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The bestselling author of the acclaimed House of Cards and The Last Tycoons turns his spotlight on to Goldman Sachs and the controversy behind its success.
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From the outside, Goldman Sachs is a perfect company. The Goldman PR machine loudly declares it to be smarter, more ethical, and more profitable than all of its competitors. Behind closed doors, however, the firm constantly straddles the line between conflict of interest and legitimate deal making, wields significant influence over all levels of government, and upholds a culture of power struggles and toxic paranoia. And its clever bet against the mortgage market in 2007—unknown to its clients—may have made the financial ruin of the Great Recession worse. Money and Power reveals the internal schemes that have guided the bank from its founding through its remarkable windfall during the 2008 financial crisis. Through extensive research and interviews with the inside players, including current CEO Lloyd Blankfein, William Cohan constructs a nuanced, timely portrait of Goldman Sachs, the company that was too big—and too ruthless—to fail.
- Sales Rank: #59483 in Books
- Published on: 2012-01-10
- Released on: 2012-01-10
- Original language: English
- Number of items: 1
- Dimensions: 9.20" h x 1.20" w x 6.10" l, 1.45 pounds
- Binding: Paperback
- 672 pages
Review
“[The] definitive account of the most profitable and influential investment bank of the modern era.” —The New York Times Book Review
“The best analysis yet of Goldman’s increasingly tangled web of conflicts. . . . The writing is crisp and the research meticulous.” —The Economist
“[A] revelatory account of the rise and rise of Goldman Sachs. . . . A vast trove of material.” —Financial Times
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“Well done and absorbing. Cohan’s grasp of the . . . recent inside politics of the firm is sure and convincing.” —The Washington Post
“The frankest, most detailed, most human assessment of the bank to date. Cohan portrays a firm that has grown so large and hungry that it's no longer long-term greedy but short-term vicious. And that’s the wonder—and horror—of Goldman Sachs.” —BusinessWeek
“Brings the bank’s sometimes ‘schizophrenic’ behavior to vivid life. . . . Cohan evinces an eye for telling images and an ear for deadpan quotations. . . . [and] puts his skepticism to good use.” —Bloomberg News
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“[Cohan is] one of our most able financial journalists.” —Los Angeles Times
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“A former Wall Street man and a talented writer, [Cohan] has the rare gift not only of understanding the fiendishly complicated goings-on, but also of being able to explain them in terms the lay reader can grasp.” —The Observer (London)
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“Cohan writes with an insider’s knowledge of the workings of Wall Street, a reporter’s investigative instincts and a natural storyteller’s narrative command.” —The New York Times
About the Author
William D. Cohan is the author of the New York Times bestsellers House of Cards and The Last Tycoons, which won the 2007 FT/Goldman Sachs Business Book of the Year Award. He is a contributing editor at Vanity Fair, has a weekly opinion column in Bloomberg View, and writes frequently for Fortune, The Atlantic, Art News, BloombergBusinessWeek, The New York Times, The Financial Times, The Irish Times and The Washington Post, among other publications. He also is a contributing editor on Bloomberg Television and a frequent on-air contributor to MSNBC, CNN and CNBC. A former investment banker, Cohan is a graduate of Duke University, Columbia University School of Journalism and the Columbia University Graduate School of Business.
Excerpt. � Reprinted by permission. All rights reserved.
Wall Street has always been a dangerous place. Firms have been going in and out of business ever since speculators first gathered under a button�wood tree near the southern tip of Manhattan in the late eighteenth century. Despite the ongoing risks, during great swaths of its mostly charmed 142 years, Goldman Sachs has been both envied and feared for having the best talent, the best clients, and the best political connections, and for its ability to alchemize them into extreme profitability and market prowess.
Indeed, of the many ongoing mysteries about Goldman Sachs, one of the most overarching is just how it makes so much money, year in and year out, in good times and in bad, all the while revealing as little as pos�sible to the outside world about how it does it. Another— equally confounding— mystery is the firm’s steadfast, zealous belief in its ability to manage its multitude of internal and external conflicts better than any other beings on the planet. The combination of these two genetic strains— the ability to make boatloads of money at will and to appear to manage conflicts that have humbled, then humiliated lesser firms— has made Goldman Sachs the envy of its financial- services brethren.
