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

by Steven G. Mandis

  It may be that Guardian financial editor Nils Pratley is right when he says that “the clients (or most of them) know they are at risk of being treated as Muppets” and even profess to hate Goldman, but choose to continue doing business with the firm because as an investment bank it enjoys “an extraordinarily privileged position in being trading houses, market-makers and advisers to companies[, making] them both impossible to avoid and riddled with conflicts of interest.”64 Dealing with Goldman simply makes good business sense, but it carries a sense of caveat emptor these days.

  Joe Nocera, a New York Times columnist, agrees: “The [client] calculus at Goldman has always been, ‘There’s no one smarter out there. I actually can get the best advice from Goldman Sachs and they will often bring me the best deals, but I also know that I can’t trust them, that ultimately, their motives aren’t necessarily aligned with my motives.’”65 Perhaps this lack of trust is less important in trading, where competition is based more on price and liquidity, but it should be of concern in investment banking, where clients must be able to trust that Goldman will not use the client’s information against the client’s best interests.

  But the Goldman response to Smith’s letter hangs over its client relationships. One client, the very large Dutch investment adviser APG, said it took Goldman more than a day to contact APG with reassurances about Smith’s allegations: “We would have expected that a company that faces such a big media backlash over something so core to their business such as client trust would have instantly reached out to those clients to say something.”66 The client’s real objection was having to explain to its own clients why it was doing business with Goldman, and having to explain about Goldman’s culture.67 Ultimately, however, another client said, “For us it’s about what these banks bring to the table. I think Goldman has the intellectual capital; they’ve got the know-how to do these transactions. There are other banks out there, but Goldman is still the preeminent investment bank and they give solid advice.”68

  As a client, I had a chance to see how different Goldman’s value-added proposition was. I had a potential investment idea, but it required the coordination and collaboration of several parts of a bank to execute the transaction. I took the idea to several banks, but I never got past the first meeting with any of them. The groups within the same bank couldn’t agree on who would get what credit or revenues, something that would impact their bonuses (they never said this out loud, and I am reading between the lines of politically correct bankerspeak). So instead of executing a trade for a client, the banks did nothing.

  I had a meeting with Goldman, and the partners understood that overall the firm would make money, even though each area might not be happy with its individual credit or revenues. The partners saw an overall opportunity, spoke among themselves, came to an agreement, and agreed to do the transaction (my personal relationship with them probably also helped). This teamwork in execution is a tremendous advantage for Goldman and shows that a residual social network and partnership culture still exists.

  As the deal progressed, Goldman better understood what I was doing and thought it was a great investment idea. Later, Goldman said it wanted to coinvest in the deal. This is an example of the powerful strategy Goldman claims of combining advisory work with coinvesting. Goldman, to its credit, was the only bank smart enough to figure out how to get the deal done and recognize it was a good deal. Goldman’s coinvestment helped execute the deal for us at attractive terms.

  I was very happy with Goldman’s advice and execution. However, a few months later I heard a rumor from a competitor that Goldman had done a similar deal with another client—much larger than we were—implying that Goldman took information about the deal and showed it to another client. I do not know whether this is true. So even though I had good feelings about Goldman getting the deal done for me, recognizing I never would have gotten it done without Goldman’s approach and ability to execute, I was slightly annoyed that, allegedly, Goldman used information to benefit itself with a larger client.

  When I heard the rumor (again, only a rumor), it kept me on my guard. I didn’t say anything. I didn’t want to upset Goldman, because it is a very important player in the marketplace. I kept doing business with Goldman (and later I was involved in hiring Goldman to sell my firm). In my opinion, its people were responsive, well prepared, thoughtful, and connected. However, I did not feel as if all the people at Goldman could be trusted completely all the time. This should not be a shocking revelation in hindsight, but it was for someone who started at Goldman in the early 1990s. And the point I am making is the change.

  What makes Goldman a tough competitor is its depth of talent and its systematic approach to providing high-quality client service (including getting senior partners to connect with clients). As an outsider, one can appreciate that, relatively speaking, Goldman is stacked with talent. The bench is deep, and the quality of the talent is relatively consistent. The firm’s expertise is phenomenal, again benefiting by pulling information from various people, geographies, and areas.

  In my interviews with clients, many said the quality of talent on Wall Street had declined overall, Goldman included, perhaps because many clients themselves have become specialized in their knowledge and technology has commoditized information and the business in many ways. There is also strong competition for the best talent. Many talented individuals interested in finance go to private equity firms and hedge funds, which offer attractive opportunities.69 Many smart people are going into technology or other fields. But clients felt that Goldman would probably be considered the best alternative generally, not necessarily in every area of specialization, if one is interested in banking or wants training and credentials.

