The collapse of the U.S. housing market in 2007 spawned the worst economic crisis since the Great Depression. Millions of Americans lost their homes, their jobs, and their faith in the financial markets. Many of Wall Street’s biggest investment banks, that helped fuel the mortgage meltdown, went belly-up. In a new book, a former Wall Street insider explains how one of these firms not only survived the crash, but made record profits, thanks to a historic bet it made against the market. The story of how Goldman Sachs came to rule Wall Street, beat the Bubble, and incur the wrath of the American public.


  • William Cohan Contributing editor at Vanity Fair, opinion columnist for the New York Times; author of "House of Cards" and "The Last Tycoons"; and former investment banker

Read an Excerpt

From “Money and Power” by William Cohan. Copyright 2011 by William Cohan. All rights reserved. Excerpted by kind permission of Doubleday:


  • 11:06:55

    MS. DIANE REHMThanks for joining us. I'm Diane Rehm. Last month, Senator Carl Levin released his report on the causes of the financial crisis. In it, he called Goldman Sachs, quote, "a financial snake pit ripe with greed, conflicts of interest and wrongdoing." His recommendation, bring criminal charges against the firm.

  • 11:07:28

    MS. DIANE REHMFormer investment banker and author William Cohan gets to the bottom of Goldman's big short. He explains why Goldman's history and culture have enabled it to defy the odds and survive scandals. His new book is titled, "Money and Power: How Goldman Sachs Came to Rule the World." The author joins me in the studio. We'll take your calls, 800-433-8850. Send us your email to Good morning to you. It’s good to have you here.

  • 11:08:16

    MR. WILLIAM COHANThank you, Diane, it's wonderful to be here.

  • 11:08:18

    REHMI know you were here previously, but I wasn't here, so I'm glad to meet you. Tell me a little about the history of Goldman Sachs and how it came to be such an important player on Wall Street.

  • 11:08:35

    COHANWell, you know, really, the evolution of Goldman Sachs is now 142 years old and still ticking. It is really the story of the evolution of the capital markets in this country, of Wall Street in general in this country and of the power of finance around the world and the real, I guess you'd have to say, the triumph of capitalism around the world.

  • 11:09:02

    COHANAnd so Goldman's power has risen along with the United States' power around the world, economic power around the world. But like many Wall Street firms, especially many Jewish Wall Street firms, they started in the dry goods business in Philadelphia, believe it or not. And then Mrs. Goldman, Marcus Goldman's wife, decided she'd had enough of Philadelphia and insisted that they move to New York.

  • 11:09:32

    COHANAnd so when Marcus moved to New York, he became what was known as a commercial paper salesman. Basically, he would buy IOUs from small businesses on the lower end of Manhattan and then trudge up a mile to the banks, a mile north of the bottom of Manhattan. In those days, that was a tough trip -- and sell those IOUs to the banks for a little bit more than he bought them for and so he made the money on the spread. And of course, that developed into a real gangbuster business.

  • 11:10:04

    REHMAnd I gather he took in his son or son-in-law?

  • 11:10:12

    COHANSon-in-law and son, yes. This was very typical behavior on Wall Street because they were all small, private family partnerships and so you don't want to dilute the ownership by bringing in outsiders until you can't possibly avoid it. And so, you know, he got his son-in-law Samuel Sachs involved and then his son, Henry Goldman who, of course, was a real visionary at the firm. Not only did he get Goldman Sachs into the business of underwriting and selling corporate securities, specifically IPOs, initial public offerings, of some of their clients, but Henry Goldman interestingly had a real seat at the table.

  • 11:10:55

    COHANA hundred years ago, the federal reserve banking system was created in the wake of the panic of 1907. So Goldman Sachs has been a real player in Washington as well for the last 100 years starting with Henry Goldman.

  • 11:11:08

    REHMSo you're saying he, in effect, influenced how the federal reserve came into being, what its role was and how it was going to move the money of the federal government?

  • 11:11:26

    COHANAbsolutely. I mean, he had a seat at the table. He was asked specifically how he thought that the Federal Reserve banking system should be organized. His vote was that the New York Fed be the most powerful, which in fact it is. And fascinatingly his view was that if banks who get themselves into trouble need to borrow at the Fed window because they're in trouble, that should all be done very quietly and sotto voce so nobody understands how much trouble they're really in.

  • 11:11:54

    COHANNow, the fact of the matter is 100 years later, Goldman Sachs itself was allowed, in September of 2008, as I'm sure we all remember, to become a bank holding company and become -- have access to the Fed window, which it still has at this moment. And we still don't know the extent of their borrowings and how much they, you know, go back and forth to that window. And it's all done sotto voce just like Henry Goldman hoped it would.

