Goldman Sachs: Power and Peril

Goldman Sachs May Be Losing Influence in Washington

Clem Taylor|CNBC Producer

When it comes to visibility and influence, Goldman Sachs is as noticeable on Pennsylvania Avenue as it is on Wall Street. But that may be changing, as a result of the firm's recent legal and public relations problems.

The firm’s access to Washington power was never more apparent than on July 10, 2006—the day Goldman CEO Henry Paulson was sworn in as Secretary of the Treasury.

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It was a gathering of the Goldman clan. There was Paulson’s successor at Goldman, Lloyd Blankfein; former chairman and one time Bush advisor, Stephen Friedman; and White House Chief of Staff, Josh Bolten, another Goldman alum.

Just two years later, Paulson would be in the fight of his life: the financial crisis of 2008.

At the Treasury Department, Paulson surrounded himself with a posse of Goldman alumni: Robert Steel, Neel Kashkari, Kendrick Wilson, Dan Jester and Steve Shafran. Their overwhelming numbers earned them a nickname from Washington wags: “Government Sachs.”

Critics believe Paulson showed poor judgment.

“Almost anybody else," says University of Maryland law professor Michael Greenberger, “would have said, ‘Okay, I’ll bring in one or two. But if I’m going to bring in an army, it’s going to look bad.’ The bailout was going to take great imagination and diversity of views. Bringing in people from the same mindset was a terrible mistake.”

Former Goldman chairman, Jon Corzine, who went on to serve in the U.S Senate and as governor of New Jersey, feels Paulson should get the benefit of the doubt.

“When you have to make the toughest decisions of your life,” says Corzine, “it’s nice to have people around you that you trust.”

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But concern over the extent of Goldman’s influence deepened after insurance company AIG survived the crisis with a taxpayer bailout that eventually reached $183 billion. The bailout allowed AIG to repay a $13 billion debt to Goldman, one of the many banks that were paid out in full on the money owed them by AIG.

“Why let Lehman fail one day and then rescue AIG the other day?” Greenberger asks.

“Was it because Goldman needed the $13 billion that AIG was a counterparty for? A lot of people believe it was the influence and the concern for Goldman.”

A spokesman for Goldman Sachs says the firm exerted no influence in the AIG bailout.

Paulson, defending himself before Congress in 2009 said, “I left Goldman Sachs. I sold my shares in Goldman Sachs. I operated very consistently within the ethics guidelines I had as Secretary of the Treasury.”

Old Goldman hands like former chairman John Whitehead, who himself left for the number two job in Ronald Reagan’s State Department, bristle at suggestions of a Goldman conspiracy.

“It’s very discouraging to me,” Whitehead said, “to have people volunteer for public service seen by some to … [have] some sort of insidious desire to take over control of Washington, which is ridiculous.”

Another former Goldman chairman, Robert Rubin, who served as Treasury Secretary during the Clinton administration, has come under fire for his support of Wall Street deregulation. Rubin pushed for repeal of the Depression-era Glass-Steagall Act, allowing banks to pursue more profitable—and riskier—lines of business.

Treasury Secretary Nominee Robert Rubin

And critics fault Rubin for not pushing for regulation of over-the-counter derivatives, one of the complex financial instruments that helped trigger the 2008 financial crisis.

In April, before a government commission investigating the crisis, Rubin was asked if the lack of political will to regulate derivatives was related to pressure from the financial services industry. Rubin replied, “I think there were very strongly held views in the financial services industry in opposition to regulation. And I think they were not surmountable at that point.”

In Washington, political will—or lack thereof—is more often than not directly tied to money. And when it comes to Goldman Sachs, there is always plenty of that to go around.

“Their PAC and their executives,” says Nick Nyhart, head of Public Campaign, a campaign finance reform group, “have spent $32 million on campaign contributions in the past 20 years. They are the top giver within the financial sector to candidates and incumbents in Congress.”

But in the current election year, candidates are less eager to take Goldman’s money. Any association with Goldman Sachs was seen as such a liability that almost two dozen candidates refused Goldman campaign contributions or donated them to charity.

Will Goldman lose clout in Washington, D.C. as a result of its current troubles?

“If I had to guess,” says Michael Greenberger, “the answer to that is ‘yes.’ They are going to lose clout. I think they’ve lost their brand. Their brand was phenomenal. I think their brand is now a liability rather than an asset.”

Watch "Goldman Sachs: Power and Peril," hosted by David Faber, Wednesday, October 6 at 9pm ET. Faber reveals how Goldman Sachs benefited from some of its most controversial deals before, during and after the economic collapse. He describes how Goldman, throughout its history, has fought back from adversity with innovation and fierce competitiveness. Faber also examines the future of Goldman Sachs, asking whether the bank can maintain its dominant position atop the world of finance.