King of Wall St becomes public enemy

A postal worker's son raised on a tough estate in a down-at-heel neighbourhood of Brooklyn, the boss of Goldman Sachs has traded his way from a scrappy job as a gold dealer to the top of Wall St's most powerful bank.

But suddenly, in the eyes of Lloyd Blankfein, 55, the United States Government is trying to destroy him.

In a series of angry, defiant phone calls last week, Blankfein told top clients that a US$1 billion ($1.39 billion) fraud case brought against Goldman by the Securities and Exchange Commission (SEC) was politically motivated and would ultimately "hurt America".

A generally humorous man with a self-deprecating wit, Blankfein's usual bonhomie has been shelved.

He has seen his bank become a lightning rod for outrage over reckless behaviour on Wall St.

The SEC's prosecution, which says Goldman fiddled customers by selling them mortgage derivatives doomed to fail, strikes at the very core of the 141-year-old firm's cherished reputation for financial integrity.

The case has helped the Obama Administration get the upper hand in a fight with Republicans in Congress for tougher Wall St regulation.

In a speech attended by Blankfein and other top financiers at New York's Cooper Union college last week, Barack Obama harangued bankers, telling them:

"Some on Wall St forgot that behind every dollar traded or leveraged, there is a family looking to buy a house, pay for an education, open a business or save for retirement."

Later Blankfein steadfastly refused to acknowledge questions. That's unusual for a man who prides himself on his repartee and his dry wit that has, at times, made Goldman's difficulties worse.

"I know I could slit my wrists and people would cheer," Blankfein quipped to one interviewer last year.

A scholarship boy who made it to Harvard, Blankfein got the top job at Goldman four years ago when the Bush Administration tapped up then chief executive Henry Paulson to become Treasury Secretary.

Blankfein's appointment surprised many at Goldman, who viewed him as a less polished figure than his predecessors at a bank noted for its elaborately courteous loyalty to corporate clients.

Insiders say his background in trading is telling; once best known for its financial advisory and deal-making activities, Goldman's trading operation has become paramount under Blankfein's watch.

For the first two years of Blankfein's tenure, everything went swimmingly for Goldman. After the bank racked up vast profits of US$11.6 billion in 2007, he got a bonus of US$68 million, making him the highest-paid chief executive on Wall St and exposing him, seemingly unprepared, to unprecedented scrutiny.

Soon afterwards, the financial crisis began in earnest and Goldman's sure-footedness began to seem malevolently opportunistic.

The bank took huge hedging positions, betting the US property market would plummet and, as millions of Americans faced foreclosure, it ratcheted up profits.

When rivals such as Bear Stearns and Lehman Brothers foundered, Goldman took advantage of cheap credit from the US Treasury.

Admirers say Blankfein's coal-face experience gives him an edge, allowing him a grasp of his bank's risk position. A former Goldman partner said:

"He's a soldier's soldier. He's been a trader himself and a manager of traders. He somehow knows how to do it."

When asked about his motivation, Blankfein likes to talk of his father, a sorter for the US Postal Service. On his retirement, Seymour Blankfein's role was filled by a machine. Blankfein junior is said to have been haunted by the spectre of his father working for years at a job that was, in reality, redundant.

He is an unlikely character to play the role of Wall St demon. For all his personal wealth, Blankfein is far from flash and is more likely to spend his evenings reading history books than waving around a platinum credit card in an upmarket cocktail bar. He has been married since 1983 to a former corporate lawyer, Laura, and the couple have three children.

One of Goldman's clever ploys to protect its wealth was to take out billions of dollars of swap positions with insurer AIG, guarding itself against default on complex derivatives.

When the credit crunch hit, Goldman made vast collateral calls against AIG and was blamed as a key player in the collapse of the insurance empire, which has required US$180 billion of aid from taxpayers.

Blankfein, who lives in a US$26 million apartment on the edge of Central Park and has a weekend estate in the Hamptons, has struggled to comprehend the public backlash against his firm's prosperity.

To senior Goldman executives, the bank has merely been a canny investor on the financial markets, contributing to "liquidity" with its esoteric derivatives and helping clients across America to raise funds for investment.

Within the sanctuary of Goldman's new US$2.4 billion, 43-storey headquarters in lower Manhattan, public discontent initially mattered little.

Rolling Stone writer Matt Taibbi captured the popular mood in July when he characterised Goldman as a vampire squid "relentlessly jabbing its blood funnel into anything that smells like money". Goldman's response was to point out that vampire squids are harmless to humans.

Finally stirred by the extent of public opprobrium, Blankfein offered a vague apology in November. But he has declined to explain exactly what he is sorry for and, in Washington hearings probing the financial crisis, he has been bombastic in his defence.

The SEC's lawsuit against Goldman is a stark shift in gear. No longer simply the subject of a whispering campaign, Goldman is facing the most damaging allegation that can be levelled against a bank - that it tricked its own clients.

Regulators have accused Goldman of encouraging investors to punt on a shaky package of home loans named Abacus without mentioning that the contents were hand-picked by a hedge fund, Paulson & Co, which had a "short" position betting on default.

Within nine months, 99 per cent of the loans in the Abacus deal had been downgraded, leaving Royal Bank of Scotland with an US$840 million liability.

Influential US banking analyst Richard Bove has forecast Blankfein's departure, suggesting "someone must fall on their sword for the devastating decline in this company's persona".

Blankfein seems determined to fight, adamant the firm is a victim of envy. He will testify before Congress on Wednesday.

In the past, Blankfein has shown a capacity for putting things in proportion. When a colleague began flagging during a series of marathon meetings in the wake of the demise of Lehman Brothers, the Goldman boss reportedly offered limited sympathy.

"You're getting out of a Mercedes to go to the New York Federal Reserve," said Blankfein. "You're not getting out of a Higgins boat on Omaha beach."


Lloyd Blankfein:

* Born: 1954 in the Bronx, New York. Brought up in the Linden projects, a housing estate in Brooklyn, and won a scholarship to Harvard. Blankfein joined a gold dealer, J. Aron, in 1981 which was bought by Goldman Sachs shortly afterwards and he has worked at the bank ever since. He lives in Manhattan with his wife, Laura. The couple have three grown-up children.

* Best of times: Blankfein was the highest paid Wall St boss in 2007, earning a bonus of US$68 million ($94 million) and he was ranked as the world's 18th most powerful person last year by Forbes magazine.

* Worst of times: Goldman is being prosecuted by US regulators for fraud and was branded as a "great vampire squid" by one writer.

* He says: "There was a lot of negligent behaviour and proper bad behaviour that has to be fixed and sorted through. We don't take ourselves out of that."

* They say: "Lloyd Blankfein and Goldman Sachs have rightfully earned the leading role in the story of all that is wrong with Wall Street." George Goehl, executive director, National People's Action.

- OBSERVER