value. if you don't have that valuation, you cannot make rational decisions. so emotions are not separate from recently they are the foundation of reason. i'm a middle-aged guy. i'm not comfortable talking about emotion particularly. one of the scientific spirit iran into, they took a bunch of middle-aged guys, they put them in these brain scan machines, and have them watch a horror movie and then they had them describe their feelings toward their wives. the brain scans were the same in both circumstances. [laughter] ..

♪ >> coming up next, booktv presents "after words," an hourlong program where we invite guest hosts to interview authors. this week wall street veteran william cohan's latest, "money and power," the follow up to his best-selling book "house of cards" is an inside story of the rise and continued strength of investment bank goldman sachs. mr. cohan had access to several current and former high-level goldman employees including ceo lloyd blankfein, and he shares his discoveries with chief economics correspondent for the washington times, patrice hill. >> host: mr. cohan, thank you for coming for this interview. >> guest: thank you for having me. >> host: and this is a man who works and lives in new york, works on wall street and is very steeped in the world of wall street, knows what he's talking

about. he's written a book "money and power: how goldman sachs came to rule the world." extremely well written and readable. extremely well researched with more than 100 interviews with the top chairmen and ceos, six of the top chairmen and -- living top chairmen and ceos of goldman sachs plus many, many of the sort of lower players but still important people in that world. um, and it's a very serious book. this is not your hollywood version of wall street, although there are elements of intrigue that, you know, could form a plot for hollywood. basically, you're going to get all of your, you know, details and some of the drier stuff that you have to learn to understand what wall street does nowadays in a very complicated financial

instruments. so what i wanted to ask, it's a rather long book, up to 600 pages. and enjoyable reading for me, but i was thinking about sort of the average guy who likes to watch, you know, the basketball game on the weekends or whatever. why would he want to read this very detailed book on goldman sachs? [laughter] >> guest: well, you know, the thing is if you want to understand the way, i think, the world today really works which is the intersection between washington and wall street and how power flows back and forth between those two and the way sort of 20th century and early 21st is century america evolved in this country, evolved in this country and around the world and the influence that wall street had both on this country and around the world, it's really one of our, you know, great success stories, wall street. american success stories is wall street. we've become sort of the

leading, you know, maker of, and providing access to capital all around the world, and this is one of our leading exports. if you want to truly understand how all that worked, you have to understand goldman sachs because goldman sachs has been at the nexus of power in washington and wall street for 142 years, giving them the benefit of the doubt, you know, they've been very powerful for around is -- 100 years. this tells the story of how they got so powerful and how this black box that is goldman sachs that for many people is very mysterious and, you know, now is sort of the object of so much scorn. and it really sort of peels back the onion, you know, on what wall street and goldman sachs is all about. and i think it's done, i hope

it's done in a very sort of readable narrative that will engage readers with characters that sort of come to life as they make their way, you know, through the firm. >> host: yes, it certainly does. and there are some real highlights with one of the original partners in goldman sachs, sidney weinberg, i thought, was an outstanding portrait of him in the book. henry paulson, boy, there's a lot of stuff in there that i'm sure people would be amazed to hear about the former treasury secretary and chairman. um, i guess one thing, though, i would say the book sort of -- i don't know whether this is a catchy phrase to try to get people to buy the book or what, but how goldman sachs came to rule the world, i'm not really convinced of that thesis after reading the book. um, what strikes me is, um, the world came to rule goldman sachs in a lot of ways, and they almost brought goldman sachs

down at various times. i think that you mentioned during the panic of 1907 they had troubles, they had troubles, serious troubles in the great depression. they had their penn central bankruptcy to contend with which almost brought them down, as i understand it. they had serious troubles in 1994 when interest rates went up precipitously. so it seemed to me that once you get into your history of goldman, you find that goldman's been batted around the ears just like the rest of us by the financial markets and the economy, although they do definitely seem to have landed on their feet better than an awful lot of -- well, the rest of us and most other wall street firms. so perhaps that's what you mean. but i wasn't sure, i wasn't convinced that you believe goldman sachs rules the world. i mean, i think you must -- i sense that you realize there's

weakness there too. >> guest: well, first of all, you know, subtitles of books are created for many different reasons. it is catchy, and i think there is, certainly, a narrative in there about how -- i mean, certainly goldman sachs has a reputation of being very powerful and the envy of every other firm on wall street. i worked on wall street for 17 years, and no here's which firm -- no matter which firm i looked like, we all envied goldman sachs. some firms were like goldman, some were not, they all wanted to be like goldman because they make so much money, they have this history of people who, their alumni getting important positions in washington. you mentioned bob reuben and hank paulson, just two recent examples. there's many others which i describe in the book. so even in this financial crisis that we've just come through,

