22. Freedman and Vohr, “Goldman Sachs/Lehman Brothers.”
23. “New Round of Layoffs at Goldman, Sachs,” New York Times, January 25, 1995, http://www.nytimes.com/1995/01/25/business/new-round-of-job-cuts-at-goldman-sachs.html.
24. Among Corzine and Paulson’s early official acts was to announce layoffs, and they were now doing it again, but “barely a month before bankers would be entitled to their annual bonuses (which represented their annual compensation). They apologized for the timing and manner of the layoffs but promised they would never do it again. When they then [announced] another round in January 1995, many at the firm felt betrayed.” See J. A. Knee, The Accidental Investment Banker: Inside the Decade That Transformed Wall Street (New York: Random House, 2006), xvii, 48.
25. Endlich, Goldman Sachs, 256. These layoffs can have an effect on both the organization and the external environment. University of Minnesota anthropology professor Karen Ho, in her book Liquidated: An Ethnography of Wall Street (Durham, NC: Duke University Press, 2009), investigates the experiences and ideologies of investment bankers. She describes how a highly unstable market system (e.g. job insecurity, constant downsizing, continual restructuring) is understood and justified through the experiences and practices of restructuring corporations. Bankers are recruited from “elite universities” and are socialized into a short-term world of high reward. The workplace culture and network of privilege create the perception that job insecurity results in better performance. The banker’s mantra is improving “shareholder value,” but the assumptions and practices often produce crises. She finds that in many ways the investment bankers and their approaches become an example of how their clients should behave. She believes Wall Street shapes not only the stock market but also how both companies and employees value each other. Wall Street’s values are intertwined in many people’s daily lives.
26. Carol J. Loomis, “The Goldman Standard Slips,” Fortune, November 28, 1994, http://money.cnn.com/magazines/fortune/fortune_archive/1994/11/28/80028/.
27. W. D. Cohan, Money and Power: How Goldman Sachs Came to Rule the World (New York: Doubleday, 2011), 359.
28. Ibid.
29. http://www.vanityfair.com/online/daily/2011/03/william-d-cohan-on-goldman-sachs-how-secret-merger-talks-with-mellon-bank-led-to-jon-corzines-demise.
30. B. Burrough, W. D. Cohan, and B. McLean, “Jon Corzine’s Riskiest Business,” Vanity Fair, February 2012, http://www.vanityfair.com/business/2012/02/jon-corzine-201202.
31. P. Truell, “Partners Vote for Changes at Goldman,” New York Times, May 21, 1996, http://www.nytimes.com/1996/05/21/business/partners-vote-for-changes-at-goldman.html.
32. http://articles.latimes.com/1997/oct/22/business/fi-45322.
33. There is some reason to believe, however, that this change was mainly psychological; most active partners retained upward of 90 percent of their capital with Goldman while working at the firm. See Endlich, Goldman Sachs (p. 237), and P. Truell, “Goldman Sachs Partners Decide Not to Sell, After All,” New York Times, January 22, 1996, http://www.nytimes.com/1996/01/22/business/goldman-sachs-partners-decide-not-to-sell-after-all.html.
34. P. Truell, “Goldman Sachs Partners Decide Not to Sell, After All.”
35. By the time Goldman became an LLC, the reporting matrices had started to add division executive committees and then geographic executive committees. Even before the 1990s, organizational changes were occurring. Capital commitments by the firm typically went to the management committee, but as the number of decisions increased, a commitments committee was established to make them.
36. In January 1999, the executive committee was dismantled and a fifteen-member management committee was restored as the firm’s senior leadership group.
37. Endlich, Goldman Sachs, 252.
38. Freedman and Vohr, “Goldman Sachs/Lehman Brothers,” 13.
39. Cohan, Money and Power, 392.
40. Here is a clear example of the impact of a change in the organization’s legal structure. According to interviews, when Goldman was a private partnership, such a vote would have been held on a one person/one vote basis; with Goldman as an LLC, however, a majority vote by the executive committee determined the future status of the firm.
41. In a letter to the firm, Whitehead wrote, “I don’t find anyone who denies that the decision of many of the partners, particularly the younger men, was based more on the dazzling amounts to be deposited in their capital accounts than on what they felt would be good for the future of Goldman Sachs.” See J. Cassidy, “The Firm,” The New Yorker, March 8, 1999, 35.
42. A. R. Sorkin, Too Big to Fail: The Inside Story of How Wall Street and Washington Fought to Save the Financial System—and Themselves (New York: Viking, 2009).
