Goldman Sachs's Rich History
Wednesday, October 15, 2008
The Making of Goldman Sachs
By Charles D. Ellis
Penguin Press. 729 pp. $37.95
Goldman, like McKinsey or Cravath or Madonna, is one of those fabulously wealthy New York entities known by a single name. Goldman, of course, is Goldman Sachs, the elite among Wall Street's remaining investment banks, a 130-year-old firm that has managed to prosper in good times and bad. The last remaining major private partnership on Wall Street until it went public in 1999, Goldman has generated both larger-than-life profits and financial statesmen. In the past 60 years, as Charles D. Ellis notes in this doorstopper of a book, it has grown from a small-time player into "a global juggernaut . . . with such strengths that it operates with almost no external constraints in virtually any financial market it chooses, on the terms it chooses, on the scale it chooses, when it chooses, and with the partners it chooses." In the months since Ellis penned those lines, Goldman, hammered by the credit crisis, has pulled in its horns significantly.
How a small peddler of commercial paper grew into an enormously profitable, highly respected firm is an epic story. But "The Partnership," though always useful and occasionally riveting, isn't an epic history. Ellis, who founded Greenwich Associates and is a longtime consultant to financial services companies, cuts through the shrouds of mystery that surround Goldman, which jealously guards its privacy, but his book reads more like a group of highly accessible, well-informed case studies.
Marcus Goldman, a German Jewish immigrant, and his son-in-law Samuel Sachs turned their firm into a powerhouse in the niche market of financing small businesses in the 1890s. The firm began to break into the mainstream of Wall Street by teaming up with Lehman Brothers and financing such companies as Sears and Woolworth. Sidney Weinberg, who hired on to clean brass spittoons in 1907 and became the first non-family partner 20 years later, led the firm from 1930 to 1969. Irreverent and whip-smart, Weinberg was the first Goldman Sachs leader to assume a national profile, advising President Franklin D. Roosevelt and becoming assistant to the chairman of the War Production Board. Weinberg scored a great coup by winning the assignment to manage Ford Motor Co.'s initial public offering in January 1956.
Weinberg was one of many forceful personalities to lead the firm. He was succeeded by Gus Levy, a New Orleans-born Tulane dropout who became a legendary trader and nurtured a young recruit named Robert Rubin, who eventually became a highly influential member of the Clinton administration. Ellis's descriptions of how Goldman built the components of a universal investment banking firm -- asset management, institutional sales, wealth management, block trading -- are highly useful, especially to young MBAs. As Ellis points out, Weinberg protege John Whitehead's " 'phalanx' organization -- ad hoc combinations into effective teams of interchangeable specialists -- was virtually unstoppable against any competitors organized in the old-fashioned 'one banker does it all' star system."
Readers may leave the book wondering how -- and why -- Goldman sends so many of its leaders to Washington. Whitehead, co-chairman at Goldman in the late 1970s and early '80s, served as deputy secretary of state in the second Reagan administration. Rubin's co-managing partner, Steve Friedman, served as director of President George W. Bush's National Economic Council. Jon Corzine, who led the firm in the mid-1990s, entered politics after he was pushed out in 1999 (he is now governor of New Jersey). His ouster from Goldman was engineered by Henry Paulson, who is now the Treasury secretary.
Ellis enjoyed privileged access to the partners of Goldman, who have been his clients for many years. And while he serves up plenty of pabulum -- "Niceness, intensity, and integrity are the three key words to describe Goldman Sachs," he quotes one partner as saying-- he also exposes Goldman's many warts. The firm dropped a series of dot-com bombs on the public in the 1990s and had to pay a hefty fine as part of Wall Street's settlement over research practices (the firm bizarrely takes pride in having paid only $110 million, while archrival Morgan Stanley paid $125 million). He recounts in great detail the work Goldman did for rogue financier Robert Maxwell and mentions a 1970 episode in which a Goldman recruiter told a Stanford student that he couldn't be considered for a job because he was black.
Ellis is at his best in providing insight into the behavior of the firm's Type A mind-set. Friedman, left to run the firm alone when Rubin joined the Clinton administration, stepped down in 1994 after suffering a health scare. Since his announcement came just after the firm had racked up big trading losses, Friedman -- an all-Ivy wrestler at Cornell -- was tagged as a quitter. Corzine, who doesn't seem to have sat for interviews, comes across as self-aggrandizing, a dangerous freelancer. "It's not that he always thinks he's right; it's that he knows he's right," said partner Bob Hurst of Corzine. "That's dangerous." In Ellis's telling, the coup organized against Corzine by Paulson and several others seems to have been deserved.
Given that Paulson is effectively running the economy for the next several months, I looked forward in particular to the chapter on him. He's described as "pragmatic, hard working, disciplined, and determined" and "so consistently serious that it must have been a bit much for others." While Ellis is great on how Paulson and his colleagues mastered the nuts and bolts of Wall Street, I was left wanting more insight into what, beyond money, drove these people and why they were propelled onto the national stage.
Finally, the risk of writing about existing companies is that the last chapter can frequently become inoperative. Ellis closes with a discussion of current CEO Lloyd Blankfein's strategy to marry the traditional role of agency (acting on behalf of clients) and principal (using the firm's own money). While Goldman hasn't gone bust like its old partner Lehman Brothers, it has taken some hits. A large hedge fund that Goldman started lost nearly 40 percent of its value in 2007. To avoid the fate of Bear Stearns and Lehman, Goldman is transforming itself from a sexy investment bank into a more staid commercial bank, able to take deposits. And in September, to stave off a potential run on the bank, it turned to Warren Buffett, who invested several billion dollars but demanded a 10 percent interest rate. Now a subprime borrower, Goldman faces a growing number of external constraints.