the 2007-2008 crisis, goldman was able to see trouble coming unliker every other -- unlike every other firm on wall street and do something about it. they made a big bet against the mortgage market that every other firm did not see and just pretended didn't exist and, basically, all went down the tubes. but i think what you do get out of this story is how often goldman found itself in trouble and how skilled it was of getting out of trouble. and so that was probably, you know, don't forget wall street has always been a dangerous place. firms have been going in and out of business their whole, you know, for the history of wall street. most firms don't make it. and most firms before 1970 when they started going public and becoming public companies were small private partnerships that had limited amounts of capital that, you know, they got from their partners. and if something happened, their

partners were the ones that suffered the losses up and to including their entire net worth. so when somebody goofed, there was always a danger on wall street that the firm would go out of business. so what i show in the first part of the book is how often goldman sachs found itself in trouble and how existential that threat was and how close it came to going out of business. so i think while, i mean, you certainly would be hard-pressed to argue that there's another firm that is as powerful on wall street now as goldman sachs even with all of its troubles, even with the hearing from the 11 committees last april, the sec lawsuit, even really with senator levin's report which came out last week which, apparently, has referred to the justice department a number of goldman executives for prosecution, for perjury. even with all of that goldman is still, i think, the envy of the few remaining firms that exist on wall street and, really,

other financial institutions around the world. still envy and admire goldman sachs. and i think that how they got to be that, in that position despite all of their, you know, existential threats along the way is really the story of the book. and so while they don't start off ruling the world, i think, you know, it's pretty safe to say that even despite the slings and arrows they've suffered and looking like st. sebastian at the moment -- [laughter] they have really risen to remain at the top of wall street. and so they rule sort of the world of wall street. and how they got to that position is really what this book is all about. >> host: okay. well, that's very convincing, and i can definitely see that. i guess what i was thinking when you talk about ruling the world is more like political power, and there has been an element of that with goldman. >> guest: yes, there has. >> host: because of, particularly, the very influential treasury secretaries of the last couple decades. >> guest: well, even as you

mentioned sidney weinberg who, you know, famously as i wrote in the book took the subway uptown one day from wall street to midtown for a meeting to decide who should be eisenhower's treasury secretary. he came up with a name on the sub bay thattizen -- subway that eisenhower hadn't even heard of, told him, he said, all right, sidney, if you say yes, we'll do it. and that was the guy who became the treasury secretary. they've been behind the scenes very powerful for a long time. i think ironically as a result of, you know, paulson being the treasury secretary and all the trouble goldman has found itself in politically and from a public relations point of view, it's unlikely that the current ceo of goldman sachs, lloyd blankfein, is going to get the call from president obama to be the treasury secretary. [laughter] so they've had an incredible amount of power on wall street and in washington and in, frankly, the rest of the world, in governments around the world for about 100 years.

and as a result of this crisis, i think maybe the spigot has been turned off a little bit although they still have the head of the commodities future trading commission is a former goldman partner and the deputy treasurer of state, the head of the world bank is a former goldman partner and the guy who's about to -- mario dragge -- who's considered to be the leading candidate to take over the european union is, you know, also a goldman partner. so they're around. don't -- >> host: they seem to be everywhere, don't they? >> guest: don't fall asleep at the switch here. [laughter] chances of them being treasury secretary anytime soon is unlikely. >> host: well, one of the things that you point out in your book, and it doesn't seem to be as much the case with other wall street firms although you're a better judge of that, is how the goldman people seem interested in politics, interested in getting involved. because that isn't always the case with, you know, wealthy individuals. many of them want to stay away

from washington where the taxes and the regulation get made. and so what is the -- i gathered when i was reading the book that that was sidney weinberg essentially started that tradition of the interest, he took an intense interest in political affairs. it seems he was also tended to be more of a democrat than a republican, although he work withed as you've mentioned with eisenhower and other republicans. >> guest: after a while he came sort of ecumenical. you know, if there's a chance to be close to the president, he didn't really care what political party the president had. and he advised every president from roosevelt to john johnson until sidney weinberg died. but there are a couple of things going on here. first of all, wall street executives, once -- that's, you know, one of the nice sort of reasons i like the title of the book is because once people on wall street have money, then

they tend to want power. and there's been a long tradition of wall street executives going to washington and not just to goldman sachs. people with names like dylan and harriman and bush have been going, you know, from wall street to washington for a long time. at goldman sachs there's a slightly different twist on it, and why it's been more prevalent with them. first of all, you're right, sidney weinberg has this long history of being, advising presidents and then taking leaves of absence from goldman sachs during world war ii to lead up the war powers board and be very important person in sort of taking the u.s.' industrial power and turning it towards the war effort and finding people to fill those jobs. he became known as the body snatcher because he would go to all his clients and insist they come to war -- washington to help with the war effort.

