Money and Power (20 page)

Goldman Sachs made a smart bet. Indeed, Medina ended up announcing his decision at a procedural hearing because he feared that his written opinion—at that moment nearly 80 percent complete—would leak out. So at the hearing, he took out a yellow legal pad and his fountain pen and sketched out his decision. He surprised the forty or so people in the courtroom that day. “I have come to the settled conviction and accordingly find that no such
combination, conspiracy and agreement as is alleged in the complaint, nor any part thereof, was ever made, entered into, conceived, constructed, continued or participated in by these defendants, or any of them,” he wrote on his legal pad in throwing out the case. “Since there was no combination, the monopoly charges fall of their own weight.”

Needless to say, Wall Street breathed a collective sigh of relief that Medina had ruled in its favor. Despite the years of headlines and the huge number of documents produced, some of them unflattering, there would be no changes—zero—to the way investment bankers performed the business of financing the exploding postwar growth of American industry. As for Goldman, Medina found the firm pursued “a competitive policy which was in every sense of the
term aggressive” and then found, explicitly, that it “was at no time a party to any scheme or plan involving deferring to any other investment banking house, or holding off because of ‘satisfactory relations’ between an issuer and any of the defendant firm or any other firm named or not named as an alleged co-conspirator.… On the contrary, there are indications that Goldman Sachs even transcended the bounds of reasonable competitive effort in its
endeavor to get every piece of business it could possibly secure, within the limits of its personnel and its resources.”

——

S
ACHS WAS CONVINCED
that the trial had vindicated the investment banking profession, that its future was exceedingly bright, and that it would continue to attract the best and the brightest from the nation’s top business schools. “
I think there’s a realization … that the investment
banking community, the profession, performs a perfectly enormous service for
American industry,” he said.

More to the point, he contended, in an argument familiar to modern ears, “the industry today earns every dollar that it gets,” an idea he put forth “without fear of contradiction.” “
You have to maintain an organization year in and year out of highly trained experts,” he said. “[Y]ou have to pay selling commissions to your sales force.” He said much was made in the press about the seemingly
high fees—“of four or five hundred thousand dollars”—an investment banker received for underwriting a deal, but that ignores that the banker has “paid selling commissions. They’ve paid printing expenses. They’ve paid for telegraph and telephone. They’ve paid for these highly trained men who’ve come out of the
Harvard Business School, or I trust, out of the Columbia Business School, or the Wharton
School—men who are career men, men who are highly paid.”

Sachs noted that after the Depression, graduates of Harvard Business School “
turned away from Wall Street” and sought jobs instead in corporate America. “Now, of course, in the more recent active years, they’re coming back. We’ve gotten many of our most able men from the Harvard Business School. We get every year men from the top third. Many of them have stayed to become partners.” Others stayed at Goldman
for a number of years and then went into other corporations, where they often showed loyalty to Goldman, resulting in new business for the firm. “Needless to say, there’s friendship there for Goldman, Sachs and Company, because they got this training with us.”

He assumed Goldman would continue to attract the best and the brightest—men. “
It’s a wonderful field for young men, it seems to me,” he said, “just as chemistry is a wonderful field and a lot of other things are wonderful fields. He told these young men, using a homely phrase that my uncle
Henry Goldman [used]: ‘Money is always fashionable.’ That was one phrase, and the other
was, ‘You must do what is fashionable.’ By that he meant that you must gear your financing to what is the order of the day.”