But it is also something else altogether: a symbol of immutable global power and unparalleled connections, which Goldman is shame�less in exploiting for its own benefit, with little concern for how its suc�cess affects the rest of us. The firm has been described as everything from “a cunning cat that always lands on its feet” to, now famously, “a great vampire squid wrapped around the face of humanity, relentlessly jamming its blood funnel into anything that smells like money,” by Rolling Stone writer Matt Taibbi. The firm’s inexorable success leaves people wondering: Is Goldman Sachs better than everyone else, or have they found ways to win time and time again by cheating?
But in the early twenty- first century, thanks to the fallout from Goldman’s very success, the firm is looking increasingly vulnerable. To be sure, the firm has survived plenty of previous crises, starting with the Depression, when much of the firm’s capital was lost in a scam of its own creation, and again in the late 1940s, when Goldman was one of seven�teen Wall Street firms put on trial and accused of collusion by the federal government. In the past forty years, as a consequence of numerous scan�dals involving rogue traders, suicidal clients, and charges of insider trad�ing, the firm has come far closer— repeatedly— to financial collapse than its reputation would attest.
Each of these previous threats changed Goldman in some meaning�ful way and forced the firm to adapt to the new laws that either the mar�ket or regulators imposed. This time will be no different. What is different for Goldman now, though, is that for the first time since 1932— when Sidney Weinberg, then Goldman’s senior partner, knew that he could quickly reach his friend, President- elect Franklin Delano Roosevelt— the firm no longer appears to have sympathetic� high- level relationships in Washington. Goldman’s friends in high places, so crucial to the firm’s extraordinary success, are abandoning it. Indeed, in today’s charged political climate, which is polarized along socioeconomic lines, Goldman seems particularly isolated and demonized.
Certainly Lloyd Blankfein, Goldman’s fifty-six- year- old chairman and CEO, has no friend in President Barack Obama, despite being invited to a recent state dinner for the president of China. According to Newsweek columnist Jonathan Alter’s book The Promise, the “angriest” Obama got during his first year in office was when he heard Blankfein justify the firm’s $16.2 billion of bonuses in 2009 by claiming “Goldman was never in danger of collapse” during the financial crisis that began in 2007. According to Alter, President Obama told a friend that Blankfein’s statement was “flatly untrue” and added for good measure, “These guys want to be paid like rock stars when all they’re doing is lip- synching cap�italism.”
Complicating the firm’s efforts to be better understood by the American public— a group Goldman has never cared to� serve— is a� long-standing reticence among many of the firm’s current and former execu�tives, bankers, and traders to engage with the media in a constructive way. Even retired Goldman partners feel compelled to check with the firm’s disciplined administrative bureaucracy, run by John F. W. Rogers— a former chief of staff to James Baker, both at the White House and at the State Department— before agreeing to be interviewed. Most have likely signed confidentiality or nondisparagement agreements as a condition of their departures from the firm. Should they make them�selves available, unlike bankers and traders at other firms— where� self-aggrandizement in the press at the expense of colleagues is typical— Goldman types stay firmly on the message that what matters most is the Goldman team, not any one individual on it.
“They’re extremely disciplined,” explained one private- equity exec�utive who both competes and invests with Goldman. “They understand probably better than anybody how to never take the game face off. You’ll never get a Goldman banker after three beers saying, ‘You know, listen, my colleagues are a bunch of fucking dickheads.’ They just don’t do that the way other guys will, whether it’s because they tend to keep the uni�form on for a longer stretch of time so they’re not prepared to damage their squad, or whether or not it’s because they’re afraid of crossing the powers that be, once they’ve taken the blood oath... they maintain that discipline in a kind of eerily successful way.”�
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Anyone who might have forgotten how dangerous Wall Street can be was reminded of it again, in spades, beginning in early 2007, as the market for home mortgages in the United States began to crack, and then implode, leading to the demise or near demise a year or so later of several large Wall Street firms that had been around for generations— including Bear Stearns, Lehman Brothers, and Merrill Lynch— as well as other large financial institutions such as Citigroup, AIG, Washington Mutual, and Wachovia.