even before sidney weinberg, though, henry goldman -- who was the son of marcus goldman, the fonder of the firm -- had a prominent role in the creation of the federal reserve banking system when after the panic of 1907 they decided to create the federal reserve system. the couple of cabinet secretaries came up to new york to interview henry goldman to see, get his intake on, his input on what the federal reserve system should look like. and i felt like in reading the transcripts of those hearings that it could have been, you know, lloyd blankfein talking to henry paulson as opposed to henry goldman talking to cabinet secretaries, you know, in the early 1900s. his prescription for what the new york federal reserve should look like which would be the most powerful member of the federal reserve banking system as well as how banks were to get access to the federal reserve bank if they needed funds, if they were in a crisis situation played out exactly 100 years

later. and goldman was the beneficiary of that, goldman sachs was. so it was eerie how long goldman has had an influence in washington and where this all began. it really began with henry goldman, but then, you know, after sidney weinberg basically every leader of the firm was either interested in politics or came to washington. and part of the reason is because goldman has now, especially, very much an up and out mentality. once you have made your pile of cash at goldman sachs as a partner, you know, they sort of force you out. which is very interesting. other firms, you know, they're not set up like that. when i worked at lazard, for instance, felix wanted to be treasury secretary, steve ratner was the car czar. but, you know, there was this mentality that, yes, public service was important, but, you know, until we get sort of tapped on the shoulder for the right job, we don't want to leave all the millions we'd have to give up being at lazard.

but at goldman they force people out. so you get your time in the sun, you mange your -- you make your pile, and then you get shown the door more or less. either you made it to a limited partner or, actually, relieved of your duties. so a lot of people who are quite young and energetic, you know, maybe in their late 40s, early 50s want to give something back. what better way than to come to washington? especially if president clipton or -- clinton or president bush is going to tap you on the shoulder and say, you know, will you be my treasury secretary? so that, you know, there's a long tradition of that at goldman, and, you know, again, unfortunately, i think there's now a chill of having people of goldman coming to washington because of all the political hay that was made, you know, in the last few years. >> host: well, that's a very good point. i mean, i think most people today look at the history would conclude that washington has

benefited a great deal from goldman's expertise in these financial matters and helping to structure the regulations and the various institutions that prop up the wall street and the banking industry, the fed and sec and so on. >> guest: they've had a very big role. i mean, all wall street firms. i mean, this is sort of ironic. you're seeing it again in the wake of dodd-frank. i mean, wall street has always had a big role and a big influence in setting up the agencies that are responsible for regulating it. it's a symbiotic relationship, some people call it a revolving door. often people go from the sec to wall street or wall street to the sec -- >> host: particularly the new york fed. >> guest: i mean, the head of the new york fed now is a former goldman partner. >> host: yes. >> guest: so one thing, you know, everybody thinks that tim geithner went from the new york

fed to the treasury secretary worked at goldman, but he never did. he was sort of an act lite of bob reuben and larry summers, so he sort of gets swept up into that. but, you know, that's why wall street and goldman has always played so close to the edge. they know exactly what the regulations are, they know exactly where the lines are drawn. most of the time they stay just on the ore -- other side of it. sometimes they cross that line and get into trouble. >> host: yeah. >> guest: this has been going on for a very long time, and because goldman hires so many lawyers, they have so many lobbyists, they are expert players in this particular activity. and we can't pretend it's not the case. even the regulations that still need to be written with dodd-frank are being heavily influenced. while we're sitting here having this conversation down the street at the sec the lobbyists are sitting there right now with the sec regulators to try to figure out what the new regulations governing wall

street should be all about. >> host: yes. it seems like washington has suffered increasingly from not having the expertise on these very complicated financial products that the people on wall street do. so the regulators often are beholden, essentially, to the banks to explain and, you know, help -- essentially help regulate these as a results. so there's -- instruments. so there's a big discussion now going on at the commodity futures commission over various kind of derivatives instruments that were used and kind of central in the financial crisis that we just went through. and, clearly, wall street's going to have a big say in what happens there. well, the -- it's interesting that you mention the nexus which is really the critical issue with goldman, the nexus between

washington and wall street. and they seem to have mastered, you know, the art of going between the two and making the maximum sort of profit from being able to maneuver in both worlds, washington and wall street. but i was a little disappointed that there wasn't more of the sort of behind the scenes juicy stuff about what went in, although i will say that there was a scene which you recount about how reuben, who eventually became president clinton's treasury secretary, essentially interviewed clinton when he was still just governor of arkansas and considering a run for president. and, essentially, sort of endorsed him almost like he was selecting clinton as the potential candidate. is that something that you can talk about a little bit more?

