What Happened to Goldman Sachs: An Insider's Story of Organizational Drift and Its Unintended Consequences
Authors: Steven G. Mandis
Copyright 2013 Harvard Business School Publishing
All rights reserved
The views and opinions expressed in this book are strictly those of the author and do not necessarily reflect those of any organization with which the author has been or is affiliated. The contents of this book have not been approved by any organization with which the author has been or is affiliated. Analyses performed within this book are based on theories, are only examples, and reply upon very limited and dated information and require various and subjective assumptions, interpretations, and judgments. The author’s opinions are based upon information he considers reliable; however, it may be inaccurate or may have been misinterpreted. The reader should not treat any opinion expressed in this book as a specific inducement to make a particular investment or follow a particular strategy, but only as an expression of the author’s opinion.
No part of this publication may be reproduced, stored in or introduced into a retrieval system, or transmitted, in any form, or by any means (electronic, mechanical, photocopying, recording, or otherwise), without the prior permission of the publisher. Requests for permission should be directed to
[email protected]
, or mailed to Permissions, Harvard Business School Publishing, 60 Harvard Way, Boston, Massachusetts 02163.
Library of Congress Cataloging-in-Publication Data
Mandis, Steven G.
What happened to Goldman Sachs: an insider’s story of organizational drift and its unintended consequences/Steven G. Mandis.
pages. cm
ISBN 978-1-4221-9419-5 (hardback)
1. Goldman, Sachs & Co. 2. Investment banking—United States—Management.
3. Corporate governance—United States. 4. Global Financial Crisis, 2008–2009. I. Title.
HG4930.5.M36 2013
332.660973—dc23
201301870
The web addresses referenced in this book were live and correct at the time of the book’s publication but may be subject to change.
ISBN: 9781422194195
eISBN: 9781422194201
This book is dedicated to my devoted wife, Alexandra, and my two loving
daughters, Tatiana and Isabella. They were my cheerleaders through many
long days and nights of working, studying, and writing
.
I would also like to thank my parents, George and Theoni, who immigrated
to America from Greece with very little money and no knowledge of English
.
They quietly sacrificed so that my brother Dean, my sister Vivian, and I
could have a better life. They taught us the meaning of values and hard work
as well as the power of the combination of these two qualities. They asked
for only one thing in return—for us to strive to give our children more opportunities
than they had been able to give us
.
Contents
2.
Shared Principles and Values
3. The
Structure of the Partnership
4.
Under Pressure, Goldman Grows Quickly and Goes Public
5.
Signs of Organizational Drift
6. The
Consequences of Going Public
7. From
Principles to a Legal Standard
8.
Nagging Questions: Leadership, Crisis, and Clients
9. Why
Doesn’t Goldman See the Change?
Appendix A: Goldman and Organizational
Drift
Appendix B: Analytical Framework Applied to
Goldman
Appendix D: Value of Partners’
Shares at IPO
Appendix E: Goldman’s History of
Commitment to Public Service
Appendix F: Key Goldman People
Appendix G: Goldman Timeline of Selected
Events
Prologue
A Funeral
O
N SEPTEMBER 25, 2006, I FILED INTO THE MEMORIAL
service for John L. Weinberg, senior partner of Goldman Sachs from 1976 to 1990. More than a thousand people filled Gotham Hall in New York to pay their respects. John L. (as he was often referred to within Goldman, to distinguish him from other Johns at the firm) was the product of Princeton and Harvard Business School and the son of one of the most powerful Wall Street bankers, Sidney Weinberg, who had literally worked his way up from janitor to senior partner of Goldman and who had served as a confidant to presidents.
The program listed a Goldman honor roll of those who would speak, including Lloyd Blankfein, the firm’s current chairman and CEO; John Whitehead, who had run the firm with John L.—the two of them were known as “the Johns”—and who had left Goldman in 1985 to serve as deputy secretary of state; Robert Rubin, who had gone from co-senior partner in the early 1990s to secretary of the Treasury; Hank Paulson, who had run Goldman when it went public on the New York Stock Exchange (NYSE) in 1999 and had just become secretary of the Treasury; John S. Weinberg, John L.’s son and current vice chairman of Goldman; and Jack Welch, former chairman and CEO of General Electric and a long-standing client of John L.’s.
Welch’s eulogy stood out. His voice cracking, holding back tears, he said, “I love you, John. Thanks for being my friend.” Imagine a CEO today saying that about his investment banker and almost breaking down at the banker’s memorial service.
John S. tried to lighten the mood with a funny line: “My father’s favorite thing in life was talking to his dogs, because they didn’t talk back.” But he caught the essence of John L. when he said, “He saw right and wrong clearly, with no shades of gray.” John L. was a veteran, having served in the US Marine Corps in both World War II and Korea, and the recessional was the “Marine Hymn.” The lyrics “keep our honor clean” and “proud to serve” seemed to provide a perfect end to the service.
From 1976, when the two Johns became cochairmen, until John L.’s death in 2006, Goldman grew from a modest, privately owned investment banking firm focused on the United States—with fewer than a thousand employees, and less than $100 million in pretax profits—to the most prestigious publicly traded investment bank in the world. The firm boasted offices all over the globe, more than twenty-five thousand employees, almost $10 billion in pretax profits, a stock price of almost $200 per share, and an equity market valuation of close to $100 billion.