Although it underwrote billions of dollars of mortgage securities, Goldman Sachs avoided the worst of the crisis, thanks largely to a fully authorized, well- timed proprietary bet by a small group of Goldman traders— led by Dan Sparks, Josh Birnbaum, and Michael� Swenson— beginning in December 2006, that the housing bubble would collapse and that the securities tied to home mortgages would rapidly lose value. They were right.
In July 2007, David Viniar, Goldman’s longtime chief financial offi�cer, referred to this proprietary bet as “the big short” in an e-mail he wrote to Blankfein and others. During 2007, as other firms lost billions of dollars writing down the value of mortgage- related securities on their bal�ance sheets, Goldman was able to offset its own mortgage- related losses with huge gains— of some $4� billion— from its bet the housing market would fall.
Goldman earned a net profit in 2007 of $11.4 billion— then a record for the firm— and its top five executives split $322 million, another record on Wall Street. Blankfein, who took over the leadership of the firm in June 2006 when his predecessor, Henry Paulson Jr., became treasury secretary, received total compensation for the year of $70.3 mil�lion.
The following year, while many of Goldman’s competitors were fighting for their lives— a fight many of them would �lose— Goldman made a “substantial profit of $2.3 billion,” Blankfein wrote in an April 27, 2009, letter. Given the carnage on Wall Street in 2008, Goldman’s top five executives decided to eschew their bonuses. For his part, Blankfein made do with total compensation for the year of $1.1 million. (Not to worry, though; his 3.37 million Goldman shares are still worth around $570 million.)
Nothing in the financial world happens in a vacuum these days, given the exponential growth of trillions of dollars of securities tied to the value of other securities— known as “derivatives”—and the extraordinar�ily complex and internecine web of global trading relationships. Account�ing rules in the industry promote these interrelationships by requiring firms to check constantly with one another about the value of securities on their balance sheets to make sure that value is reflected as accurately as possible. Naturally, since judgment is involved, especially with ever more complex securities, disagreements among traders about values are common.
Goldman Sachs prides itself on being a “mark- to- market” firm, Wall Street argot for being ruthlessly precise about the value of the securities— known as “marks”—on its balance sheet. Goldman believes its precision promotes transparency, allowing the firm and its investors to make better decisions, including the decision to bet the mortgage market would collapse in 2007. “Because we are a mark- to- market firm,” Blank�fein once wrote, “we believe the assets on our balance sheet are a true and realistic reflection of book value.” If, for instance, Goldman observed that demand for a certain security or group of like securities was chang�ing or that exogenous events— such as the expected bursting of a housing bubble— could lower the value of its portfolio of� housing- related securi�ties, the firm religiously lowered the marks on these securities and took the losses that resulted. These new, lower marks would be communi�cated throughout Wall Street as traders talked and discussed new trades. Taking losses is never much fun for a Wall Street firm, but the pain can be mitigated by offsetting profits, which Goldman had in abundance in 2007, thanks to the mortgage- trading group that set up “the big short.”
What’s more, the profits Goldman made from “the big short” allowed the firm to put the squeeze on its competitors, including Bear Stearns, Merrill Lynch, and Lehman Brothers, and at least one counter-party, AIG, exacerbating their problems— and fomenting the eventual crisis— because Goldman alone could take the� write- downs with impunity. The rest of Wall Street squirmed, knowing that big losses had to be taken on mortgage- related securities and that they� didn’t have nearly enough profits to offset them.
Taking Goldman’s new marks into account would have devastating consequences for other firms, and Goldman braced itself for a backlash. “Sparks and the [mortgage] group are in the process of considering mak�ing significant downward adjustments to the marks on their mortgage portfolio esp[ecially] CDOs and CDO squared,” Craig Broderick, Gold�man’s chief risk officer, wrote in a May 11, 2007, e-mail, referring to the lower values Sparks was placing on complex mortgage- related securities. “This will potentially have a big P&L impact on us, but also to our clients due to the marks and associated margin calls on repos, derivatives, and other products. We need to survey our clients and take a shot at deter�mining the most vulnerable clients, knock on implications, etc. This is getting lots of 30th floor”—the executive floor at Goldman’s former head�quarters at 85 Broad Street—“attention right now.”
