Money and Power (6 page)

According to Birmingham, the commercial paper of these small businesses in lower Manhattan would be discounted at between 8 to 9 percent. Goldman bought the discounted notes in amounts ranging from $2,500 to $5,000 and then “tucked the valuable bits of paper inside the inner band of his hat for safekeeping.” Throughout his morning, as he bought more and more notes at a discount from these merchants, Goldman’s “hat sat higher and higher above his forehead.” In this way, Goldman could keep score against the likes of his fellow ambitious Jewish
bankers:
Solomon Loeb, the
Lehmans, and the Seligmans. The higher the hat on the forehead in the morning, the more business being done. In the afternoon, Goldman would make his way uptown to visit the
commercial banks—Commercial Bank on Chambers Street, the
Importers’ and Traders’ Bank on Warren Street, or the
National Park Bank on John Street—where he would see a “cashier, or perhaps the president,” according to Birmingham, “deferentially remove his hat, and they would begin to dicker” about what price the bankers would pay for the notes Goldman had in his hat. The difference between the buying and selling—not unlike what his descendants would do with mortgage-backed securities 140 years or so later—would be Marcus Goldman’s profits. Right away, according to Birmingham, Goldman was able to buy and sell some $5 million worth of this commercial paper a year. Assuming he could clear, say, five cents on every dollar, he may well have been making some $250,000 a year—a tidy sum indeed in 1869.

The Goldmans quickly improved their lifestyle. The family moved to a four-story brownstone at 649 Madison Avenue, some twenty-five feet wide and ninety feet tall. Bertha was able to afford one of the “sumptuous turnouts”—a carriage—“with liveried servants” to go about her morning errands and shopping sprees. Around this time, on a passport application, Marcus Goldman was described as five foot, three inches tall, with a gray beard, fair complexion, and an oval face. His forehead was described as “high.”

For some thirteen years, unlike his peers who had a number of partners in their businesses—mostly siblings or in-laws—Goldman took in no partners, and his personal wealth grew, as did the capital of his firm, which stood at $100,000 in 1880, all of it belonging to Marcus Goldman. But, in 1882, at age sixty, at which point he was buying and selling around $30 million of commercial paper per year, he decided the time had come to bring a partner into the firm. In typical fashion, Goldman chose to invite a family member—in this case, his son-in-law, Samuel Sachs, the husband of his youngest daughter, Louisa—into the business. Not only would a family member be easier to control and to trust, but also in an era of quasi-arranged marriages, the Goldmans had already decided that the Sachses, also immigrants who came to the United States in 1848, possessed the right stuff.

Samuel Sachs’s father, Joseph, was a poor tutor and the son of a saddle maker from outside Würzburg. As a teenager, the
Baer family—the father of which was a wealthy goldsmith from Würzburg—asked
Joseph Sachs to tutor their beautiful daughter, Sophia. Against the wishes of the Baers, of course, “in a fairy-tale way, the poor young tutor
and the lovely young merchant princess fell in love,” according to Birmingham. They decided to elope and take the next schooner for America (although where they got the cash from is not clear; Birmingham suspects Sophia Baer “pocketed some of her father’s gold” on the way out of town).

The Sachses raised five children in Baltimore and Boston before moving, after the Civil War, to New York City, where Joseph—who had been both a teacher and a rabbi—opened a school for boys named the
Sachs Collegiate Institute, in 1871, on West Fifty-ninth Street. Their oldest son, Julius, ran the Sachs school and went on to become a well-regarded educator. “Herr Docktor Sachs was a stern, Old World schoolmaster whose uniformed boys, in smart black suits and starched stand-up collars, were seldom spared the rod,” according to Birmingham. He emphasized discipline and classicism and spoke nine languages fluently, including Sanskrit. Sachs Collegiate Institute quickly became the school of choice for other aspiring Jewish immigrants with names such as Lehman, Cullman, Goldman, and Loeb. The idea was to get these boys—it was an all-boys school then—“ready for Harvard at the age of fifteen,” Birmingham wrote.

By arrangement,
Julius Sachs married the Goldmans’ daughter, Rosa, a combination that worked out sufficiently well that the parents arranged for Louisa to marry Sam, who had already started his working life—as a bookkeeper—at the age of fifteen after his parents’ untimely death.