>> guest: well, i mean, we've evolved -- first of all, to your point about sort of why not more behind the scenes political stuff, you know, i want to be clear this is a book about goldman sachs. so once they, you know, the player involved -- say bob reuben -- you know, did interview clinton down in the little rock, sort of blessed him and had fundraisers for him and things like that. once bob reuben left the stage of goldman sachs and became head of the national economic council in january of 1993, basically, that was the end of bob reuben in my book. so, you know, because i had to keep going on my narrative focus which was who was left behind at goldman and what they did -- how they had to sort of clean up the mess that bob reuben had left behind. and that became the story of what happened in '93 and '94 at the firm when they almost went out of business. so i try to tell a few vignettes about what got people like bob

reuben or john whitehead or steve friedman or hank paulson interested in politics. i tell a great story about how steve friedman who was bob reuben's co-senior partner at goldman sachs and then was left alone by reuben when reuben went to washington and then, you know, eight years later ironically steve reuben got offered -- i mean, steve friedman got offered the same job in the white house that bob reuben had had at the national economic council. and bush calls him up and insists he come do this job, and he tells bush, look, i've got a heart i rivet my ya, i don't know that i can do this. that kind of pressure is not going to be good for me physically. and bush says, hey, steve, my father had a heart arrhythmia, he was in world war ii.

yes, probably a whole other book could be written, paulson's own book gets into that. you point out this is a long enough book as it is. if i had delved into policies that reuben had pursued in washington that may or may not have benefited goldman sachs or paulson, you know, people have already written the story of what paulson did, you know, in the treasury during the bailout and what he may or may not have benefited goldman sachs. i was mostly interested in how these guys would evolve in their positions at goldman sachs to the point where they were willing to leave what has got to be seen as like the holy grail on wall street, being head of goldman sachs, and were willing to leave to go to washington. and, yes, it is -- you know, we've evolved to such an interesting point in early 21st century america where people

like bill clinton before they could be considered legitimate, serious candidates had to get the approval of people like bob reuben. so the people who run wall street sort of anoint these candidates. i assure you nobody's going to take donald trump seriously for a while as a presidential candidate, if they ever do, until, you know, people on wall street start taking hem seriously to. -- him seriousty too. and i don't see that happening anytime soon. maybe donald trump would be doomed anyway, you know, given his silly candidacy if even it is one. but we've just come to an intersection at this point in early 21st century america where wall street has a huge influence on who becomes president of the united states. >> host: is that just strictly because of the money that they, that they have, you know, to finance the campaigns, or what -- how would you -- what would you ascribe that to? >> guest: well, part of it is, you know, you cannot have

capitalism as, you know, basically everyone practices around the world without capital. and wall street is the capital cartel. i mean, the wall street firms, the few wall street firms that are left control capital and the capital flows in much the same way opec controls the flow of oil. there's not a whole lot of difference. so, you know, the engine of capitalism is wall street. you know, the left vent ventricf capitalism is wall street. so that's why both the end of the bush administration and the beginning of the obama administration were so focused on reestablishing the status quo on wall street in the wake of this crisis. i mean, another, another government might have taken the whole approach that, you know, wall street is bankrupt, the whole wall street system is corrupt, let's just junk it. let's just let it collapse of its own weight, and something

else will evolve out of the ashes of that, like a phoenix will rise up. but that's not the approach they took. i thought maybe that happened. it seemed like it could happen, and, you know, don't forget when first paulson asked for the t.a.r.p. to be approved, congress voted it down. market fell 700 points at the end of september, and then it wasn't until the beginning of october 2008 that the second t.a.r.p. plan got proposed and approved. you know, there was a moment there where it really could have gone a different direction. but it's, you know, it's so powerful and so important to the way our country funks and the way, hopefully, jobs are created and capital gets allocated and, you know, without proper allocation of capital from savers to investors, you know, you can't have new plant and equipment. you can't have new businesses grow and prosper. so, you know, since that is the engine room of capitalism, you've got to restore it, and

that's what they chose to do. >> well, that's a very eloquent statement of exactly what happened over the last several years which continues to reverberate and be an issue politically -- >> guest: absolutely. because main street has been, basically, kept out of the fun of reestablishing the status quo on wall street, and in the last year i note with interest that $150 billion -- billion dollars -- of bonuses were paid out to wall street in 2010. i mean, wall street -- i mean, main street is correct in saying, hey, you know, what about us? we bailed out wall street. they're now getting the benefit of that bailout in their pocketbooks, and main street is still hurting. it's a serious problem. and that's why, frankly, if you're going back to your first question why i think, you know, people do need to read this book even though, you know, some of the concepts are complicated. i'm careful to try to explain them when they do, but the narrative of understanding what

is this firm, what's it all about, why are they so powerful, why are they worth saving when people on main street are not worth safing? what's going on there? why have these guys gotten all the cake, and i just get the crumbs? it was a mystery to me that i wanted to try to solve just like in the last book about bear steps' house of cards. it was a mystery to me how bear stearns could have collapsed so quickly that i wanted to try to understand, and that's why i wrote this book. how was goldman sachs able to see around the corner and bet against the mortgage market and benefit themselves, perhaps at the expense of their clients? be and what about main street? what's happened to everybody on main street in the wake of all of this? and why have these guys been anointed while everybody else, apparently, still has to suffer? >> well, that's, you know, an interesting point because i think if you do read the book, you may still kind of question that in the sense that, i mean,

i think as you're saying people realize that you can't do without wall street or something like that, but -- >> guest: you have to be able to allocate capital around the world when it's needed, especially in a capitalistic system. i mean, basically, it's sort of central allocation of capital is, clearly, discredited in this country. but, basically, around the world capitalism as a concept has taken root around the world and very successfully. >> host: so this really gets to the core of one of our most sensitive and important political issues in this decade of the nexus between washington and wall street. um, we're going to be taking a break right now, and we'll get back to some of the mars in the book -- some of the particulars in the book afterwards. >> guest: thank you. >> "after words" with william cohan and patrice hill will be back shortly.

