What Happened to Goldman Sachs: An Insider's Story of Organizational Drift and Its Unintended Consequences (37 page)

31
. The Super League is also mentioned in chapter 7.

32
. Knee reports telling Thornton of his (Knee’s) plan to leave the firm and joking, when asked by Thornton to stay on to help with the global reorganization of CME, that Thornton could hire him back when Thornton took over the firm. When Thornton reminded Knee of the “cultural taboo” against rehiring people who left Goldman, Knee retorted that if Thornton were in charge, “this would probably not be the most important cultural taboo that would have already been swept aside.” (See Knee,
The Accidental Investment Banker
, 49, 93.)

33
. B. Groysberg and S. Snook, “Leadership Development at Goldman Sachs,” Case 9-406-002 (Boston: Harvard Business School, 2007), 4.

34
. Ibid.

35
. The subject of conflicts is discussed in greater detail in chapter 7.

36
. Garza Baldwin and Seth Huffstetler, “Staple Financing: Proceed with Caution,”
M&A Update
, July 3, 2007,
www.wcsr.com/resources/pdfs/M%26AUpdate_3July2007.pdf
.

37
. R. Hall, “Stapled Finance Packages under Scrutiny,”
http://www.iflr1000.com/LegislationGuide/146/Stapled-finance-packages-under-scrutiny.html
.

38
. Baldwin and Huffstetler, “Staple Financing.”

39
. B. Klempner, D. Mathur, L. Molefe, J. Reynolds, and T. Uccellini, “Case Study: Selling Neiman Marcus,”
Harvard Negotiation Law Review
, Winter 2007.

40
. A business standards committee report in 2011.

41
. “When combined with the toxic ecology of bonus systems that emphasize short-term revenues, banks evolved a transactional business model. Deals and profits dominated at the expense of client interests and longer term relationships, a practice known as ‘scorched earth banking.’” (See S. Das, “Goldman Sachs’ Flawed Model,”
The Independent
, March 17, 2012,
http://www.independent.co.uk/news/business/comment/satyajit-das-goldman-sachs-flawed-model-7575865.html
.)

42
. A. Garfinkle, “A Conversation with Robert S. Kaplan,”
The American Interest
, March 15, 2012,
http://www.the-american-interest.com/article.cfm?piece=1223
.

43
. Ibid.

44
. S. Gandel, “Goldman Says It Can Profit from Europe’s Bust,”
Fortune
, May 31, 2012,
http://finance.fortune.cnn.com/tag/gary-cohn/
.

45
. M. Abelson and C. Harper, “Succeeding Blankfein at Goldman May Be Hurdle Too High for Cohn,”
Bloomberg
, July 24, 2011,
http://www.bloomberg.com/news/2011-07-24/succeeding-blankfein-at-goldman-may-prove-hurdle-too-high-for-no-2-cohn.html
.

46
. This is after Water Street, which is not mentioned on Goldman’s website. The funds listed are only merchant banking funds.

47
. Ellis,
The Partnership
, 537.

48
. Knee,
The Accidental Investment Banker
, 24–25.

49
. One manager said, “Things have to be done in a very high-end way. People at Goldman Sachs are pretty intolerant of weak execution and weak quality, even of things most people might think of as trivial.” (See Groysberg and Snook, “Leadership Development at Goldman Sachs.”)

Chapter 6

1
.
http://money.cnn.com/2000/08/01/companies/goldman/
.

2
.
http://www.economist.com/node/28791
.

3
. I compared the daily change in Goldman’s stock price to the daily change in a couple of US financial indexes and looked to see whether the daily change increased over the month (i.e., if Goldman had manipulated the price in the period close to the fiscal year end). I tried a couple of different basic specifications to see if there was any non-linearity in this. Every way I looked, though, there was no increase in returns on Goldman’s price versus the indexes as we got closer to the end of the fiscal year. So it looks like Goldman wasn’t doing this.

4
.
http://www.efinancialnews.com/story/2012-11-12/goldman-sachs-protecting-the-partnership
.

5
. Compensation is described in the proxy statements filed by Goldman.

6
.
http://dealbook.nytimes.com/2011/01/18/study-points-to-windfall-for-goldman-partners/
.

7
.
http://dealbook.nytimes.com/2011/02/05/stock-hedging-lets-bankers-skirt-efforts-to-overhaul-pay/
.

