(Intelligencer) - Before Lloyd Blankfein left his condo at the luxe Faena House in South Beach on Monday afternoon, the billionaire former CEO of Goldman Sachs and I were talking about the global response to Russia’s war in Ukraine.
“I know this will sound very unbankerlike,” he said, “but I think it crossed everyone’s moral threshold.” Moral threshold. For about a dozen years, Blankfein, 67, was atop one of the world’s most powerful investment banks in a position that turned him into both a power broker with few equals and a villainous caricature to the public, who only glancingly knew how Wall Street operated.
He was the guy whose bank made a killing off subprime mortgages and who was hauled in front of Congress to be the face of the most bare-knuckle aspects of Wall Street capitalism.
I’d hoped to get some rare insight Blankfein might have on the ways the global financial system is being wielded to bring Russia’s economy to heel in a series of measures, with few precedents in history, that are being deployed at the start of what could ultimately become a 21st-century Cold War. Instead, he practically offered me the Golden Rule. “You have to remember what life’s about,” he philosophized.
Or did he? Vladimir Putin’s aggression is happening within the boundaries of Ukraine, yet it’s anything but a local skirmish over land. Since Russian forces invaded last week, the G7 and NATO countries have been pulled in two directions: staying out of the conflict before it explodes into a Third World War or exerting whatever influence they have — short of actual combat — to keep Russia from toppling the global balance of power.
On Saturday, it became clear that sanctions had escalated beyond the usual pinpricks on banks and oligarchs when the U.S., Canada, and Europe moved against the Russian central bank, essentially freezing the country’s assets and sending the ruble into free fall. It’s powerful evidence, Blankfein said, that the global financial system as it’s built relies so much on the U.S. economy that even adversarial countries have few choices but to do business with us.
“Everybody, even Russia and China, holds much of their assets in U.S.-dollar assets, which means U.S. Treasuries — which finance us,” he said. “You don’t want to overuse it for policy, but when the policy is so palpable and so moral that everybody in the world joins in save for the miscreants, I don’t think this will create any problem.”
Goldman Sachs has a long, wobbly history in post-Soviet Russia as one of the many western banks that rushed into the country seeking to cash in on a potential gold rush of oil and debt sales after the Berlin Wall fell, as the New York Times reported back then. No bank was as influential in the region as Goldman, however.
In 1992, Goldman — then under the direction of its co-chair Robert Rubin — pushed economic shock therapy to Boris Yeltsin’s new government. Over the next few years, the bank pulled out of the country, came rushing back in, and would help finance the Russian government in deals that turned sour soon after they closed.
Years later, as Treasury secretary, Rubin would help engineer a disastrous $22.5 billion loan to Russia from the International Monetary Fund that preceded a collapse in the value of the ruble. In more recent years, Goldman and rival JPMorgan Chase have competed for investment-banking deals there, even as Moscow never ascended to the status of a global financial center on the level of New York, London, or Hong Kong.
The global financial system as it is today was shaped by bankers like Blankfein, who steered Goldman through the Great Recession, accepting more than $69 billion in Federal Reserve loans to stay afloat. Blankfein rose through the ranks of finance through a career as a trader, placing bets on the winners and losers on the global stage through oil and currency trades, using both sharp elbows and — as Jessica Pressler wrote in her 2011 New York profile of him — a “high EQ” to get to his position.
People who stay at such levels aren’t naïve about the power that comes with the global financial system. “Can you make an argument for the instrumentality of finance to be always neutral and just a utility? Here, they couldn’t,” he said of the response to Russia, “because it was just too much of a violation, too public, too well known, too distributed because of social media, too one-sided.”
It seemed to me that what Blankfein was getting at in bringing up morality wasn’t just the ugliness of war. He had lived through the Cold War and sided with capitalism (even though, in a Twitter feud with Bernie Sanders a few years ago, he said he leans “a bit to the left“). The current global financial system could be a force for good even if it weren’t used to create prosperity but to destroy billions of dollars of a country’s wealth as a deterrent.
“The United States benefits from the architecture of, frankly, the postwar national security system but also the financial system,” he said. “That architecture is a tremendous benefit to the U.S., for example, because most trade is conducted in dollars, and most central bank wealth is stored in dollars, and those dollars are used to fund the deficit.” A potential problem, he added, would be in creating a backlash that could undermine such a reliance: “You don’t want people hysterically trying to find alternatives to the current system that suits us so much. I’ll give you an analogy.
If Russia cuts off gas supplies to Europe, even if they put them back, it’s going to make Europe so insecure about those gas supplies in the future that, even if they come back, the rest of Europe is going to try to find alternatives.”
Some alternatives are easier than others. For instance, after Russian banks were booted off the SWIFT global financial messaging system, they pivoted to another system. But things got serious when the Central Bank of Russia itself became a target of international sanctions. Unlike commercial banks, central banks are key to how countries manage their economies.
In the U.S., the Federal Reserve sets interest rates, stores bank deposits, and bought billions of dollars’ worth of debt during the past two downturns as a way to prop up the economy. In the past eight years, Putin used his country’s central bank to store nearly $640 billion in cash and gold as a bulwark against the sanctions he would have expected for invading Ukraine.
What makes these sanctions different has to do with an apparent mistake on Putin’s part: Central-bank reserves aren’t always kept in a big bank vault, and Russia had stored its money in countries that are the most enraged about the invasion. The proposal to freeze the Bank of Russia, originally made by Canada’s finance minister, was soon taken up by the U.S., the U.K., and other European countries — even Switzerland abandoned its neutrality to freeze Russia’s assets.
That left Russia with as little as $12 billion in cash on hand and, with sanctions against its major banks, few avenues to convert its gold and other reserves into hard currency. “What does it mean to have $640 billion of reserves?” Blankfein asked. “Putin is not sitting on a bed, throwing it up in the air and watching it fall down on his head like Scrooge McDuck.”
Other work-arounds that Russia has at hand don’t seem promising either, such as cryptocurrencies that were more or less invented to chip away at the influence of governments and high finance. “There isn’t enough now, and it’s not liquid enough,” Blankfein said, pointing out that there’s only about $2 trillion in crypto worldwide. While that may sound like a lot, it’s hardly enough to run a $1.5 trillion economy for very long, especially since most won’t sell anyway. (The White House has tried to stop crypto exchanges from sending money to Russia, but major platforms like Binance have bucked that call.)
In New York, Blankfein’s neighbor at 15 Central Park West is Dmitri Ryobovlev, one of the Russian oligarchs who have stashed money in U.S. property — sometimes with the help of the secrecy embedded in the American financial system. Twice during our conversation, Blankfein noted the worst consequences that come with money laundering, bringing up 9/11 twice and how hidden money can finance terrorism — something he equated to Russia’s actions.
“If you’re asking me, Should we make it easier to launder and conceal money? I would say that a lot of experiences, ranging from the terrorists of 9/11 to situations we have now, suggest that you’re just helping bad behavior if you make things too opaque,” he said. “As a guy who would like to not see the World Trade Center blown up again or people steal vast amounts of wealth and conceal it forever, I think somebody has to be able to surveil who’s getting paid so that you know you’re not paying the North Koreans or Al Qaeda, who then use it to wreak havoc.”
Blankfein didn’t see much difference between Russia’s shelling of major Ukrainian cities and terrorist bombings. “At the end of the day, they both are trying to achieve objectives by terrorizing and killing innocent people,” he said. “The moral imperative in this particular case is so big and so clear.”
By Kevin T. Dugan
March 2, 2022