  • 11:12:20

    REHMYou are yourself a former investment banker. Did you ever work for Goldman Sachs?

  • 11:12:29

    COHANNo, I never worked for Goldman Sachs. I competed against Goldman Sachs. I worked with Goldman on deals. I lost business to Goldman Sachs. I won business from Goldman Sachs. You know, no matter what firm I worked on on Wall Street, and I worked at four different firms, we all wanted to be like Goldman Sachs. We all wanted to emulate Goldman Sachs. Goldman Sachs still is the most admired firm on Wall Street for its brains, for its brawn, for its audacity and for its aggressiveness.

  • 11:13:06

    COHANGoldman is sort of like IBM used to be in the olden days when you could not go wrong hiring IBM to design your computer systems. You couldn't go wrong hiring Goldman Sachs to underwrite your securities or to advise you on an M & A deal. Obviously, some of the bloom is off the rose.

  • 11:13:24

    REHMWhy did you leave investment banking turning to journalism? You wrote The New York Times bestsellers, "House of Cards" and "The Last Tycoons." How come?

  • 11:13:35

    COHANWell, first of all, Diane, before I had gone to Wall Street, I was a newspaper reporter in Raleigh, N.C., an investigative reporter. And then, I went back to business school and went to Wall Street in 2004. Like many people on Wall Street who get into their 40s, I was summarily relieved of my duties, involuntarily relieved of my duties. I believe that's called being fired and so I needed a new career in effect.

  • 11:14:07

    COHANAnd what I found was that even though I'd been paid all this money on Wall Street as an M & A banker, my skills were not transferable into the general, you know, world of business. It was absolutely shocking that I could get -- sort of like playing left tackle for the New England Patriots or something. You get paid a lot of money to be a left tackle, but when your career is over, that's it. What else can you do?

  • 11:14:33

    REHMWhy were you fired?

  • 11:14:34

    COHANI was fired because it was after 9/11 and the firm that I worked for at the time had just gone through a big merger, the merger of J.P. Morgan and Chase. And when they put this merger together which closed at the beginning of 2001, they had these grandiose plans about how much business the firms combined were going to do and how many people they needed for that.

  • 11:14:57

    COHANWell, after 9/11, the business on Wall Street dropped off a cliff and they began a series of massive layoffs. And finally in January of 2004, my number came up and it was time for me to go. It was either, you know, one Bill Cohan or 25 young associates and analysts and I think that became an easy decision.

  • 11:15:14

    REHMHow much of a role do you think Goldman Sachs played in the meltdown of the housing market?

  • 11:15:26

    COHANGoldman Sachs, like other firms on Wall Street, was a major player in the creation of mortgage-backed securities that were sold to investors, the raw material for which were mortgages that had been given to people who probably should never have been given mortgages, could not afford them and ultimately were unable to pay those mortgages back.

  • 11:15:55

    REHMDid Goldman know?

  • 11:15:58

    COHANGoldman absolutely knew that the quality of the mortgages going into these mortgage-backed securities were deteriorating over time, that the credit quality of the people who were getting mortgages was really scraping the bottom of the barrel. And people -- you know, they used to say all you had to do was to be able to fog a mirror and you could get a mortgage.

  • 11:16:25

    COHANNow, when you're putting those kinds of mortgages, stuffing them into mortgage-backed securities and selling them to investors around the world, then you know, there's no question -- not only Goldman, by the way, but everybody, all the major underwriters on Wall Street knew that the credit quality had deteriorated extensively by 2005, 2006.

  • 11:16:45

    COHANNow, the thing about Goldman Sachs, unlike every other firm on Wall Street, is that beginning in December of 2006, they started to put on a major, major bet that the mortgage market would collapse. By the way, the same time that they were doing that -- and this was billions of dollars. At the same time that they were doing that, they continued to sell these mortgage-backed securities to investors at 100 cents on the dollar, even though they themselves, the firm using its own money...

  • 11:17:12

    REHMWas betting against...

  • 11:17:14

    COHAN...was betting that they would collapse. Not necessarily the very same securities that they were selling, but securities very much like that and derivative securities and indices, whatever way they could do to get short -- or bet against the mortgage market, they were putting into place big time by December of 2006 and through much of the rest of 2007. They didn't stop selling mortgage-backed securities to investors at 100 cents on the dollar until June or July of 2007.

  • 11:17:42

    REHMCan it simply be argued that this was good business?

  • 11:17:46

    COHANWell, that is, Diane, the Goldman Sachs argument. In other words, we were on the one hand continuing to, you know, manufacture and sell these mortgage-backed securities because our investors and our clients wanted them. You know, interest rates were very low after 9/11. Greenspan had lowered them tremendously and that forced many investors to reach for yield as they say, to try to find investments that would yield them more than the low-yielding Treasury securities and that forced them to take more and more risk.

