13. In hindsight, from a sociologist’s perspective, it is clear that too many partner additions or departures would have an impact on Goldman’s interdependent social network of trust, but I hesitate to suggest that the partners themselves were fully aware of or concerned about all the potential consequences or rationales at the time.
14. For a discussion of closure, see R. Burt, Brokerage and Closure: An Introduction to Social Capital (Oxford, UK: Oxford University Press, 2007).
15. Ibid.
16. Burt’s research shows that social networks create competitive advantages in and for organizations. The basic idea is that better-connected people have more social capital; as a result, they gain certain advantages. Burt’s social structure theory suggests that, when there is a gap between two individuals with complementary resources or information and the two are connected through a third individual, the gap (or hole) is filled, creating an important advantage for the third individual as well as for the organization. A company’s competitive advantage is a matter of access to the structural holes in the markets: obtaining information that allows it to make deals and connecting buyers and sellers, borrowers and lenders. The partnership provides that access by tying partners together financially, socially, and culturally. Trust is also important, and a partnership structure creates that foundation as a result of the partner screening and election process and the intertwining of partners’ financial interests. Goldman’s partnership structure provided the opportunity to connect diverse parts of an enterprise. When Goldman connected private banking with investment banking or a portfolio manager in commodities with a trader in equity derivatives, the firm played the role of the gaudius tertius, “the third who benefits.” In Brokerage and Closure, Burt suggests that the gaudius tertius is typically an individual, but the concept can be expanded to apply to organizations as well—especially in the case of a partnership wherein the partners are financially interdependent and benefit together. The “third” party may not control the relationship but still benefits by controlling the information flow between the two parties it brings together.
17. “I’ve always been a team player and, by now, I’d become a fierce partisan of Goldman Sachs. I liked being a part of a storied institution that held so much promise.” See John C. Whitehead, A Life in Leadership: From D-Day to Ground Zero (Princeton, NJ: Princeton University Press, 2005), 88.
18. C. D. Ellis, The Partnership—The Making of Goldman Sachs (New York: Penguin, 2008), 189.
19. A social network is a social structure made up of a set of actors (such as individuals or organizations) and the ties between them (such as relationships, connections, or interactions). Trust developed from the familiarity that Goldman partners had with each other by virtue of having worked together for a long time and from having undergone the same partnership election process. Trust is built up as a part of socialization and shared experiences.
20. See K. Kuwabara, “Cohesion, Cooperation, and the Value of Doing Things Together: How Economic Exchange Creates Relational Bonds” (American Sociological Review 76 [2011]) for an extended discussion of this type of network. He shows that integrative and two-way exchange lead to cooperation, and joint action produces or reinforces cohesion. In Foundations of Social Theory (Cambridge, MA: Belknap Press of Harvard University Press, 2010) J. S. Coleman discusses the cliquish nature and density of partnership networks. R. Reagans, E. Zuckerman, and B. McEvily, in “How to Make the Team: Social Networks vs. Demography as Criteria for Designing Effective Teams” (Administrative Science Quarterly 49 [2004]: 101–133), look at the power of networks and cohesion.
21. W. D. Cohan, Money and Power: How Goldman Sachs Came to Rule the World (New York: Doubleday, 2010), 474.
22. M. Graham, “Top 10 Commandments of Business Growth,” Overdrive: The Official Blog of the Entrepreneurs’ Organization, January 31, 2011, http://blog.eonetwork.org/2011/01/top-10-commandments-of-business-growth/.
23. A partner explained that cross-selling is important to Goldman’s profitability and return on equity especially relative to those of its peers. There is a fixed infrastructure cost of being in business, so if banking/M&A can notify and introduce a cross-border deal to the foreign exchange desk as part of a full solution, then the customer acquisition costs to obtain the deal would be zero and the profits would flow straight to the bottom line. In addition, the company could benefit from favorable foreign exchange pricing by avoiding a public, competitive auction, because the information had to be kept confidential.
24. See Joel M. Podolny, “A Status-Based Model of Market Competition” (American Journal of Sociology 98, no. 4 [1993]: 839, 851), for a discussion of a status-based model of market competition.