In 1882, when Sam Sachs was thirty-one, his father-in-law invited him into his business. This required Sam to sell his small dry-goods business one piece of clothing at a time, and to do this, according to Birmingham, Goldman loaned Sachs fifteen thousand dollars, which was to be repaid in three annual payments over three years. As agreed, Sachs repaid ten thousand dollars over two years. On May 28, 1884, the Sachses’ third son, Walter, was born, and in recognition of the birth of yet another grandchild, Marcus Goldman agreed to forgive his son-in-law’s third and final installment of the original fifteen-thousand-dollar debt. In Goldman’s “old-fashioned German script,” according to Birmingham, he acknowledged his son-in-law’s “energy and ability” as a partner, thus relieving him of his final portion of the debt. Louise Goldman Sachs had kept her father’s letter to her husband plus a copy of the canceled note. “And thus,”
Walter Sachs said later in an oral history of his life after seventy-two years as part of his father’s and grandfather’s firm (he died in 1980, age ninety-six), “it appeared that on the very first day of my entrance into the world, I concluded my first business deal for Goldman, Sachs.”

With Samuel Sachs’s arrival, Marcus Goldman’s business began to look more like the other small, Jewish Wall Street partnerships that had evolved from their roots as merchants. The firm became known as M. Goldman & Sachs. Not everything went as swimmingly, of course, as the var
ious accounts of the firm’s history would have one believe. For instance, in February 1884, one of the pieces of paper Marcus Goldman carried around in his hat went awry. A Mr. Frederick E. Douglas has purchased a $1,100 note from Goldman & Sachs, written on the account of an “
A. Cramer” and endorsed by “Carl Wolff.” Goldman was selling the six-month note for Wolff, with Douglas being the buyer. But, it turned out, Cramer’s signature had been forged, Wolff ran away, and the note became worthless. Douglas sued the firm in superior court on the grounds that it “had, by implication, guaranteed the note to have been made by Cramer.” This certainly was one of the first legal examinations of the role of the responsibility of a financial intermediary in a transaction between a buyer and a seller. Would the jury hold Goldman & Sachs responsible for the IOU as if it had been an underwriter of the paper—the role of an underwriter of a security being one that Goldman Sachs would soon pioneer at the beginning of the twentieth century—or would the jury hold Goldman blameless and rely on the tried-and-true concept of caveat emptor, or buyer beware? A Judge Freedman instructed the jury to find for Douglas “if they believed the defendants to have been acting as brokers for Wolff at the time of the sale of the note.” In the end, “the jury found a verdict for the defendants” and the new firm was spared liability for the fraud. Had the jury found differently in March 1886, the tantalizing possibility exists that the Goldman Sachs we know today might have been an early victim of the plaintiffs’ bar.

Relieved of that potential legal burden for the moment, M. Goldman & Sachs plowed ahead. In 1885, Goldman asked his son Henry and son-in-law
Ludwig Dreyfus to join the firm and, as a result, it became formally known as Goldman, Sachs & Co. (It was also briefly known as
Goldman, Sachs & Dreyfus.) The partners lived near one another in town houses on the Upper West Side of Manhattan. Marcus Goldman gave up his house on Madison Avenue and moved to West Seventieth Street. Sam Sachs bought the town house next door.
Harry Sachs, Sam’s brother, bought a town house on West Seventy-fourth Street, and
Henry Goldman, Marcus’s son, bought “an even larger one” on West Seventy-sixth Street.

In December 1893, the growing firm narrowly avoided losing $22,500—some 5 percent of its capital—lent to
N. J. Schloss & Co., a small manufacturer of boys’ clothing on lower Broadway. It turned out
the company’s bookkeeper had embezzled $50,000 and, when caught, tried to commit suicide by lying down on a hotel bed—where he had registered under an assumed name—with the gas on. Goldman got its money back as a preference to other creditors because it had made a short-term loan to the manufacturer.

In 1894,
Harry Sachs, Sam’s brother, joined the firm and the five partners, ten clerks, and a handful of messengers settled into second-floor offices at 43 Exchange Place. At that time, Goldman Sachs had $585,000 in capital and an annual profit of $200,000, a
return on equity of an astounding 34.2 percent and an early indicator of how profitable the business could be when managed properly. In 1896, Goldman Sachs joined the
New York Stock Exchange. By 1898, the firm’s capital stood at $1.6 million and was growing rapidly.

At that time, the firm also decided to open a foreign exchange department and by June 1899 had sent $1 million worth of
gold coins to Europe. Some dealers thought the firm had mispriced the shipment and lost $500, but Marcus Goldman said that it was “a regular and profitable operation” and done because gold coins “were cheaper” than bills of exchange. During the next few years, Goldman Sachs—along with Lazard Frères & Co., another small banking partnership with a Wall Street business—were among the largest in the business of importing and exporting gold bullion. It wasn’t all business at Goldman Sachs either: Goldman’s employees—with last names like Gregory, Hanna, Odz, Keiser, and Morrissey—were also regular tenpin bowlers in the
Bank Clerks’ League.