  • 11:18:23

    COHANWhen you had rating agencies who had rated these securities AAA, which is a whole other scandal, then investors reached for these.

  • 11:18:31

    REHMWilliam Cohan and his new book is titled, "Money and Power: How Goldman Sachs Came to Rule the World." Short break and we'll be right back.

  • 11:20:04

    REHMAnd William Cohan is with me. He is the New York Times bestselling author of "House of Cards." His newest book is all about Goldman Sachs and how he says it came to rule the world. His new book is titled, "Money and Power." We're going to take your calls in just a few moments. Join us on 800-433-8850. Here's a Tweet from Ryan who says, "Please speak about the secret letter certifying Goldman Sachs as a bona fide hedger thus escaping regulation." Do you know anything about that?

  • 11:20:56

    COHANA bona fide hedger, you know, being absolved of regulation. No, I don't...

  • 11:21:03

    REHMAll right.

  • 11:21:04

    COHAN...really know anything about that. I mean, they certainly didn't escape the umbrella of regulation. In other words, they fell under the FCC of regulators. They fell under all sorts of -- there's plenty of regulation out there even before Dodd Frank, even before they became a bank holding company. Whether or not they were actually regulated, of course, is another question.

  • 11:21:31

    REHMHere is an email from Ronnie in Florida who says, "I've not heard of any laws that Goldman Sachs or the other too-big-to-fail firms have actually broken. Does Congress make laws so vague and so full of loopholes that, in fact, no laws were broken? I'd love some clarification on this and if laws were broken, are cases working their way through the courts? Being immoral is not against the law."

  • 11:22:09

    COHANAs I -- that's a very astute observation. As I write in the book, it's not what's illegal that's the crime, it's what's legal. In other words, you know, Goldman Sachs -- not only does Congress write the laws, but they do so with the influence of firms like Goldman Sachs. And not, you know, just passing -- a passing interest. They have a serious interest.

  • 11:22:38

    COHANIn fact, Diane, while we're sitting here now having this conversation, I can assure you down at the FCC Goldman and its representatives are sitting there working with the FCC regulators to draft the regulations that still need to be written as part of the Dodd Frank Law. They have a front row seat at this. They pay for it and it doesn't cost them that much money, frankly. It doesn't -- they remain...

  • 11:23:03

    REHMWhat do you mean they pay for it?

  • 11:23:05

    COHANThey pay for it by giving major campaign contributions to Congressmen. And it doesn't cost them that much. I think Goldman Sachs is one of the largest campaign contributors to congressional campaigns, to presidential campaigns of both parties. It doesn't cost them that much money either.

  • 11:23:24

    REHMSo what you're saying is they're not only not breaking the law, they're actually making the law.

  • 11:23:32

    COHANThat's absolutely correct.

  • 11:23:34

    REHMYou talk about in the book, "The Goldman Way" and how it's influenced the firm's direction. And you tell a great story, but give us a sense of "The Goldman Way."

  • 11:23:49

    COHANWell, you know, I'll tell you the story and then you'll see very much where it -- it's like it was about, you know, a Memorial Day weekend, you know, maybe ten years ago when a bunch of new analysts and associates were collected at the firm and it was the Friday night of Memorial Day Weekend. And they were told to go to a conference room and wait. And, you know, the hours just droned on and a lot of them, of course, wanted to get out for the weekend 'cause it was Memorial Day weekend. But there was no senior partner who had arrived yet in the conference room to tell them why they were there.

  • 11:24:27

    COHANSo about three of them left and then at about 10:00 at night the senior partner showed up and said, you know, okay, well, you've learned a valuable lesson here today, which is that when you're told to wait that's what you're supposed to do. And, by the way, the three guys who left, they've all been fired. So it sends a very powerful message about the rules of the road at Goldman Sachs.

  • 11:24:51

    COHANIn other words, their view is we're in the service business. We make money by helping our clients do what they want to do. And sometimes our clients want us to sit around for ten hours straight without being told necessarily what to do, even though it's Memorial Day weekend. And therefore, we want you to do that.

  • 11:25:10

    COHANYou know, Voltaire had a great expression about, you know, (speaks foreign language) he, you know, A, to encourage the others. In other words, he told the story of how a British general was assassinated or executed for failing to win a battle. And the idea was to (speaks foreign language) to let the other people -- the other officers know that they had to win battles not lose battles. Very powerful message that is sent.