25. Although it is often overlooked, Goldman made diversity of people, including women and minorities, a priority throughout my time at the firm. However, like most Wall Street firms, Goldman struggled to attract, develop, and retain women and minorities, and they tended to represent a smaller percentage of the senior ranks. Goldman, as in many things, continued to improve throughout my tenure, and many senior partners and others put a lot of emphasis on diversity. Although Goldman has many programs for recruiting, career development, and advancement to promote diversity, like most Wall Street firms it has been sued several times for discrimination. According to Goldman, in 2010 women constituted about 29 percent of its vice presidents, 17 percent of its managing directors, 14 percent of its partners, and about 13 percent of members of its management committee. These percentages may be among the highest on Wall Street. However, diversity of people was not nearly as strong as diversity of ideas. A little-noticed provision in the Dodd–Frank legislation tries to address those low percentages. Section 342 mandates gender and racial hiring quotas for the financial services industry.
26. “The thrust of the Goldman culture has been its indomitable team spirit. Partners and staff ‘gang tackled’ problems with a near mania for interdepartmental and interpersonal communication and coordination.” See Freedman and Vohr, “Goldman Sachs/Lehman Brothers.”
27. Burt, Brokerage and Closure: An Introduction to Social Capital.
28. In Burt’s work at Raytheon, his mission was to integrate several acquisitions. Managers were set up with discussion partners in other groups and should have been sharing ideas across business units. Burt found, however, that the people they cited for discussion of ideas were overwhelmingly colleagues in their existing informal discussion network. The ideas ended up never going anywhere. Burt writes that results would have been different had the managers reached beyond their typical contacts, particularly to people having enough power to be allies but not actual supervisors. Border crossing is essential to overcoming what Burt calls “structural holes.” See R. S. Burt, Structural Holes: The Social Structure of Competition (Cambridge, MA: Harvard University Press, 1995).
29. “Open dialogue was another principle. Part of this was posting: keeping everyone informed. Part was the deliberate flat organization structure. During the seventies, the firm initiated monthly meetings of partners. Any partner whose area was doing better or worse than anticipated would be expected to stand and explain the difference.” (See Ellis, The Partnership, 190).
30. This was the case except for certain situations that arose in 1986, 1994, and 2000, which I touch upon later. Some people think Lehman Brothers failed because it had become too insular. It had a unique culture and cohesion, but it reached a tipping point where it offered limited ways to challenge the status quo. A systematic influx of new partners and elimination of older partners helped keep Goldman a private firm longer than most. New partners generally always wanted to be near retirement at the point when they had the maximum amount of ownership when selling their shares, so they wanted to delay such discussions. They wanted to invest in the business. In contrast, the more-senior partners had reached their highest ownership percentage and were likely incentivized to maximize the value and liquidity of their shares. Swedberg notes that in the case of Lehman (see
R. Swedberg, “The Structure of Confidence and the Collapse of Lehman Brothers,” in Markets on Trial: The Economic Sociology of the U.S. Financial Crisis, ed. M. Lounsbury and P. M. Hirsch [Bingley, UK: Emerald, 2010], 81), CEO Richard Fuld ran Lehman in an authoritarian manner, “setting his own distinct mark on the aggressive and competitive type of corporate culture that seems to be characteristic of modern investment banks.” Fuld’s leadership and personal styles were both in sharp contrast to what was typical at Goldman.
31. See Cohan, Money and Power, (388–399) for an example of productive dissonance among management committee members.
32. Kaplan, What to Ask the Person in the Mirror, 157. This syndrome was on display during the recent economic crisis. A lack of diversity (in the broadest sense) at the top of a number of companies contributed to monolithic thinking, insulation, and, ultimately, severe damage to (or even failure of) organizations.
33. Bill Cohan, “Meet John F. W. Rogers, Goldman’s Quiet Power Player,” Business week, September 1, 2011, www.businessweek.com/magazine/meet-john-f-w-rogers-goldmans-quiet-power-player-09012011.html.