Broderick’s e-mail may turn out to be the unofficial “shot heard round the world” of the financial crisis. The shock waves of Goldman’s lower marks quickly began to be felt in the market. The first victims— of their own poor investment strategy as well as of Goldman’s marks— were two Bear Stearns hedge funds that had invested heavily in squirrelly mortgage- related securities, including many packaged and sold by Gold-man Sachs. According to U.S. Securities and Exchange Commission (SEC) rules, the Bear Stearns hedge funds were required to average Goldman’s marks with those provided by traders at other firms.
Given the leverage used by the hedge funds, the impact of the new, lower Goldman marks was magnified, causing the hedge funds to report big losses to their investors in May 2007, shortly after Broderick’s e-mail. Unsurprisingly, the hedge funds’ investors ran for the exits. By July 2007, the two funds were liquidated and investors lost much of the $1.5 billion they had invested. The demise of the Bear hedge funds also sent Bear Stearns itself on a path to self- destruction after the firm decided, in June 2007, to become the lender to the hedge funds— taking out other Wall Street firms, including Goldman Sachs, at close to one hundred cents on the dollar— by providing� short- term loans to the funds secured by the mortgage securities in the funds.
When the funds were liquidated a month later, Bear Stearns took billions of the toxic collateral onto its books, saving its former counter-parties from that fate. While becoming the lender to its own hedge funds was an unexpected gift from Bear Stearns to Goldman and others, nine months later Bear Stearns was all but bankrupt, its creditors res�cued only by the Federal Reserve and by a merger agreement with JPMorgan Chase. Bear’s shareholders ended up with $10 a share in JPMorgan’s stock. As recently as January 2007, Bear’s stock had traded at $172.69 and the firm had a market value of $20 billion. Goldman’s marks had similarly devastating impacts on Merrill Lynch, which was sold to Bank of America days before its own likely bankruptcy filing, and AIG, which the government rescued with $182 billion of taxpayer money before it, too, had to file for bankruptcy. There is little doubt that Goldman’s dual decisions to establish “the big short” and then to write down the value of its mortgage portfolio exacerbated the misery at other firms.
From the Hardcover edition.
Most helpful customer reviews
96 of 99 people found the following review helpful.
Inside scoop on the "giant vampire squid"
By Srikumar S. Rao
In his now famous - infamous? - Rolling Stone article Matt Taibbi refers to Goldman Sachs as a "...great vampire squid wrapped around the face of humanity, relentlessly jamming its blood funnel into anything that smells of money." Cohan,whose earlier books gave you the inside scoop on Lazard Freres and Bear Stearns now turns his searchlight on Goldman Sachs, arguably one of the most powerful financial institutions that ever existed.
It is not really a Goldman "bashing" book but there is plenty of hard reporting that lead one to wonder how Goldman can get away with proclaiming itself to be a temple of team play and a firm where customer interests always come first. Team playing culture? Cohan gives you details about the unusually sharp knives that came out frequently in succession struggles from earlier days - Gus Levy clashing with Sid Weinberg - to more recent events - Hank Paulson ousting Jon Corzine - and paint a picture quite at variance with Goldman PR.
Customer comes first? Cohan reveals that way back in the sixties Goldman was sued for "...fraud, deception, concealment, suppression and false pretense..." in connection with the Penn Central fiasco. Creditors claimed that Goldman "...made promises and representations as to the future (of the company) which were beyond reasonable expectations and unwarranted by existing circumstances." You make up your mind about whether this was a disgruntled customer trying to splash mud or a depiction of Goldman's approach. It certainly was a harbinger of later developments such as the firms disingenuous statement that it was not "betting against its customers" during the sub-prime crisis but merely and prudently managing its risk profile. If you believe that may I interest you in a solid gold brick I found on Fifth Avenue the other day? I will let you have it real cheap because I like you.
Whether you like it or not Goldman executives - past and present - play larger than life roles on a global stage. Cohan gives you engaging details about the real person behind the persona. Did you know that Robert Rubin dropped out of Harvard Law to bum around Europe and persuaded the dean of the school to hold his admission for a year by getting a psychiatrist to testify that he was making a "reasonable" decision?
