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

by Steven G. Mandis

  29. Executives also need to overcome the structural secrecy inherent in the technical language of risk management.

  30. M. Taibbi, “The Great American Bubble Machine,” Rolling Stone, April 5, 2010, http://www.rollingstone.com/politics/news/the-great-american-bubble-machine-20100405.

  31. M. Taibbi, “The People vs. Goldman Sachs,” Rolling Stone, May 11, 2011, http://www.rollingstone.com/politics/news/the-people-vs-goldman-sachs-20110511?page=3.

  32. Taibbi, “The Great American Bubble Machine.”

  33. A fiduciary is someone who has undertaken to act for and on behalf of another in a particular matter in circumstances that give rise to a relationship of trust and confidence. A fiduciary duty is the highest standard of care at either equity or law.

  34. Goldman is, however, a fiduciary to its shareholders and to the funds it manages for clients. Legislation was proposed (as part of the Dodd–Frank Act) that would impose a fiduciary standard rather than the current suitability standard for those selling products. The intent was to require brokers to put clients’ interests first or be held legally accountable. Within a week, that provision was dropped after intense lobbying by Wall Street.

  35. However, under the federal securities laws, investment advisers (banks that manage clients’ money, such as Goldman’s asset management business or private equity business) are bound to a fiduciary standard that requires them to put their client’s interests above their own. Conflicts of interest must be disclosed, and self-dealing is generally prohibited.

  36. Blankfein “basically [denied] it all” at the hearing. “The political environment we live in now is such that he would rather look like they were as dumb as the other firms on Wall Street. And yet the evidence is overwhelming. They didn’t do it nefariously. They did it because they thought they could make money. And they did. I think they made $13 billion pre-tax in 2007.” (See J. Pressler, “Goldman Chronicler William Cohan Is Doing God’s Work,” New York Magazine, April 17, 2011, http://nymag.com/daily/intelligencer/2011/04/william_cohan_is_doing_gods_wo.html.)

  37. Goldman did not have a fiduciary responsibility to BP or to Sara Lee (see chapter 1) but still accorded them essentially that level of care.

  38. I also heard echoes of the “higher purpose” rationalization (see chapter 9) in the fiduciary responsibility defense offered as an explanation of Goldman’s actions.

  39. A Goldman spokesman said that until AIG was rescued by the government, the insurer “was viewed as one of the most sophisticated financial counterparties in the world. It wasn’t until the government intervened in September 2008 that the full extent of AIG’s problems became apparent.” The interesting comment is the next one: “‘What is lost in the discussion is that AIG assumed billions of dollars in risk it was unable to manage,’ the Goldman spokesman added.” This is a key ethical issue and source of criticism, so why was Goldman selling it to them? (See S. Ng and C. Mollenkamp, “Goldman Fueled AIG Gambles,” Wall Street Journal, December 12, 2009, http://online.wsj.com/article/SB10001424052748704201404574590453176996032.html; and http://www.npr.org/blogs/money/2010/04/is_goldman_sorry_it_sold_a_sec.html.)

  40. Although the data shows a sudden spike, there were signals and public recognition of changes. For example, there were also rumbles about Goldman’s serving its own interests ahead of clients’ and questions about conflicts of interest: “Goldman Sachs has engineered many megadeals over the years. But few underscore its influence on Wall Street like the deal it brokered yesterday … The surprising merger of Archipelago, an electronic stock market, and the New York Stock Exchange cements, perhaps definitively, Goldman’s longstanding role as the premier Wall Street firm, and the one with the most sway over the Big Board’s future.… But while the merger emphasizes this notion, it also raises longstanding fears among supporters of the auction-based model that Goldman’s intent, as the largest user of the exchange, has been to divert order flow from the exchange floor to its own trading desks, a process called internalization.” See L. Thomas, “Goldman Seals a Deal, and Its Status,” New York Times, April 21, 2005, http://query.nytimes.com/gst/fullpage.html?res=9A03EFDE1731F932A15757C0A9639C8B63.

  41. “Goldman to Review Its Business Practices,” New York Times, May 7, 2010, http://dealbook.nytimes.com/2010/05/07/goldman-toreview-its-business-practices/.

  42. Endlich, Goldman Sachs, 164.

  43. “Goldman Sachs Clients Lost in Translation,” London Evening Standard, January 14, 2011, http://www.this islondon.co.uk/standard-business/article-23914152-city-spy-goldman-sachs-clients-lost-in-translation.do.

  44. L. Rappaport, “Goldman Opens Up to Mollify Its Critics,” Wall Street Journal, January 11, 2011, http://online.wsj.com/article/SB10001424052748703779704576074360288635474.html.

