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

by Steven G. Mandis

  10. L. Endlich, Goldman Sachs—The Culture of Success (New York: Simon & Schuster, 2000).

  11. http://dealbook.nytimes.com/2011/05/16/the-goldman-sachs-diaspora/.

  12. According to interviews and publicly filed documents, however, around the time of the IPO, John L. Weinberg was put on the board and granted tens of millions of dollars in stock and a consulting agreement that paid millions of dollars.

  13. “People have come to Goldman Sachs despite the promise of very long hours and possibly less compensation, because becoming a partner at Goldman Sachs was the brass ring. It was the highest accolade on Wall Street, and now that no longer exists.” (See P. Viles and J. Cafferty, “Goldman Sachs’ IPO,” CNNfn, May 4, 1999.)

  14. The sources are annual reports and the Wall Street Comps Survey. The numbers for J.P. Morgan relate only to its investment bank, without commercial banking. Morgan Stanley was excluded because it includes a large brokerage business.

  15. http://dealbook.nytimes.com/2011/05/16/the-goldman-sachs-diaspora/.

  16. See Donald MacKenzie, An Engine, Not a Camera: How Financial Models Shape Markets (Cambridge, MA: MIT Press, 2006), and his similar works.

  17. 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/.

  18. C. D. Ellis, The Partnership—The Making of Goldman Sachs (New York: Penguin, 2008), xvi. Goldman’s trading position marks were shown to be more accurate than those of the other Wall Street firms. Its longstanding “mark-to-market” discipline and cultural element of dissonance may have meant it was more accurate and generated more volatility in positions.

  19. McLean and Serwer, “Goldman Sachs: After the Fall.”

  20. The IPO prospectus can be found at http://www.goldmansachs.com/investor-relations/financials/archived/other-information/ipo-prospectus-gs-pdf-file.pdf.

  Chapter 7

  1. Matthew Gill explores the work of accountants and the accounting profession to find the causes of problems of trust behind scandals and the headlines. His focus is largely on the way that accountants construct knowledge, and he emphasizes the need to understand the “underlying norms according to which accountants approach the rules, rather than the rules themselves.” The uncertainty resulting from the subjectivity inherent in this situation can easily lead to moral ambiguity. See M. Gill, Accountants’ Truth: Knowledge and Ethics in the Financial World (Oxford, UK: Oxford University Press, 2009), 8.

  2. They pointed to the data supporting this; it is rare for an employee of Goldman to be criminally convicted. However, that can be said for many firms and may be more of a statement on the law or enforcement, as pointed out by Senator Carl Levin (D-Mich.) when the Department of Justice dropped its criminal investigation against Goldman in 2012: “Whether the decision by the Department of Justice is the product of weak laws or weak enforcement, Goldman Sachs’ actions were deceptive and immoral,” Levin said. Goldman’s “actions did immense harm to its clients and helped create the financial crisis that nearly plunged us into a second Great Depression;” see http://www.ft.com/cms/s/0/6e032042-e315-11e1-a78c-00144feab49a.html#axzz2O5ePeAlh.

  3. In discussing Goldman’s practices during the internet/technology boom, Taibbi wrote, “For a bank that paid out $7 billion a year in salaries, $110 million fines issued half a decade late were something far less than a deterrent—they were a joke. Once the Internet bubble burst, Goldman had no incentive to reassess its new, profit-driven strategy; it just searched around for another bubble to inflate.” See M. Taibbi, “The Great American Bubble Machine,” Rolling Stone, April 5, 2010, http://www.rollingstone.com/politics/news/the-great-american-bubble-machine-20100405.

  4. A Chinese wall is a mechanism used to prevent conflicts of interest regarding the use of information. The word wall implies that the information cannot get out and is contained. It also implies that there is a line. Often it is a legal line concerning which information can go where, but it is as much an ethical barrier between different divisions of a financial (or other) institution to avoid conflicts of interest. A Chinese wall is said to exist, for example, between the corporate–advisory area and the brokering department of a financial services firm to separate those giving corporate advice on takeovers from those advising clients about buying shares. The wall is created to prevent leaks of inside information that could influence advice given to clients making investments or allow staff to take advantage of facts not yet known to the general public.

  5. Goldman acknowledges this confusion in its business standards committee report.

  6. http://www.businessinsider.com/goldman-sachs-traders-2010-12.

  7. This was a weekly practice from 2006 to 2011. In 2007, Goldman launched a program that allowed research analysts to call a select group of priority clients.

