The Goldman Sachs Government

On the morning of September 16, 2008, one day after Lehman Brothers filed for bankruptcy, Henry Paulson placed a phone call to Lloyd Blankfein.

Paulson was the Treasury Secretary of the United States. Blankfein was the CEO of Goldman Sachs, where Paulson had spent 32 years and served as chief executive until 2006.

The call was legal. It was permitted under an ethics waiver Paulson had received from the Treasury Department's ethics office, authorizing him to speak directly with his former employer on matters related to the financial crisis. It was one of 38 such waivers he would receive during his tenure as Treasury Secretary.

That evening, the Federal Reserve and Treasury announced an $85 billion emergency bailout of AIG, the insurance conglomerate that had sold credit default swap contracts to Goldman Sachs worth $12.9 billion.

Goldman was paid in full. One hundred cents on the dollar.

That is not an allegation. It is the documented settlement record, confirmed by the Government Accountability Office and the TARP Special Inspector General in reports published between 2009 and 2011.

Here is the full file.

Goldman Sachs was founded in 1869 as a commercial paper trading firm. It went public in 1999. It currently manages approximately $2.8 trillion in assets and employs 45,000 people.

It has also produced three United States Treasury Secretaries, one Director of the National Economic Council, one White House Chief of Staff, and one Treasury Chief of Staff across five presidential administrations spanning thirty years.

This is not a coincidence of talent. Every major financial institution produces capable executives. JPMorgan, Citigroup, and Morgan Stanley have not placed their former chief executives at the head of the US Treasury at the precise moment when their industry required government rescue.

Goldman has.

The mechanism is worth examining precisely because it is so consistent. A Goldman executive enters government. Policy is set during their tenure that benefits Goldman's business model or protects Goldman's balance sheet. The executive leaves government. They return to the private sector, sometimes to Goldman itself, sometimes to firms that operate in the markets Goldman's government service helped shape.

The record runs from 1995 to 2021. It covers Republican and Democratic administrations. It has never produced a congressional investigation.

Robert Rubin joined Goldman Sachs in 1966. He rose to co-Senior Partner and then Co-Chairman. In 1993, he left Goldman to join the Clinton administration as Director of the National Economic Council. In 1995, he became Treasury Secretary.

In 1933, following the collapse of the banking system during the Great Depression, Congress passed the Glass-Steagall Act. The law separated commercial banking from investment banking. A bank could take deposits and make loans. Or it could trade securities and underwrite stock offerings. It could not do both. The purpose was explicit: prevent banks from gambling with depositors' money.

For 66 years, the law held.

On April 6, 1998, Citicorp and Travelers Group announced a merger that would create Citigroup. The merger was illegal under Glass-Steagall. A commercial bank and an investment bank combining into a single institution was precisely what the law prohibited. The Federal Reserve granted an emergency two-year waiver.

The waiver was granted on the explicit assumption that Glass-Steagall would be repealed before it expired.

Robert Rubin was Treasury Secretary throughout this period.

On November 12, 1999, President Clinton signed the Gramm-Leach-Bliley Act, repealing Glass-Steagall. Robert Rubin supported the legislation. The merger that had been announced 18 months earlier as an illegal transaction became legal.

Six weeks after the signing, Rubin left the Treasury Department.

One month later, he joined Citigroup as a director and senior counselor.

Over the next eight years, Rubin earned $115 million from Citigroup. Citigroup became the largest bank in the world, operating precisely the combined commercial and investment model that Glass-Steagall had prohibited. When Citigroup collapsed in 2008, it received $45 billion in TARP funds and $300 billion in government asset guarantees.

Rubin resigned from Citigroup's board in January 2009. He was never investigated.

Henry Paulson joined Goldman Sachs in 1974. He became CEO in 1999. In 2006, he left Goldman to become Treasury Secretary under President George W. Bush.

Before taking office, Paulson was required to divest his Goldman holdings to avoid conflicts of interest. He sold approximately $485 million in Goldman stock. Under the "certificate of divestiture" provision for senior government officials, the sale was exempt from capital gains tax. The tax benefit was worth an estimated $200 million.

In September 2008, when the financial system collapsed, Paulson became the architect of the government response. He designed the Troubled Asset Relief Program, the $700 billion rescue fund that Congress authorized on October 3, 2008. He selected which institutions would receive funds and on what terms.

The decision not to save Lehman Brothers was his. The decision to save AIG was his.