43. The Gramm–Leach–Bliley Act is also known as the Financial Services Modernization Act of 1999, or the Citigroup Relief Act. It repealed part of the Glass–Steagall Act of 1933, removing barriers in the market between an investment bank, a commercial bank, and an insurance company. “The government’s decision … to allow the large commercial banks to aggressively pursue investment banking business put further pressure on the old way of doing things. The Depression-era legislation known as Glass–Steagall had long insulated the rarified investment banking partnerships from assault by these better-capitalized institutions. Its ultimate repeals in 1999 paved the way not only for radically intensified competition but a wave of mergers that created enormous financial supermarkets with an entirely different ethos.” (See Knee, The Accidental Investment Banker, xi.)
44. “Even with one arm tied behind their backs, these institutions [commercial banks] had been investing heavily for at least a decade in expanding their investment banking activities in anticipation of the rule’s ultimate repeal. They hired high-profile investment bankers, pressed various loopholes in the existing rules, exploited their balance sheets.” (See Knee, The Accidental Investment Banker, 24.)
45. Endlich, Goldman Sachs, 124.
46. “New organizations such as multibillion-dollar hedge funds and LBO [leveraged buyout] firms have begun to step in and play some of the roles once dominated by investment banks.” (See Knee, The Accidental Investment Banker, xvi.)
47. S. Butcher, “Deconstructing Goldman’s Q2 Conference Call: What Was Said, What It Means, What Comes Next,” Reuters, July 18, 2012, http://news.reuters-gulf.efinancialcareers.com/newsandviews_item/wpNewsItemId-107560.
48. http://faculty.chicagobooth.edu/steven.kaplan/research/km.pdf and http://www.businessinsider.com/shortest-tenure-ceo-2011-5.
49. http://www.bloomberg.com/news/2013-04-04/bond-traders-club-loses-cachet-in-most-important-market.html.
50. John Whitehead pointed this out in our discussion. In The Challenger Launch Decision: Risky Technology, Culture, and Deviance at NASA (Chicago: University of Chicago Press, 1966), sociologist Diane Vaughan writes that all organizations share certain basic aspects of structure (hierarchy, division of labor, goals, normative standards, patterns of coming and going) and certain common processes (socialization, conflict, competition, cooperation, power and inequality, and culture) and points to the “complexity of the internal processes and structure that accompany increased size” (see page 68).
51. C. Perrow, Normal Accidents: Living with High-Risk Technologies (New York: Basic Books, 1984), 308.
Chapter 5
1. Goldman Sachs Group, “Letter to Shareholders,” Annual Report 1999, http://www.goldmansachs.com/investor-relations/financials/archived/annual-reports/attachments/1999-annual-report.pdf.
2. W. D. Cohan, Money and Power: How Goldman Sachs Came to Rule the World (New York: Doubleday, 2011), 234.
3. B. McLean and A. Serwer, “Goldman Sachs: After the Fall,” Fortune, October 23, 2011, http://features.blogs.fortune.cnn.com/2011/10/23/goldman-sachs-after-the-fall-fortune-1998/.
4. Bankers Trust, Barclays, Chase, Credit Suisse First Boston, Deutsche Bank, Goldman Sachs, Merrill Lynch, J.P. Morgan, Morgan Stanley, Salomon Smith Barney
, and UBS each put up $300 million.
5. C. Chandler, “Goldman’s Golden Chance: An IPO or Merger Could Reap Millions for Partners at the Wall Street Titan—But Would It Destroy What Makes Goldman Sachs Goldman Sachs?” Washington Post, June 7, 1998, H01.
6. McLean and Serwer, “Goldman Sachs: After the Fall.”
7. It was rumored that Corzine ultimately agreed to pay out the limited partners at two times book value. (See J. A. Knee, The Accidental Investment Banker: Inside the Decade That Transformed Wall Street [New York: Random House, 2006], 103.) Many limited partners believed that their historical contributions to Goldman were being seriously underappreciated and undervalued. (See J. Kahn, “Goldman, Sachs Tries to Soothe Limited Partners,” New York Times, July 30, 1998, D1.)
8. There were indications, some of them subtle, that a culture shift was already under way. In the years leading up to the IPO, adherence to Goldman’s principles was less obvious. According to interviews, it was rare for the principles to be included in the front of presentations to clients as they once were, and they were certainly not as regularly hanging on anyone’s office wall. The principles were still taught, but it would be difficult to argue that they held the same prominence as they once had.