  • 11:25:41

    COHANAnd so that's a small part of the whole culture which, of course, relies on trying to find the best and the brightest people and making them go through 30 different interviews. And they like people who are team players, who have been on sports teams, who are young. Their brains are malleable. They haven't been infected by the bad behavior of other firms. So they like them young and malleable. Almost like Stepford Wives or Manchurian Candidate kind of ideas, or a sideboard. They like to be able to, you know, collect young minds, mold them the way -- in the Goldman image of communicating well with others, working hard. You know, supposedly doing only what their clients want them to do now.

  • 11:26:25

    REHMBut hasn't Goldman Sachs itself had some pretty major leadership conflicts? They haven't always gotten along at the top.

  • 11:26:37

    COHANOf course not, and that’s very -- you know, their image of course -- the myth of Goldman, which I found so interesting in the writing of this book, the myth is, of course, collegiality. You know, planning -- always planning for the future, succession planning long in advance. We have a great bench and we know exactly who is on that bench and who are going to choose to rise up to be the top of the firm.

  • 11:27:01

    COHANBut as I described repeatedly throughout the history of the firm, they had many, many conflicts among their senior partners. I had the great -- what I thought was a wonderful excerpt that appeared in last month's Vanity Fair about the conflict between our former treasury secretary Henry Paulson and former senator and governor from New Jersey, John Corzine, about their intense battle that went on at the top of the firm from '94 to '99 when basically Paulson kneecapped Corzine and forced him out of the firm.

  • 11:27:34

    REHMOver what? Was it a basic difference of philosophical thinking? Was it money? Was it where to put money, how to do business? What was it...

  • 11:27:49

    COHANYeah, I think -- first of all, I think they had a visceral dislike of one another. I mean, Paul...

  • 11:27:54

    REHMJust personally.

  • 11:27:55

    COHANRight. Even though they were both from Illinois and, in fact, both from rural Illinois, Corzine was a trader, Paulson was a banker. But it wasn't a real banker trader kind of thing, is what happened at Lehman Brothers and at other firms. But it was really sort of a visceral disagreement about the way to do business.

  • 11:28:14

    COHANCorzine wanted to keep merging Goldman -- you know, kept reaching out to different merger partners. Goldman is a very insular culture. Unlike most other firms on Wall Street, Goldman never really sought out the big mergers and always sort of stuck to its original knitting and grew internally and organically. But for some reason, Corzine got into his head that Goldman should merge with, you know, Travelers or JP Morgan or Chase.

  • 11:28:43

    COHANAnd the straw that broke the camel's back was when he tried to merge the firm with Mellon Bank without telling Paulson. And Paulson blew a gasket and that was sort of the end of Corzine.

  • 11:28:55

    REHMThen there was the Penn Central bankruptcy in the '70s. How similar was that to Goldman's actions prior to the financial meltdown?

  • 11:29:11

    COHANThis was one of the major revelations to me. I mean, the Penn Central bankruptcy was, to that point, the largest industrial bankruptcy in our nation's history in 1970. And Goldman had been underwriting commercial paper for Penn Central, which of course was supposed to be the safest security at the top of the capital structure. And then Goldman kept underwriting these securities and selling them to their clients, even though Goldman had been getting information in the months prior to the collapse of Penn Central, the bankruptcy, that the firm was in trouble.

  • 11:29:47

    COHANBut Goldman got that information and didn't stop selling the bad paper -- continued to sell the bad paper. So a number of its clients continued to buy it at 100 cents of the dollar. Then Penn Central went bankrupt and of course they lost their money, which was supposed to be the safest...

  • 11:30:05

    REHMThe clients lost their money.

  • 11:30:06

    COHANThe clients lost their money. And incredibly in the months before -- this was really the zinger -- in the months before the bankruptcy Goldman had about $10 million of Penn Central's commercial paper on its balance sheet. Now, I know that seems like, you know, chump change...

  • 11:30:21

    COHAN...small potatoes, yeah.

  • 11:30:22 the moment. But you have to remember, in 1970 Goldman Sachs' total capital, the whole firm's capital was $45 million. So to lose $10 million of it would be 25 percent thereabout and would be a serious detriment to their ability to do business. So what did they do? They went to Penn Central and they said, you need to buy this paper back from us at 100 cents on the dollar.

  • 11:30:45

    COHANAnd Penn Central did do that. They did buy the paperback, the $10 million from Goldman at 100 cents on the dollar months before they went into bankruptcy. And their own clients got hosed, if I may use that expression, and they lost all of their investment. Goldman came out, you know, smelling like a rose and basically put their own self interest in 1970 ahead of their clients. Virtually the exact same thing they did 40 years later, which is incredibly shocking.