Cohan does a splendid job of describing how Goldman grew from a small but influential investment bank - and a partnership where the partners were liable to the full extent of their personal net worth - to the titan that it is today with the ability to shake the central banks of major nations and tentacles into the inner political circles of many countries and where Croesus may envy the amount of moolah the senior guys rake in with limited liability.
It is possible, indeed likely, that Goldman is actually the "good guy" in the field in which it plays and that its competitors are far worse in morality and tactics. And that, my friend, is the really scary story.
96 of 107 people found the following review helpful.
Wow, what a book - EXTRAORDINARY - No Holds Barred - 5 STARS !!!!
By Richard of Connecticut
Every now and then, someone comes along and writes a book, and in the process lays out a new framework of understanding with such exquisite detail that the average reader's generalized understanding of how the world works is blown away, and a new understanding becomes the norm. This is EXACTLY what author William Cohan has achieved with "Money and Power: How Goldman Sachs Came to Rule the World."
Such a book was Carroll Quigley's "Tragedy and Hope". Quigley understood how the world worked and the dark forces that can exert undue enormous power behind the scenes. President Clinton in his inauguration speech specifically mentioned the power that Carroll Quigley had over him when he was student at Georgetown and Quigley lectured about those who truly control the world. Clinton understood the power structure, and their assumed ruthlessness, and was forever changed by it. Now we have in Cohan's book the thorough exposure of the less seemly side of Goldman Sachs.
Today there are only two firms that have the cache value to make an MBA's dream of working for them. They are Goldman Sach's in the financial world and McKinsey & Company in management consulting. If you work for either entity, it is the equivalent of having a halo over your head. You are anointed. Goldman Sachs now stands alone as the ultimate financial wheeler dealer in our time. With 35,000 employees, they still manage to be able to cut and slash like an institution a tenth of their current size.
Being a former alumnus of both Lehman Brothers and Bear Stearns, and currently managing several billions of dollars of private money, I have always had the utmost respect for Goldman. I believed then as now that only Goldman could possibly have been better run than either Bear or Lehman. The rest of the players were a joke compared to these three firms.
Now it appears that Goldman was head and shoulders above the other two. I only say this on the basis of survival. No matter how smart you are, if you manage to have your business platform destroyed like Bear and Lehamn, even if it takes a tsunami type event, you simply did not manage well. Goldman demonstrated the ultimate in management style by surviving the financial crisis of 2008 completely intact. Some would argue including the author of this book that perhaps Goldman completely planned the coming debacle to knock out their two arch rivals Lehman and Bear Stearns and have the playing field basically to themselves. Keep in mind that the three of them dominated the fixed income arena for a century.
Back in the old days of the late 1800's and 1900's, German-Jewish firms were not allowed in investment banking, and therefore exploited those areas where they could shine, like fixed income trading. The so called "White Shoe" firms headed by JP Morgan at the top of the list, completely controlled the banking side of the business. Big corporate America would only deal with Christian dominated Wall Street, corporate America was held captive by the big firms. They had a lock on the business. You must read Stephen Birmingham's exquisite book "Our Crowd" for the details of this period. Slowly but surely, absolutely brilliant German-Jewish minds came into Wall Street including but not limited to August Belmont, Felix Warburg, Otto Kahn, Jacob Schiff, and many, many more. They built firms that intellectually were magnitudes smarter and better run than the White Shoe houses like Dillon Read, White Weld, Kidder Peabody, Brown Brothers Harriman and others. Of course JP Morgan stood alone.
Where the German-Jewish firms took off and completely dominated was fixed income, and to this day Bear, Lehman, and Goldman dominated this vast, quiet, non-publicized multi-trillion dollar market, and then with Bear, and Lehman gone there is one left - Goldman. Author William Cohan does an extraordinary and exemplary job of documenting the rise, and dominance of Goldman Sachs. I do not see how this book could have been done any better. I have thought about how to criticize it, where is it lacking, could it have been done tighter (less pages) or better edited. I keep coming up empty. This work is simply superb.
