The irony is, I didn't become a conspiracist until I read this book. It will make your skin crawl if you know anything about finance.
Chapter 36 - Lloyd Blankfein "Risk Manager"
(page 665)
While some of his partners still saw balancing Goldman's Sachs agency business with its principal investing as a worrisome choice, Lloyd Blankfein was sure it was instead a momentous strategic opportunity. At an internal meeting in London in 2005 he laid out his arguement. It was a powerful extension of the strategic thinking that had originated with Friedman and Rubin and gathered force under Paulson---- and could be traced all the way back to Gus Levy's business in arbitrage and block trading........... (the arguement of being both Principal and Agent or choosing one)
Meanwhile, principal businesses were growing, and profit margins were high and holding up because only a relatively few firms could seriously compete----and all the major competitors were smart enough not to ruin the party by competing on price. (some call it price fixing). Real estate, a hugh market, had moved away from a business of negotiated private deals into a business ot transactions on both private and public markets. (Steal from the public market, hide it in the private. That played to Goldman's Sachs dual strenghts in both private and public transactions. (You don't say. I imagine any transactions or CDS contracts, or insurance payouts on buildings around the twin towers were probably of the "private" type?) I might as well thrown in tid bit on info here. Goldman didn't lose one person during 911. In fact, when it happened, they were already meeting with arcitechs for their own tower.) ..........
Blankfein made his case: Goldma Sacah's strategic opportunity---and, as he saw it, the firm's strategic imperiative was to integrate the roles of advisor, financier, and investor: giving astute advice and committing capital..........
As Blankfein assereted that day in London, Goldman Sachs had come of age and was no longer dependent on anyone or anything. (Quite accurate) With its worldwide operations plus its diversity of businesses plus knowledge of economics, industries, compamies, and markets plus its clients relationships plus its capacity to embrace risk, the firm had developed for a unique strategic position. Each of those stengths was unequaled, and in aggreagate they were unbeatable and unmatchable. Goldman Sachs was now free to capitalize on all the years of hard work and steady business develpomemt done by predecessors.................................
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Blankfein ( who spends a significant amout of time managing real or perceived conflicts) (hmm....)said, " If major clients -------governments, institional investors, corporations and wealthly families -----believe they can trust our judgement, we can invite them to partner with us and share in their success. (The difference between a "real" conflict and a "perceived" conflict is just a function of how much the public has discovered. So, it sound like he is inviting everyone in the world (except the poor and middle class) to join in this "partnership." Foriegn governments, foriegn companies, and foriegn families. Just bring alot of money to the table. I wonder if the Bilderberg group approached Goldman, or did Goldman approch the Bilderberg group with a plan of world domination?)........................................
When J. Aron was acquired, Blankfeinn got into Goldman Sachs by the back door--- and just barely. Fortunately, Mark Winkelman decided not to include him in major layoffs and, and against Bob Rubin's advice,(or maybe with his advice) encouraged Blankfein to switch from sales to trading. J. Aron expanded into into risk-embracing trading currencies as well as in oil and other commodites, and Blankfein flourished and rode the expansion to inreasing authority. (Goldman bought J. Aron with the explicit purpose of manipulating commodites markets.) ......... ..................................................
page 672
Risk is complex and deceptive. There are known riskd and unknown risks. And risk is not entirely quantitative. At the margin, managing risk is closer to an art than to a science and depends on experience and judgement. ..............................................
Those with substantail experience knew that analytical models like (Var), however widely celebrated as the latest thing in risk controls, would catch all the normal risks, but not the killer risks-----the toxic black swans that reside in the six-sigma "fat tails" of a normal bell -curve distribtion of propbable events. (Ah, but Goldmam was able to spot these "black swans?" I thought the book about black swans came out just recently, yet this author is throwing it around like its been around awhile. Hmm, I wonder why? Oh, because in the next paragraph he describes how Goldman made billions shorting sub prime. The "Black Swan" sounds like a great story, but the real reason is Goldman shorted the ABX index.)