And that business would boom, with
the next ten years being “enormously active years in investment banking.” Sachs said in April 1956, “[A]nd it’s easy to see why. You only have to read the daily press to see the enormous amounts of money that industry requires for the building of plants and for development.” But the boom would not be uninterrupted. “We’re sure to have that,” he continued.
“I don’t believe—and I may be wrong—that we’re going to have a 1929, 1930 debacle or depression.
But business surges up and business surges back somewhat. I don’t think there’s any doubt about that. [T]he greatest factor is the continued growth in population, and the growth in population means that more consumer goods are wanted, and if more consumer goods are wanted, you’ve got to build factories to produce
those consumer goods. It’s just as simple as that, it seems to me.” He said the “
reason for 1929 was easy to see—[t]here was cheap money, and it was profitable from a tax point of view for people to create debt. Now, you go along that road up to a certain point, but that takes care of itself in a certain way, because if your debt, in relation to your assets, gets too high, you have to take another route.” At that end of
World War II, Goldman had more equity capital—$6.5 million—than all but seven other investment banks. Merrill Lynch had the most capital—$11.4 million—followed by
Wertheim & Co., with $10.6 million, and
Loeb, Rhoades, with $10.3 million. Lehman Brothers had $9.9 million; Bear Stearns had $6.9 million, just above Goldman. After Goldman on the
list was Lazard Frères & Co., with $6.447 million. Morgan Stanley, twenty-sixth on the list, had $2.9 million of its partners’ capital in the firm. Sachs had a view about how Goldman would capture more of the pie. Sachs’s aim, essentially, was to find companies where competitors did not already have a toehold and then provide the best-quality service possible, ensuring the firm would have the best chance of winning business and then repeat
business. “Industrialists naturally go back to banking houses that have done a good job …,” he said. “
If you have a lawyer or a doctor that has served you well, you’re not going to go around and have one man compete against another. You’re pretty apt to go back to the same lawyer. You’re pretty apt to go back to the same doctor. And in the same way, you’re pretty apt to go back to the same
banker.” At the same time that Goldman “tried to keep our own fences well mended,” he said, it tried to exploit weaknesses at other firms. “We are constantly on the look-out for weaknesses.”

In Sachs’s 1956 musings about how to win investment banking business and its future emerge the first stirrings of a way of doing business—call it this notion of being “long-term greedy”—that would form the bedrock of the Goldman Sachs partnership for the next fifty years, even as it transformed itself into a global behemoth that would be unrecognizable to Sidney Weinberg and Walter Sachs.

O
n April 1, 1957, when Goldman moved to 20 Broad Street, the
New York Times
also included a large photograph of the firm’s latest technological acquisition—the previously mentioned telephone-turret trading desk designed especially for the firm by New York Telephone. Essentially, the innovation was little more than a group of bulky, vertical rotary phones with 120 different access lines and the
ability—by pushing a button—to tap into the conversations of any of their fellow traders on the desk “for greater flexibility in transacting business.” This was a material innovation at the time. In the picture, thirteen Goldman traders can be seen sitting at their “turrets,” and every one of them has on his suit jacket. Standing behind one of the traders and dressed elegantly in a suit and pocket square, with a tight-collared shirt and a tie
bar under the knot of his tie and slicked-back black hair, was
Gustave Lehmann Levy, forty-seven years old, and the partner then in charge of the firm’s fledgling trading efforts. The athletic, nearly six-foot-tall Levy was looking particularly patrician that day. Although he was anything but that, there was no mistaking his importance to Goldman Sachs. A year earlier, during one of his “reminiscences” about his banking career, Walter Sachs
had described Levy as the firm’s “
new brilliant genius” with “a great flair for the security business” and then added that Levy was “the fourth genius in the firm.”

Despite Levy’s appearance in that cleverly staged photo, there was nothing the slightest bit polished about his upbringing. Born in May 1910 in New Orleans, Levy was the only son of Sigismond, known as Sigmund, Levy, a box manufacturer, and
Bella Lehmann Levy. Somehow the fact of Levy’s father being a box manufacturer got transformed over the years. “
His father was a middle-class doctor,” was what L.
Jay Tenenbaum, who for years worked directly for Levy at Goldman, remembered being told.

In June 1924, Sigmund Levy died at age forty-seven. Sigmund Levy’s death brought some insurance money to the family, and Bella moved them to Paris, where Gus attended the American School. “
She wanted to show the people in New Orleans that the Levys were somebody,” Tenenbaum said when asked why the family moved to Paris. He said Bella was trying to marry off one of the daughters to European royalty, but that
did not go so well. She was “sort of an ugly sister to tell you the truth …,” Tenenbaum said. “Gus spent six months going to bars and doing nothing,” which was quickly decided was not best for him. “
He was unsupervised and undisciplined,” according to
The New Crowd,
Judith Ramsey Ehrlich and
Barry Rehfeld’s 1989 book about Jewish bankers on Wall
Street. “His favorite pastime was skipping off to the racetrack instead of attending school.” In 1927, the family moved back to New Orleans, at least in part so that Levy could attend
Tulane University, where he tried out for the football team. But Gus was not much of a student and his mother could not afford the tuition. “
His mother was a real flake,” according to
Betty Levy Hess,
Levy’s daughter. “He had to go to work to support the family. His father had died … and his mother took the kids to Europe and spent all the money.” Levy left Tulane after three months and headed to New York City in 1928 to find work if he could. His mother became a seamstress and lived in the Bronx. Levy lived at the Young Men’s Hebrew Association on Ninety-second Street and Lexington Avenue and was so poor that at one point he
stiffed the Y on a two-dollar balance. Tenenbaum remembered Levy always telling him, “
I had two dollars in my pocket. That’s all I had, that’s all I had was two dollars and lived at the Y.”