There are 610 pages of superbly written, entertaining narrative spread over 24 chapters. The book reads like lightening. There is not a dull page in the book. If you have read a corporate thriller like the "Smartest Guys in the Room," which is the story of Enron, you will know what I mean by thrilling. If you have any desire to know how Wall Street is really run, about how the world works, and what power is, than you must read this book. Here are just a few things that I found fascinating:
* For 142 years this firm has been the envy of corporate America - its ability to move swiftly from area to area and to cloak its moves has been unequalled. With each generation, Goldman gets stronger and stronger, and more entranched in the financial world.
* The way they manage conflicts, make money, and deal with global power is second to none.
* Goldman can come at you from the short side as well as the long side. They are masters of hedging, and then disguising it. Nobody knew they were hedged during the financial crisis which is why they came out of the crisis unscathed.
* In September of 2008 when Lehman was filing bankruptcy, Goldman had already refinanced the firm with $5 billion of Warren Buffett's money, and another $5 billion raise from the public. They did not need a dollar of government bailout money.
* In October of 2008, they were forced to take $10 billion of government money at the insistence of the Secretary of the Treasury. Less than a year later they would pay it back with interest and buy back the warrants that were issued. For the government it was a 23% profitable annual rate of return.
* You will recall that the government brought legal charges against Goldman for their marketing of the Abacus 2007-AC1 CDO underwriting. They would wind up paying a $550 million fine for this act of greed.
* They also demonstrated to the world during this period that the firm was beyond greedy. They put their own interests and the interests of another client ahead of the clients who were buying the underwriting. Their reputation would never be the same again, but no one served time, and they could easily write the check.
CONCLUSION:
My favorite chapter is entitled POWER which is chapter 13. It is the story of Robert Rubin who would become Co-Chairman of the firm and then shortly thereafter retire from Wall Street to become assistant to President Clinton for economic affairs. Ultimately Rubin would become Secretary of the Treasury in his own right, and establish an illustrious career in government. Do not think about reading any other book on Wall Street until you have read the history of Goldman Sachs by reading Cohan's book. The depth, the insights, the exhaustive research that was done on this book is second to none. I promise you that you will love it, and thank you for reading this review.
Richard Stoyeck
32 of 35 people found the following review helpful.
Interesting read but a bit too long
By Robert
I have read a variety of books recently about the current financial crisis, the Great Depression, and other crises of late 19th century and 20th century. This is a reasonable addition to that list. The details on the founding of GS, it's impacts over the years on important historical events: Penn Central, LTCM, Bear Sterns, Lehman, AIG, are all very interesting and enlightening. I was quite surprised to learn many of these details.
I also appreciated the author's relatively objective tone. I came into this book with no particularly strong opinion about whether GS is evil or not and this book didn't really change my mind. However, this book does paint a strong picture of an organization with a lot of conflicts of interest. Given that most of their clients are generally other sophisticated organizations: other financial institutions, large corporations, etc, I find myself surprised that these clients continue to do business with them.
The stories about the various players of the years from Marcus Goldman through Waddill Catching and Sydney Weinberg up to the present day players in Jon Corzine, Henry Paulson, and Lloyd Blankfein are all interesting, to a point. I found many of these mini autobiographies to be way too long & tedious. This book is 600 pages long and I think could have been a much better book at maybe 400 or 450 pages.
That said, if you tackle this book, the payoffs come later. Skim some of biographies and you'll be rewarded with interesting details about GS's involvement the Penn Central crisis, the LTCM crisis, and how GS had concluded that a mortgage meltdown was coming way ahead of a lot of other players and took actions to both protect themselves and profit from it. Their decisions on how they marked their assets to market while other organizations resisted are very enlightening.
In addition to learning a lot about GS, my biggest takeaway (and to be clear, i don't think the author was suggesting such) is that most of the federal bailouts were unnecessary and counterproductive. In my opinion, these bailouts only ended up honoring a set of bets between sophisticated economic actors. If the Feds had not bailed out Bear Sterns, AIG, etc, a lot of the existing investment firms would have likely gone belly up. So what? Other firms with more integrity and better risk management would have come along to fill the void. And we'd all be better off. As it is, we still have most of the same players in place and they all know that if they act badly and suffer losses, the Federal Reserve and the Treasury department will be there to cover those losses.
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