Gary
Rivlin, Michael Hudson
Part
3 - ALPHA MALES
Donald
Trump, the “blue-collar billionaire,” has taken great pains to
write grit and toughness into his privileged biography. He talks of
military schools and visits to construction sites with his father and
wrote in “The Art of the Deal” that in the second grade, “I
actually gave a teacher a black eye. I punched my music teacher
because I didn’t think he knew anything about music and I almost
got expelled.” Yet when the authors of the book “Trump
Revealed: An American Journey of Ambition, Ego, Money, and Power”
spoke to several of his childhood friends, none of them recalled the
incident. Trump himself crumpled when asked about the incident during
the 2016 campaign: “When I say ‘punch,’ when you’re that
age, nobody punches very hard.”
Gary Cohn,
however, is the middle-class kid and self-made millionaire Trump
imagines himself to be. It appears that Cohn actually did slug a
grade-school teacher in the face. “I was being abused,”
Cohn told author Malcolm Gladwell, who interviewed him for his book,
“David and Goliath: Underdogs, Misfits, and the Art of Battling
Giants,” back when Cohn was still president of Goldman Sachs. As a
child, Cohn struggled with dyslexia, a reading disorder people didn’t
understand much about when Cohn attended school in the 1970s in a
suburb outside Cleveland. “You’re a 6- or 7- or
8-year-old-kid, and you’re in a public-school setting, and everyone
thinks you’re an idiot,” Cohn confessed to Gladwell. “You’d
try to get up every morning and say, today is going to be better, but
after you do that a couple of years, you realize that today is going
to be no different than yesterday.” One time when he was in the
fourth grade, a teacher put him under her desk, rolled her chair
close, and started kicking him, Cohn said. “I pushed the chair
back, hit her in the face, and walked out.”
While
Trump’s father was a wealthy real estate developer, Cohn’s father
was an electrician. When Trump sought to get into the casino
business, his father loaned him $14 million. When Cohn couldn’t
find a job after graduating from college, all his father could do was
find him one selling aluminum siding. While Trump has the instincts
of a reality show producer and an eye for spectacle, Cohn prefers to
operate in the shadows.
But they
likely recognize much of themselves in the other. Both Cohn and Trump
are alpha males — men of action unlikely to be found holed up in an
office reading through stacks of policy reports. In fact, neither
seems to be much of a reader. Cohn told Gladwell it would take him
roughly six hours to read just 22 pages; he ended his time with the
author by wishing him luck on “your book I’m not going to
read.” Both have a transactional view of politics. Trump
switched his voter registration between Democratic, Republican, and
independent seven times between 1999 and 2012. In the 2000s, his
foundation gave $100,000 to the Clinton Foundation, and he
contributed $4,700 to Hillary Clinton’s senatorial campaigns. He
even bought and refurbished a golf course in Westchester County a few
miles from the Clinton home, in part, Trump once admitted, to
ingratiate himself with the Clintons. Cohn is a registered Democrat
who has given at least $275,000 to Democrats over the years,
including to the campaigns of Hillary Clinton and Barack Obama, but
also around $250,000 to Republicans, including Senate Majority Leader
Mitch McConnell and Florida Sen. Marco Rubio.
There are
also striking similarities in their business histories. Both have a
knack for weathering scandals and setbacks and coming out on top.
Trump has filed for bankruptcy four times, started a long list of
failed businesses (casinos, an airline, a football team, a steak
company), but managed, through his best-selling books and highly
rated reality TV show, to recast himself as the world’s greatest
businessman. During Cohn’s tenure as president, Goldman Sachs faced
lawsuits and federal investigations that resulted in $9 billion in
fines for misconduct in the run-up to the subprime meltdown. Goldman
not only survived but thrived, posting record profits — and Cohn
was rewarded with handsome bonuses and a position at the top of the
new administration.
Cohn’s
path to the White House started with a tale of brass and bluster that
would make Trump the salesman proud. Still in his 20s and stuck
selling aluminum siding, Cohn made a play that would change his life.
In the fall of 1982, while visiting the company’s home office on
Long Island, he stole a day from work and headed to the U.S.
commodities exchange in Manhattan, hoping to talk himself into a job.
He overheard an important-looking man say he was heading to LaGuardia
Airport; Cohn blurted out that he was headed there, too. He jumped
into a cab with the man and, Cohn told Gladwell, who devoted six
pages of “David and Goliath” to Cohn’s underdog rise, “I
lied all the way to the airport.” The man confided to Cohn that
his firm had just put him in charge of a market, options, that he
knew little about. Cohn likely knew even less, but he assured his
backseat companion that he could get him up to speed. Cohn then spent
the weekend reading and re-reading a book called “Options as a
Strategic Investment.” Within the week, he’d been hired as the
man’s assistant.
Cohn soon
learned enough to venture off on his own and established himself as
an independent silver trader on the floor of the New York Commodities
Exchange. In 1990, Goldman Sachs, arguably the most elite firm on
Wall Street, offered him a job.