  • 11:31:17

    COHANIn that case with Penn Central, their clients sued Goldman Sachs and incredibly they allowed those. They didn't -- weren't able to settle all of these law suits and a number of them went to trial and Goldman lost virtually all of these lawsuits. If they had lost all -- you know, had not been able to settle all of them -- they settled some and they lost a lot of them -- had they not been able to settle some of them the firm would've been put out of business 'cause they only had $45 million in capital. These lawsuits totaled something like $85 million. So, you know, had they lost all of those lawsuits and not sort of skated by they would've been out of business in 1970.

  • 11:31:57

    REHMWho were the big losers in the housing debacle?

  • 11:32:04

    COHANAside from American taxpayers, who lost trillions of dollars, who bailed out these Wall Street firms, who are now -- paid themselves something like $150 billion in bonuses last year. So they got back on their feet on our backs and they're making billions of dollars in bonuses while we're still struggling economically in this country. So that's a major question that I still wonder about.

  • 11:32:30

    COHANBut, you know, investors all around the world lost trillions of dollars investing in these mortgage back securities. And a number of law suits are coming -- civil lawsuits are coming to the fore now and we're -- you know, they're still working their way through these.

  • 11:32:45

    REHMWilliam Cohan and the book we're talking about it titled "Money and Power: how Goldman Sachs Came to Rule the World." And you're listening to "The Diane Rehm Show." Before we open the phones, tell us about the experience of women and minorities at Goldman.

  • 11:33:11

    COHANWomen and minorities all over Wall Street have been treated terribly full stop, continues to this day. It's unacceptable. Goldman Sachs being part of Wall Street is, of course, no different than that. I tell, I think, a fascinating story in the book about a guy named James Cofield who was a student at Stanford Business School in the '70s and wanted to go to Goldman Sachs. Had been working at various Wall Street firms in the summers and leading up to his graduation from Stanford Business School.

  • 11:33:52

    COHANHe tried to get a job at Goldman Sachs. He interviewed with a partner at Goldman Sachs and basically everything looked good until the partner told him that, well, there's this other partner back in New York who doesn't like Black people. And so we have to end the discussion right now. Well, James Cofield was shocked, but he also kept all of the communication that he had with Goldman Sachs about all of this. In the subsequent years, he filed an EEOC claim. It turned out that he didn't file it in time so he ended up not being able to collect.

  • 11:34:27

    COHANBut it was an incredible story and saga that went on for about, you know, a couple of years after he graduated from Stanford Business School. The upshot of it was that Goldman Sachs was kicked off of the Stanford campus for five years. They were not allowed to recruit on the Stanford campus as a result of, you know, this misunderstanding about their feelings about Black people and working at Goldman Sachs.

  • 11:34:52

    COHANI think they pretty much remedied that, at least overtly. But women incredibly still get mistreated all the time. And there are lawsuits filed virtually all the time. There was a bunch of lawsuits filed last year about the treatment of women and how shabbily and horrifically they're treated. You know, sort of along the lines but maybe not quite as explicit as, you know, the way Dominick Strauss-Kahn treated the maid...

  • 11:35:22

    REHM...the woman.

  • 11:35:23

    COHAN...the woman at the hotel in New York.

  • 11:35:28

    REHMInteresting that you talk about one of the women first hired by Goldman Sachs, who was then invited to meet -- to come to a dinner at the Yale Club. I happen to know the Yale Club fairly well and can remember the first time I walked in there and was told that I could not use the main entrance and had to go around the lobby to the side entrance. How insulting.

  • 11:36:07

    COHANDiane, it's -- you couldn't make this stuff up if you tried...

  • 11:36:10

    REHMYou couldn't. You really couldn't.

  • 11:36:11

    COHAN...the fact that the Yale Club would not allow women to go through the front doors.

  • 11:36:15

    REHMBut don't -- did you wonder whether that woman was deliberately told to come to the Yale Club for that dinner knowing full well she would be embarrassed at the door?

  • 11:36:32

    COHANWell, it would not have surprised me if that was done...

  • 11:36:35

    REHM...take her down a peg.

  • 11:36:37

    COHAN..deliberately, yes. I mean, obviously -- it's funny, I told the similar story in my Lazard Book, which was my first book, where there was a club -- another club in New York on the (word?) side that also didn't accept women to even have dinner there. And this client invited a woman banker from Lazard to go there. And she couldn't get in and she was outraged. And she said to him, (speaks foreign language) there are a 1,000 restaurants in New York and you picked this one to have dinner at, knowing that I wouldn't be able to go.

  • 11:37:18

    COHANAnd that was around the same time, probably a little later than the incident at the Yale Club. So I'm sure it was known that women were not allowed and they could've picked any one and they picked that one.

  • 11:37:27

    REHM"Money and Power: How Goldman Sachs Came to Rule the World." Author William Cohan is with me. When we come back, we'll open the phones, take some of your calls. I look forward to hearing from you.