  45. S. Johnson, “Goldman Sachs: ‘We Consider Our Size an Asset That We Try Hard to Preserve,’” Baseline Scenario, January 13, 2011, http://baselinescenario.com/2011/01/13/goldman-sachs-we-consider-our-size-an-asset-that-we-try-hard-to-preserve/.

  46. R. Teitelman, “Goldman Sachs, Business Standards and the Critics,” Huffington Post, January 14, 2011, http://www.huffingtonpost.com/robert-teitelman/goldman-business-standard_b_808827.html.

  47. J. Carney, “The Banality of Goldman’s Business Standards,” CNBC, January 12, 2011, http://www.cnbc.com/id/41040099/The_Banality_of_Goldman_s_Business_Standards.

  48. Johnson, “Goldman Sachs.”

  49. Carney, “The Banality of Goldman’s Business Standards.”

  50. Johnson, “Goldman Sachs.”

  51. Ibid.

  52. Carney, “The Banality of Goldman’s Business Standards.” See also http://www.clmr.unsw.edu.au/article/ethics/embedding-ethics/basis-trust-warranted-goldman-sachs-business-standards-report-assessed: “The failure to articulate and integrate purpose, values and principles within a functioning ethical framework created toxic and socially harmful corporate cultures in urgent need of reform, which an emphasis on technical measures alone will be incapable of addressing. The critical question, therefore, is whether the revised Goldman approach, which covers client relationships, conflicts of interest, structure products, transparency and disclosure, broader governance, and training and development, represents a robust improvement or should be seen as a cynical privileging of symbolism? On this front, the evidence is mixed.”

  53. http://blogs.reuters.com/financial-regulatory-forum/2013/05/30/goldman-standards-review-reflects-new-compliance-landscape/.

  54. S. Craig and P. Lattman, “Goldman’s Shares Tumble as Blankfein Hires Top Lawyer,” New York Times, August 22, 2011, http://dealbook.nytimes.com/2011/08/22/goldmans-shares-tumble-as-blankfein-hires-lawyer/.

  55. Greg Smith, “Why I Am Leaving Goldman Sachs,” New York Times, March 14, 2012, http://www.nytimes.com/2012/03/14/opinion/why-i-am-leaving-goldman-sachs.html?pagewanted=all.

  56. I asked some Goldman partners about this survey. They said it was an internal survey and must be taken with a grain of salt. When people fill out internal surveys, they might be concerned about where the information goes and who sees what and from whom; they question the confidentiality. I found this interesting, because some clients I interviewed expressed the same skepticism about Goldman.

  57. “Goldman Sachs (GS) Issues Response to Op-Ed Piece in New York Times,” Street Insider, March 14, 2012, http://www.streetinsider.com/Corporate+News/Goldman+Sachs+%28GS%29+Issues+Response+to+Op-Ed+Piece+in+New+York+Times/7268955.html.

  58. “Another Ex-Goldman Banker Confesses: The Firm Became ‘Toxic,’” Daily Finance, March 15, 2012, http://www.dailyfinance.com/2012/03/15/ex-goldman-banker-confesses-toxic-smith-resignation/.

  59. When Goldman went public it listed three competitive strengths: “strong client relationships,” “distinctive people and culture,” and “global reach.” It is difficult to argue that Goldman does not still have these as competitive strengths.

  60. S. Cruise, “Goldman Sachs’ Greg Smith’s Letter Prompts Backlash from Clients,” Huffington Post, March 15, 201
2, http://www.huffingtonpost.com/2012/03/15/goldman-sachs-backlash-clients-begins-gain-steam_n_1349576.html.

  61. D. McCrum, D. Schafer, and P. Jenkins, “Goldman’s Clients Stand by Their Bank,” Financial Times, March 15, 2012, http://www.ft.com/intl/cms/s/0/db9ae576-6ebd-11e1-afb8-00144feab49a.html.

  62. Taibbi, “The Great American Bubble Machine.”

  63. C. Harper, “Goldman Model Championed by Blankfein Planted Seeds of Distress,” Bloomberg, July 21, 2011, http://www.bloomberg.com/news/2011-07-22/goldman-sachs-model-championed-by-blankfein-planted-seeds-of-own-distress.html.

  64. Nils Pratley, “Muppets of the World Unite,” The Guardian, March 14, 2012, www.guardian.co.uk/business/nils-pratley-on-finance/2012/mar/14/goldman-sachs-greg-smith-muppets.

