The Smartest Kid in the Classroom

Don't let that "dumb"founded look of Lloyd Blankfein, CEO of Goldman Sachs, fool you. Testifying in front of a testy Congress would make Einstein look below average. Blankfein looks a bit like "Dopey" of Snow White and Seven Dwarfs lore. Smiles less these days than Dopey. He acknowledged that his face is not made for television or Congressional hearings. But forget about how he looks in front of the red light. Underneath all the recent media glare, Blankfein is the smartest man in whatever room he is in...and doesn't act like it. In fact, being the smartest is how he ascended from nothing to the top of the Wall Street heap at Goldman.

Throughout Goldman's 141 year old history of investment banking, brilliant creative minds have run the most successful company on Wall Street. Marcus Goldman, Sidney Weinberg, Gus Levy, John Weinberg, John Whitehead, Robert Rubin, Stephen Friedman and Hank Paulson all Goldman past CEO's...and all brilliant businessmen. Blankfein, no slouch himself, sits comfortably in tall cotton amidst that legacy.

Blankfein started humbly. He was raised in public housing in the Bronx. Father was a postal clerk. Mother was a receptionist. But native smarts has no limitations. And work was his lifestyle. He was valedictorian at his high school. After school, he sold sodas at Yankee Stadium. He was the first in his family to go to college. Harvard on scholarship. Then on to Harvard Law School. Started his career as a corporate tax lawyer in 1978. Decided that "lawyering" was not his thing. Found his way to Wall Street via J. Aron Company, a little known commodities trading firm. Aron Co. needed a lawyer to unravel the complexities of deals and then explain the deal in concise and understandable terms to clients. Blankfein was their man. In 1981, Goldman buys Aron Co. and Blankfein becomes a Goldman employee. In 1988, Blankfein makes partner. In 1998, Blankfein, while running one of the most profitable businesses at Goldman, the fixed income and commodities floor, is tapped by Paulson to be his co-president (much to the chagrin of John Thain who leaves Goldman in a huff and hiss). In 2006, Paulson leaves Goldman for Treasury and Blankfein becomes CEO.

In 2007, Goldman records a profit of $11.6 BILLION on revenues of $45.99 BILLION. In 2008, the credit and housing markets crashed. Lehman Brothers files for bankruptcy, the largest ever in the United States ($639 BILLION in assets). Goldman Sachs along with the other Wall Street investment houses are reeling and hemorrhaging cash by the hour. Goldman is saved from ruin partially from a $5 BILLION preferred stock/10% dividend purchase by Warren Buffett and a $10 BILLION TARP LOAN. In desperation, Goldman and rival Morgan Stanley declared their business model deceased and became bank holding companies overnight. In mid-2009, Goldman pays back the $10B TARP loan with interest to the Government.

Fast forward to 2010, Goldman reports a record profit of $13.39 BILLION in 2009. The 1Q of 2010, Goldman earned $3.46 BILLION , the second highest quarterly profit in it's 141 year history. All of this success, turbulence and success again was adroitly navigated by Lloyd Blankfein. How does Goldman/Blankfein do it? Narrowly escapes it's own demise in 2008 and in 2009 pays off TARP, makes record profits while the country is still slowly coming out of the worst financial crisis since the 1930's. Main street suffers while Goldman prospers. Their success drives their competition crazy, the public nuts and the government apoplectic. They can't figure out how Goldman does it. Because they aren't as smart as Goldman and they know it. Conversely, Goldman's success benefits their clients, shareholders and themselves mightily. Their opponents cry foul. Their proponets shout hooray. Which brings us to the present case of SEC v Goldman.

On Friday, April 16, 2010, the day after tax day, the SEC accused Goldman of defrauding investors. Goldman's world was shaken to the core. Blankfein said he was shocked by the SEC charges and lived the "worst day of my life." Since the announcement was made, Goldman's share price has fallen from $180 plus to below
$150.

Apparently, the government has had it with Goldman and their kind. They are going hard after Goldman with civil and criminal charges. They want to exact several "pounds of flesh" from Goldman from their bully pulpit. Ravage them, if you will. In the recent Senate subcommittee hearing, Chair and Senator Carl Levin,(D.,Michigan), blasted Lloyd Blankfein and Goldman for selling "shitty deals to customers and clients and then taking a short position and betting against the deal...where clients lose and Goldman profits." Blankfein responded, "Goldman is a market maker. We buy and sell things for our clients. We do four things: we give advice, we provide financing for deals, we sell bonds and stock funds and we grow our clients assets." Levin attacked, "...don't you see a conflict of interest when Goldman shorts a security that your client owns?" Blankfein counters, "our clients don't care what our position is. It's not relevant to our clients to disclose Goldman's position. They don't care if Goldman is the fiduiciary or not. Shorting is a legitimate market function. Goldman lost $1.2 BILLION on shorts in 2008." Levin ripostes, "and you want people to trust you?" Blankfein concludes, "...trust is what we offer our clients."

(In truth, Goldman "has no legal obligation to be kind to their clients". Their clients are offered complex and risk-laden deals from Goldman which commands the client to do due diligence. The client owns the right of refusal. In the SEC's case against Goldman's trader Fabrice Tourre and his Abacus deal, the counterparty and client, IKB Deutsche Bank, was guilty for being the idiot on the other side of the deal. They exhibited an "inexhaustible capacity for self-harm." What's a German bank doing dabbling in the overheated US housing market anyway?)

Well the stage has been set. Lawyers will be busy. SEC must prove fraud. Goldman must prove that they did nothing illegal. Both have alot at stake here. The SEC needs a victory desperately against the top dog in its ardent desire to reshape the financial landscape on Wall Street. Goldman wants to survive for another day amidst it all. It will be fascinating to watch how this plays out.

My hunch is Goldman will settle out of court with the Government. The Government will look like they won in the eyes of their constituency. Insiders will know that the Government failed to prove their case. Goldman will get back to business probably with a new CEO who will be just as smart as Blankfein. Some new ground rules will be made to police Wall Street. However, when it is all said and done, Goldman will always be miles ahead of the Government because they are smarter than everybody and the Government has no clue what Goldman is doing. And how can they monitor something they don't understand? Only the author knows how to do that.

As Ayn Rand wrote in Atlas Shrugged, "Money is not the tool of the moochers, who claim your product by tears, or of the looters, who take it from you by force. Money is made possible only by men and women who produce." Goldman and Blankfein and his successor(s)are producers...very smart producers.