known in insurance parlance as “actuarial risk” was not unlike Goldman’s own risk-management principles.
Goldman could not buy just any insurer, however; it would have to be a company large enough to put more than a dent in Goldman’s already hefty balance sheet. The top name on O’Neill’s list was AIG, American International Group, which by some measures was the biggest insurance company in the world. The stock price of AIG had recently been decimated, so it might even be economical. Doing a deal with AIG had not, in fact, been a new idea; a possible merger had been talked about in hushed whispers at 85 Broad Street for years. Previous leaders of Goldman, John Whitehead and John Weinberg, both of whom were friends of Hank Greenberg, had suggested to him that the companies should perhaps do a deal some day.
Everyone in the group had a view about AIG. Rajat K. Gupta, senior partner emeritus of McKinsey & Company, was intrigued, as was John H. Bryan, the former CEO of Sara Lee and one of Paulson’s closest friends.
Bill George, the former head of Medtronic, the medical technology giant, appeared a bit more hesitant, and Gary Cohn said frankly that the idea made him nervous. They all looked to one particular board member for direction: Edward Liddy.
As the chief executive of Allstate, the major auto and home insurer, Liddy was the one person in the room with actual experience in the insurance business. Some