  65. T. Samuelson, “Goldman Sachs Employee’s Op-Ed Doesn’t Surprise Some,” WYNC, March 14, 2012, http://www.wnyc.org/blogs/wnyc-news-blog/2012/mar/14/goldman-sachs-employees-op-ed-doesnt-surprise-clients/.

  66. Cruise, “Goldman Sachs’ Greg Smith’s Letter Prompts Backlash from Clients.”

  67. Ibid.

  68. www.reuters.com/article/2012/03/16/goldman-apg-idUSL2E8EFCAW20120316.

  69. In 2012, in part because Goldman was losing so many financial analysts that it committed to employ for two years to hedge funds and private equity funds after just one year of training, Goldman changed its policy and hired full-time financial analysts right out of school. If the analysts are caught interviewing, it is technically a fireable offense. The New York office’s decision came after executives grew frustrated that many graduates weren’t staying with the firm after completing the two-year period, and after Goldman fired a handful of analysts for signing on to work at other financial companies in violation of their contracts. In recent years, private-equity firms have become more aggressive in recruiting Goldman analysts, said people in the private-equity industry. The companies used to begin recruiting from Goldman’s analyst program in March of the analyst’s first year. Recently, some firms advanced their initial overtures to January, when analysts have been working at Goldman for only about six months.

  70. I was curious if Goldman’s fees had been impacted, so I analyzed Goldman’s publicly disclosed sell side advisory M&A fees for $1 billion to $4 billion from 2003 to 2011. I selected this product and range because it is considered “bread and butter” assignments for the M&A department. From 2003 to 2008, the firm had a premium of the percentage of deal size over a selected peer group average each year. But since 2009, the fees have been the average.

  71. P. J. Henning, “Is That It for Financial Crisis Cases?” New York Times, August 13, 2012, http://dealbook.nytimes.com/2012/08/13/is-that-it-for-financial-crisis-cases/.

  72. P. Lattman, “U.S. Goldman Disclosure a Rare Break in Secrecy,” New York Times, August 10, 2012, http://dealbook.nytimes.com/2012/08/10/justice-department-closes-investigation-of-goldman/.

  73. C. J. Levin, “Sen. Levin Statement on DOJ Announcement on Goldman Sachs,” August 10, 2012, http://www.levin.senate.gov/newsroom/press/release/sen-levin-statement-on-doj-announcement-on-goldman-sachs.

  74. G. Bowley, “$500 Million and Apology from Goldman,” New York Times, November 17, 2009, http://www.nytimes.com/2009/11/18/business/18goldman.html.

  Chapter 9

  1. Criticism has been focused on Goldman’s arrangement to allow its partners to participate in the $1.5 billion Facebook offer, when some clients were being shut out.

  2. C. Harper, “Goldman to Cash Out $1 Billion of Facebook Holding in IPO,” Bloomberg, May 17, 2012, http://www.bloomberg.com/news/2012-05-17/goldman-to-cash-out-1-billion-of-facebook-holding-in-ipo.html/.

  3. M. Dowd, “Op-Ed Columnist; Virtuous Bankers? Really!?!” New York Times, November 11, 2009, http://www.nytimes.com/2009/11/11/opinion/11dowd.html.

  4. According to J. W. Meyer and B. Rowan (“Institutionalized Organizations: Formal Structure as Myth and Ceremony,” American Journal of Sociology 83, no. 2 [1977]: 340, doi: 10.1086/226550), “[I]nstitutional theorists believe that the institutional environment can strongly influence the development of formal structures in an organization, often more profoundly than market pressures. Innovative structures that improve technical efficiency in early-adopting organizations are legitimized in the environment. Ultimately these innovations reach a level of legitimization where failure to adopt them is seen as ‘irrational and negligent’ (or they become legal mandates). At this point new and existing organizations will adopt the structural form even if the form doesn’t improve efficiency.” Meyer and Rowan argue that often these “institutional myths” are merely accepted ceremoniously in order for the organization to gain or maintain legitimacy in the institutional environment. Organizations adopt the “vocabularies of structure” prevalent in their environment, such as specific job titles, procedures, and organizational roles. The adoption and prominent display of these institutionally acceptable “trappings of legitimacy” help preserve an appearance of organizational action based on “good faith.” Legitimacy in the institutional environment helps ensure organizational survival.

  5. John Whitehead, Bob Rubin, Hank Paulson, Jon Corzine, Steve Friedman, and many others have gone on to hold high-level government positions. In addition, Goldman’s community service and philanthropy are mentioned often in Goldman’s public filings.

  6. C. D. Ellis, The Partnership—The Making of Goldman Sachs (New York: Penguin, 2008), 664.

  7. B. McLean, “The Bank Job,” Vanity Fair, March 23, 2012, http://www.vanityfair.com/business/features/2010/01/goldman-sachs-200101.