Goldman
Sachs was founded in the years just after the American Civil War.
Marcus Goldman, a Jewish immigrant from Germany, leased a cellar
office next to a coal chute in 1869. There, in an office one block
from Wall Street, he bought the bad debt of local businesses that
needed quick cash. His son-in-law, Samuel Sachs, joined the firm in
1882. A generation later, in 1906, the firm made its first mark,
arranging for the public sale of shares in Sears, Roebuck. Goldman
Sachs’s influence over politics dates back at least to 1914. That
year, Henry Goldman, the founder’s son, was invited to advise
Woodrow Wilson’s administration about the creation of a central
bank, mandated by the Federal Reserve Act, which had passed the
previous year. Goldman Sachs men have played important roles in U.S.
government ever since.
There was
the occasional scandal, such as Goldman Sachs’s role in the 1970
collapse of Penn Central railroad, then the largest corporate
bankruptcy in U.S. history. Still, the firm built a reputation as a
sober, elite partnership that served its clients ably. In 1979, when
John Whitehead, a senior partner and co-chairman, set to paper what
he called Goldman’s “Business Principles,” he began with the
firm’s most cherished belief: The client’s interests come before
all else.
Two years
later, Goldman took a step that signaled the beginning of the end of
that culture. In the fall of 1981, Goldman purchased J. Aron &
Co., a commodities trading firm. Some within the partnership were
against the acquisition, worried over how profane, often crude,
trading culture would mix with Goldman’s restrained, well-mannered
way of doing business. “We were street fighters,” one
former J. Aron partner told Fortune magazine in 2008.
The J. Aron
team moved into the Goldman Sachs offices in lower Manhattan, but
didn’t adopt its culture. Within a few years, it was producing well
over $1 billion a year in profits. They were 300 employees inside a
firm of 6,000, but were posting one-third of Goldman’s total
profits. The cultural shift, it turned out, was moving in the other
direction. J. Aron, according to a book by Charles D. Ellis, a former
Goldman consultant, brought to Goldman “a trading culture that
would become dominant in the firm.”
Lloyd
Blankfein, who ascended to chairman and CEO in in 2006, started his
Goldman career at J. Aron, a year after Goldman acquired the firm.
“We didn’t have the word ‘client’ or ‘customer’ at the
old J. Aron,” Blankfein told Fortune magazine two years after
taking over as CEO. “We had counter-parties.” Cohn joined
J. Aron eight years after Blankfein did, in 1990. Four years later,
Blankfein was put in charge of the firm’s Fixed Income, Currency,
and Commodities division, which included J. Aron. Cohn, loyal and
hard-working, with an instinct for connecting with people who can
help him, became Blankfein’s “corporate problem solver.”
The
emergence of “Bad Goldman” — and Cohn’s central role in that
drama — is really the story of the rise of the traders inside the
firm. “As trading came to be a bigger part of Wall Street, I
noticed that the vision changed,” said Robert Kaplan, a former
Goldman Sachs vice chairman, who left in 2006 after working at the
firm for 23 years. “The leaders were saying the same words, but
they started to change incentives away from the value-added vision
and tilt more to making money first. If making money is your vision,
what lengths will you not go?”
At the
height of the dot-com years, a debate raged within the firm. The firm
underwrote dozens of technology IPOs, including Microsoft and Yahoo,
in the 1980s and 1990s, minting an untold number of multimillionaires
and the occasional billionaire. Some of the companies they were
bringing public generated no profits at all, while Goldman was
generating up to $3 billion in profits a year. It seemed inevitable
that some within Goldman Sachs began to dream of jettisoning the
Goldman’s century-old partnership structure and taking their firm
public, too. Jon Corzine was running the firm then — he would later
go into politics in the Goldman tradition, first as a U.S. senator
and then as New Jersey governor — and was four-square in favor of
going public. Corzine’s second in command, Henry Paulson — who
would go on to serve as Treasury secretary — was against the idea.
But Corzine ordered up a study that supported his view that remaining
private stifled Goldman’s competitive opportunities and promoted
Paulson to co-senior partner. Paulson soon got on board. In May 1999,
Goldman sold $3.7 billion worth of shares in the company. At the end
of the first day of trading, Corzine’s and Paulson’s stakes in
the firm were each worth $205 million. Cohn’s and Mnuchin’s
shares were each worth $112 million. And Blankfein ended up with $168
million in company stock.
Like any
publicly traded company, there would now be pressure on Goldman Sachs
to make its quarterly numbers and “maximize shareholder value.”
Discarding the partner model also meant the loss of a valuable
restraint on risk-taking and bad behavior. Under the old system, any
losses or fines came out of the partners’ pockets. In the early
1990s, for example, the firm was involved in transactions with Robert
Maxwell, a London-based media mogul who was accused of stealing
hundreds of millions of pounds from his companies’ pension funds.
