Goldman Sachs and the Shorebank Bailout: Exclusive Excerpt from Bought and Paid For.

Excerpted from Bought and Paid For: The Unholy Alliance Between Barack Obama and Wall Street. Published by Sentinel. Copyright Charles Gasparino, 2010.

But despite his trials, [Lloyd] Blankfein had taken time out of his grueling schedule to help a firm that wasn’t a Goldman client, not even a prospective one. The firm was ShoreBank Corporation, a small community bank located in Chicago that lent money to inner-city businesses and was exploring the possibility of financing nascent and as-yet-unprofitable “green” businesses through so-called conservation loans and environmental banking, according to the bank’s Web site.

The bank’s self-described mission was to “change the world.” And yet despite its seemingly good intentions, the bank’s urban commercial borrowers were suffering greatly from the lower property values and high unemployment that stemmed from post-financial crisis recession. Without Blankfein’s help (and the help of other

major Wall Street firms) ShoreBank would follow the fate of dozens of other banks during the great recession and face almost certain collapse and government liquidation.

To be sure, helping out a struggling bank that wasn’t even a client was a most un-Goldman-like thing to do. Goldman dealt with only the biggest companies in corporate America or with superwealthy individuals (typically, those with $10 million or more to invest with the firm). More thanthat, this was a firm that had a reputation for screwing just about any company, clients included, when business was on the line. Goldman, of course, would deny that assertion. Even so, in the normal course of business, a bank like ShoreBank, with its modest funds and do-gooder reputation, wouldn’t even appear on Goldman’s radar as a potential customer.

Yet for some seemingly inexplicable reason, Lloyd Blankfein–who had a net worth close to $500 million and until recently had never heard of ShoreBank–started imploring his friends at other firms, like Morgan Stanley, GE Capital, and others, to help this little bank. Not that Blankfein suggested there was money to be made here. Quite the contrary; it was simply the right thing to do.

To any casual observer, this puzzling scenario raises the question: Why would Blankfein possibly want to save ShoreBank?

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Like the rest of Wall Street, Goldman had benefited from a bailout, funded entirely by taxpayer dollars, to survive. Yet since then, it had used a number of special privileges created by the Bush administration to help the big banks in the aftermath of the financial crisis to make more money than ever before. The profits of the big banks began rolling in just weeks after the 2008 bailout, yet the government support continued through 2009 and into 2010 as the programs remained firmly in place under the Obama administration. These included, among other perks, guarantees on

the firms’ debt, superlow interest rates set and then left untouched by the Fed, changes in accounting rules that allowed the firms to create profits out of losses, and maybe most of all, the notion that the remaining banks, backed up as they were by the federal government, were too big to fail. In a desperate attempt to save the economy from total collapse, the government did for a handful of banks what the mob does for its highest, most important criminals: It made them, in effect, made men. This policy, known as too big to fail, asserted that some firms–including many of those responsible for the credit crisis–should not be allowed to collapse for fear that, if they did, the entire economy would follow.

It was an unprecedented assortment of government goodies that allowed Wall Street to survive and, after the initial threat of collapse had waned, thrive. They all made out like, for lack of a better word, bandits; even lowly Citigroup, after two rounds of federal bailouts, was profitable early in 2009, so much so that its CEO, Vikram Pandit, who was nearly pushed out as head of the firm a few months later, found job security and a second chance.

But Goldman was the most adept at gaming this no-lose system, executing a business plan based on government support that made it the envy of every other firm on the Street. Goldman, probably more than any other firm, was able to use its status as a government-protected business to gain access to billions of dollars of borrowed money at rock-bottom borrowing rates and then use those funds to buy bonds–many of which were the same as those that had helped cause the financial crisis but were now trading at just pennies on the dollar.

Thanks to new government guarantees, these once risky investments became sure bets because of another government program in which the Federal Reserve was snapping up mortgage-backed securities in the open market to help prop up their prices. According to the Fed’s Web site, the program is designed to “provide support to mortgage and housing markets,” the theory being that if the mortgage-bond market stabilizes, banks will increase their lending and housing prices will rise. But the biggest beneficiary of this program hasn’t been the average American homeowner (the housing market remains pitifully soft in many parts of the country)

but the average big-bank bond trader, who profited by buying debt on the cheap and sitting back and watching his investments pay off thanks to a government payout.