>> on the go? "after words" is available via podcast through i tiewns and xml. visit booktv.org and select which podcast you'd like to download and listen to "after words" while you travel. >> we're back with patrice hill and william cohan on "after words." >> host: so goldman sachs, without question, is one -- remains one of the most powerful investment banks in the world. other investment banks may also claim the title, and one of those is jpmorgan which really is, remains a powerhouse. i believe that was, jpmorgan was the one bank that was singled out as not needing a bailout

perhaps. i believe it was bernanke who said, fed chairman bernanke that even goldman sachs would have gone down the drain without the bailout in the fall of 2008. and there was only one bank that probably could have survived on it own. i believe he was referring to jpmorgan. can you talk a little bit about that? because we don't want to create the impression that goldman sachs is the only one with power and influence. >> guest: well, clearly, the folks at jpmorgan chase would like, would argue that they are as strong, if not stronger than goldman sachs. i think you need to make a distinction, if i can. you know, jpmorgan is a depository institution. it's a commercial bank with a large investment banking component to it. it's a bank holding company. you know, before march of 2008 when the fed and the treasury

decided to step in and save bear stearns, the government had never bothered to come in and try to save a securities firm as opposed to a bank holding company or a commercial bank. securities firms don't haves depositors who can go to the atm. they finance themselves in the public markets or by various other means of borrowing money from banks or insurance companies. and then they took that money, and they invested it or they, they made proprietary trades, or they used it to underwrite securities, whatever they do. they used that capital. until march of 2008 no securities firm had ever been rescued. the treasury made the decision in march of 2008 to save bear stearns. we can debate that decision all along.

i think probably now that was a mistake even though i can understand why the decision was made at the time. so, basically, what came out of this crisis, though -- >> host: and it was jpmorgan that stepped forward and --ing with -- >> guest: well, yeah, bernanke and geithner encouraged jpmorgan chase to buy bear stearns at a rock bottom price. that deal fell apart until the fed stepped in to buy the assets that jpmorgan didn't want. there's no question the fed facilitated that. they had good reasons for that. i suppose that was something they felt they needed to do to try to put their finger in the dike of what was about to be a tsunami. and that worked, you know, for a little while until we got to september of 2008 when, basically, you know, the water crashed over the walls. and it was clear at september of

2008, six months later, that the whole structure of wheat, wall street -- securities firms that financed themselves in the short-term markets and then lend long, borrow short and lend long, that whole model was bankrupt. that whole model was no longer functioning. it is one of those things that's sort of like a light switch. it worked for a long time, and then you flip the switch, and basically it stopped working. now, that's a matter of confidence, that's a matter of counterparties wanting to do business with these firms, it's a matter of credit quality. on december 22 rkd 2008, goldman sachs and morgan stanley were allowed to become bank holding companies by the fed making them very much like the wells fargos, the bank of americas. interestingly, they did not allow lehman brothers to become a bank holding company. lehman brothers had asked, they denied that opportunity for them just like the fed had denied

bear stearns access to the fed window in march of 2008, in the beginning of 2008 when they asked for that. and can they made that ability, allowed securities firms to hit the fed window. the same day that bear stearnss was allowed to fail. so the fed was making very important decisions along the way, who to save and who not to save. but jpmorgan chase was a totally different, funded itself in a totally different way than goldman sachs and morgan stanley. now they fund themselves in a similar way, although not only does jpmorgan chase have access to the fed window, but it also has its depositors' you know, money that it uses, that basically it gets for free because we all know what the interest rate is on our savings and checking accounts -- virtually nothing. so they get that money for free, and can then they can lend that out, you know, for higher interest rates. so they're just playing an arbitrage game. yes, jpmorgan chase was probably

the only institution that was strong enough to have weathered this crisis. they had done a few things right. they basically got out of the business of underwriting mortgage-backed securities sooner than others. they had a lot of risk in their balance sheet, but they weren't nearly as susceptible to the whims of the overnight financing market as goldman sachs and morgan stanley and lehman brothers and merrill lynch which had a different funding model. now it's all the same, so, you know, i think that you also have to look at the fact that, you know, jpmorgan chase is a mongrel firm. it's been -- [laughter] you know, i've lost count of the number of mergers, but 10, 15 or 20 mergers over the years. i mean, the old jpmorgan and company looked a lot like goldman sachs did. he was incredibly powerful as a banker after 1907. he provided the role of like the

fed did of long-term capital management when they brought the wall street elders together and decided to put together a rescue package. jpmorgan, the man, did that himself. but we've come a long way from jpmorgan the man and his e upon mouse, you know, firm that was named after him to what we have today. it's a very different institution. yes, they're very powerful. but they do business in a different way. goldman has basically stayed, you know, pure. they've made a few small mergers over the years and one large one that didn't work out. they basically have avoided even though during the crisis the fed was trying to get goldman to verge with citigroup or merrill or whoever it was. they resisted that, and they stuck to their knitting. and i think that as a result of that, you know, they are still very strong as is jpmorgan. they're both very strong.

