Money and Power (53 page)

That same year, the man she says attacked her was promoted to
managing director, earning millions annually and twice as much as she was paid. In March 2001, her attacker was named sole head of U.S. convertible-bond sales and the next year he was named a partner. In 2002, someone she was working with sent around racially offensive e-mails, including to Chen-Oster, who is of Chinese descent. “Learn Chinese in 5 Minutes,” read one. “Our meeting is scheduled for next week.… Wai Yu Cum Nao?” and “Great … Fu Kin Su Pah.” After two maternity leaves, when she returned to Goldman Sachs, she was asked to sit among the administrative staff, even though she was a trading professional. On March 10, 2005, she resigned rather than continue to be humiliated. During her career at Goldman, she was promoted once and her pay increased 27 percent. Her attacker was promoted continuously, became a partner, and saw his pay increase 400 percent.

Shanna Orlich, another plaintiff in the September 2010 class-action lawsuit against Goldman, started working at the firm in the summer of 2006 while studying for her JD/MBA degree at Columbia University. After graduating from Columbia in 2007, she returned to Goldman to work in something called the Capital Structure Franchise Trading Group, which had twelve professionals, two of whom were women. Throughout 2007, Orlich had performed well and her supervisor told her so. She had joined Goldman with the intention of becoming a trader, but when she started, she was told there was no trading position on the CSFT desk available and she would have to be an analyst, working with other traders on the desk. When she asked about the prospect of becoming a trader, she was told that there were no such openings at the time, even though one of her business-school classmates—a man—had started with her and had been given a seat as a high-yield debt trader. By way of explanation for how this might have happened, Orlich described how “Goldman Sachs’ managers often challenged this male classmate to do push-up contests on the trading floor.” Around the same time, a man who had been just hired from college was given a seat as a trader on the CSFT desk.

In January 2008, Orlich spoke with a senior woman trader about the possibility of being allowed to trade. Soon thereafter, her direct supervisor assigned her to be a junior trader to another male trader on the CSFT desk. By April, though, both the male trader she had been assigned to work with and her direct supervisor had left Goldman. Once again, her trading prospects were dimmed. In July, she spoke to a male managing director and asked about becoming a trader and he told her he did not think she had the “right fit” to be a trader and was surprised she had been hired for that role. When she spoke with a partner on the Goldman
senior management team about trying to be a trader, he told her to be “a team player” and stay as an analyst. She was often asked to perform clerical tasks for other traders, such as making photocopies, taking calls from wives, and setting up BlackBerry accounts.

What’s more, even though she had played golf since childhood and was on her high school’s varsity golf team, she—along with other women traders—was excluded from company outings to country clubs to play golf. At one golf outing, where eighty Goldman professionals attended—only one of whom was a woman—she was told she could not attend because she was “too junior,” even though “several male analysts right out of college attended the outing.” In November 2008, Goldman terminated her employment.

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I
N GENERAL
, G
OLDMAN
had much work to do when it came to making sure its employees believed they were being given sufficient opportunity to succeed. When Friedman and Rubin took over, the firm hired consultant
Reed Whittle to beef up the firm’s human resources function and to create a more robust employee evaluation system. When Whittle looked at Goldman’s personnel evaluation system, he was appalled. “
You’re doing everything wrong,” he told Friedman. “I don’t mean you’re doing two things wrong or a lot of things wrong, I mean you’re doing
everything
wrong.”

“And we probably were,” Friedman said. He remembered once when someone came into his office after he had received his annual review and fingered Friedman for writing that he didn’t think the person was “very bright.” While Friedman wasn’t sure that’s what he wrote, he found the breach of confidentiality unacceptable. “You have to have a system of confidentiality, you have to have a system of candor, you have to have a system where people say, ‘Friedman, this is something you really have an issue with and you have to work on it,’ where I don’t sit there thinking, ‘Who is the Iago who whispered that in my boss’s ear?’ We were given the personnel reviews clearly without adequate data.”

