Mandis what happened to goldman sachs; an insiders story of organizational drift and its unintended consequences (2013)

STEVEN G MANDIS WHAT An Insider’s Story HAPPENED of Organizational Drift TO and its GOLDMAN Unintended Consequences SACHS? Harvard Business Review Press Boston, Massachusetts Copyright 2013 Harvard Business School Publishing All rights reserved The views and opinions expressed in this book are strictly those of the author and 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 permissions@hbsp.harvard.edu, 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) Goldman, Sachs & Co Investment banking—United States—Management Corporate governance—United States 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 Prologue: A Funeral What Happened PART ONE How Goldman Succeeded Shared Principles and Values The Structure of the Partnership PART TWO Drift Under Pressure, Goldman Grows Quickly and Goes Public Signs of Organizational Drift PART THREE Acceleration of Drift The Consequences of Going Public From Principles to a Legal Standard PART FOUR Goldman’s Performance Nagging Questions: Leadership, Crisis, and Clients Why Doesn’t Goldman See the Change? Conclusion: Lessons Appendix A: Goldman and Organizational Drift Appendix B: Analytical Framework Applied to Goldman Appendix C: Selected Goldman Employees and Lobbyists with Government Positions (Before or After 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 Appendix H: Goldman’s Culture and Governance Structure Notes Acknowledgments About the Author Prologue A Funeral ON 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 Chapter What Happened GOLDMAN IS GOING STRONG” DECLARED THE TITLE OF A Fortune article in February 2007 “On Wall Street, there’s good and then there’s Goldman,” wrote author Yuval Rosenberg “Widely considered the best of the bulge-bracket investment firms, Goldman Sachs was the sole member of the securities industry to make [Fortune’s] 2006 list of America’s Most Admired Companies (it placed 18th).” Rosenberg argued that what distinguished the firm was the quality of its people and the incentives it offered “The bank has long had a reputation for attracting the best and the brightest,” he wrote, “and no wonder: Goldman made headlines in December for doling out an extraordinary $16.5 billion in compensation last year That works out to an average of nearly $622,000 for each employee.” And as if that weren’t enough, “[i]n the months since our list came out, Goldman’s glittering reputation has only gotten brighter.” But only two years later, Goldman was being widely excoriated in the press, the subject of accusations, investigations, congressional hearings, and litigation (not to mention late-night jokes) alleging insensitive, unethical, immoral, and even criminal behavior Matt Taibbi of Rolling Stone famously wrote, “The world’s most powerful investment bank is a great vampire squid wrapped around the face of humanity, relentlessly jamming its blood funnel into anything that smells like money.”2 Understandably it seemed that angry villagers carrying torches and pitchforks were massing just around the corner (In 2011, the Occupy Wall Street protest movement would begin.) The public and politicians grew particularly upset at Goldman as allegations surfaced that the company had anticipated the impending crisis and had shorted the market to make money from it (Goldman denies this.) In addition, there were allegations that the firm had prioritized selling its clients securities in deals that it knew were, as one deal was described by an executive in an e-mail, “shitty”—raising the question of whether Goldman had acted unethically, immorally, or illegally.3 Particularly agonizing for some employees were accusations that Goldman no longer adhered to its revered first business principle: “Our clients’ interests always come first.” That principle had been seen at the firm as a significant part of the foundation of what made Goldman’s culture unique And the firm had held up its culture of the highest standards of duty and service to clients as key to its success A partner made this point as part of a 2006 Harvard Business School case, saying “Our bankers travel on the same planes as our competitors We stay in the same hotels In a lot of cases, we have the same clients as our competition So when it comes down to it, it is a combination of execution and culture that makes the difference between us and other firms … That’s why our culture is necessary—it’s the glue that binds us together.”4 ... 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) Goldman, ...STEVEN G MANDIS WHAT An Insider’s Story HAPPENED of Organizational Drift TO and its GOLDMAN Unintended Consequences SACHS? Harvard Business Review Press Boston, Massachusetts Copyright... standards committee, cochaired by Mike Evans (vice chairman of Goldman) and Gerald Corrigan (chairman of Goldman s GS Bank USA, and former president of the Federal Reserve Bank of New York), to