  Clients I interviewed said that other firms have equal (if not better) talent in selected people or specialties, but it is not nearly as broad, consistent, and deep, nor as coordinated, as it is at Goldman. A Goldman banker or employee will speak to multiple people to get their views and then present a firm view. At many other banks, clients explained they typically get the talent of only one person of high quality that they trust. They elaborated that one individual has a tough task competing against Goldman even if the one person is more trustworthy. The organizational elements that support coordination set Goldman apart, and this is one reason clients still use the firm. This differentiator has been and will be challenging to maintain. Some partners I interviewed said that the volume of deals, geographic dispersion, information overload, technology changes, new regulations, and client expectations have changed the dynamics of collaboration and that they are more rushed and have less time to help others than they had in the early 1990s, for example. However, they pointed out that their peers have the same challenges and were confident that Goldman has the ability to adapt.

  Many clients pointed out that not just at Goldman but at its peers, even if they trust their one key adviser, they are always skeptical of the organizational pressures. Their adviser may have the client’s best interests at heart, but at the same time the adviser has internal pressures to sell products or do things in order to get paid or keep his job or get promoted. Therefore, the quality of execution, the ability to provide liquidity or find a buyer that no one else thought of or find a creative solution often trumps trust on deciding which firm to hire because clients are skeptical anyway.

  Goldman still attracts a staggering amount of business. If clients were sick of alleged abuses, they would go to another competitor. Every time clients choose to do business with Goldman, essentially they are subconsciously performing a cost–benefit analysis, and they are making the unpopular (even if financially prudent) decision of giving their business to Goldman. Even though Goldman’s market shares seem to be fine after the crisis, I did find one interesting fact, that the premium fees that it charged clients above its competitors dissipated in at least one key area.70 Perhaps this is a coincidence or there are not enough data points, but it is interesting to see if changes in Goldman’s fees in th
e future will be a barometer of what clients think beyond just market share.

  Justice Department Declines to Prosecute Goldman

  The Justice Department began an investigation of Goldman in 2011 after the Senate’s Permanent Subcommittee on Investigations issued a report highlighting questionable conduct by Goldman and other banks. The Justice Department focused on Goldman’s practices in selling pools of subprime mortgage securities to clients while simultaneously betting on a decline in the housing market. The report essentially alleged that Goldman had profited by betting against the very mortgage investments that it sold to clients. In addition, the report insinuated that Blankfein might have misled lawmakers when testifying about the mortgage deals. Blankfein testified that the bank never bet against its clients for its own profit. In April 2011, Senator Carl Levin, chairman of the subcommittee, referred Goldman’s case to the Justice Department for a criminal investigation.

  In August 2012, the Justice Department took the unusual action of publicly announcing that its investigation into Goldman was closed and it would not bring a case: “[B]ased on the law and evidence as they exist at this time, there is not a viable basis to bring criminal prosecution.”71 The statement continued, “The department and its investigative partners conducted an exhaustive review of the report and its exhibits, independently gathered and scrutinized a large volume of other documents, and tenaciously pursued potential evidentiary leads, including conducting numerous witness interviews.”

  According to news reports, this action came as a result of pushing by Goldman’s lawyers.72 Senator Levin responded, “Whether the decision by the Department of Justice is the product of weak laws or weak enforcement, Goldman Sachs’ actions were deceptive and immoral.”73 In addition, separately, Goldman soon afterward disclosed that the SEC would not pursue any further claims against the bank related to a $1.3 billion mortgage bond deal.

  Goldman seemingly focuses on its legal exoneration, although it does not claim to be free of all wrongdoing. At an investor conference in 2009, Blankfein said, “We participated in things that were clearly wrong and we have reasons to regret and apologize for.”74 But as a current partner pointed out to me, upon further reflection, legal exoneration does not mean that the original principles have been upheld or that the ethical standards are the same as they were ten or twenty or thirty years ago. He said he doubted Goldman would ever publicly admit to that.

  Chapter 9

  Why Doesn’t Goldman See the Change?

  DESPITE GOLDMAN’S ADMISSION IN 2011 THAT IT NEEDED TO “strengthen the firm’s culture in an increasingly complex environment,” its name keeps popping up in the news. For example, Goldman’s actions while underwriting a closely watched private financing deal for Facebook raised serious ethical questions.1 Goldman sold its own Facebook shares by bundling them under one name and selling them to favored clients, circumventing SEC reporting requirements. As Jon Stewart quipped on Comedy Central’s The Daily Show, “Oh, Goldman, is there any regulation’s intent you can’t subvert?”2

  Even when Goldman thinks it is doing something good, its actions sometimes have negative consequences. Goldman’s procurement of doses of the swine flu vaccine for its employees when the drug was being rationed to hospitals and schools had consequences. People wanted to know why Goldman got as many doses for its bankers as a local hospital got, while people at much greater risk had to wait. “Can you not read how mad people are at you?” demanded Amy Poehler on a Saturday Night Live skit poking fun at Goldman. She added, “When people saw the headline, ‘Goldman Sachs Gets Swine Flu Vaccine’ they were super happy—until they saw the word ‘vaccine.’”3

  Clearly, there is a gap between the way Goldman views itself and the way some people outside the firm view it, particularly regarding its government connections and the ethics surrounding its business practices.4 What are the organizational elements that prevent Goldman from noticing, or acknowledging, its changes or their consequences? We’ve considered many reasons that Goldman has trouble recognizing its organizational drift—including the incremental nature of the changes and the social normalization process. Here we’ll focus on an important additional factor in the rationalization: the firm’s sense of higher purpose, which is driven by its commitment to public service.