Almost every element of risk ----toxic or rewarding was on display in the mortgage crisis that rocked the United States and the world in 2007. At Goldman Sachs, the structured-products group of sixteen traders is responsible for making a market for clients trading a variety of securities based on residential mortagages. Simultaneously but quite separtely, members of this group trade or invest the firms own capital or take the other side of a client's transaction, either because they a good opportunity or to fulfill their role as a market maker. Because those businesses are separate, it's well understood by all parties that Goldman Sachs has no obligation to tell trading clients what it is doing in its propreitary activities----even when it is handling buy orders for client's accounts and selling for its own account, as was the situation in 2007.
A year eariler, in yet another line of business, Goldman Sachs had been a major underwriter of securities backed by sub prime mortgages. Because subprime mortgage-backed bonds traded only occasionally and only privately, a new family of indexes, called ABX, was created to reflect these bonds' values based on instruments called credit-default-swaps. These are derivatives that pay the buyer if borrower default on their mortagages and the mortgage backed securties fall in price. The derivatives actually trade more often than the bonds themselves, with their prices rising and falling as investors' views of the risk of subprime defaults rise and fall. As expected, withen the firm's mortgage department, the introduction of the ABX was great for traders. The firm made $1 million on the first day, but volume was thin and the firm had to use its own capital on most trades.
In December 2006, David Viniar, the firm's highly respected, long serving, and unflappable CFO, pressed for a more negative posture on subprime mortgages. (Yet Paulson is at the Tresasury saying everything is fine in real estate!) He wanted the firm to offset its long position in collateralized debt obligations (CDO's) and other arcane securities that it had underwritten and was holding in inventory to trade for customers, and to do so by shorting parts of the ABX or buying credit-default swaps. When traders complained they did not know how to price their portfolios, Blankfein (above they say it was Viniar) it ordered them to sell 10 percent of every position. (That should get the avalanch started in the stock market).
page 675
While Global Alpha and its investors suffered major losses, and investors in securities underwritten by the firm experienced seriously disappointing performance, the firm and its own investors enjoyed a substantial profits Goldman Sachs produced by taking an astute and almost unique short position in the sub prime market. While some would question whether the firm did not have an overarching fiduciary responsibility to all clients and customers to share its expertise across all three areas,(like telling the US government of impending doom?) senior management was is clear: Each business unit is responsible and accountable for doing its best to complete the mission of that particular business----period. No business is its brother's keeper. Each tub on its bottom. (Except when Blankfein tells every department to sell 10%. ) Organized like any good cult. Top down. Nobody is anybodies keeper. So, most people that work at Goldman, have no idea what the "management committee" is up to! That makes total sense. That would explain why there is this large disperison between what the employees thinking they are a "force of good" and what the public thinks.)
Chapter 35 - Paulson's Disciplines (page 662 )
In May 2006, Henry M. Paulson got a call, not the first, from the White House to discuss his becoming Secretary of the Treasury. He told partners he wasn't going to take the job, and John Whitehead advised against considering it: "This is a failed administration. You will have a hard time getting anything accomplished."
A bluff, Paulson acts like its a burden or he really doesn't want it; when in fact he has direct orders from the Bilderberg Group. "I am NOT going to take the job. " Sounds like "I am NOT going to merge with JP Morgan" 15 years ago, and I am NOT going to loan Semgroup the money for their margin call after I said I would. John White Head and the White Head Principals . The principals of NWO?. Of course this is a failed administration and the stock market market should be crashing in October , just-in-time for the election.. Ah, relief at last, a different party.........CHANGE is on the way.