  • 11:40:03

    REHMAnd before we open the phones for your questions for Bill Cohan, let's do a little clarification here. An email from Vanessa, who says, "When people say Goldman Sachs bet against the housing market, what does that actually mean in specifics? How did they bet against the housing market?"

  • 11:40:32

    COHANSure. I'm happy to explain that. So Goldman used its own capital, not -- its own money. It used its own money, not its clients' money, not its investors' money, its' own money to buy or to in effect sell securities that were mortgage related. In effect they made big bets that these securities would fail by buying derivatives or buying shorting indexes that were comprised of securities that were mortgage related. So in other words, as the price of these securities fell, Goldman benefited because they bet that the price of these securities would fall. And they did this over a number of months.

  • 11:41:20

    REHMBut is that legal?

  • 11:41:23

    COHANOh, of course that's legal, yes. That is legal. Now, is it right to also continue to sell them the mortgage securities, underwrite and sell them to investors at 100 cents on the dollar at the same time that you're making a big proprietary bet...

  • 11:41:41

    REHMOkay. So let me just...

  • 11:41:42

    COHAN...that they'll fall?

  • 11:41:43

    REHM...let me just take this. So you've got one person, let's say, at Goldman who has a client who's interested in buying some of these securities because he's heard that there are a lot of them on the market and he wants to make a lot of money. So you're talking to him on the telephone. You say these are really something. These are really worth it and if you want to really make some money, you ought to buy these. And at the same time, on the other hand, he is putting the firm's money into another pot that says these securities are gonna fail big time and we, Goldman Sachs or whoever, is gonna make money when these securities fail.

  • 11:42:53

    COHANThat's correct. I mean, it's not the same person doing...

  • 11:42:57

    REHMRight, right.

  • 11:42:57

    COHAN...both jobs obviously. There's 30,000 people at Goldman Sachs.

  • 11:43:01

    REHMBut do they all know the same thing?

  • 11:43:03

    COHANAt the top of the firm they knew both of these things were happening.

  • 11:43:06

    REHMHow about the guys lower down?

  • 11:43:07

    COHANOf course. They knew that these...

  • 11:43:09

    REHMEverybody knows.

  • 11:43:10

    COHANThey're smart people. They knew. Now, at Goldman they call this hedging. When they respond to Senator Levin's charges that you described at the top of the show, they describe that as hedging. Hedging their bets. In other words, we had a bunch of securities that we owned on the long side here and we wanted to, as they say, get closer to home. In other words, bring the risk of those securities back to -- close to zero. So we created these big, huge short positions at the same time. Now, they call that hedging.

  • 11:43:44


  • 11:43:45

    COHANI call that making a proprietary bet against the mortgage market at the same time you're continuing to sell and underwrite mortgage securities to investors at 100 cents on the dollar without telling anybody.

  • 11:43:56

    REHMSo how much did Goldman Sachs make?

  • 11:44:02

    COHANLet me put this into stark terms...

  • 11:44:04

    REHMI'll hold my breath.

  • 11:44:04

    COHAN...for you, Diane. Basically this one desk of these three or four guys who created what David Viniar, the CFO of Goldman Sachs, referred to in his own e-mails as the big short in 2007. That one desk made $4 billion on this proprietary short bet. The...

  • 11:44:25

    REHMOne desk.

  • 11:44:26

    COHANOne desk. This firm -- the firm as a whole in 2007 made $17.2 billion pretax. That same year -- that same year, 2007, the top five guys at Goldman Sachs split amongst themselves something like $350 million. Now, Diane, the important thing here is to remember what was going on in the rest of Wall Street. Merrill Lynch was losing billions of dollars. Their CEO got fired. Citigroup was losing billions of dollars. Their CEO got fired.

  • 11:44:58

    COHANBear Sterns had its first loss in its 85 year history at the end of 2007. Lehman Brothers was losing. Every other firm on Wall Street was losing money. Only Goldman Sachs made anything like $17.2 billion and was smart enough to create this proprietary short bet that now they don't wanna admit that they made to Senator Levin. In front of Senator Levin they're denying that they did this.

  • 11:45:23

    REHMThey're saying we were smart enough to hedge our bets.

  • 11:45:28

    COHANRight. They're calling it a hedge, we weren't net short. But I've gone through the 900 pages of documents that Senator Levin made available in April, 2010. I've gone through the Financial Crisis Inquiry Commission Report and the document that they've made available. I've incorporated all of these documents and the relevant parts into my book. And it's absolutely clear that Goldman Sachs made this big proprietary bet. I talked to the traders who made it. And they absolutely are clear. Now, why at the top of the firm they like to pretend that they didn't do this, it's a mystery. And whether that qualifies as a crime that should be prosecuted by the Justice Department or the SEC, we shall find out.

