Blankfein Discusses Goldman’s Support of SAC Capital

Just a few days after the indictment of the hedge fund SAC Capital Advisors on insider trading charges, Gary Cohn, the president of Goldman Sachs, appeared on CNBC and issued a public statement of support for the firm.

“They’re an important client to us; they have been an important client to us,” Mr. Cohn said in late July. “We continue to trade with them, and they’re a great counterparty.”

Though virtually all of SAC’s clients have asked to withdraw their money from the fund, the firm has survived for two main reasons. First, nearly two-thirds of the $15 billion that the firm had at the start of the year â€" about $9 billion â€" belongs to Steven A. Cohen, the owner of SAC, and his employees. And second, Wall Street banks have all continued to trade with SAC and finance its operations.

On Wednesday morning, Andrew Ross Sorkin interviewed Goldman’s chief executive, Lloyd Blankfein, and asked him about the decision to keep SAC as a client.

“Well, they’ve been indicted, they haven’t been convicted,” said Mr. Blankfein, a Harvard Law School graduate who practiced law for several years before pursuing a career on Wall Street.

He added that if Goldman and the other banks had withdrawn their support, it would have destroyed the firm. And the Justice Department did not want that to happen, Mr. Blankfein said.

“The government wouldn’t want us to withdraw,” he said. ” Because if everybody withdrew liquidity you would vaporize a firm.”

Mr. Blankfein then cited the Arthur Andersen case as a cautionary tale for the government. After the Justice Department indicted the accounting firm on charges related to the Enron scandal, it was forced to close and 28,000 jobs were lost.

“I think the government would be reluctant to bring charges if they knew the moment they brought a charge you’d actually be the executioner,” Mr. Blankfein said. “The government did come back and encourage firms like ours to continue to deal with SAC.”

Mr. Sorkin then cited the collapse of the investment banking firm Drexel Burnham in 1990 as another example of a company destroyed by an indictment. He asked Mr. Blankfein if the government’s treatment of SAC represented a changed approach in bringing criminal charges against financial firms, and companies more broadly.

“I think the world appreciated what happened,” he said. “Look, after those cases, what happened was the government could never prosecute a financial firm. And so you ended up with non-prosecutions, and the world didn’t like that. And they said, ‘Why are you doing deferred prosecutions?’”

The government became loath to indict companies because “there was only a nuclear option,” he said.

“The fact they’re getting people to cooperate and still support during the trial actually means it’s not an on/off switch,” Mr. Blankfein said. “You have something in between doing nothing and a nuclear option. So I think the government is supportive of maintaining relationships with these firms pending a trial.”