34. Ibid.
35. A. Blitz, interview with John Whitehead, 2002, http://www.hbs.edu/entrepreneurs/pdf/johnwhitehead.pdf.
36. B. Groysberg and S. Snook, “Leadership Development at Goldman Sachs,” Case 9-406-002 (Boston: Harvard Business School, 2007), 6.
37. Ibid.
38. Ibid.
39. David Stark, The Sense of Dissonance: Accounts of Worth in Economic Life (Princeton: Princeton University Press, 2009).
40. Stark argues that different criteria of worth are valuable in different domains. This different value may be an interesting nuance between traders and bankers. Clients depend on investment bankers to give advice. Clients may value longer-term investment and are willing to wait until trust is built. They also may value people smarter than they are, or who have better technical expertise or better education. They look for a banker who has access and a competitive advantage that they can leverage. This is what is sold. In trading, on the other hand, clients are looking for liquidity and price. They fear that the counterparty is smarter than they are or knows more than they do or has a different competitive advantage. Clients don’t care whether the trading counterparty went to an elite business school or has a pedigree. If clients believe a firm’s insights are being shared with them and are advantageous, they value them, but they wonder whether the counterparty is on the other side of the deal, talking up its own book.
41. Beunza and Stark, in Stark’s Sense of Dissonance, develop this theory in the context of traders’ use of models “to translate stock prices into estimates of what their rivals think.” I discuss this point in greater detail in chapter 6 in the context of performativity.
42. S. McGee, Chasing Goldman Sachs: How the Masters of the Universe Melted Wall Street Down—and Why They’ll Take Us to the Brink Again (New York: Crown, 2010).
43. Stark, The Sense of Dissonance, 15.
44. Stark, The Sense of Dissonance, 21.
45. “Interview with John Whitehead, MBA 1947,” www.hbs.edu/entrepreneurs/pdf/johnwhitehead.pdf.
46. Once Goldman became a public company, the partners had liquidity. They no longer had to wait until retirement to pull out their capital. At any time they could sell their Goldman shares—those shares that were not restricted or in a restricted time period—and they were also compensated as employees. Goldman now has five-year restrictions on selected stock grants to certain executives, a situation that clearly is much better for partners than having their equity tied up until they retire. I discuss this later.
47. Capital is usually thought of in monetary terms alone, but in the Goldman partnership, the personal capital contributed by the partners included something intangible but of great value: reputation. Reputation was so important that it was mentioned in Goldman’s second business principle:
Our assets are our people, capital and reputation. If any of these is ever diminished, the last is the most difficult to restore. We are dedicated to complying fully with the letter and spirit of the laws, rules and ethical principles that govern us. Our continued success depends upon unswerving adherence to this standard.
Partners not only were paid from the same pool of profits generated by the overall firm but also depended on each other for managing both reputational and capital risk.
48. It is, however, noted in the current description.
49. Peter Weinberg, “Wall Street Needs More Skin in the Game,” Wall Street Journal, September 30, 2009, http://online.wsj.com/article/SB10001424052748704471504574443591328265858.html.
Chapter 4
1. L. Endlich, Goldman Sachs—The Culture of Success (New York: Simon & Schuster, 2000), 124.
2. Pub L. 73-66, 48 Stat. 162 was enacted on June 16, 1933. The law established the Federal Deposit Insurance Corporation (FDIC) and introduced banking reforms, some of which were designed to control speculation. The term “Glass–Steagall Act,” however, is most often used to refer to four provisions that limited commercial bank securities activities as well as affiliations between commercial banks and securities firms. Provisions that prohibit a bank holding company from owning other financial companies were repealed on November 12, 1999, by the Gramm–Leach–Bliley Act (GLBA). Many commentators have stated that the repeal of the affiliation restrictions was an important cause of the 2007–2008 financial crisis by allowing banks to become “too big to fail.”
3. In the 1990s, a number of investment banks claimed that some commercial banks had coerced customers into hiring their Section 20 (securities) affiliates to underwrite securities in order to receive loans from the bank, in violation of the “anti-tying” provisions of the Bank Holding Company Act. Investment banks continued to make claims of illegal tying after the GLBA became law. Many Wall Street experts expected that investment banks would change their legal structures to become bank holding companies so that they could compete with securities firms affiliated with commercial banks, but no major investment bank took that route until 2008, when they did so to gain a measure of federal protection during the credit crisis.
