Interesting Times

By Gary Weiss, The Street, 5-3-2010 

On such occasions, I go dizzy. Flashes of lights appear before my eyes, I go into a trance, and I see junk bond legend Michael Milken, smiling energetically, or the silver-maned Fred Joseph, CEO of Drexel Burnham Lambert, manfully defending his firm (after Milken took the Fifth) on Capitol Hill many years ago. Goldman CEO Lloyd Blankfein has less hair than Joseph, but otherwise he is Joseph come alive -- the same vacant courtesy, the same evasions, the same solemn balance between restrained hubris and patient condescension.

Whenever I look at Goldman Sachs, I see Drexel Burnham Lambert, that great junk bond powerhouse that collapsed under a federal juggernaut reasonably reminiscent of today's get-Goldman campaign. There are a number of glaring dissimilarities between Drexel Burnham Lambert and Goldman Sachs, to be sure. But the historical parallels between these scandals are amazing.

It's the sort of thing that happens every couple of decades. In the blink of an eye, a true pillar of society, friend of the New York Congressional delegation and revered campaign contributor suddenly becomes an enemy of every man, woman and child in America.

In order to have a Drexel-Goldman moment, a rare alignment of the Wall Street celestial objects must take place. Ordinary regulatory standards totally break down. A permanent condition of American commerce known as "regulatory capture" goes into reverse, sort of the way a cat coughs up a hairball. Regulators who might ordinarily be indulgent are hostile and unfeeling. Benefits of the doubt are no longer given, and there are breaches of customary civility -- such as the filing of SEC fraud lawsuits without attempts to notify, cajole, settle and ameliorate.

With regulators suddenly functioning in a regulatory capacity, the target is in the uncomfortable position of having to treat its regulators as regulators, and not as drinking buddies.

Thus we have Goldman fighting back, just as took place in September 1988, when a New York Times headline read Drexel Burnham Fights Back," after the SEC filed charges. The SEC even tried to pull a Goldman-like fraud lawsuit surprise on Drexel, but was thwarted by lawyers from the firm camping out at the courthouse. "The battle is being waged on many fronts," the Times wrote about the Drexel Burnham scandal back at the time. "The firm is keeping an eye on its many constituencies -- from clients to employees, from the Congress to the press -- to make sure that it is able to get across its message that neither Drexel nor anyone within the firm violated any laws, and that the high-yield bonds, or 'junk' bonds, are continuing to thrive."

I haven't heard about Goldman employing "image consultants, pollsters and public relations experts" to bolster its image, as Drexel Burnham Lambert did, but that may come next. If ever a firm needed PR. help or image management, it's Goldman Sachs. (Free advice: avoid flacks with British accents.)

Now, what we're not seeing are two ingredients that made the Drexel Burnham scandal into the vaguely annoying memory that it is today: Michael Milken and Rudy Giuliani. There is no single person to absorb the hatred of the populace -- Blankfein looks too much like a grocer to play that role -- and certainly no prosecutorial knight to ensure that said Wall Street evildoers are given an appropriate term in prison. True, it appears that Preet Bharara, the U.S. Attorney for Manhattan, has commenced an investigation of Goldman Sachs. But so far he has shown little of the fire in the belly pursuing Wall Street fraud that he has in chasing minor gangsters and movie-poster gyp artists. (As a movie buff, I applaud Mr. Bharara's efforts to keep the market in lobby cards squeaky clean.)

Counterbalancing the lack of prosecutorial zeal is the brutal fact that Goldman Sachs, unlike Drexel Burnham Lambert, represents the central values of Wall Street. Drexel was certainly not a major corporate-cultural force the way Goldman surely is. Stan O'Neal of Merrill Lynch wanted his firm to be so much like Goldman Sachs that he did everything but shave his head to imitate Blankfein.

Goldman is not an anomaly as was Drexel, but a placeholder for all the other big banks that may have crossed ethical lines when trading in synthetic derivatives and mortgage-backed securities, or committed any other high misdemeanors prior to the financial crisis. Just think of all the other potential Goldmans out there: Citigroup (C), Merrill Lynch and its successor Bank of America (BAC), Wells Fargo (WFC), JPMorgan Chase (JPM), Morgan Stanley (MS). Some bought derivatives, some sold derivatives. No matter. In this climate, that's like the distinction between buyers and sellers of crack cocaine.

Twenty years ago, there was no way you could have come up with such a distinguished list of potential Drexel Burnham Lamberts. A couple of minor firms were swept up in the juggernaut, but Wall Street royalty stayed above the scandal. Drexel was all alone, out there on the chopping block with Milken and Ivan Boesky, and after all the indictments and hand-wringing, the Street chugged along as if nothing had happened. Today, Goldman's peers are not bemused bystanders but seem more to resemble unindicted co-conspirators, waiting for the next shoe to drop.

That's the problem with my hallucination: reality is a lot more harrowing. What makes it so is that, at the end of the day, there's a reasonable chance that, once again, the Street will chug along as if nothing had happened.