The NYT examines Goldman's role in the '98 Russian financial crisis.

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Source - NYT

Special Report: For Russia and Its U.S. Bankers, Match Wasn't Made in Heaven

The House of Unions, like so many buildings in Russia, has served many different masters. In the 18th century, a Crimean prince commissioned its construction in Moscow. Russian nobles later converted it to a private club. Lenin, Stalin and Brezhnev lay in state behind its bright green facade.

And in June, as Russia lurched toward a financial crisis that set off global shock waves, the House of Unions was rented for a glittering celebration of capitalism, with one of the country's most ardent bankers, Goldman, Sachs & Company, as its host. Goldman flew in former President George Bush, paying him more than $100,000, and entertained Russia's former Prime Minister. But between toasts to United States-Russian ties, the talk was about what really mattered to Goldman and many Wall Street brethren: deals.

True, Russia was a mess, the Government's bank accounts were almost empty and even the postal system was near collapse. But Goldman wanted to become Russia's leading deal maker, paid handsomely to finance the Government and newly private businesses. Now was the time to prove that Goldman could come through with money in a crisis.

So in the days preceding its elegant soiree, Goldman helped the Government raise money by selling $1.25 billion in bonds. A few weeks later, it arranged a complex deal in which short-term debt was exchanged for long-term debt to give Russia financial breathing room.

It was not enough. By late August, the Russian Government stopped paying what it owed on much of its debt. Buyers of the bonds that Goldman sold now hold nearly worthless paper. Goldman itself escaped the blood bath: in the course of those bond deals it earned tens of millions of dollars in fees and protected hundreds of millions of dollars it had at stake in Russia. When the Government defaulted, Goldman said its losses were ''absolutely minimal.''

Senior Goldman executives expressed regret that Russia's economic program collapsed and that the deals that bear Goldman's imprimatur did not always work as intended. But they defended the firm's role there as ''very constructive'' and attributed the country's troubles to problems that had little to do with investment banking. Goldman maintains a small office in Russia.

But the firm's troubled bond deal and the skillful protection of its own money are a window on the role that many investment banks played in the breathless rise and fall of the newly liberated Russian economy. To critics, including Russian officials, analysts and some investment bankers who worked in Russia, Wall Street helped hook Russia on easy money, rarely saying no or advising clients to take it slow. They fed the seemingly insatiable appetite for borrowed money.

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