9. L. Endlich, Goldman Sachs—The Culture of Success (New York: Simon & Schuster, 2000).
10. Ibid.
11. Until 1996, according to interviews, partners who retired and became limited partners took out half their capital at retirement but the rest remained with the firm for at least four more years. After 1996, when the firm became an LLC, that period was increased to six years.
12. McLean and Serwer, “Goldman Sachs: After the Fall.”
13. T. Metz, “The Pacifist: Goldman Sachs Avoids Bitter Takeover Fights but Leads in Mergers,” Wall Street Journal, December 3, 1982, 1.
14. Goldman also refrained from doing business with companies involved in the gambling industry.
15. Cohan, Money and Power, 225.
16. I. Ross, “How Goldman Sachs Grew and Grew,” Fortune, July 9, 1984, 158.
17. C. D. Ellis, The Partnership—The Making of Goldman Sachs (New York: Penguin, 2008), 645.
18. According to Dealogic, Goldman advised Krupp in a 1997 hostile takeover of Thyssen in Germany for a fee of nearly $10 million. Also, internationally Goldman advised Banque Nationale de Paris (BNP) in its hostile acquisition of a majority interest in Compagnie Financiere de Paribas (Paribas) in 1997. It was a large and high-profile transaction. It also gained attention because Goldman’s investment bankers had done work for Paribas. The same issue came up when Goldman advised Vodafone in its acquisition of Mannesmann in one of the largest M&A deals in history. Goldman has also represented many leading foreign companies in hostile deals, including Repsol, Air Canada, Royal Bank of Scotland, Foster’s Group, and Mittal Steel (Lakshmi Mittal is on the board of Goldman). It advised Sara Lee (John Brian, the former Sara Lee CEO, is on the board of Goldman) in its hostile M&A acquisition of Courtaulds Textiles in the United Kingdom in 2000. Also in 2000, it advised Unilever in its hostile acquisition of Bestfoods. In 2005, it represented Novartis in its hostile purchase of Chiron Corp. In 2011, Goldman advised Terex Corp in its hostile acquisition of a majority interest of Demag Cranes.
19. Goldman represented Westmont Hospitality Group in buying its remaining interest in UniHost, a Canadian hotel operator.
20. B. McLean, “The Bank Job,” Vanity Fair, March 23, 2012, http://www.vanityfair.com/business/features/2010/01/goldman-sachs-200101.
21. Endlich, Goldman Sachs, 45.
22. Keep in mind that this is when John L. Weinberg was still at the firm.
23. Ezra Zuckerman’s work (1999, 2000, 2004) regarding analysts’ impact on the behavior of Wall Street firms also has relevance here.
24. “Goldman Sachs Lex Column [MG1],” Financial Times, April 26, 1999, 22.
25. P. S. Cohan, Value Leadership: The 7 Principles That Drive Corporate Value in Any Economy (San Francisco, CA: Jossey-Bass, 2003), 196.
26. M. Taibbi, “The Great American Bubble Machine,” Rolling Stone, April 5, 2010, http://www.rollingstone.com/politics/news/the-great-american-bubble-machine-20100405.
27. http://www.dechert.com/files/Publication/355765b1-8255-4d1c-8792-f34bf2843970/Presentation/PublicationAttachment/259fc2a6-c9fe-4448-9787-f699d9a8a5c5/FSSL_Alert_6-05.pdf.
28. Brendan Pierson, “Dismissal of Action Against Goldman Over eToys IPO Stands,” New York Law Journal, December 9, 2011, http://www.newyorklawjournal.com/PubArticleNY.jsp?id=1202534952140&slreturn=1.
29. The full list of IBS business development commandments is as follows: “1) Don’t waste your time going after business you don’t really want; 2) The boss usually decides—not the assistant treasurer. Do you know the boss?; 3) It is just as easy to get a first-rate piece of business as a second-rate one; 4) You never learn anything when you’re talking; 5) The client’s objective is more important than yours; 6) The respect of one person is worth more than an acquaintance with 100 people; 7) When there’s business to be found, go out and get it!; 8) Important people like to deal with other important people. Are you one?; 9) There’s nothing worse than an unhappy client; 10) If you get the business, it’s up to you to see that it’s well-handled.”
30. J. A. Knee, The Accidental Investment Banker: Inside the Decade That Transformed Wall Street (New York: Random House, 2006), 49.