AIG had written credit default swap contracts with virtually every major financial institution on earth. When AIG's collateral ran out, it could not honor those contracts. The question facing Paulson and the Federal Reserve was whether to allow AIG to default or to inject government capital to cover its obligations.

Goldman Sachs was AIG's largest counterparty. It held $12.9 billion in credit default swap contracts with AIG.

The government injected $182 billion into AIG. Goldman Sachs received $12.9 billion, every dollar it was owed, at a time when every other major creditor in the market was accepting steep discounts to settle debts.

The New York Fed, which negotiated the AIG settlement terms, was run by Timothy Geithner. Geithner would later become Treasury Secretary under Obama. His chief of staff was Mark Patterson, a former Goldman Sachs lobbyist.

Neil Barofsky, the TARP Special Inspector General, documented the AIG settlement in a 2011 report. He concluded that the decision to pay Goldman and other counterparties at full value rather than negotiating discounts cost taxpayers billions. No investigation followed. No official was held accountable.

Paulson's 38 ethics waivers authorizing direct communication with Goldman executives during the crisis are a matter of public record, filed with the Treasury Department's ethics office.

Gary Cohn spent 26 years at Goldman Sachs, rising to President and Chief Operating Officer. In 2017, he left Goldman to become Director of the National Economic Council under President Trump, the most senior White House economic policy position outside the Treasury.

Cohn was the principal architect of the Tax Cuts and Jobs Act of 2017, the largest overhaul of the US tax code since 1986. The legislation reduced the corporate tax rate from 35% to 21% and introduced a one-time repatriation rate for offshore profits held by US corporations.

Goldman Sachs reported a tax benefit of approximately $1 billion from the repatriation provision alone in the fourth quarter of 2017.

Cohn resigned in March 2018. He returned to the private sector.

Steven Mnuchin spent 17 years at Goldman Sachs, where he ran the mortgage securities desk. In 2017, he became Treasury Secretary under President Trump.

After leaving Goldman, Mnuchin purchased IndyMac, a failed mortgage lender, from the FDIC for $1.6 billion in 2009. He renamed it OneWest Bank. Between 2009 and 2015, OneWest foreclosed on approximately 36,000 homes. The bank was later investigated by the California Attorney General's office for foreclosure irregularities. No charges were filed.

In 2015, Mnuchin sold OneWest to CIT Group for $3.4 billion. The profit was approximately $1.5 billion on a six-year investment in a bank acquired from the government at a discount during a crisis the government was simultaneously managing.

As Treasury Secretary, Mnuchin oversaw the $2 trillion CARES Act in 2020.

No law prohibits former financial executives from serving in government. No law requires recusal from decisions affecting former employers beyond the ethics waiver system, which provides waivers on request. No law prevents government officials from returning to the financial sector after their service.

The revolving door is not a bug in the regulatory architecture. It is a feature of a system in which the government relies on industry expertise to regulate the industry, and the industry relies on government relationships to shape regulation in its favor.

The result is a consistent pattern across 30 years: the person setting the rules for Goldman's industry once worked for Goldman. When Goldman required saving, the person deciding whether and how to save it once worked for Goldman. When the tax code required revision, the person writing the revisions once worked for Goldman.

Each transaction was legal. Each was documented. None produced an investigation.

Three things the Goldman Sachs government record reveals.

The rules governing your bank were written by people who built their careers at one of the banks they were regulating. Glass-Steagall, the law that kept commercial and investment banking separate for 66 years, was repealed while a Goldman Co-Chairman served as Treasury Secretary. The repeal allowed the exact business model that produced the 2008 crisis. The executive who supported the repeal earned $115 million from the institution that benefited most from it.

When the system collapsed, the rescue was designed by the former CEO of the institution with the most to lose from an unmanaged AIG default. Goldman received $12.9 billion at full value while the rest of the market settled debts at a discount. The official responsible for that decision held 38 ethics waivers to speak directly with his former employer throughout the process.

The pattern is bipartisan and uninterrupted. Rubin served Clinton. Paulson served Bush. Cohn and Mnuchin served Trump. The administrations changed. The institution supplying senior economic officials did not. In 30 years of financial crises, deregulation, and taxpayer-funded rescues, Goldman Sachs has not once emerged on the losing side of a government decision made by a Goldman alumnus.

That is not luck. That is infrastructure.

$12,900,000,000. The amount Goldman Sachs received from the AIG bailout. Paid at full value. Authorized by a Treasury Secretary who had spent 32 years at Goldman Sachs and held 38 ethics waivers to speak with Goldman's CEO during the crisis.

The official term for this arrangement is public service.

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