8
.
Leverage
is the ratio of debt to equity. At 33-to-1 leverage, a 3 percent drop in the value of an investment bank’s assets can wipe out its equity.

9
. A. Garfinkle, “A Conversation with Robert S. Kaplan,”
The American Interest
, March 15, 2012,
http://www.the-american-interest.com/article.cfm?piece=1223
.

10
. L. Endlich,
Goldman Sachs—The Culture of Success
(New York: Simon & Schuster, 2000).

11
.
http://dealbook.nytimes.com/2011/05/16/the-goldman-sachs-diaspora/
.

12
. According to interviews and publicly filed documents, however, around the time of the IPO, John L. Weinberg was put on the board and granted tens of millions of dollars in stock and a consulting agreement that paid millions of dollars.

13
. “People have come to Goldman Sachs despite the promise of very long hours and possibly less compensation, because becoming a partner at Goldman Sachs was the brass ring. It was the highest accolade on Wall Street, and now that no longer exists.” (See P. Viles and J. Cafferty, “Goldman Sachs’ IPO,” CNNfn, May 4, 1999.)

14
. The sources are annual reports and the Wall Street Comps Survey. The numbers for J.P. Morgan relate only to its investment bank, without commercial banking. Morgan Stanley was excluded because it includes a large brokerage business.

15
.
http://dealbook.nytimes.com/2011/05/16/the-goldman-sachs-diaspora/
.

16
. See Donald MacKenzie,
An Engine, Not a Camera: How Financial Models Shape Markets
(Cambridge, MA: MIT Press, 2006), and his similar works.

17
. B. McLean and A. Serwer, “Goldman Sachs: After the Fall,”
Fortune
, October 23, 2011,
http://features.blogs.fortune.cnn.com/2011/10/23/goldman-sachs-after-the-fall-fortune-1998/
.

18
. C. D. Ellis,
The Partnership—The Making of Goldman Sachs
(New York: Penguin, 2008), xvi. Goldman’s trading position marks were shown to be more accurate than those of the other Wall Street firms. Its longstanding “mark-to-market” discipline and cultural element of dissonance may have meant it was more accurate and generated more volatility in positions.

19
. McLean and Serwer, “Goldman Sachs: After the Fall.”

20
. The IPO prospectus can be found at
http://www.goldmansachs.com/investor-relations/financials/archived/other-information/ipo-prospectus-gs-pdf-file.pdf
.

Chapter 7

1
. Matthew Gill explores the work of accountants and the accounting profession to find the causes of problems of trust behind scandals and the headlines. His focus is largely on the way that accountants construct knowledge, and he emphasizes the need to understand the “underlying norms according to which accountants approach the rules, rather than the rules themselves.” The uncertainty resulting from the subjectivity inherent in this situation can easily lead to moral ambiguity. See M. Gill,
Accountants’ Truth: Knowledge and Ethics in the Financial World
(Oxford, UK: Oxford University Press, 2009), 8.

2
. They pointed to the data supporting this; it is rare for an employee of Goldman to be criminally convicted. However, that can be said for many firms and may be more of a statement on the law or enforcement, as pointed out by Senator Carl Levin (D-Mich.) when the Department of Justice dropped its criminal investigation against Goldman in 2012: “Whether the decision by the Department of Justice is the product of weak laws or weak enforcement, Goldman Sachs’ actions were deceptive and immoral,” Levin said. Goldman’s “actions did immense harm to its clients and helped create the financial crisis that nearly plunged us into a second Great Depression;” see
http://www.ft.com/cms/s/0/6e032042-e315-11e1-a78c-00144feab49a.html#axzz2O5ePeAlh
.

3
. In discussing Goldman’s practices during the internet/technology boom, Taibbi wrote, “For a bank that paid out $7 billion a year in salaries, $110 million fines issued half a decade late were something far less than a deterrent—they were a joke. Once the Internet bubble burst, Goldman had no incentive to reassess its new, profit-driven strategy; it just searched around for another bubble to inflate.” See M. Taibbi, “The Great American Bubble Machine,”
Rolling Stone
, April 5, 2010,
http://www.rollingstone.com/politics/news/the-great-american-bubble-machine-20100405
.