That’s when Goldman decided to implement a confidential 360-degree review system and to separate the annual reviews from the awarding of compensation. “
I’m a huge believer in them …,” Friedman said of the 360. “If you have a bunch of people giving their views on Bill, you will discover a remarkable degree of consensus about what his strengths are and what his weaknesses are, and if it’s done in a standardized manner and it’s known that it’s taken seriously, then when your boss sits down and says, ‘Bill, here’s an issue. It’s a serious issue we want you to be working on … but let me just read you some of the comments.’ I never met anyone
who … could stay in denial when they’d had ten different comments about them pretty much around the same weakness.”

Then there were the conversations with hotshots Friedman or Rubin wanted to move overseas. “
You say to another partner who’s an immensely talented guy, ‘We really need you—we are globalizing this firm—and the only way we’re going to get to be a global firm is to have some of our real talent go overseas.… We are prepared to make you a partner two years ahead of your class if you will go to Asia and we want you to take one for the firm,’ ” Friedman explained. “And the guy says, he’s thought about it and has come back and said, ‘I can’t do it, my girlfriend, my mother, my dog doesn’t travel well,’ We’re not at all vindictive about it. ‘We hear you, you’ll be considered together with your class in two years.’ But then you go to another guy on your list and you make that offer and he goes. He becomes a partner two years ahead of the class.” The message got around, fast, as
Voltaire understood when he coined the phrase “
pour encourager les autres.
” Then there were the conversations about sexual harassment (which apparently were less effective). “You go to a third guy and you say—and we’ve been loud and clear about no intimate relationships, consensual or otherwise, with people in your chain of command—‘You are an intensely able person, you ought to be a partner in this firm, you’ve broken the ground rules, you ain’t gonna be a partner this time. I really want you to stay and we will really, really make sure that this is put behind you, but you’re going to pay your debt to society.’ Now I promise you that no one is going to tell anyone that so-and-so didn’t become a partner because he’d been having an affair with a woman in his department. No one is going to say the other guy didn’t become a partner because he wouldn’t move overseas, but I can promise you the organization figures it out very quickly, and the message gets across that when we say, ‘There’s a one-firm concept,’ and a culture we must abide by. We really mean it.”

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W
HATEVER SOCIAL AND
behavioral problems the firm seemed to be having as the John Weinberg era faded away, there was no question Goldman Sachs—more than ever—still knew how to make money.
Institutional Investor
estimated the 1990 “honeypot” at “north of $600 million,” and
Forbes
wrote, without caveat, that the firm made $1 billion in net income in 1991. The Ad Hoc Profit Maximization Committee seemed to be working quite well. Goldman was not only the leader in the traditional investment banking businesses of underwriting debt and equity securities and in advising on M&A deals, but it had also started to become a leader in the business of investing its own capital, as a principal
in trades and as a major investor in a variety of its own private-equity, bridge loan, and hedge funds. For years, there had been a reluctance under the traditional investment bankers Whitehead and Weinberg to take risks as principals, but there was no holding back now that the transaction-oriented Rubin and Friedman, arbitrageur and M&A banker respectively, were in charge. And besides, many of Goldman’s competitors were way ahead of it in taking these risks; Goldman, playing catch-up to some degree, was determined to show the rest of Wall Street how to take these risks, in a prudent fashion (or so it hoped). By the early 1990s,
Mark Winkelman had resurrected J. Aron, in part by broadening the commodities it traded, including
oil and
grain, among others. Winkelman rode his masterful management and turn-around skills to a seat on the
Management Committee and as co-head of fixed-income with a successful trader named
Jon Corzine. J. Aron had become a big part of Goldman’s profit story. After years of acting only as an agent in the buying and selling of interest-rate swaps, Goldman had started acting as a principal in that business, too. “
We were in the chicken camp on that,” Friedman said, before Goldman found courage. Goldman had also started a $783.5 million distressed investing fund, the Water Street Corporation Recovery Fund—named after a street that runs perpendicular to Broad Street in downtown Manhattan—with $100 million of its partners’ money to invest in the discounted debt securities of companies as a way to control them after a restructuring process.