  8. A conviction buy list is a list of the stocks of companies that Goldman’s research analysts believe are extremely attractive for investors to buy.

  9. S. N. Lynch and A. Viswanatha, “Goldman to Pay $22 Million to Settle ‘Huddles’ Case,” Yahoo!, April 12, 2012, http://news.yahoo.com/goldman-pay-22-million-settle-sec-finra-charges-154759042.html.

  10. R. Lowenstein, When Genius Failed: The Rise and Fall of Long-Term Capital Management (New York: Random House, 2000), 172–173.

  11. http://www.zerohedge.com/contributed/2012-11-17/greg-smith-vs-goldman-sachs.

  12. http://www.sec.gov/litigation/litreleases/lr18113.htm.

  13. State of Missouri, Office of Secretary of State, Securities Commission, November 25, 2003, Consent Order, Case No. AO-03-15, http://www.sos.mo.gov/securities/files/goldman_sachs.pdf. Enacted in reaction to a number of corporate and accounting scandals (such as Enron and WORLDCOM), the Sarbanes–Oxley Act of 2002 sets standards for all US public company boards, management, and public accounting firms. The act contains eleven sections, ranging from additional corporate board responsibilities to criminal penalties. The SEC had to adopt dozens of rules to implement the act.

  14. State of Missouri, Office of Secretary of State, Securities Commission, November 25, 2003, Consent Order, Case No. AO-03-15.

  15. There was already a John L. Weinberg award, which was given to a professional in the investment banking division who best typified Goldman’s core values.

  16. In this vein, Sørensen and Phillips examine the relationship between organizational size and structural complexity and note problems arising from increasing specialization and fragmentation: “As organizations grow larger, tasks get subdivided into more specialized roles, and an increasing proportion of jobs in the organization is devoted to coordinating between the increasingly elaborate division of labor … the average worker in a large firm has less overview over what all of the organization’s vital routines are and how they fit together. Nor are they provided with the skills for the integration of the large firm’s differentiated skills.” See J. Sørensen and D. J. Phillips, “Competence and Commitment: Employer Size and Entrepreneurial Endurance,” Industrial and Corporate Change 20, no. 3 (2011), doi: 10.1093/icc/dtr025.

  17. Sources for the perception variable discussion include Lulofs (R. S. Lulofs, Conflict: From Theory to Action [Scottsdale, AZ: Gorsuch Scarisbrick, 1994]) and Wilmot and Hocker (W. W. Wilmot and J. L. Hocker, Interpersonal Conflict 5th ed. [Boston: McGraw-Hill, 1998]).

  18. Ellis (The Partnership—The Making of Goldman Sachs [New York: Penguin, 2008], 667) wrote that all could be lost—in fact, that all “would be lost if the firm squandered its reputation or failed to anticipate, understand, and manage the potential conflicts or failed to excel in its important agency business.”

  19. A. R. Sorkin, Too Big to Fail: The Inside Story of How Wall Street and Washington Fought to Save the Financial System from Crisis—and Themselves (New York: Viking, 2009).

  20. Ibid.

  21. The business standards committee investigation and report are discussed in detail in chapter 8 as one of the outcomes of Goldm
an’s experience during the credit crisis.

  22. See, for example, Sorkin (Too Big to Fail) and W. D. Cohan, “Goldman’s Double Game,” Businessweek, March 14, 2012, http://www.businessweek.com/articles/2012-03-14/goldmans-double-game.

  23. Ellis, The Partnership, 668–669.

  24. A. D. Frank, “Goldman Boss Lloyd Blankfein’s Testimony Bolsters Case Against Rajat Gupta,” Daily Beast, June 5, 2012, http://www.thedailybeast.com/articles/2012/06/05/goldman-boss-lloyd-blankfein-s-testimony-bolsters-case-against-rajat-gupta.html.

  25. According to court testimony, ironically when then-Goldman board member Raj Gupta wanted to work out an arrangement by which he could stay associated with Goldman and at the same time be associated with the private equity firm Kohlberg Kravis Roberts (KKR), Blankfein said that Goldman had competed with KKR in certain areas and if Gupta worked with both companies it could create a situation of conflict and therefore was not possible. “Mr. Gupta told me he was considering or deciding to accept an offer from a large private-equity group,” Blankfein recalled, “to be on their advisory board.” The Goldman CEO continued: “I told him that presented certain conflicts for us … it created a problem and I did not think it was a good idea.” Gupta told Blankfein that he could manage any potential conflicts that might arise while he also consulted with KKR, the private-equity firm first made famous in 1988 by its $25 billion hostile takeover of RJR Nabisco. Blankfein said he decided that Gupta had to give up his Goldman board seat because KKR, while a big customer of Goldman’s, also competed with the investment bank, and the conflicts for a director would be too significant to overcome while honoring his “fiduciary duty.” So it seems Goldman had decided that Gupta could not “manage conflicts.” (See Frank, “Goldman Boss Lloyd Blankfein’s Testimony Bolsters Case Against Rajat Gupta.”)