Marcus Goldman was also developing a reputation as a small-scale philanthropist, especially for causes involving the “Hebrews,” as Jewish immigrants to the United States were then known. In 1891, Goldman was part of leading an appeal—apparently the first of its kind—for general succor, “irrespective of creed or religion” of the donors, to Jewish
Russian immigrants to New York City who had arrived in the United States “
well nigh penniless.” Some 7,500 Russians were then coming to Ellis Island monthly, “not willingly, nor even as did the Pilgrim Fathers, preferring liberty to persecution for conscience’s sake. They are given no choice, but are driven forth relentlessly from a land in which they have been settled for hundreds of years.” According to the
New York Times
article about the appeal, Jews, “
always charitable to a degree, and famous for the care of the poor of their race, the Hebrews, now find themselves confronted with a task that is beyond them to carry out unaided.”

As their wealth grew, the Goldman Sachs partners soon joined the “ghetto” of well-to-do Jewish bankers that had begun flocking to the New
Jersey coastal towns of Elberon, Long Branch, Deal, and Sea Bright about ninety miles south of New York City. At a time well before the Hamptons became the place for rich Wall Streeters to preen, the Jewish bankers were simply mirroring, in their way, the exclusive weekend retreats that the WASP bankers had established in Newport, Rhode Island. Indeed, Elberon and its environs became known as the “Jewish Newport.” Newport was akin to Fifth Avenue, according to
Stephen Birmingham, and Elberon was akin to Central Park West, a distinction without much substance except for the obv
ious implications of the exclusionary aspects of each community.
Peggy Guggenheim called Elberon “the ugliest place in the world. Not one tree or bush grew on the barren coast.”

Samuel Sachs’s house in Elberon was a grand adaptation of an Italianate palazzo “of white stucco, with a red-tiled roof and fountains and formal gardens,” and according to Birmingham “adopted from Versailles.” The Loebs, Schiffs, and Seligmans had homes in and around Elberon. “Certainly at some point during these great Elberon years,” Birmingham observed, “New York’s German Jewish financiers and their families had begun to think of themselves as an American aristocracy of a certain sort. With their moral tone and their emphasis on family, they had begun to regard themselves as perhaps just a little bit ‘better’ than ‘the butterflies’ of Newport.” On July 20, 1904, Marcus Goldman, whose health had been failing for a “long time,” according to the
New York Times,
died at his daughter and son-in-law’s Elberon home, where he had spent the summer. A few weeks earlier, Sam Sachs’s sons, Arthur and Paul, had joined Goldman Sachs shortly after graduating from
Harvard University.

——

T
HE FIRM
Marcus Goldman bequeathed to his son Henry Goldman and to his son-in-law Samuel Sachs was in fine form and was nothing less than the leading
commercial paper house on Wall Street. But Goldman, Sachs & Co. had greater ambitions than just trafficking in commercial paper and precious commodities such as gold. Goldman Sachs wanted to become part of the banking elite that raised debt and equity capital for American companies. Still in its infancy at the start of the twentieth century, the task of raising capital—dubbed “
underwriting”—became one of the most crucial roles Wall Street would perform for corporate clients eager to expand their workforces and their factories, and led to the creation of American
capitalism, one of the country’s most important exports.

Henry Goldman, who ironically had dropped out of Harvard without a degree because he had trouble seeing, had a vision of Goldman
Sachs as a leading securities underwriter. He had been a traveling salesman after leaving Harvard but had joined the family business at age twenty-eight and would help lead a transformation of the firm into the underwriting business, which meant taking calculated risks for short periods of time by buying the debt or equity securities of its corporate clients before turning around and quickly selling these securities to investors who had been previously identified and were eager to buy them, assuming they had been priced correctly. The idea of the business was that Goldman would get a fee for providing the capital to its clients and would unload its risk as rapidly as possible by selling the securities to investors. Usually, when markets were functioning properly—and investor panic was not an issue—the process of underwriting worked smoothly, seeming almost risk free and allowing the underwriter to perform what appeared to be an act of magic or one of alchemy. But, at other times, if the securities were poorly priced or investor fear was palpable, underwriters could get left holding huge amounts of the securities without a buyer in sight. Such misjudgments happened only rarely, of course—the spring of 2007 and the ensuing financial crisis being one particularly acute recent example of this phenomenon—but the consequences could be devastating for underwriters and investors alike.