Like other firms, Goldman had started a series of private-equity funds to invest its own capital, and that of third parties, in companies and in real estate that the funds—and Goldman—would control. The first
Whitehall real-estate fund—named after another downtown street—was started in 1991 to buy skyscrapers, particularly in Manhattan, and other massive real-estate projects around the globe. Goldman’s first private-equity fund, with more than $1 billion in it, began in 1992. Like many of its competitors, Goldman even started to make “
bridge loans”—secured and unsecured loans put on Goldman’s balance sheet—to companies in the process of buying other companies, enabling them to “bridge” their financing needs. The loans offered Goldman the potential for huge fees—after all, the financing made the deals possible—but also the huge risk that the loans might not be paid back or syndicated to other investors (oops!). By December 1990, a number of these loans that Goldman had made—for the leveraged buyouts of
Southland Corp., the owner of 7-Eleven, of
National Gypsum, and of R. H. Macy—had come a cropper. And one bridge loan in particular—made by
First Boston in March 1989 for an acquisition of the
Ohio Mattress Company, owner of the
Sealy and
Stearns & Foster mattress brands—became known as “the Burning Bed” deal and almost sank the venerable investment bank after the $457 million loan could not be repaid in the wake of the collapse of the junk-bond financing market. The loan represented 40 percent of First Boston’s capital and forced the bank into the arms of Credit Suisse.

Goldman’s growing fascination with its principal businesses—whether in trading or investing—was understandable, especially from a good, old-fashioned moneymaking perspective. After all, advising on an M&A deal could take a year, or longer, between germination of an idea and a successful closing. While the fee on a big merger assignment could easily be in the tens of millions of dollars and require little capital to accomplish (bridge loans aside, a product that quickly faded from the scene given the deadly risks), there was also the risk that a deal team could spend huge amounts of time working on a project that might not happen or another company might win the asset, leaving nothing to show for many hours of work. The same could be said, too, for the underwriting of debt or equity securities, which may or may not end up happening, and, worse, tie up the firm’s capital, as Goldman knew well from the 1987 BP underwriting. Even a successful underwriting—for instance, Goldman’s handling of the Ford IPO—could take years and yield relatively little in fees (but huge bragging rights for sure). A successful trade, though, while also requiring the firm’s capital, could be resolved far more quickly than an underwriting or an M&A assignment, usually in days or weeks. If the traders were clever and astute and (mostly) avoided reckless trades, the profit potential could be enormous, as Goldman was discovering.

The market had started to take notice of the changes taking place at Goldman. Under the “reign” of Friedman and Rubin,
Forbes
reported in 1992, “Goldman seems to be putting less emphasis on serving clients and more on dealing for its own account.” The magazine noted that while other firms were ahead of Goldman in this activity, “for Goldman it is a landmark departure” and that while “[s]uch is the power of the firm that no one wants to criticize it in public,” one former partner said “flatly” that “[t]here has been an enormous change [at Goldman], from worrying about clients to worrying about revenues.” (Sensing that the
Forbes
article could be critical of the firm, Goldman executives declined the magazine’s requests for interviews.) For instance, for years under Whitehead and Weinberg, Goldman resisted entering the asset management business because those two senior partners did not want to compete with the money managers who bought the stock and bond offerings Goldman underwrote. But, under Friedman and Rubin, Goldman’s asset management business had grown considerably, to reach $30 billion in assets
under management. “Goldman is only doing what the other firms do,”
Forbes
observed. “But that’s the point: In the past, Goldman set itself apart.” By 1991, Goldman found itself at loggerheads with investment banking clients. Some complained that Goldman’s Water Street Corporation Recovery Fund, set up to buy
bonds of troubled companies, was working against them. They also accused the fund of basing investments on confidential information they had supplied to Goldman bankers.

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R
UN BY PARTNERS
Mikael Salovaara, Alfred “Fred” Eckert III, and to a lesser extent
Kenneth Brody, from the outset the Water Street fund was known for Salovaara’s brilliant—but aggressive—tactics and its high returns. In the rough-and-tumble world of investing in the debt of distressed companies or those involved in a restructuring—where successful investors were known as “vultures”—there were many courageous and clever investors. Nevertheless, at thirty-seven years old, Salovaara stood out among them for both his investing savvy and his ability to turn arcane bankruptcy laws and practices to his advantage. But the very skills that made Salovaara an admired investor made him a lousy partner, and Goldman started very quickly to rue its decision to start the Water Street fund, which became an unwanted poster child for conflicts of interest—a supposed outlier for a firm that prided itself on being able to manage its conflicts.