But as the economy stagnated and companies continued to lay off employees, only Wall Street seemed to be winning. While the banks that had been largely responsible for the recession were saved, the taxpayers who had funded these bailouts and government initiatives were suffering. The national unemployment rate was hovering at close to 10 percent; in fact, the only sector seeming to fare well was state, local, and federal government (which faced an estimated 3 percent unemployment) and the bailed-out Wall Street firms, which began hiring again just months after receiving the bailout money. With Wall Street benefitting from this unequal redistribution of wealth, the public wanted blood. And with Goldman benefitting

the most, the firm and its CEO, Lloyd Blankfein, became public enemy number one.

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With Goldman enmeshed in a huge PR and legal debacle, Blankfein knew he needed a game changer, something that put the firm back in the good graces of the government and, most important, of the man who controls the government, President Obama. For the most part, Obama had been good to the banks–really good. They’d gotten everything they wanted in terms of bailouts and handouts and reaped enormous profits because of it. But now, realizing the public’s increasing anger, Obama came to the conclusion that he needed to change his tune or risk appearing completely out of touch with the national mood. So he and his fellow Democrats made banker bashing their pet project.

Amid this assault, ShoreBank’s demise presented a unique opportunity for Wall Street’s battered CEOs. After all, Obama hailed from Chicago, where the bank was based. He had earned his political chops there serving in local government and later as a senator. Obama had even once touted ShoreBank as doing God’s work, even though according to independent analysts I spoke to it hasn’t generated a profit in years. Judging by its financial troubles and unprofitability, the bank seemed to exist to lend money to poor people or investors who tried to spur economic growth in the inner-cities, even if that growth didn’t really work out as planned. But it kept

lending anyway and also began to pursue so-called green investing, or investing

in businesses that are environmentally friendly even if those businesses lose money and generate few jobs.

Blankfein knew all of this and more, namely that ShoreBank had direct ties to senior administration officials: Presidential senior adviser Valerie Jarrett sat on the board of Chicago Metropolis 2020, a civic organization run by Adele Simmons, one of ShoreBank’s directors; Obama’s own controversial green czar, Van Jones (who later resigned after reports linked him to controversial remarks about the September 11 terrorist attacks), was involved in one of ShoreBank’s many projects. Eugene Ludwig, the former comptroller of the currency under President Bill Clinton who was a former ShoreBank director, had called many top Wall Street executives, including Blankfein, and explained all the societal “good” they could accomplish if they helped bail out the struggling, civic-minded bank.

Another layer of pressure came from Sheila Bair, the head of the Federal Deposit Insurance Corporation (FDIC), the federal agency in charge of taking over and liquidating failed banks. A Republican who was reappointed by the new president, Bair made it clear in her calls to various Wall Street executives that despite taking over more than two hundred banks since the financial crisis began, she didn’t want to liquidate this one.

It didn’t take Blankfein long to put together the pieces. Blankfein may be brutal in front of the press of congressional committees (check out his public appearances), but he knows that in politics, sometimes it pays to play nice. In fact, one of the first things he did as the regulatory noose began to tighten was hire former Obama counsel Greg Craig as a senior adviser. Craig knows better than anyone on Wall Street whom to cozy up to in the administration.

Knowing what he could gain from an investment in ShoreBank, Blankfein pledged $20 million of Goldman money to the troubled bank to help rescue it, and called around to his friends in corporate America to do the same. And it worked. GE Capital, the giant finance arm of General Electric Company, came up with $20 million, and Morgan Stanley threw in $10 million on top of the tens of millions already donated by JPMorgan Chase, Bank of America, and Citigroup.

Blankfein–who by some accounts was fighting for his job as he struggled against multiple regulatory probes, mounting shareholder lawsuits over the company’s problems, and growing dissatisfaction inside Goldman over his management–had just fought to save a small bank in Chicago that had had a history of unprofitability and no signs of turning itself around. These weren’t exactly the kind of maneuvers that had helped Goldman earn $12 billion in 2009.

But what if they were? What if the ShoreBank bailout, disguised as an act of charity at best and a desperate attempt to save Goldman’s public image at worst, actually represents just one more example of how Wall Street and the government, namely Big Government, really work?

The fact of the matter is, when you strip away the name-calling and class warfare coming from the Obama administration, and when you ignore Wall Street’s gripes about the new financial reform legislation that will put a crimp in some of its profits, these two entities are far more aligned than meets the casual eye. They coexist to help each other–in an unholy alliance against the American taxpayer.