The $253 million that Goldman Sachs paid to settle lawsuits brought
by pension funds over its involvement was split among the firm’s 84
limited partners. Now any losses are paid by a publicly traded entity
owned by shareholders, with no direct financial liability for the
decision-makers themselves. In theory, Goldman could claw back
bonuses in response to executives’ bad behavior. But in 2016, when
Goldman paid over $5 billion to settle charges brought by the Justice
Department that the firm misled customers in the sale of a subprime
mortgage product during Cohn’s time overseeing that unit, the
Goldman board declined to dock Cohn’s pay. Instead, the company
awarded him a $5.5 million cash bonus and another $12.6 million in
company stock.
As Blankfein
moved up the corporate hierarchy, Cohn rose along with him. When
Blankfein was made vice chairman in charge of the firm’s
multibillion-dollar global commodities business and its equities
division, Cohn took over as co-head of FICC, Blankfein’s previous
position. That meant Cohn was overseeing not just J. Aron and the
firm’s commodities business, but also its currency trades and bond
sales. By the start of 2004, Blankfein was promoted to president and
COO, and Cohn was named co-head of global securities. At that point,
Cohn had authority over the mortgage-trading desk. Under Cohn, the
firm aggressively moved into the subprime mortgage market, using
Goldman’s own money and that of its customers to help stoke the
housing bubble.
Goldman was
already enabling subprime predators, such as Ameriquest and New
Century Financial, by providing them with the cash infusions they
needed to scale up their lending to individual home buyers. Cohn
would steer the firm deeper into the subprime frenzy by setting up
Goldman as a patron of some of these same mortgage originators.
During his tenure, Goldman snapped up loans from New Century,
Countrywide, and other notorious mortgage originators and bundled
them into deals with opaque names, such as ABACUS and GSAMP. Under
Cohn’s watchful eye, Goldman’s brokers then funneled slices to
customers they sold on the wisdom of holding mortgage-backed
securities in their portfolios.
One such
creation, GSAA Home Equity Trust 2006-2, illustrates Goldman’s
disregard for the quality of loans it was buying and packaging into
security deals. Created in early 2006, the investment vehicle was
made up of more than $1 billion in home loans Goldman had bought from
Ameriquest, one of the nation’s largest and most aggressive
subprime lenders. By that point, the lender already had set aside
$325 million to settle a probe by attorneys general and banking
regulators in 49 states, who accused Ameriquest of misleading
thousands of borrowers about the costs of their loans and falsifying
home appraisals and other key documents. Yet GSAA Home Equity Trust
2006-2 was filled with Ameriquest loans made to more than 3,000
homeowners in Arizona, Illinois, Florida, and elsewhere. By the end
of 2008, 65 percent of the roughly 1,400 borrowers whose loans
remained in the deal were in default, had filed for bankruptcy, or
had been targeted for foreclosure.
In just
three years, Goldman Sachs had increased its trading volume by a
factor of 50, which the Wall Street Journal attributed to “Cohn’s
successful push to rev up risk-taking and use of Goldman’s own
capital to make a profit” — what the industry calls
proprietary trading, or prop trading. The 2010 Journal article quoted
Justin Gmelich, then the firm’s mortgage chief, who said of Cohn,
“He reshaped the culture of the mortgage department into more of
a trading environment.” In 2005, with Cohn overseeing the
firm’s home loan desk, Goldman underwrote $103 billion in
mortgage-backed securities and other more esoteric products, such as
collateralized debt obligations, which often were priced based on
giant pools of home loans. The following year, the firm underwrote
deals worth $131 billion.
In 2006, CEO
Henry Paulson left the firm to join George W. Bush’s cabinet as
Treasury secretary. Blankfein, Cohn’s mentor and friend, took
Paulson’s place. By tradition, Blankfein, a trader, should have
elevated someone from the investment banking side to serve as his No.
2, so both sides of the firm would be represented in the top
leadership. Instead he named Cohn, his long-time loyalist, and Jon
Winkelried, who also had history on the trading side, as
co-presidents and co-COOs. Winkelried, who had started at Goldman
eight years before Cohn, had probably earned the right to hold those
titles by himself. But Cohn had the advantage of his relationship
with the CEO. Blankfein and Cohn vacationed together in the Caribbean
and Mexico, owned homes near each other in the Hamptons, and their
children attended the same school. Winkelreid was out in two years.
The bromance between his fellow No. 2 and the top boss may have
proved too much.
With
Blankfein and Cohn at the top, the transformation of Goldman Sachs
was complete. By 2009, investment banking had shrunk to barely 10
percent of the firm’s revenues. Richard Marin, a former executive
at Bear Stearns, a Goldman competitor that wouldn’t survive the
mortgage meltdown, saw Cohn as “the root of the problem.”
Explained Marin, “When you become arrogant in a trading sense,
you begin to think that everybody’s a counterparty, not a customer,
not a client. And as a counterparty, you’re allowed to rip their
face off.”
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