  26. The conflict issues are often raised by boutique advisory firms as their competitive advantage over larger, full-service firms. Some of the executives I interviewed work at boutique investment advisory firms. They said that because they do not have large trading or financing businesses, they can offer more independent and less conflicted advice. Sorkin (Too Big to Fail, 463–464) describes boutique firms as resembling the Wall Street partnerships of the 1970s and 1980s, in that they present fewer opportunities for real or perceived potential conflicts. When Morgan Stanley’s independent board members, led by C. Robert Kidder, the lead director, decided to hire an independent adviser, they chose Roger Altman, former deputy secretary of the Treasury, who founded the boutique investment banking firm Evercore Partners. His role was to advise Morgan Stanley’s board on transactions, but within twenty-four hours of being hired, he was advising the board to think seriously about selling the firm. Some people I interviewed raised the concern that some of the boutique firms are publicly traded or have meaningful outside investors or private equity departments that might impact how the firms are managed.

  27. The “doomsday scenario” Altman painted during that board meeting had some people convinced that he was interested only in collecting a big fee by advising Morgan Stanley on selling. Others worried that he might pass on information about the company’s financial health to his government contacts. Some thought that any advice about selling the firm should come from Morgan Stanley’s own bankers. Another concern was Evercore’s partnership with Mizuho Financial Group of Japan, a rival of Mitsubishi, which was in negotiations with Morgan Stanley at the time. The main theme seemed to be, “I don’t know what this guy [Altman] is up to” (Sorkin, Too Big to Fail, 463–464). I mention this story because I find it interesting how banks view each other‘s conflicts and motivations.

  28. William Cohan, quoted at http://www.efinancialnews.com/story/2011-04-14/qa-cohan-goldman-money-power.

  29. The categories in which members were grouped are subjective because members have various backgrounds as they have rotated, so although someone may be in one division at the time he/she is on the committee, I asked interviewees with which groups they were most affiliated. I also asked research analysts to independently look at the backgrounds of the various members and make independent judgments, which came out relatively close to my analysis and included information from interviewees.

  Chapter 8

  1. Goldman’s NEOs are currently Lloyd Blankfein (CEO), Gary Cohn (president and COO), David Viniar (CFO), Michael Evans (a vice chairman, global head of growth markets, and chairman of Goldman Sachs Asia), and John S. Weinberg (a vice chairman and co-head of investment banking).

  2. “Without question, direct government support helped stabilize the financial system. We believe that the government action was critical, and we benefited from it.” Testimony by Lloyd Blankfein, www.goldmansachs.com/media-relations/in-the-news/archive/1-13-testimony.html.

  3. 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), 69–112.

  4. My analysis as a sociologist focusing on the organizational factors should not detract from serious questions and concerns raised by many people, such as the Senate Subcommittee on Investigations, chaired by Carl Levin (D.-Mich.), alongside Tom Coburn (R.-Okla.); and several authors including William Cohan, Bethany McLean, Matt Taibbi, and Gillian Tett.

  5. In Too Big to Fail: The Inside Story of How Wall Street and Washington Fought to Save the Financial System from Crisis—and Themselves (New York: Viking, 2009), A. R. Sorkin implies that Hank Paulson, in his role as Treasury secretary, grasped the true systemic risk at hand only after the Lehman bankruptcy and Bank of America deal for Merrill Lynch. Yet Goldman had been actively trying to de-risk for months.

  6. P. Jorion, “In Defense of VaR,” Derivatives Strategy, April 1997, http://www.derivativesstrategy.com/magazine/archive/1997/0497fea2.asp.

  7. J. Nocera, “Risk Mismanagement,” New York Times, January 4, 2009, http://www.nytimes.com/2009/01/04/magazine/04risk-t.html?_r=1.