4. Morgan Stanley was formed by J.P. Morgan partners Henry S. Morgan (grandson of J. P. Morgan), Harold Stanley, and others, on September 16, 1935, in response to provisions of the Glass–Steagall Act that required the splitting of commercial and investment banking businesses.
5. The Securities and Exchange Commission (SEC) was established by Franklin D. Roosevelt in 1934 to address issues arising from the Great Depression. The SEC is a federal agency with primary responsibility for enforcing the federal securities laws and regulating the US securities industry, including the stock and options exchanges and other electronic securities markets. It also licenses and regulates the companies whose securities are traded on US exchanges as well as the brokers and dealers who conduct the trading.
6. Lazard went public in 2005. Although it is a very prestigious firm, it was not a “capital-intensive,” full-service investment bank. Rather, it was a boutique advisory firm with an asset management business.
7. See Alan D. Morrison and William J. Wilhelm, Jr., Investment Banking: Institutions, Politics, and Law (Oxford, New York: Oxford University Press, 2007), and Alan D. Morrison and William J. Wilhelm, “Partnership Firms, Reputation, and Human Capital,” American Economic Review 94, no. 5 (2004): 1682–1692.
8. C. D. Ellis, The Partnership—The Making of Goldman Sachs (New York: Penguin, 2008), 394–395.
9. R. D. Freedman and J. Vohr, “Goldman Sachs/Lehman Brothers,” Case Studies in Finance and Economics, C49 (New York: Leonard N. Stern School of Business, 1991, rev. 1999), 13.
10. The specific legal risks partners were exposed to were spelled out in Goldman’s IPO prospectus and include: Potential liability under securities or other laws for materially false or misleading statements made in connection with securities and other transactions; potential liability for the “fairness opinions” and other advice they provide to participa
nts in corporate transactions and disputes over the terms and conditions of complex trading arrangements; the possibility that counterparties in complex or risky trading transactions will claim that Goldman improperly failed to tell them the risks or that they were not authorized or permitted to enter into these transactions with the firm and that their obligations to Goldman are not enforceable; exposure to claims against the firm for recommending investments that are not consistent with a client’s investment objectives or engaging in unauthorized or excessive trading; claims arising from disputes with employees for alleged discrimination or harassment, among other things. See www.goldmansachs.com/investor-relations/financials/archived/other-information/ipo/prospectus-gs-pdf-file.pdf.
11. H. Sender, “Too Big for Their Own Good,” Institutional Investor, February 1987, 63.
12. Ibid.
13. A few partners told me they asked or considered asking John L. Weinberg to come out of retirement as chairman or in another senior role.
14. W. D. Cohan, “The Rage over Goldman Sachs,” Time, August 31, 2009, http//www.time.com.
15. Ibid.
16. Ellis, The Partnership, 539.
17. W. D. Cohan, Money and Power: How Goldman Sachs Came to Rule the World (New York: Doubleday, 2010).
18. Cohan, “The Rage over Goldman Sachs.”
19. It was alleged that Maxwell stole money from Maxwell company pension plans by hiring Goldman to broker a trade between various Maxwell-controlled entities. See Endlich (Goldman Sachs, 137–160) for a detailed account of the relationship between Goldman and Robert Maxwell.
20. Endlich (Goldman Sachs, 197) notes, however, that management had “over-reserved in anticipation of such a financial charge” and was eager to put the case behind it.
21. According to A. Raghavan (“Goldman Sticks to Plan on Allocating Settlement Costs,” Wall Street Journal, April 13, 1995), “eighty-four of the more than 164 partners who will wind up footing the settlement are now ‘limited’ partners, or retired from active duty at the firm.” The firm’s management committee allocated “80 percent of the settlement cost to those who were general partners in 1991, 15 percent to those of 1990, and 5 percent to those of 1989.” Endlich (Goldman Sachs, 197) describes the “stunned” reaction of the limited partners, many of whom “were told simply to take out their checkbooks.”
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