If anyone expected the tone to change once Blankfein took his seat late in the day, they were mistaken. During hours of questioning, he struggled to explain Goldman’s position to the stony-faced senators, once acknowledging with frustration, “I’m trying to explain it and I wish I were better.”
Reporting on the hearings throughout the day, I couldn’t imagine how the average viewer—even one knowledgeable about investment banking—could draw any firm conclusions. At times it felt as if it were a large cleansing ritual, and what the senators were really saying was, “America almost crashed in 2008. Explain yourselves!” But while it would be impossible for anyone to determine, based on the hearings, whether Goldman was guilty of fraud, I did notice a striking stance, taken over and over, that may explain some of the dismay felt by American citizens. The executives became downright tongue-tied any time they were asked the simple question, “Do you have an obligation to represent the best interests of your clients?” The obvious answer, straight out of Client Services 101, is, “Yes, of course.” But the Goldman executives seemed to have a hard time giving a straight answer. They were afraid to say the wrong thing after being lawyered up in preparation of the hearing.
In the end it didn’t matter if the senators had scored any hits. In fact, I did not see any major body blows against Goldman during the hearings, and I believed fraud would be very hard to prove. However, the jury of public opinion voiced its upset. The gold-plated firm took a hit for sure. Goldman paid $550 million to settle with the SEC, putting an end to the potential tarnish of a legal fight.
TEN
Capitalism in the Balance
“The historical debate is over. The answer is free-market capitalism.”
—THOMAS FRIEDMAN
In the fall of 2009 I was invited to do an honorary teaching fellowship at Stanford University’s Hoover Institution. It was exhilarating to be in the company of extremely bright MBA students who were preparing to enter the workforce. It was also quite a wake-up call.
I was taken aback when one after another of the students challenged me to defend capitalism. They asked, “Does this system really work? What’s the value of the free market?” I could see in their eyes and in their words that they just didn’t believe it anymore. My response sounded hollow, even to me, because although I had no doubt that capitalism is the most freedom-promoting and personally fulfilling economic system ever devised, I also knew that the financial collapse of 2008 and the bailouts of 2009 had failed so many people who believed in its basic tenet: hard work is rewarded. The students were unwilling to blindly trust a system that had failed so miserably. Once again, the questions of “too big to fail” and why Americans had to rescue companies whose poor decisions had gotten them into trouble kept haunting the conversations I was having with students.
As I returned to New York City, I contemplated what the students had told me, in light of the events that had transpired since that crucial weekend in September 2008. Had we learned a valuable lesson and changed our ways, or were the changes merely the equivalent of shuffling deck chairs on the Titanic?
There is no question that easy money, too much liquidity, and way too much debt, along with greed and recklessness inside financial institutions and among individuals, had left the country damaged. For many decades the world had followed “the American way” and admired the United States. Now, after the crisis, that was changing. Under Secretary of State Bob Hormats told me, “For so long China looked to America for know-how. Now the Chinese have left the class.” Europe and the Mideast—particularly in places like Dubai, whose fortunes had been undone by reckless and grandiose overbuilding—were contemplating how they would get out of the stranglehold of leverage and grow once again.
As the Stanford students suggested, capitalism itself had been damaged and was in the grip of a crisis of confidence. For the system to work, people have to trust that it will work for them. Instead, the public saw too many other people making a lot of money doing questionable deals, with countless lives turned upside down as a result. They saw the supposed guardians of the economy being careless with their money. For the first time in my memory, students were asking, “Is capitalism a force for good?”
The classic assumption that of course it is—an assumption under which I have operated throughout my life—had been upended. Embedded in the bedrock of the financial system is the presumption that the markets are always right, that they’re self-correcting, and that the cream will ultimately rise to the top. Now people were questioning whether this is still true.
The students at Stanford challenged me, and others, to question the conscience of Wall Street. For them it was urgent. They were among the best and the brightest, trained and conditioned to enter a system that no longer seemed capable of supporting their dreams.
The Lehman weekend changed Wall Street, not because the failure of a single investment bank, or even the failure of several banks, was enough to implode an infrastructure that was centuries in the making. It changed Wall Street because it was a stunning moment when the confidence of a nation and the world was blown. Capitalism is not a tangible entity with inherent value, like a precious jewel. Its value is wholly dependent on public trust. When we say that capitalism is the best system in the world, that belief is based on the understanding that by and large the people involved will play fair.
Nor are investors merely abstract dealers or superrich fat cats. The most traumatic consequences of the financial crisis were felt by ordinary people, who lost their jobs, their homes, and their retirement savings through circumstances entirely beyond their control. They believed a basic tenet of capitalism, that
