Money and Power

by William D. Cohan

  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 various 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 obvious 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.

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  THE 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.

  The brothers-in-law Sam Sachs and Henry Goldman were said to be “a study in contrast.” Sachs was conservative both in his risk taking and in his formal attire: even on the hottest days of the year he was said to wear “a thin alpaca office coat.” He also wanted to build the partnership based upon its past successes—a responsible enough approach to preserving his capital. His son, Paul Sachs, once remarked about his father’s satisfaction that a deal the firm was working on with a partner they did not know particularly well had fallen through. Their first impression of the potential partner had been negative. “From the very first moment,” Paul Sachs revealed, “[we were] disturbed by the moral[ity] of these men and while I do not deny that the business might have proved satisfactory enough, we are as a matter of fact glad to have seen it fall through because as we progressed our first unfavorable impression was at every meeting strongly emphasized.” Goldman, by contrast, worked in his shirtsleeves and often would tell his nephew Walter Sachs, “Money is always fashionable” and relished trading railroad and utility bonds—usually at a profit—but risking his partners’ capital nonetheless. The tension between Goldman and Sachs—between prudent risk taking and preservation of capital—would from then on become an integral part of the firm’s DNA.

  As with other Wall Street firms started during this era, using the actual DNA of the Goldman senior partners to perpetuate the firm became essential, too. Walter Sachs, for one, was part of that grooming from a relatively early age. After graduating from Harvard College in 1904 and then enduring a year of Harvard Law School, Walter joined Goldman in 1905 as a clerk, going from office to office around the firm doing the menial tasks asked of him. The following spring, he accompanied his father, then the senior partner of the firm, on a trip to Europe, where he served as secretary: sending cables and dispatches and writing letters for his father’s signature. When Samuel Sachs returned to the United States that summer, and to Goldman’s downtown offices, Walter Sachs stayed behind in Paris, on sanctioned leave from Goldman, in order to receive some additional real-world experience working as an unpaid intern in the offices of two French banks. In early 1907, Walter Sachs continued his banking education in Berlin. He returned to New York at the end of 1907. While in the midst of this banking whirlwind—which was not uncommon for the sons of banking patriarchs looking to educate their children in the ways of the banking system—Samuel Sachs had promised Walter Sachs a trip around the world once he had completed his various tours of duty. Unfortunately, fate intervened in the form of the Panic of 1907, and Samuel Sachs cabled his son in London: “My boy, you come home and go to work.” Walter Sachs’s full-time career at Goldman, Sachs & Co. began on January 2, 1908. He was told to sell commercial paper to New York, Philadelphia, and Hartford banks. After his first day, he came home with the paper unsold and decided he must be a failure.

  In addition to encouraging sons to join the family business, Goldman, Sachs & Co. also sought alliances with other banking partnerships, and particularly with Lehman Brothers, a successful family-run business with origins in retail merchandising and cotton trading in Montgomery, Alabama. As it turned out, Henry Goldman’s best friend was Philip Lehman, one of the five Lehman brothers who ran Lehman Brothers when Emanuel Lehman died in January 1907.

  As they took control of their firms after the deaths of their fathers, the two friends began to discuss ways to expand their businesses. Philip Lehman suggested to Henry Goldman that the two firms think seriously about getting into the underwriting business together. Indeed the two men even considered starting a new firm—Goldman & Lehman—dedicated solely to underwriting corporate securities. “But,” according to Birmingham, “the pressures, both practical and sentimental, not to abandon their respective family firms were strong, and so at last they decided to collaborate in underwriting as a side line. Each house would continue with its specialty—Lehman with commodities, Goldman, Sachs with commercial paper—and the two friends would go in as partners in underwriting ventures, splitting the proceeds fifty-fifty.”

  Goldman already had had a taste of the underwriting business in April 1906, when the United Cigar Manufacturers’ Corporation asked the firm to raise $4.5 million through the selling of preferred stock. On May 3, Goldman and three other firms underwrote an unspecified amount of 4 percent, fifty-year bonds for the state of Alabama. By the time Philip Lehman broached the idea with Henry Goldman of the underwriting joint venture, Goldman Sachs knew it was a business it wanted to be in.