4
. A Chinese wall is a mechanism used to prevent conflicts of interest regarding the use of information. The word
wall
implies that the information cannot get out and is contained. It also implies that there is a line. Often it is a legal line concerning which information can go where, but it is as much an ethical barrier between different divisions of a financial (or other) institution to avoid conflicts of interest. A Chinese wall is said to exist, for example, between the corporate–advisory area and the brokering department of a financial services firm to separate those giving corporate advice on takeovers from those advising clients about buying shares. The wall is created to prevent leaks of inside information that could influence advice given to clients making investments or allow staff to take advantage of facts not yet known to the general public.

5
. Goldman acknowledges this confusion in its business standards committee report.

6
.
http://www.businessinsider.com/goldman-sachs-traders-2010-12
.

7
. This was a weekly practice from 2006 to 2011. In 2007, Goldman launched a program that allowed research analysts to call a select group of priority clients.

8
. A
conviction buy list
is a list of the stocks of companies that Goldman’s research analysts believe are extremely attractive for investors to buy.

9
. S. N. Lynch and A. Viswanatha, “Goldman to Pay $22 Million to Settle ‘Huddles’ Case,”
Yahoo!
, April 12, 2012,
http://news.yahoo.com/goldman-pay-22-million-settle-sec-finra-charges-154759042.html
.

10
. R. Lowenstein,
When Genius Failed: The Rise and Fall of Long-Term Capital Management
(New York: Random House, 2000), 172–173.

11
.
http://www.zerohedge.com/contributed/2012-11-17/greg-smith-vs-goldman-sachs
.

12
.
http://www.sec.gov/litigation/litreleases/lr18113.htm
.

13
. State of Missouri, Office of Secretary of State, Securities Commission, November 25, 2003, Consent Order, Case No. AO-03-15,
http://www.sos.mo.gov/securities/files/goldman_sachs.pdf
. Enacted in reaction to a number of corporate and accounting scandals (such as Enron and WORLDCOM), the Sarbanes–Oxley Act of 2002 sets standards for all US public company boards, management, and public accounting firms. The act contains eleven sections, ranging from additional corporate board responsibilities to criminal penalties. The SEC had to adopt dozens of rules to implement the act.

14
. State of Missouri, Office of Secretary of State, Securities Commission, November 25, 2003, Consent Order, Case No. AO-03-15.

15
. There was already a John L. Weinberg award, which was given to a professional in the investment banking division who best typified Goldman’s core values.

16
. In this vein, Sørensen and Phillips examine the relationship between organizational size and structural complexity and note problems arising from increasing specialization and fragmentation: “As organizations grow larger, tasks get subdivided into more specialized roles, and an increasing proportion of jobs in the organization is devoted to coordinating between the increasingly elaborate division of labor … the average worker in a large firm has less overview over what all of the organization’s vital routines are and how they fit together. Nor are they provided with the skills for the integration of the large firm’s differentiated skills.” See J. Sørensen and D. J. Phillips, “Competence and Commitment: Employer Size and Entrepreneurial Endurance,”
Industrial and Corporate Change
20, no. 3 (2011), doi: 10.1093/icc/dtr025.

17
. Sources for the perception variable discussion include Lulofs (R. S. Lulofs,
Conflict: From Theory to Action
[Scottsdale, AZ: Gorsuch Scarisbrick, 1994]) and Wilmot and Hocker (W. W. Wilmot and J. L. Hocker,
Interpersonal Conflict
5th ed. [Boston: McGraw-Hill, 1998]).

18
. Ellis (
The Partnership—The Making of Goldman Sachs
[New York: Penguin, 2008], 667) wrote that all could be lost—in fact, that all “
would
be lost if the firm squandered its reputation or failed to anticipate, understand, and manage the potential conflicts or failed to excel in its important agency business.”

19
. A. R. Sorkin,
Too Big to Fail: The Inside Story of How Wall Street and Washington Fought to Save the Financial System from Crisis—and Themselves
(New York: Viking, 2009).

20
. Ibid.

21
. The business standards committee investigation and report are discussed in detail in chapter 8 as one of the outcomes of Goldman’s experience during the credit crisis.

22
. See, for example, Sorkin (
Too Big to Fail
) and W. D. Cohan, “Goldman’s Double Game,”
Businessweek
, March 14, 2012,
http://www.businessweek.com/articles/2012-03-14/goldmans-double-game
.

23
. Ellis,
The Partnership
, 668–669.