  8. “Stark’s work, however, suggests an alternative conjecture: that it would have taken heterarchical organization to fuse together the two institutionally separate insights needed fully to grasp those dangers. The conjecture is plausible: in particular, Goldman Sachs, reported by several of my interviewees to be more heterarchical in its organization than most other major banks (it was a partnership, not a public company, until 1999), escaped financially almost unscathed. Unlike almost all other banks, Goldman hedged or liquidated its ABS and ABS CDO positions several months before the crisis. However, the systematic, comparative organizational research needed to test the conjecture is, for reasons of access, currently impossible.” (See D. MacKenzie, “The Credit Crisis as a Problem in the Sociology of Knowledge,” American Journal of Sociology 116, no. 6 (2011): 1832.)

  9. One of the characteristics Weick ascribes to high-reliability organizations is the “mindfulness with which people in most HROs react to even very weak signs that some kind of change or danger is approaching.” He describes HROs as “fixated on failure” and refusing to “simplify reality.” See K. E. Weick and D. L. Coutu, “Sense and Reliability: A Conversation with Celebrated Psychologist Karl E. Weick,” Harvard Business Review, April 2003, 84–90, 123.

  10. E. Derman, My Life as a Quant: Reflections on Physics and Finance (Hoboken, NJ: Wiley, 2004), 257.

  11. J. Nocera, “Risk Mismanagement,” New York Times, January 4, 2009, http://www.nytimes.com/2009/01/04/magazine/04risk-t.html?_r=1.

  12. Sorkin, Too Big to Fail, chapter 7. But his actions would have unintended consequences.

  13. According to Goldman’s 2012 proxy statement, Goldman’s board held fifteen meetings. Its independent directors also met thirteen times in executive session without management. Goldman disclosed that its directors meet informally from time to time to receive updates from senior management, and the directors receive weekly informational packages that include updates on recent developments, press coverage, and current events related t
o its business. Some people I interviewed said that a board position could be almost a full-time position, with selected board members needing to sit in on risk management meetings.

  14. U.S. Senate Permanent Subcommittee on Investigations, “Wall Street and the Financial Crisis Anatomy of a Financial Collapse: Majority and Minority Staff Report,” 2011, http://hsgac.senate.gov/public/_files/Financial_Crisis/FinancialCrisisReport.pdf.

  15. http://www.ft.com/intl/cms/s/80e2987a-2e50-11dc-821c-0000779fd2ac,Authorised=false.html?_i_location=http%3A%2F%2Fwww.ft.com%2Fcms%2Fs%2F0%2F80e2987a-2e50-11dc-821c-0000779fd2ac.html&_i_referer=#axzz2Rrj0fwk

  16. L. Endlich, Goldman Sachs—The Culture of Success (New York: Simon & Schuster, 2000), 199.

  17. Ibid.

  18. Ibid.

  19. Endlich, Goldman Sachs, 225.

  20. William Cohan, Money and Power: How Goldman Sachs Came to Rule the World (New York: Doubleday, 2012), 529.

  21. http://dealbook.nytimes.com/2012/10/01/the-j-aron-takeover-of-goldman-sachs/.

  22. Cohan, Money and Power.

  23. W. D. Cohan, “Where Blankfein Came From,” Fortune, April 20, 2011, http://management.fortune.cnn.com/2011/04/21/where-blankfein-came-from/.

  24. C. D. Ellis, The Partnership—The Making of Goldman Sachs (New York: Penguin Press, (2008), 668.

  25. Ellis, The Partnership, 670–671.

  26. A 2011 review of Cohan’s Money and Power published in The Economist addresses clients’ confusion about whether Goldman is an agent or competitor: “Goldman has pushed this envelope further than any other investment banks, believing it had the skill to manage the resulting conflicts.” See “Goldman Sachs: Long on Chutzpah, Short on Friends,” The Economist, April 14, 2011, http://www.economist.com/node/18557354.

  27. Ellis, The Partnership, 670–671.

  28. Goldman had a tradition of mobility of people among departments, divisions, and geographies. Small steps that lead to new practices, and the normalization they entail, are seldom visible or seen as significant by those who work in a department or organization for a long time (see S. Dekker, Drift into Failure: From Hunting Broken Components to Understanding Complex Systems [Farnham, UK: Ashgate Publishing, 2011], 180). It helps to have people come in from other areas to bring fresh perspectives that help insiders recalibrate what they consider normal. It also forces insiders to articulate their ideas about running their system. This can be true culturally, as well as from a risk management perspective. In both, an environment that supports rotation of employees and discussion is important.