envied, feared, admired, whatever one of those years you want to use in ways that jpmorgan chase is not. and i know, i worked there. i'm familiar with the firm. goldman still has a certain catchy that they don't. cache that they don't. >> host: well, your book explains very well the disciplined model that goldman follows in recruiting, in the hiring the best of the class in harvard business school and other top schools. and i guess what one of your points is that this type, you know, it's really a meritocracy -- >> guest: very much so. >> host: and this is a society where we reward meritocracies, but we also envy the ones that succeed so well. like goldman. and that seems to be in place today too. so your book discusses the sort of goldman type. and i saw various types, one is

just your young, brilliant harvard business school graduate who may be like a math ph.d. or something and can do these complicated securities. but there was also the type of sidney weinberg who actually had a very different background. and i thought you might want to get into that. >> guest: sure. you know, unlike -- you know, i worked at lazard for six years which, you know, was sort of an elite -- now it's public, but for a long time a private partnership. and i would walk around the corridors and wonder how i got there because, you know, next to me were sons and daughters of presidents of france and sons and daughters of ceos of publicly-traded companies and, you know, then me, a kid from worcester, massachusetts. so that was a firm where you expected to see ped greed

individuals -- pedigreed individuals. they recruited smart people at lazard too, but at goldman it's something else. it's this notion of being team players, being academically gifted, being achievement-oriented, having achieved greatness at every step of the way. and also being team-oriented. so, you know, somehow your ego stayed in check while, you know, enough to help the team. so they love athletes at goldman, and be they love people who are hungry to succeed. so that was, you know, very much in the mold of sidney weinberg whose father was a bootlegger in be brooklyn, i think he was one of 11 or 13 kids. and basically after his eighth grade schooling ended at a public school in brooklyn, he sort of decided he had to get a job and made his way to wall street, made his way to the tallest building on wall street which happened to be at that

time 30 pine street which is where gold match was. took the elevator to the top and went to each business on each floor until somebody agreed to hire him. he got to the third floor which was where goldman was, and he got hired to, you know, i think clean the spitoons and be an errand boy. and he over time, you know, was a man of, i think, great character and living by his wits and, you know, figured out a way to impress the main partners of firm, the goldmans and the sachs. he sort of got his big break when one of the sachs brothers asked him to take a flag pole from lower manhattan to his home in, you know, by the polo grounds way uptown in the 130th street or something. and somehow sidney weinberg who was a very el-like character -- elf-like character, very short,

brought this flag pole up to the senior partner's house, and they got to talking, and that led him to get a real job at goldman sachs. that sort of became part of the myth, mythology of the firm, that they hire people like this. and, you know, frankly -- >> host: people who pull themselves up by their boot straps. >> guest: by their boot straps. and to some degree it's a myth because there are plenty of people there. i mean, lloyd blankfein's, the ceo's sons both work at goldman. lloyd had to pull himself up by his boot straps, but not his kids. there are plenty of people there who have privileged backgrounds. but even the people who make it to the top, look at lloyd blankfein. you know, he grew up in the south bronx, he moved to the east part of brooklyn for a better life, his father was a postman. lloyd told me, i thought this was fascinating, that his father was then, you know, after he retired was replaced by a machine. so, you know, the job that his

father was doing was outmoded, and a machine could do it better, and his mother worked at an alarm security company which he described to me as a growth industry in that part of brooklyn. and he went to public high school where, you know, harvard happened to recruit. found him, he was clearly one of the smartest kids in the class, and gave him a full scholarship to go to harvard where he didn't feel like he fit in. but he eventually did well at harvard, then went to harvard law school and, as he said, e went from being -- i went from being an underprivileged child to a child of privilege because he had access to harvard and harvard law school. and, you know, this is very much the kind of person that mawtion z ud to the -- that makes it to the top at goldman sachs. henry paulson grew up on a farm 40 miles outside of chicago. his grandfather had been a leading watch maker and businessman in chicago, but those businesses failed during

the depression, and his father was, basically, a farmer. and john corzine who also ran goldman for a period of time grew up on a farm in the southern illinois. this is the kind of person that makes it to the top there. we're not talking about sons -- rarely daughters, unfortunately, don't seem to have much place at goldman -- but these are not the sons of privilege. this is real meritocracy, and it's an impressive collection of people. you know, honestly, in reporting this book and interviewing these people they exhausted me. i mean, spending three hours with henry paulson can be exhausting because he's so much energy even though, you know, he came across when he was treasury secretary as somewhat inarticulate, and people have remarked on that, i found him extremely articulate and extremely energy energetic and charming, incredibly charming. and so, you know, three hours later with an alpha male like hank paulson, i was exhausted. i needed a break.