  • 11:46:13

    REHMHave you talked to Senator Levin directly?

  • 11:46:16

    COHANYes, I have.

  • 11:46:17


  • 11:46:18

    COHANWell, we talked about it. I mean, he said the same thing to me that he has said publicly, I mean, you know, and that he said during the hearing. You know, I think that there's one aspect of this that if Senator Levin were hearing, I wish he would -- listening, I wish he would focus on because this is really subtle. This goes beyond sort of having the big proprietary bet on at the same time that you continue to sell the mortgage securities. The other thing that Goldman did is that it alone wrote down the value of the securities on the long side that it owned to levels well below what everybody else on the street was doing, which in effect did two things.

  • 11:46:59

    COHANNumber one, it increased the value on their short side because they were in effect driving the market lower on the long side which gave them a huge profit on the short side. And it in effect as I described in "House of Cards," which was the book about Bear Sterns, I described how that made the two Bear Sterns hedge funds collapse. The value -- the lowering of the value of these securities caused huge losses in the hedge funds at Bear Sterns which caused the collapse of Bear Sterns. Same thing happened at AIG. Same thing happened at Merrill Lynch and at Lehman Brothers and at Morgan Stanley.

  • 11:47:33

    COHANSo Goldman Sachs helped to drive down the value of these securities in the market which forced all the other of their competitors to take huge losses. So as I like to say, imagine if you could create a proprietary bet that Goldman -- like Goldman did and make billions yourself while also at the same time driving all of your competitors into the toilet. And that's exactly what they did. I don't think they necessarily knew that that was what was gonna happen, but that's what in fact did happen.

  • 11:48:04

    REHMAre you convinced that they didn't know that was gonna happen?

  • 11:48:11

    COHANWell, it would be sort of like the trade of the millennium to think and know it was going to happen. To hope it would happen, I mean, I don't even think, you know, as, you know, Goldman and all its wildest dreams, you know, it needs competitors or else, you know, it'll find itself in a situation sort of that it finds itself in now, which is that everybody, you know, points all its ire at that firm. They don't like this situation I can assure you, so...

  • 11:48:35

    REHMAll right. Let's open the phones. First to Cleveland, Ohio. Good morning, Patrick.

  • 11:48:43

    PATRICKGood morning, Diane. Thank you.

  • 11:48:44

    REHMHi. Sure.

  • 11:48:46

    PATRICKMr. Cohan, I have a question for you about influence that's different from what you just talked about before. During the period in 2004, 5, 6 when anybody was paying attention knew that poor mortgages were being made and sold, do you find any evidence that Goldman Sachs improperly influenced the rating agencies, the SEC or any really crucial overseer or rater of the securities?

  • 11:49:16

    COHANSo, I mean, just taking the rating agencies first, every Wall Street firm paid the rating agencies for the ratings they wanted. They paid. It was a service.

  • 11:49:31

    REHMFor the ratings they wanted?

  • 11:49:34

    COHANExactly. That is exactly what happened, under the guise...

  • 11:49:38

    REHMSo do I pay more for a AAA rating?

  • 11:49:44

    COHANI don't know if you pay more, but if S&P does not rate -- you know, there were three, you know, ratings firms basically. It was sort of an oligopoly and it still remains that way even though there are people trying to get into the business. And if you -- and if S&P didn't give Goldman the rating it wanted on these mortgage backed securities, it would go to Moody's or it would go to Fitch or whatever it was, so they all knew this. So basically the answer was rate all of this stuff, as much of it as possible, as AAA. And that which didn't get rated AAA got lower ratings, was repackaged up again and sold again so that most of that was again rated AAA.

  • 11:50:23

    COHANSo this system was scandalous and corrupt and there's no question that it mislead investors who of course were all too willing to believe that these securities were rated AAA.

  • 11:50:37

    REHMAnd what about the SEC?

  • 11:50:40

    COHANI mean, my feeling about the SEC, you know...

  • 11:50:43

    REHMSheila Bear.

  • 11:50:44

    COHANWell, no, this was Christopher Cox. Sheila Bear was at the FDIC. Christopher Cox was a congressman from California. I figured he must've surfed through his entire time when he was head of the SEC. I don't see any regulation that SEC did during the time when he was there.

  • 11:51:02

    REHMBut Sheila Bear did warn that all of this was happening.