31. The Super League is also mentioned in chapter 7.
32. Knee reports telling Thornton of his (Knee’s) plan to leave the firm and joking, when asked by Thornton to stay on to help with the global reorganization of CME, that Thornton could hire him back when Thornton took over the firm. When Thornton reminded Knee of the “cultural taboo” against rehiring people who left Goldman, Knee retorted that if Thornton were in charge, “this would probably not be the most important cultural taboo that would have already been swept aside.” (See Knee, The Accidental Investment Banker, 49, 93.)
33. B. Groysberg and S. Snook, “Leadership Development at Goldman Sachs,” Case 9-406-002 (Boston: Harvard Business School, 2007), 4.
34. Ibid.
35. The subject of conflicts is discussed in greater detail in chapter 7.
36. Garza Baldwin and Seth Huffstetler, “Staple Financing: Proceed with Caution,” M&A Update, July 3, 2007, www.wcsr.com/resources/pdfs/M%26AUpdate_3July2007.pdf.
37. R. Hall, “Stapled Finance Packages under Scrutiny,” http://www.iflr1000.com/LegislationGuide/146/Stapled-finance-packages-under-scrutiny.html.
38. Baldwin and Huffstetler, “Staple Financing.”
39. B. Klempner, D. Mathur, L. Molefe, J. Reynolds, and T. Uccellini, “Case Study: Selling Neiman Marcus,” Harvard Negotiation Law Review, Winter 2007.
40. A business standards committee report in 2011.
41. “When combined with the toxic ecology of bonus systems that emphasize short-term revenues, banks evolved a transactional business model. Deals and profits dominated at the expense of client interests and longer term relationships, a practice known as ‘scorched earth banking.’” (See S. Das, “Goldman Sachs’ Flawed Model,” The Independent, March 17, 2012, http://www.independent.co.uk/news/business/comment/satyajit-das-goldman-sachs-flawed-model-7575865.html.)
42. A. Garfinkle, “A Conversation with Robert S. Kaplan,” The American Interest, March 15, 2012, http://www.the-american-interest.com/article.cfm?piece=1223.
43. Ibid.
44. S. Gandel, “Goldman Says It Can Profit from Europe’s Bust,” Fortune, May 31, 2012, http://finance.fortune.cnn.com/tag/gary-cohn/.
45. M. Abelson and C. Harper, “Succeeding Blankfein at Goldman May Be Hurdle Too High for Cohn,” Bloomberg, July 24, 2011, http://www.bloomberg.com/news/2011-07-24/succeeding-blankfein-at-goldman-may-prove-hurdle-too-high-for-no-2-cohn.html.
46. This is after Water Street, which is not mentioned on Goldman’s website. The funds listed are only merchant banking funds.
47. Ellis, The Partnership, 537.
49. One manager said, “Things have to be done in a very high-end way. People at Goldman Sachs are pretty intolerant of weak execution and weak quality, even of things most people might think of as trivial.” (See Groysberg and Snook, “Leadership Development at Goldman Sachs.”)
Chapter 6
1. http://money.cnn.com/2000/08/01/companies/goldman/.
2. http://www.economist.com/node/28791.
3. I compared the daily change in Goldman’s stock price to the daily change in a couple of US financial indexes and looked to see whether the daily change increased over the month (i.e., if Goldman had manipulated the price in the period close to the fiscal year end). I tried a couple of different basic specifications to see if there was any non-linearity in this. Every way I looked, though, there was no increase in returns on Goldman’s price versus the indexes as we got closer to the end of the fiscal year. So it looks like Goldman wasn’t doing this.
4. http://www.efinancialnews.com/story/2012-11-12/goldman-sachs-protecting-the-partnership.
5. Compensation is described in the proxy statements filed by Goldman.
6. http://dealbook.nytimes.com/2011/01/18/study-points-to-windfall-for-goldman-partners/.
7. http://dealbook.nytimes.com/2011/02/05/stock-hedging-lets-bankers-skirt-efforts-to-overhaul-pay/.
8. Leverage is the ratio of debt to equity. At 33-to-1 leverage, a 3 percent drop in the value of an investment bank’s assets can wipe out its equity.
9. A. Garfinkle, “A Conversation with Robert S. Kaplan,” The American Interest, March 15, 2012, http://www.the-american-interest.com/article.cfm?piece=1223.
What Happened to Goldman Sachs: An Insider's Story of Organizational Drift and Its Unintended Consequences Page 36