[laughter] >> host: i was going to ask you about hank paulson because that was one, the portrait of henry paulson that comes out in this book is one of the really, to me, revelatory parts of it. because you show how he started out as such a straight arrow and was raised up into management because he had honesty, forthrightness, you know, he established good relationships with people, he was -- >> host: he >> guest: he was not going to embarrass the firm as some other partners had been doing about the time hank paulson was elevate today the management of the firm. >> host: maybe i misread it, but i perceived him as ending up as kind of a machiavellian figure who ended up edging out his co-chairman, john corzine, and some other people in the firm that he pushed out. >> guest: that's true. >> host: and almost like a back stabber in that regard. that seemed surprising to me.

and he comes across as an extremely forceful person which is particularly interesting for those of us in washington who saw him as treasury secretary in the key role that he played throughout the financial crisis. can you talk a little bit more about this and, you know, the way he pushed out corzine who was also a figure here in washington? former senator -- >> guest: former senator from new jersey and governor of new jersey. again, you're right. i mean, this was a revelation to me because my image of hank paulson was the one we all saw on tv during the crisis, the one who got down on bended knee to ask nancy pelosi for, you know, $700 billion which was plenty audacious, you have to admit. and, but i found somebody who was, as i said, you know, extremely charming, articulate, a man of high integrity. now, nevertheless -- and all

that can be true statement that he, he was qoit ruthless -- quite ruthless about making sure that, i mean, he would say, of course, that he did it in the interest of what he thought was best for goldman sachs. in other words, the reason john corzine had had to be pushed out of goldman sachs was because hank paulson and others thought that -- but particularly hank paulson -- thought that corzine was leading the firm in the wrong direction. i tell the story in the book about how corzine was eager to do these mergers first with solomon brothers, then with travelers, jpmorgan, and the one that ultimately tripped him up is when he started merger discussions with mellon bank which, you know, frankly, may have been a very good fit for goldman. but, basically, his ore partners -- other partners didn't want him to do that, and he didn't inform them. so then paulson and others thought he was leading the firm in the wrong direction.

i'm sure he would say i was just doing what i thought was the best for goldman sachs, but it does come off machiavellian. and he basically completely kneecapped jon corzine. before he knew it right on the precipice of the ipo in the spring of 1939, corzine was out -- 1999, corzine was out and paulson had used alliances to become ceo and take the firm public. ironically, the two guys who became his allies -- john thain who later became the ceo of merrill lynch and now cit, and john thornton who's now the head of the brookings institute -- these two guys formed an alliance with paulson and with the understanding that paulson was going to be the ceo for a couple of years and then leave and turn it over to these two guys. well, you know, hank being hank, you know, sort of liked the job too much. i mean, he was having a great time being ceo of goldman sachs.

frankly, who can blame him? being ceo of a public goldman sachs seems like one of the greatest jobs in the world especially when you're not the target of so much public ire as lloyd blankfein is at the moment. but, you know, hank had the board of directors in his pocket, and they kept wanting him, so he says, to continue leading the firm. so, basically, hank didn't want to leave, and that made thain and thornton expendable, and he pushed them out too. [laughter] and, you know, you sort of take that in toto, and it does look very machiavellian. and so, you know, on the one hand you've got this guy who's very charming and personal and down to earth and makes plenty of time, you know, for people like me which i appreciated. on the other hand, you just look at what he did, and you say, look, this guy does what he thinks has to be done. now the reason he pushed thain and thornton aside, ultimately, is because he saw this guy,

lloyd blankfein. he saw the direction that the business was going and the way that goldman could make most money which was in the proprietary trading business, and he knew that thain and thornton didn't have those skills. and he saw blankfein, who did, so he plucked him up out of the masses and made him the next leader of the firm, and when he went to washington, it was obvious that blankfein was going to get the job. again, it looks very ruthless and machiavellian. paulson would say, hey, i did what was in the best interests of goldman sachs. you know what? it's hard to debate that because if blankfein hadn't been the ceo of goldman sachs during the crisis, it may have gone down the tubes like everyone else. instead, it made this big short against the mortgage market and did things to save itself whether now don't look so great earth, but at least they could make a credible argument that, you know, they department need the bailout.

i think they probably would have gone down the tubes in the tsunami just like everybody else. clearly, goldman was the only one to see the problem coming in the mortgage market and do something about it. we now know they did other things they shouldn't have done which is continue to sell mortgage-backed securities at the same time and, basically, their clients suffered, i think, financially as a result of goldman's decisions. >> host: well, this is an issue that you bring to the forefront and explain very well in the book, how wall street came to be -- a firm like goldman sachs which started out in the world providing services to clients, helping with mergers, helping to issue first stock issues, helping to arrange loans and bond issues and so on for corporations. >> guest: a really valuable service. >> host: a valuable service. and then somehow somewhere in the, what was it, '60s,

