Money and Power: How Goldman Sachs Came to Rule the World Paperback – January 10, 2012

Wall Street is the symbol of power and wealth in America where smart entrepreneurs make millions of dollars on risky bets in the equity and fixed income markets. Money and power are the driving forces on Wall Street, for good - or for evil. As we have seen in recent years, scoundrels can (and have) take control of our capital markets. In the hurly burly world of Wall Street, justice is a rare commodity.A new book about Goldman Sachs, one of the leading investment houses on Wall Street, enlightens us on the workings of one of our most important financial institutions. The book is titled MONEY AND POWER: HOW GOLDMAN SACHS CAME TO RULE THE WORLD, and its author, William D. Cohan, provides us all the details -- good, bad and otherwise -- of how Wall Street works. Cohan's book tells a fascinating story of heroes and villains in the pantheon of the American capitalistic system.One chapter in Cohan's book, in particular, brings a long overdue measure of justice to one of the victims of Wall Street. The victim was Goldman Sachs partner Robert Freeman, whose life was changed forever on Feb. 12, 1987 when an assistant U.S. Attorney abruptly arrested him on alleged charges of insider trading. Freeman was innocent of the charges, according to Cohan, but his experience highlights the risks posed by the old freewheeling trading activities on Wall Street - as well as improper performances by then U.S. Attorney General Rudolph Giuliani and reporter James Stewart, who was then working at the Wall Street Journal.But there are many other highlights in this book that provide some sunlight on Wall Street. We learn about the major GS leadership (founder Marcus Goldman, Sam Sachs, Sidney Weinberg, and onward to his son John Weinberg, John Whitehead, Steve Friedman and Bob Rubin, Jon Corzine and Hank Paulson, as well as current CEO, Lloyd Blankfein).Cohan brings us up to date on Goldman's triumphs and travails. Initially Goldman Sachs profited from the influence of its founding partners. But by the second half of the 20th century, things had to change. Whitehead, for example, drags the firm into the 20th century by stressing the creation of new business and customer service. Rubin and Friedman stressed the firm's trading operations when billions were made in profits on just smart trading in the equity, fixed income and commodity markets. They also brought in additional capital from outside investors who acquired ownership of 20 per cent of the firm. Public ownership was broadened in 1999 when Goldman issued an IPO -- which transformed the company further.Goldman's historical warts included its dismal record in treating its female employees who suffered form all sorts of sexual harassment and abuse.But perhaps the most damaging era in Goldman's history was its record in creating and dealing mortgage-backed securities (MBS) that led to the financial crisis of 2007-2009. This period is, necessarily, still incomplete because of ongoing litigation (Goldman has already paid $550 million in fines and faces the prospect of further charges by federal regulators). Goldman was not alone in this sordid story involving housing finance, but it made billions of dollars off of highly questionable synthetic and derivative securities that it had created for its own profit motives. Cohan does an excellent job in relating this sorry record of finance, but since the saga is not yet complete, Cohan's book is necessarily incomplete in this area of finance.The Freeman saga is also not complete, but Cohan goes a long way towards bringing closure to that sorry episode - sorry from the standpoint of government regulation and the American financial press.Freeman was the victim. The villains, according to Cohan, were a trio of vain, self-centered, ambitious men: U.S. Attorney Rudolph Giuliani, who was being driven by his political ambitions; journalist James Stewart, a reporter at the Wall Street Journal who served as Giuliani's public mouthpiece; and Martin Siegel who was, by his own admission, a crooked investment banker who already had a covert relationship with Stewart, feeding the reporter with tips on impending mergers and takeovers.In the mid-1980's, Giuliani was increasingly cited as a potential candidate for Mayor of New York (he was to lose his first try in 1990 to David Dinkins), and to further his political ambitions, he cooked up a phony scheme under which he could be seen as taking down a partner in one of Wall Street's most prestigious firms. He launched his scheme on Feb. 12, 1987 when he sent one of his deputies to arrest Freeman right off the Goldman trading floor. There was no credible evidence, no indictment and no grand jury. Freeman's arrest (and that of two other traders at Kidder Peabody) was simply a concocted event, based on lies by the crooked Siegel (who had been receiving suitcases full of money from convicted inside trader Ivan Boesky)."In truth ... Siegel's specific allegations against Freeman and his two former Kidder colleagues were pure fiction," writes Cohan. "But by the time anyone bothered to figure that out, Freeman's career was over...."Giuliani justified his concocted event by feeding his version of events to Stewart, who duly published the insider details in the Wall Street Journal. Alas for Giuliani, the case began unraveling within days of Freeman's arrest."Two months after Freeman's arrest, a grand jury did issue an indictment, but even that belated document did not last long. A few weeks later, Giuliani withdrew the original indictment, promising a new one. It never came. Two years later, Giuliani resigned his office to run for mayor of New York. During those two years, Giuliani justified his actions by continuing to leak information to Stewart - published information that later proved to be simply wrong. Ironically (and pathetically), Stewart (and his