  • 11:51:09

    COHANWell, you know, you go back and people have begun to reconstruct all of the warning signals along the way. You know. Gretchen Morgenson has a new book "Reckless Endangerment" where she describes all of the warning signs along the way at Freddie Mac and Fannie Mae. And, you know, Paul Volcker was issuing warning signs. Meredith Whitney, the research analyst, was issuing warning sign. I mean, there were plenty of warning signs along the way. But, you know, when it's euphoria time, when, you know, there's a big party going on, nobody wants to listen to somebody who wants to take the punch bowl away.

  • 11:51:47

    REHMThanks for calling, Patrick. To Indianapolis. Hi there, Eric.

  • 11:51:53

    ERICHi, thanks. Mr. Cohan, do you anticipate that the Department of Justice will follow-up on Senator Levin's recommendations and actually file some suits against Goldman? And also what regulations would you recommend to prevent this from happening in the future?

  • 11:52:07

    COHANSo Senator Levin gave an interview to the Financial Times last week where he said he remains hopeful that the Justice Department will bring charges. We don't know for sure what Senator Levin and Senator Coburn have asked specifically the Justice Department and the SEC to look at beyond, you know, in terms of charges because they wrote in a May 3rd letter that they for some reason have not made public. So -- but the supposition is that it relates to, you know, potential perjury charges from the executives at the hearing in April, 2010 and other aspects of what's in the 250 or so page section about Goldman Sachs in his 600 page report.

  • 11:52:52

    COHANI think that it's, you know, very difficult in this environment to bring new charges against a firm like Goldman Sachs. I think that's gonna be a very tough road for the Justice Department to hone. Not only because of the political environment, you know, in Washington where, you know, if you put Goldman Sachs out of business, which clearly a criminal indictment will do -- I mean, no firm on Wall Street has ever survived a criminal indictment. If Goldman Sachs is indicted criminally, that'll be the end of Goldman Sachs. So there'll be huge pressure not to do that. If you bring perjury charges against the executives, well, that could happen. But perjury charges are a notoriously tough charge to bring.

  • 11:53:31

    COHANLloyd Blankfein, the CEO of Goldman Sachs, is a Harvard Law School graduate and a former lawyer himself. I'm sure there's plenty of -- and was probably very well -- had a huge number of counsel and advice prior to going into the hearing. I'm sure there'll be ways to justify all the things that he said. I think those charges are gonna be hard to bring and...

  • 11:53:51

    REHM"Money and Power" is the title of the book. And you're listening to "The Diane Rehm Show." The subtitle of the book is "How Goldman Sachs Came to Rule the World." Is that an exaggerated subtitle?

  • 11:54:14

    COHANOh, I don't think so in the least. Believe it or not, Diane, they have more power now after -- they have more market power after the crisis than they did before. Why? Because, number one, something like half of their major competitors are either out of business or so wounded that they don't do nearly any of the kinds of business or make the kinds of markets that Goldman makes and they used to do -- they used to compete against Goldman to make. That's number one. So they're competitors are badly wounded.

  • 11:54:55

    COHANNumber two is now incredibly after this crisis as of September of 2008, they are now a bank holding company and they can back themselves up to the fed window and get as much cheap financing as they possibly can take and they can use that money basically that the fed is giving them for free and arbitrage and make huge bets, you know, all around the world. And so they alone understand risk taking and are really good at monitoring the amount of -- that's why they were able to create the big short in December of 2006 because they are so good at understanding the risks in the market, whereas all their competitors are not by the way.

  • 11:55:36

    REHMAnd that's the final e-mail from Orlando who's in Ohio. He says, "Given your guest's perspective, does he still think Goldman is smarter or does he think they just cheat?"

  • 11:55:57

    COHANOh, boy. I mean, they're clearly smarter and I think clearly they have been known to cheat. They're doing both things at once unfortunately. You know, we saw it -- I saw it in...

  • 11:56:11

    REHMAnd they're gonna get away with it is what you're saying.

  • 11:56:15

    COHANThey apparently have.

  • 11:56:16

    REHMBecause they're too big to fail.

  • 11:56:18

    COHANAnd they're too powerful. They've got too much influence in Washington and in capitals around the globe. The new head of the European Central Bank is Mario Draghi is a former Goldman Sachs executive.

  • 11:56:32

    REHMWhat's happened to Wall Street, an institution that people used to depend on?

  • 11:56:40

    COHANIt used to be incredibly widely admired. I mean, our ability in this country to provide capital to companies around the globe 24/7 to provide them with investment advice or M&A advice was the envy of the world and it just went completely off the rails when these firms started going public in 1970.

  • 11:56:59

    REHMWilliam Cohan, his new book is titled "Money and Power: How Goldman Sachs Came to Rule the World." What a story. Thank you for joining us.

  • 11:57:14

    COHANThank you, Diane.

  • 11:57:15

    REHMAnd thanks for listening all. I'm Diane Rehm.

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