On Saturday, May 20 , Paulson meet more than once with White House chief of staff Josh Bolton--------who had worked at Goldman Sachs ----(you don't say, and a Clinton boy))to discuss the bias upon which Paulson would agree to serve. (You know Bilderberg stuff) Bolten had begun the conversation: "Let's discuss for a minutes what you would want to know this job was going to be-----on the hypothetical assumption that you had accepted because those understandings were you wanted to work." The two men worked out an e-mail memorandum (hank does not use email) of understandings that would include "regular, direct access to the president; equal stature with Defense and State; (SOUNDS LIKE A MAN WHO KNOWS WHAT HE WANTS, AND WHAT HE IS AFTER) principal spokesman on all economic and fiscal policies---even those not normally reporting to Treasury; chair the economic policy luncheons in the White House, and ability to choose his own staff." With that understanding, Paulson went into a meeting with the President. Their conversation centered on family---Paulson's family and Bush's family-----(Bilderberg Group, NWO, usually stuff, OK maybe some dog talk) and on other personal matters before turning to what Paulson calls "philosophies and objectives" ( and agreement on having regular, direct access, chairing the weekly policy luncheon, (and sub prime never can up ??)and being spokesman for the administration on all fiscal matters. As the conversation continues into the next hour, the president invited Paulson to join the cabinet. Knowing that "no agreement means anything unless real trust is earned, "Paulson would sleep on it. Next morning , he called to accept. (Paulson sure likes to sleep on it. But NOT when it came to his TARP plan.)
When he left, Goldman Sachs was recognized as the premier "solutions provider." It had the best working relationships with the largest number of major corporations, governments, institutional investors, banks and private-equity investors; the best knowledge and understanding of companies, industries, economies, and markets; the largest appetite and capacity for risk of all sorts, with ability to commit substantial capital; the strongest recruiting program; the highest compensation----and a well-accepted overall strategy for the future. (all the contacts and ingredients to infiltrate the US government and position itself as the bank for the NWO.)
While it would not have changed his decision to serve his nation (tears ) and risk his reputation (what's it to lose a reputation but to gain the world. A master of risk knows this) by joining the Bush Administration , the irony, as some saw it, was that the financial benefit to Paulson of accepting the call to duty is surely greater than that enjoyed by any other public servant in U.S. history. Goldman Sachs has long had a policy that all deferred compensation becomes payable promptly, to any partner that accepts a senior position in the federal government. Congress passed a law a quarter-century ago that people taking senior appointed federal positions who convert their investments into either an index fund or a blind trust can do so upon assuming office with zero capital until such investments are later sold. If Paulson took advantage of these provisions, (Paulson will be vested in Goldman for life.His propbably there right now trying to put out PR fires) they enabled him to sell his shares in Goldman Sachs without raising any public questions and without tax and to diversify his large personal investments in a single stroke. For just over two years' of service, the savings in Paulson's personal income taxes could have been as large as $ 200 million. Paulson had no interest in diversifying his investments and has never sold a share of Goldman Sachs stock. So these "benefits" were purely hypothetical.
There is another large irony. Paulson, who had encouraged others to diversify and stay at the firm, and never previously sold a share of Goldmans Sachs stock. He sold his shares at $150, a price that he believed deeply------and accurately ----was low because 2006 was a very strong year, and he estimates that the timing of the sale cost him $200 million. He also had to liquidate his large private-equity holdings---- including a substanial position in the Industrial and Commercial Bank of China, (Paulson owns Chinese Banks. He only made over 60 trips to China while CEO of Goldman for eight years. I am sure there is nothing to see here. Maybe that's why he failed to see the banking crisis. He was in China buying banks.)
The Bank which has since multiplied fourfold. (looks like he saw something in banking) The tax break was no great boon to Paulson: He plans to give most of his wealth to his charitable foundation. (more tears) Tax breaks/ non-breaks are no different than bonus / non - bonus. There just a bunch of side shows, to distract the media/public from the REAL crimes of treason, racketeering, and theft of what's left of the money system.
page 653
Paulson was determined to estalish a major busniess for Goldman Sachs in private equity and real estate-----not as agent , but as principal investor. (hmm, equity and real estate. Sounds like they inflated sunprime with private money; then shorted it causing it to implode on Lehman and AIG. Goldman knew that a governmnet bailout was waiting for their remaining chips or marker. )
During an era in which other banking firms were dropping out of private-equity investing and saying , "We don't want to compete with our clients," Paulson went the other way. Paulson states: We are going to do both principal investing for our own account- often, we hope co-investing with you as partners--- and, as advisers, helping you accomplish your objectives. We believe we know how to manage the differences and avoid direct conflicts of interest. We want to understand and certainly hope you will understand that from time to time, we are going to be investing for our own account, regularly and in size." There was no need to say that Goldman Sachs would not be asking for permission. (from time to time......please...how about every single day Goldmant trades 7 X more often then their clients. The NYSE has become just Goldman trading with Goldman. The last 2 chiefs of the NYSE were from Goldman. Over half the daily volume at the exchange is Goldman Sachs.)