  A Sense of Higher Purpose

  My argument is that Goldman employees are socialized to believe their work is fulfilling a higher social purpose, and that this contributes to their justification, or rationalization, of what others view as ethically (and some have claimed legally) inappropriate behavior. As covered earlier, public service is deeply embedded in the culture. (See appendix E, which is from Goldman’s governance report. No other bank has disclosed as much about its commitment and history of commitment to public service in its public documents.) Many of Goldman’s leaders have gone into public service, and the firm also regularly recruits people from public service. The firm also makes substantial philanthropic contributions and encourages its employees to volunteer. While those at the firm may no longer be so modest in their lifestyles and demeanor as was true back in my early days there, the ethic of doing public service has remained strong, though the emphasis of the reasons of why it’s encouraged may have changed.

  Based on my interviews with employees, the sense of serving a higher purpose that pervades the firm leads to the rationalization that they must strive to be the best (and that they deserve to be paid the most) because they are serving a more important master than just the drive for money.5 This leads them to believe that Goldman should be given the benefit of the doubt about its dealings.

  Many at Goldman subscribe to the notion that because the firm serves a higher purpose, they are more driven to excellence and are more dedicated than their peers at other firms. The pursuit of profit is portrayed as virtuous, and hard work is viewed as a kind of, for lack of a better phrase, religious duty. The idea of a corporate culture having the characteristics of religious belief only works as a kind of general parallel. And my use of religious terms or phrases should be understood only as analogy, to help explain the ethos.

  Employees at Goldman do even often use religious terms to describe the nature of the firm’s work, and there is the element of something like blind allegiance, or faith, in the devotion of employees to the firm. A religious-like work ethic is an important force behind Goldman’s relentless pursuit of excellence and its people’s devotion. Goldman’s atmosphere is one in which the pursuit of excellence is seen as the good and right thing to do, and its success (including economic gain) is well deserved. The feeling is augmented by the belief that a higher judge (or partnership committee) “elects” people who are destined for something greater and whose good favor is reflected in successes. Continuing with the religious parallel, the business principles can be seen as a form of Goldman’s own Ten Commandments, and the election to partnership as a sort of ascension to heaven. This organizational aura or overtone is such a part of the culture and identity of the people at Goldman that an attack on the firm tends to be perceived psychologically as almost a “holy war” (the wording is paraphrasing from an interview of an executive at a competitor). This helps explain why the firm is so aggressively defensive, and why it is blinded by the sense of higher purpose. It is difficult for someone who has been socialized through training and has rationalized and made sense of what he or she is doing in this way, who has become, for lack of a better word, a zealot, to question behavior or instructions.

  This belief in the good of the firm seems to contribute to the commitment to hard work and outperformance, which has benefited the firm, but it has slowly and incrementally changed to also be used as a rationalization for behavior that may not be consistent with the original meaning of the firm’s principles. The sense of higher purpose explains why Goldman brushes off cases of bad behavior as “one-offs” or “exceptions,” why its employees should get swine flu vaccinations ahead of others, and why the firm believes that while its peers may not be able to handle
situations where conflicts need to be managed through ethical behavior, Goldman can.

  I’m not saying that Goldman doesn’t expect its employees to do good in the world, or that they don’t do so. The firm and its employees have given hundreds of millions of dollars to charity (keep in mind, though, that they have also made tens of billions). Goldman runs many community and public service initiatives, including pledging $500 million to help develop ten thousand small businesses and dedicating resources to develop the business and management skills of ten thousand women in the developing world.

  Two of the most visible examples of Goldman’s philanthropy are the Goldman Sachs Foundation, created at the time of the IPO with $200 million, and Goldman Sachs Relief Fund and Outreach, created in response to the attacks of September 11, 2001. Charles Ellis writes, “[N]o other organization spawns so many trustees of colleges and universities, art museums, foundations, libraries and hospitals” and states that at Goldman, “service and serious giving are expected, and leaders are expected to set the pace.”6 There is also a serious expectation that Goldman employees will participate in the firm’s philanthropic and charitable activities. According to a Goldman’s website section called “Citizenship,” in 2012, more than twenty-five thousand Goldman Sachs employees from forty-eight offices partnered with 950 nonprofit organizations. When I worked at Goldman, almost everyone I worked with gave time to Community Teamworks, one of the very few acceptable excuses for delaying a meeting, call, or deadline. This still holds true. For an employee not to participate would be frowned upon.

  But the firm’s corporate citizenship, well intended and generous as it may be, serves a dual purpose. Goldman promotes and leverages the positive publicity that attends its and its current and former employees’ public service, and the firm’s reputation and network of external connections both benefit from it.