colleague, Daniel Hertzberg) won the Pulitzer Prize for their incorrect, unethical reports that were based on leaks from Giuliani and access to supposedly secret Grand Jury deliberations (in violation of the law).Giuliani kept Freeman in limbo for two years, without bringing any formal charges. Freemen voluntarily underwent five lie detector tests (all of which he passed). But even without formal charges, Freeman was under pressure. Giuliani's successors started talking about using the RICO (Racketeer Influenced and Corrupt Organizations Act) law to convict Freeman. The RICO statute is a broad-based law that allows law enforcement wide latitude to convict racketeers, and seize their assets. The statute was used to convict the Princeton Newport firm, headed by Freeman's close friend, Jay Regan. That verdict (which was subsequently overturned) convinced Freeman that he didn't stand a chance if the prosecutors came after him under the RICO law; in that case, he would be in limbo for years - with the potential loss of his family fortune - leaving him in prison and his wife and children penniless. Two weeks after the Princeton Newport verdict (but before the verdicts were overturned), he reluctantly authorized his lawyers to negotiate a deal to end his ordeal, pleading guilty to a single count of mail fraud involving a highly questionable chargeGiuliani, at least, had the temerity to admit that the case against Freeman was wrong. In a walking tour in 1989, as he ran for mayor, Giuliani told reporters: "It was a mistake to move that case at the time that I did and - to the extent - I should apologize to them."Stewart accepted his Pulitzer Prize without so much of a flinch of embarrassment over his unethical behavior. Even though he was a trained lawyer, according to Cohan, he had published secret grand jury testimony (in violation of the law) and used a convicted embezzler (Siegel) as a source of false information that he published in the Wall Street Journal. To its credit, the Wall Street Journal published several editorials that condemned Giuliani's behavior - and by inference, its own reporter, Stewart (Stewart was just recently hired by the New York Times to become the newspaper's financial columnist).Belatedly, the news media came around to the realization that Giuliani and his cohorts had screwed Bob Freeman:Said the Wall Street Journal the week after Freeman ended his ordeal with a plea bargain:"Rudy Giuliani promised new indictments in `record time' and asserted that the original charges were just the `tip of an iceberg.' Last week, the iceberg turned out to be an ice cube, and even it melts under close scrutiny."Said The Daily News:"The government's behavior in that case reflects what many defense lawyers have called a display of sloppiness and arrogance that has needlessly ruined careers and reputations in the government's anti-fraud crusade."Newsday called Freeman "the Willie Horton of Rudolph Giuliani's mayoral ambition." Wrote Robert Reno: "They could never find anything on the guy they handcuffed, but not to be left looking entirely like a bunch of loutish brownshirts, federal prosecutors scratched around for two years, combed the details of Freeman's existence, and found a wholly unrelated charge to which it was conveniently arranged for him to plead guilty...in Robert Freeman's martyrdom all of us were brutalized by Handcuff Giuliani."Cohan's book is the first to really detail the ordeal of Bob Freeman, and Cohan should be commended for doing so. As for Freeman himself, he served his four months in prison, and since then he has lived a private life for the last 20+ years, trying to cope with the exploitation he experienced at the hands of a politically-driven prosecutor. Cohan gives him a well-deserved chapter in his excellent book. Someone, someday, ought to devote an entire book to this miscarriage of justice.Disclosure: the writer was a boyhood friend of Bob Freeman and remained in touch with him throughout his ordeal.

The definitive biography of Goldman. Very well written, very well researched, very well told, if a bit long, and perhaps too detailed in some areas. It is obvious that Goldman supported this book, as the author got broad access to pretty much all of the major figures in Goldman over the last several decades. That said, Mr. Cohan doesn't pull any punches in discussing the many scandals around Goldman, even going back to its earliest days.My only objection is the almost lavish praise the author places on former Goldman head and US Treasury Secretary Henry Paulson. He says almost nothing negative about Mr. Paulson and depicts him as a reluctant, country boy, with no ambition, who was brought to the head of Goldman by happenstance. He even depicts Mr. Paulson as reticent and benevolent in wresting control of Goldman from John Corzine. Its a little hard to believe that Mr. Paulson rose through the ranks of the most competitive, testosterone laden, killer investment bank in the world, just by chance, with no ambition. You can make your own judgment.You can't read this book without ending up with at least a grudging admiration for Goldman Sachs. Having worked in several large bureaucracies, what was most impressive is that despite its size, and resultant bureaucracy, Goldman has managed not to become risk averse and to maintain its edge. Much of this appears to be its ability to hire the best and to compensate them accordingly.Time and again, when other investment banks were zigging, Goldman was zagging. At no time was this more evident than the recent 2007-2008 financial crisis, which Mr. Cohan describes in fantastic detail. Mr. Cohan also points out the many conflicts of interest, and very interestingly, how over time Goldman has moved away from being client focused to being profit focused.All in all, an excellent read, that you will find interesting and informative if you are interested in Wall Street and investing.