Paulson's drive met resistance within Goldman Sachs as well as outside. Senior Goldman Sachs people---- particularly partners who had gone limited-----would go to Paulson and say, "Hank, you're destroying the culture of Goldman Sachs," and follow up with an explanation like, "We cannot compete with our clients!" Paulson wasn't buying it. "What they really mean is they don't know how or are unwilling to adapt to change. The facts are that our clients' expectations for capital commitments and sharing the risks are forcing us to be principals. The business is changing because our clients want us to change. If you don't or won't change, you will wind up with less than the best strategies, practices, and plans. The market---the---world does change, and as intermediaries, we must change." (CHANGE is here, compliments of the Bilderberg Group)
Paulson with help from John McNulty, Peter Sacerdote, and other partners---- moved the firm to a new strategic proposition: it was committed to being both explicitly principal and agent. No longer could or should the clients expect the firm to be just an agent or to expect it to subordinate its interests in the principal investments that it might make on its own account with its own capital, expertise, and access to information. (In NO other industry is this allowed!. Being both Principal and Agent. Completely unthical and scandalous.)
The change in strategic positioning would involve educating clients about the meaning of being a client...(what other industry can you get away with this)
page 647
The concept of leadership at Goldman Sachs has changed completely overthe past fifty years. Sidney Weinberg was a leader, but in many ways his firm was a propritorship. While Gus Levy insistently expected many people to do all they could to build the business, there was no question that he was the leader----in overall pace and direction and on dozens of transactions every day. White and Weinberg pushed decision responsibility and accountability out to the unit heads. Rubin and Friedman matched even more widely distributed authority and resposibility with centralized accountability to the management comittee. (Blame-shifting) Paulson continued the multiplication of decision-making leaders (expanded the cult)and increased the coordination of operating units through centralized disciplines: risk controls, business planning, and performance measurement at increasing numbers of smaller and smaller, more agile units that were closer to particular markets. (Dividing up the world)
"When I joined Goldman Sachs's senior management team," says Paulson. "John Whitehead told me that me that the most important thing we do as senior management is recruiting. If we had high-quality people , then all the senior management needed to do was figure out the firms strategy and put dollars behind resources appropriately." (Any cult needs, good brain washing, the (recruitment firm) and mega salaries also help. As Paulson, states in the book, "No one is to a brother's keeper. Meaning deparment heads were NOT to talk to other deparment heads!)
The number of leaders needed rose by a factor of ten in the years between Sidney Weinberg and the two Johns; then by another factor of ten under Rubin and Friedman; and on upward by yet another factor of ten under Corzine and Paulson (growth rate equal to any modern day cult through brain washing with White Head Principals) as the firm and its business became increasingly competitive and specialized. The firm had grown from 300 to 30,000 and the need for leadership had grown more rapidly with the distribution of authority that comes with rapidly advancing technology, multipling geographic and customer market segmentation, increasing competition, and the firm's own intensifying determination to prevail.
page 637
Some of the most difficult and important decisions for individuals and for leaders of organizations are "not" decisions. .........So it was for Hank Paulson and his decision not to combine with J.P..... At the the time of decision, Paulson was classically alone at the top.............