'70s, '80s this other function appeared on the scene and has now one could -- looks like outgrown the original service model. >> guest: to put it mildly, yes. >> host: which is that these companies are now in the business of just making money for themselves. they call it proprietary trading, and it's the reason that goldman sachs can offer billions of bonuses and so on for their partners and their employees each year. and so, essentially, they've become their own clients, and they're in the business of making must for themselves and getting extremely rich. and this puts them at odds with their clients from time to time which is, as you say, the issue that became problematic for goldman sachs in this whole crisis. but i guess it's an issue for virtually all the wall street firms now. >>ing well, again --

>> guest: well, again, it's important to make a distinction. goldman has really pushed this to the edge, this behavior. they -- you know, lazard, for instance, where i know and is now a public company, they just provided investment management advice. they don't have any trading, make any proprietary bets. there are other models out there. there are those people, getting back to what we were talking about before, that old model, that sort of securities firm model of the goldman, lehman, merrill, bear stearns where they were taking big risks with their balance sheet, leveraging them way up and, you know, when it all collapsed caused us to have to bail them out, there were many people who thought that whole business model should have just gone down the tubes instead of being reestablished which is what, you know, the government ended up doing. greenhill and ever core would have come up out of that, you know, providing services once

again to their climates without this whole trading side of the balance sheet. and which got everybody into so much trouble. and so, you know, goldman pushed, as i say, pushed this whole proprietary trading business, this whole trading enterprise of making markets for their clients as lloyd blankfein tried to explain to senator levin. yes, but all of that requires human amounts of capital, big balance sheet, lots of leverage and lots of risks. now, goldman thinks of itself as being the best manager of risk on wall street, and they're not wrong. they saw the risks coming in the mortgage market and uniquely did something about it. everybody else didn't see the risks and let it take them down. goldman saw something about it, saw the risks and did something about it. but at the same time they've created huge conflicts for themselves. now, the other tenet of their philosophy is they believe they're great at managing conflicts whether with their clients or internally or whatever it is.

we're in the business of managing conflicts. there are lots of conflicts, and we're in the business of managing them. well, i think that's gotten them into a lot of trouble. and you can see during this crisis, yes, they were very smart about seeing trouble coming in the mortgage market and then making a big proprietary bet against the mortgage market. check for goldman, very smart move, and it made them billions of dollars while it cost everyone else billions of dollars. but they didn't stop underwriting the mortgage-backed securities that were causing the problems. why? because they saw a way to continue to make money for another six months. so they kept doing that. to me, that's an inherent conflict that's unmanageable. that cannot be managed, and goldman has proven itself unable to manage that conflict despite what they told senator levin. at the same time, and this is a subtle point that even senator levin didn't get into but the financial crisis inquiry commission did, is the effect that goldman's marks, the marks on the securities that it had in

the market, its marks were lower than every other firm. trading at 100 cents or 98 cents, goldman had them trading at 50 or 60 cents at the same time they had this big short on. and those marks got translated into the market because these are not stocks that are traded on an exchange where, you know, the differences in price are one-sixteenth of a dollar or a penny or whatever it is. these are lightly-traded securities that rarely trade, don't trade on an exchange, trade by appointment. so if goldman says they're worth 50 cents and merrill lynch says 95 cents, then they have a debate. but eventually, the rest of the market had to admit goldman was right about these marks, so goldman lowered their marks, made a ton of money and had the effect of putting bear stearns out of business, putting aig out of business. there are lots of otherrens reasons, they would -- other

reasons. they would have gone out of business anyway. so if you can imagine goldman put on this trade in the december of 2006 time period that made them billions of dollars. at the same time, they put all their counterparties and competitors out of business. i mean, i'm sure they didn't start out doing that, but that was the effect that this trade had. brilliant on the one hand but ruthless and devastating on another and caused us, you know, all of us taxpayers -- cost us trillions of dollars to rectify. >> host: well, a number of people have raised problems with this proprietary trading thing, as you were saying. you look back at it and wonder if they wouldn't have been better off just letting that die, letting it collapse with the -- in the financial crisis. have we really resolved this issue as a nation? >> guest: this issue is not resolved. the volcker rule has supposedly made proprietary trading or some

parts of proprietary trading, you know, unlawful now. but, you know, goldman makes the argument that that was actually only a really small part of our business. now, in truth the guys who came up with this proprietary trade in 2006 was three or four guys on the mortgage desk. >> they seem to borrow heavily from pollson -- >> guest: yes, he was their client. and at one point they were executing trades for him as an intermediary, and then they copied him and, basically, didn't want to trade with him anymore because they wanted to put the same trade on themselves. so there's an example of, you know, taking their client's good idea, you know, there's no market for -- i mean, the market for good ideas is available to everybody, but they obviously were aware that this was a proprietary idea that their client had, and they copied it.