  8. http://www.thedailyshow.com/watch/thu-april-28-2011/exclusive-william-cohan-extended-interview-pt-2.

  9. Stephen Colbert, “Greg Smith’s Goldman Sachs Op-Ed,” The Colbert Report (Viacom), March 14, 2012.

  10. W. D. Cohan, “Doing God’s Work: How Goldman Became the Vampire Squid,” Institutional Investor, April 25, 2011, http://www.institutionalinvestor.com/Popups/PrintArticle.aspx?ArticleID=2813008.

  11. http://businesshighbeam.com/435607/article-1G1-16396594/inside-goldman-college-cardinals.

  12. James Quinn and James Hall, “Goldman Sachs Vice-Chairman Says: ‘Learn to Tolerate Inequality,’” The Telegraph, www.telegraph.co.uk/finance/recession/6392127/Goldman-Sachs-vicechairman-says-Learn-to-tolerate-inequality.html.

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

  14. McLean, “The Bank Job.”

  15. L. Endlich, Goldman Sachs—The Culture of Success (New York: Simon & Schuster, 2000), 8.

  16. See R. S. Kaplan, What to Ask the Person in the Mirror: Critical Questions for Becoming a More Effective Leader and Reaching Your Potential (Boston: Harvard Business Review Press, 2011), 15. This attitude seems to have changed in recent years. Gary Cohn has stated that competitive pressures limit how much the firm can cut compensation: “There is enormous pressure out there, even in a market environment like this, for the best people … There’s always a competitor, or in some cases a client, willing to hire our good people.” See also “Goldman’s Cohn Warns of Poaching Risks from Further Cuts,” Bloomberg, May 31, 2012, http://www.bloomberg.com/news/print/2012-05-31/goldman-s-cohn-warns-of-poaching-risks-from-further-cuts.html.

  17. Many people have noted that Goldman’s political contributions and money spent on lobbying put it in an ethical gray zone. John Fritze noted that Goldman Sachs is “one of the financial industry’s most generous political givers”(John Fritze, “Goldman Political Contributions Under Attack, USA Today, April 23, 2010 www.intellectualtakeout.org/library/articles-commentary-blog/goldman-political-contributions-under-attack). According to Jonathan Salant, Goldman increased its lobbying in 2010 when the Senate considered the rewriting of financial regulations (Jonathan D. Salant, “Goldman Doubled Lobbying Expenses Amid Financial Revamp, SEC, Probe,” Bloomberg.com, July 21, 2010, www.bloomberg.com/news/2010-07-21/goldman-sachs-doubled-lobbying-expenses-amid-financial-revamp-sec-probe.html). Further, Felix Salmon
charged that former Secretary of the Treasury Hank Paulson gave insider tips to Goldman employees. Salmon writes, “Paulson was giving inside tips to Wall Street in general, and to Goldman types in particular: exactly the kind of behavior that ‘Government Sachs’ conspiracy theorists have been speculating about for years. Turns out, they were right” (Felix Salmon, “Hank Paulson’s Inside Jobs,” Reuters.com, November 29, 2011, http://blogs.reuters.com/felix-salmon/2011/11/29/hank-paulsons-inside-jobs/). Madison Ruppert says that Paulson’s actions epitomize “the plague upon our economy, and the greater global economic system, that is crony capitalism” (see “Turns Out the ‘Government Sachs’ Conspiracy Theorists Were Right All Along,” December 1, 2011, http://www.activistpost.com/2011/12/turns-out-government-sachs-conspiracy.html).

  18. L. Wayne, “The Corridor from Goldman to Washington Is Well Traveled,” New York Times, December 13, 2002.

  19. Ibid.

  20. J. Grant, “Goldman Shrinks an Adage; Long-Term Greedy Can’t Wait,” Observer, February 15, 1999, http://www.observer.com/1999/02/goldman-shrinks-an-adage-longterm-greedy-cant-wait/.

  21. S. Lohr, “Goldman’s Pitch for Deals in Russia,” New York Times, March 12, 1992.

  22. CBS News Investigates, “Goldman Sachs’ Revolving Door,” CBS News, April 7, 2010, http://www.cbsnews.com/8301-31727_162-20001981-10391695.html.

  23. M. Lynn, “Goldman Sachs Has Gained Too Much Political Power,” Bloomberg News, June 4, 2006, http://www.bloomberg.com/apps/news?pid=newsarchive&refer=columnist_lynn&sid=aGS6lvr8ipiw.