I had left Goldman in 2004 after a twelve-year career, a few months after my Goldman IPO stock grant had passed the five-year required vesting period. I had moved on to become a trading and investment banking client of Goldman’s. I went to John L.’s memorial service out of respect for a man I had known and admired—a Wall Street legend, although one would never have guessed that from his demeanor. I also wanted to support John S., whom I considered (and still consider) a mentor and a friend. (See
appendix F
for an annotated list of key Goldman partners over the years.)
I first met John L. in 1992, when I was a Goldman financial analyst six months out of college. The legend of Sidney and John L. Weinberg was one of the things that had attracted me to Goldman, and I was excited at the prospect of meeting him. I identified with John L. because we were both sons of parents who came from humble beginnings. I figured if John L.’s father could start by emptying spittoons and end up running Goldman, then anything was possible for me, the son of Greek immigrants. My father had started as a busboy at the Drake Hotel in Chicago, and my mother worked at a Zenith TV assembly factory.
I met John L. early in my time at Goldman, as a financial analyst in the M&A department, when I interviewed him as part of a work assignment. I was asked to make a video on the history of the M&A department to be shown at an off-site department outing. Goldman was enthusiastic about documenting and respecting its history and holding off-site outings to promote bonding among the employees. In the interview John L. could not have been more jovial and humble. At the time, Goldman had less than $1.5 billion in pretax profits, and fewer than three thousand employees. Steve Friedman and Bob Rubin, co-senior partners, had embarked on an aggressive growth plan—growing proprietary trading and principal investing, expanding internationally, and spreading into new businesses.
John L. told me that his father had once fired him in the 1950s for what seemed a minor offense—without the proper approvals, he had committed a small amount of the firm’s capital to help get a deal done for a client—and how, lesson learned, he had groveled to get his job back. He told me about sharing a squash court as an office with John Whitehead—the second of the two Johns—because there was no other space for them. He talked about integrity and business principles and explained how his military experiences had helped him at Goldman and in life. He told me how proud he was of his family, including his young grandchildren. He took a strong interest in my own family, and I was struck by his asking me to share my father’s stories about his Greek military experiences. John L. asked why I volunteered for Guardian Angels safety patrols and also wanted to know how I had managed to play two varsity sports at the University of Chicago while simultaneously performing community service. He revealed that his two children also played college tennis. Sharing that he liked Chicago, where I was born, he advised me to work with the head of the Chicago office, Hank Paulson, because I would learn a lot from him and it would allow me to fly from New York to see more of my family, something he emphasized was important.
I didn’t see John L. again until 1994, after Goldman had lost hundreds of millions of dollars betting the wrong way on interest rates as the Fed unexpectedly raised them. There were rumors that partners’ capital accounts in the firm, representing their decades of hard work, were down over 50 percent in a matter of months. And to make matters worse, because Goldman was structured as a partnership, the partners’ liability was not limited to their capital in the firm; their entire net worth was on the line. With the firm reeling from the losses, Steve Friedman, now sole senior partner because Rubin had left to serve in the Clinton administration, abruptly resigned. Friedman cited serious heart palpitations as the reason for his unexpected retirement. John L. viewed Friedman as a “yellowbellied coward” and his departure as tantamount to “abandoning his post and troops in combat,” regardless of Friedman’s stated reason for leaving.
1
Despite John L.’s best efforts to persuade them to stay, almost one-third of the partners retired within months. Their retirements would give their capital in the firm preferential treatment over that of the general partners who stayed—and would allow the retirees to begin withdrawing their capital. Many loyal employees were being laid off to cut expenses.
When John L. walked onto the M&A department’s twenty-third floor at 85 Broad Street that day in 1994 to calm the troops, the atmosphere was tense. The firm seemed in jeopardy. Before he spoke, I genuinely was worried that Goldman might fold. Drexel Burnham Lambert had filed for bankruptcy a few years earlier—why not Goldman? John L.’s encouraging words meant a great deal to my colleagues and me, as did the fact that he delivered them in person. The amazing thing is that he remembered me from my video project and, in a grandfatherly way, patted me on the shoulder as he said hello.
Later, I spent time with John L. socially. We belonged to the same club in the Bahamas, and I often saw him there. Although many of the members own large, impressive vacation homes, John L. did not. He rented a cottage. He told me once how many cots he had managed to fit into a bedroom when his kids were younger—proud of how much money he saved by not having to rent larger quarters. He read voraciously, and I always remembered how much he loved to eat coleslaw with his lunch. We exchanged books, and once he even wrote a letter of recommendation for me.
One night when he was in his seventies, I had the pleasure of having dinner with him, his wife, John S., and a few others at La Grenouille, one of New York’s best restaurants. John L. was in failing health, so he didn’t go out often. The place was filled with prominent CEOs and other VIPs, and, as they were leaving, each stopped at our table to say hello to John L., although many had not seen him in years. He greeted each of them by name and asked about their families, deflecting any praise about himself or Goldman.
In 2004, after twelve years, I left Goldman to help start an asset management firm. But when I saw John S. after the funeral service, he offered to help me in any way he could, just as his father had done, and showed an interest in how my family was doing, even at a difficult time for him and his own family.
Yet something struck me at the service. It caused me to stop and reflect on the cultural and organizational changes I’d witnessed, first as an employee and later as a client. The service brought them into sharp focus.
It felt strange, almost surreal, to be reflecting on change. In that fall of 2006, Goldman was near the height of its earning power and prestige. But I felt that, in some weird way, I was mourning not only the loss of the man who had embodied Goldman’s values and business principles, but also the change of the firm’s culture, which had been built on those values.
2