Later, after Goldman went public in 1999, the firm gave serious consideration to combining with J.P Morgan. The prevailing view was that all the leading investment banking firms would have to have big balance sheets to succeed -------or even survive. (After months of meetings with dozens of people from each side, and everyone thinking the deal was done, Paulson once again reneges after he got the information he was looking for. The hostility that ensued would make the front page of the Wall Street Journal)
Looking back, Paulson says, "only a few people on the management committee were not bulls on J.P. Morgan." But as the years passed and J.P. Morgan merged with Chase Manhattan Bank, each observer, including Warner, came around to the conclusion that Paulson's decision had probably been right for Goldman Sachs. Balance-sheets assets, which would have been huge in the Goldman-Sachs-Morgan merger, are a powerful store of value; they show the strenght of past achievements and can be used to create new revenues and absorb risk and losses. But the real strenght of a modern-day financal intermediary is not balance-sheet capital nearly so much as it is reliable, ready, large-volume access to the capital markets. (Just eariler in the chapter they were saying how big balance sheets were the only way to survie. That seems to change HERE) And that depends on the creativity(new crimes) and connectedness (politicans) of people with superior talent, drive, and strategic dynamism. These assests at Goldman were far greater and were increasing. (And Paulson didn't know this before meeting with JP for 2 months?) With the discipline and focus that Paulson had always lived by as a leader and talent finder, Goldman Sachs was almost certain to continue accumlating and compounding its competitive advantage. The firm's access to open capital markets of the world meant that it could obtain assets and lay off risks at times of its own choosing. (What does this mean? "LAY OFF RISKS AT ITS OWN CHOOSING. " To me it sounds like if they can choose when to realize risk: then there really is no risk at all!) It did not need to own hugh balance-sheet assets because it could always find institutions that would rent to the firm. Meanwhile, the firm's own capital comparative advantages----usually talented, motivated individuals interconnected through shared values, team work, and White Head Principals and the high financial rewards of effectiveness ----would lift Goldman Sachs to higher and higher levels of profit and power.
page 655
Paulson had been a believer in technology and its impact on the securities business since the seventies, when he first saw continuously updated bond prices displayed on a computer screen at a clients office. Goldman Sachs was certaintly no technology leader in the eariler years. Senior management got its first briefing on the impact of the internet in 1996, including answers to the basic question: What is the Internet?
That changed alot. Paulson believed the firm was in a race to expliot the revolution in digital technology...........
After the firm spent $5 billion in five years, by the middle of the decade proprietary trading alogrithms handles twenty thousand derivative trades a day and 70 percent of the firm's Treasury bond trades -----updating prices two hundred times a second and executing all trades up to $100 million automatically......."Paulson's strategy was to cover all the bases, enabling the firm to keep in close touch with changing technology and able to move quickly in any direction as developments clarified. "We have two dozen electronic trading ventures going on, and they're a sideshow compared to what we're doinf in-house." Hull Group, for example which traded derivatives through complex quantitative pricing models and alogrithms, was acquired for $550 million and promptly expanded into equity-options trading. The greater the market volatility, the more Hull's trading speed and precise pricing increased profitability and market share. (As I state in my blog, the MORE volatile a market is, the more money Goldman makes. Depsite that BS they thought us in college, that derivatives decrease volatility.GS has fiqured out how to use futures contracts to control the underlying "cash" market in any market. In Tokoyo, Hull's know-how resulted in its controlling nearly half of all options trading. (sounds alot like what they have done in America)
Paulson pursued the same general goals through difficult times as a director of the New York Stock Exchange. In 2003, he was told by the exchange's CEO, Richard Grasso, "My compensation package is not on the agenda," so Paulson felt no need to change his plan to go birding in Argentina and missed the cruical meeting on Grasso's outsize compenstation package. "He lied to you, Hank," advised an experienced senior colleague, "so you can and should resign with a clear conscious." So Paulson, at considerable cost to himself, (tears) stayed on and worked through the problems. (And looked at every "book" in the place) It was good for the exchange that he did stay. Over the next few years, the old, obsolete business model of the NYSE was revolutionized by the central limit order book, (maybe Limited to Goldmnan's Eyes) which consolidated limit orders received from all sources, and the merger with the Archipelago electronic stock exchange, which transformed operations and produced major gains in valuation for both sides. (SO we have Paulson the head of the NYSE for a couple years, updating the systems and what not, doing public service years ago! hmm.. So Paulson starts out doing "public service" under Nixon in the 70's as some aid to the Treasuary. Then goes to Goldman. Then some "public service" at NYSE, then back to Goldman, then on to Treasuary under Bush! What a busy guy. I wonder what he he is up these days? Hopefully getting briefed on his upcoming court hearings. Good luck Mr. Paulson!