His first job in New York was as a runner on Wall Street in November 1928. “
It was the thing to do in those days,” he told the
Times
in a 1961 interview. The writer then added the thought—which obviously had come from Levy—“His decision to make Wall Street his career is not too surprising, since he is distantly related to the Lehman family.” (His mother was not, in fact, related to the
Lehman Brothers clan.) He started as a runner at
Newborg & Company, a small brokerage located on Broadway, but quickly worked his way up to being an assistant in the firm’s arbitrage department as well as a trader. He attended New York University at night but never graduated from there or from any college. He later told a
New York Times
reporter he was one of the few people not to lose money in the
1929 Crash. “
I didn’t have any money to lose,” he said. The 1930 census showed that Bella, Gus, and Rose, his sister, lived in Manhattan and that Gus, age twenty, was a “broker” in “art” and “bronze,” but without any elaboration.

In 1931, in the aftermath of the Crash, Newborg’s trading department went out of business, and Levy left to join a “two-man shop in Wall Street” named
Pringle & Company, where he stayed “for about a year” and worked as a securities trader. He also told the newspaper that this was when he roomed at the Y. “It may be emotion,” Levy said, “but the Y gave me more than a
room. It gave me friendship and confidence in myself at a time when I needed it badly.” In 1933, he heard that Goldman—still reeling from the Trading Corporation scandal—was looking for a young trader, a job that paid $27.50 per week, or $1,400 a year. “
With a friend’s help,” the
Times
reported, Levy “landed it.” He began at Goldman on the foreign bond desk and then moved over to the
arbitrage desk, working for
Edgar Baruc, a cousin of
Bernard Baruch, under
Walter Sachs, where he contributed a “wealth of ideas” and “added substantial profits to what would have been otherwise very lean years.” His job was to buy and sell foreign securities. “I was known as a foreign arbitrageur,” he explained. The next year, Levy married Janet Wolf, a chorus girl and the daughter
of
Alec Wolf, a limited partner at Goldman from 1935 to 1945. They had two children, Peter and Betty.

Walter Sachs put Levy in charge of the firm’s relationships with the New York Stock Exchange as well as its arbitrage business, which the legendary mergers and acquisitions banker at Lazard, Felix Rohatyn, described to Congress in 1969 as a business “age-old in concept and execution [that] represents essentially the hedged short-term investment of funds at fairly high
risk with commensurate rewards.”

According to
The New Crowd,
“
Arbitrage as a form of trading had a long history dating back to medieval times, when Venetian merchants traded interchangeable currencies to profit from price differentials.” Ehrlich and Rehfeld wrote that Levy “led the way from traditional to
risk arbitrage,” where “arbs” bought “shares in companies being reorganized or merged into other
companies, based on the premise that if the transaction was completed, they would be holding a new stock worth considerably more than their investment. It was not a game for the timid, but the payoffs could be huge.” In his congressional testimony, Rohatyn described how the game was played. “
The classic example in present-day markets is the arbitrage of a merger between two publicly traded companies after the exchange values have been
announced,” he said. “Theoretically, since one security is soon to be exchanged at a specific ratio for other securities, the two values should be identical but for reasons enumerated later they are not.” Among these reasons, he explained, were “abrupt changes in securities and money markets,” “various warranties and other ‘outs’ in the merger agreement,” “governmental opposition,” and “shareholder
opposition.” He
continued, “The arbitrageur is willing to take the risk that the transaction will go through and to profit by the difference between the present market and the ultimate realized value.”