  Then the firm had a bit of good fortune. Thanks to the marriage of a distant relative to Samuel Hammerslough, a former peddler who had moved to Springfield, Illinois, to become a men’s clothing merchant, Goldman met Hammerslough’s cousin, Julius Rosenwald. Rosenwald had a successful clothing manufacturing business that was merged into Sears, Roebuck. In June 1906, he approached Henry Goldman, his “cousin” and friend from his days living in New York, and asked him whether Goldman would be willing to lend Sears $5 million. Sears had just built a new manufacturing facility and needed money for working capital to make the company’s investment worthwhile. Legend has it that Goldman had a better idea for Rosenwald: Why not take Sears public, through an underwritten offering of equity by the new Goldman and Lehman joint venture? Rosenwald would get rich in the process and the business would be financed with equity, rather than with debt. While if the equity performed well—which it certainly did for the longest time—equity would be more expensive than debt, it would also put the company less at risk in the near term should the economy falter (which it did during the financial panic of 1907). Before making the suggestion about the IPO, which could prove risky for his firm if the deal did not go well, Goldman had the good sense to review Sears’s financial performance. In 1904, Sears generated $27.6 million in revenue and $2.2 million in net income; in 1905, the numbers improved to $37.9 million in revenue and $2.8 million in net income. Considering that in 1897, Sears had a net worth of $237,000, the company had grown exponentially in fewer than ten years. In short, Sears was a great candidate for an IPO.r />
  The offering would be unusual on a number of fronts. First, it would be the first large IPO Goldman and Lehman would lead together. There had been plenty of IPOs in the previous years—for steel companies, railroads, and oil companies—but rarely, if ever before, had a retail mail-order business ventured into the public markets. As a Jewish firm, Goldman had not previously had much success breaking into the ranks of the underwriters for the big industrial companies that were run by old-line WASP executives such as Andrew Carnegie and John D. Rockefeller Jr. The Sears IPO would bring together, for one of the first times, Jewish bankers willing to underwrite the securities of a Jewish-owned, prominent national business. It was Henry Goldman’s good fortune to be friendly with Julius Rosenwald at the very moment Goldman Sachs was venturing into the underwriting business.

  Together, Goldman and Lehman underwrote $30 million of Sears’s common stock and $10 million of Sears’s preferred stock, with a 7 percent dividend. Goldman priced the IPO at $97.50 per share. “It was more or less blazing a trail …,” Walter Sachs said in 1964 of the Sears offering. “[T]his type of business, to my mind, was really a creative invention of my uncle, Henry Goldman. I think he was one of the two or three geniuses in our firm over a period of a hundred years.”

  Before long, according to Birmingham, the Goldman-Lehman underwriting partnership was the “hottest young underwriting team.” Goldman had also enlisted Kleinwort, Sons & Co., a British merchant bank, to help underwrite these deals and to sell the securities to investors in Europe. Together, they underwrote fourteen major offerings, including those for Underwood Corporation, in 1910; what became May Department Stores, in June 1910; Studebaker Corporation, in February 1911; F. W. Woolworth Company, in 1912; B. F. Goodrich Company, in 1912; Diamond Rubber Company, in 1912; and Continental Can Company, in 1913. Goldman also helped to finance B. F. Goodrich’s acquisition of Diamond Rubber Company, also in 1912. “That Sears business was the thing that began to give us this very great reputation in industrial securities,” according to Walter Sachs. Goldman’s financing of Woolworth also enhanced the firm’s reputation. “Frank Woolworth all of a sudden became a very rich man,” Sachs said. He built the Woolworth Building, in Manhattan, then the tallest building in the world. The architect was Cass Gilbert. After the building opened, Woolworth gave a celebratory dinner. “The story goes that Gilbert was on Woolworth’s left hand, and Goldman was on Woolworth’s right hand,” Sachs remembered, “and he stood up and asked them to stand, and he put his right arm on Goldman and his left arm on Gilbert, and he said, ‘These are the two men who have made this wonderful building possible.’ ”