Goldman Sachs: the Culture of Success

Book by Endlich Lisa J

Chapter 1: 1986: The Road Less Traveled

On Wednesday morning, October 15, 1986, John L. Weinberg, the venerable senior partner of Goldman Sachs, had a long list of phone calls to make. Before the morning was over he needed to telephone thirty-six men and one woman. His conversations would be brief; good news travels fast.

He started early, hours before the official list would be published. Thomas W. Berry would be first and Garland E. Wood last; alphabetical order was the rule. This was the phone call each vice-president on his list had waited years to receive. Each would reach for the receiver hoping Weinberg was about to extend an invitation to the most exclusive club on Wall Street -- the partnership of Goldman Sachs. Weinberg's simple statement, "I would like to invite you to join the partnership," was for most the reward for a decade of grinding hard work. No one had ever refused the honor. Thirty years earlier, Weinberg's own father, the legendary

Sidney Weinberg, had issued him the same invitation.

John Weinberg, with help from the eight other partners who comprised the management committee, had vetted hundreds of vice-presidents in the biannual selection process. They had deliberated for two agonizing months while speculation among the troops grew. For the hundred or so in "the zone," the inside term for those actually in contention, everything was at stake -- prestige, recognition, riches. As Weinberg traveled through the alphabet, some of the dozens passed over would shut themselves in their offices, while a few would storm out of the firm's headquarters. Envy and frustration would cause one or two people to resign, but the vast majority would take the disappointment in stride, hoping for another shot at a partnership two years hence.

Those telephoned that autumn morning were being offered not only vast wealth but virtual lifetime employment as well. John Weinberg himself had spent his entire career at the firm, beginning in 1950; Robert E. Rubin and Stephen Friedman, two of the more senior members of the management committee, had been with the firm for twenty years. Their tenure was not unusual. Moreover, few partners had ever been asked to leave; graceful and bittersweet departures almost always capped lengthy and prosperous careers. Barring any missteps, the young men and woman answering Weinberg's phone call could expect to retire with a nest egg worth tens of millions of dollars.

Yet those selected knew that after years of grueling sixty-, seventy-, or even eighty-hour weeks spent on trading floors, in clients' offices, or on airplanes, the real work was only now about to begin. The partners of Goldman Sachs in 1986 owned a $38 billion business, and running it was, and still is, an all-consuming job. Partnership meetings are held on weekends; vacations and sleep are routinely interrupted with conference calls whose participants span the globe. Partners felt free to call each other whenever they needed to know something about another's business. "When you made partner suddenly you had to return eighty other phone calls," says one retired partner. "Partners were much less respectful of your privacy than employees would be."

The partnership class of 1986 represented change. At thirty-seven, it was twice as large as any previous class. The all-white, all-male partnership had invited into its ranks the first African American and the first woman in its history. The pressure on Wall Street firms to become more diverse was considerable, and Goldman Sachs was one of the last to bow. Almost all partners had spent their entire careers with the firm, yet this class included two former managing directors from rival Salomon Brothers and a famous professor from MIT.

For the first time, existing partners had been unfamiliar with some of the candidates. The firm had grown and specialized. Its four divisions -- equities (stock trading), investment banking, fixed income (bond trading), and J. Aron (currency and commodities trading) -- had been separated into dozens of specialized departments, many members of which had very little contact with employees from outside their own department. Partners had been forced to trust the recommendations of their colleagues. Impersonality had crept into the process.

Perhaps the most atypical feature of the class of 1986 was the number of partners elevated from the ranks of salesmen and traders. Goldman Sachs's traditional strengths lay in the field of investment banking, in raising capital for large corporations or arranging mergers and acquisitions. Despite some areas of excellence, particularly in stock trading, Goldman Sachs did not have the trading prowess of a firm like Salomon Brothers. In 1986 top management determined that this would change.

Weinberg's anointed officially joined the partnership on Monday, December 1, 1986, the first day of the firm's new fiscal year. Only five days later, the management committee that so recently had bestowed this honor proposed to take it away. At the annual partnership meeting held in New York, Steve Friedman and Bob Rubin, who would be appointed co-vice chairmen the following year, announced that the firm was considering selling itself to the investing public.

In an abrupt break with one hundred seventeen years of history, the management committee was proposing that Goldman Sachs become a public corporation. No longer would the partners own their firm; no longer would they run it unencumbered by outside influences. Stockholders would own much of the firm's capital, and a board of directors, presumably with outside members, would rule on issues of policy. Partners would find themselves as employees, albeit extremely wealthy ones, of a large corporate entity. The management committee believed that in order to expand into new businesses, additional capital of a more permanent nature would be required. The pressure to sell the firm had only increased as each of Goldman Sachs's major competitors had undertaken a public sale or merger with a larger entity. Now the management committee unanimously recommended that the partnership vote for an initial public offering. Not one of the thirty-seven new partners, who had far less to gain than longtime partners from the windfall that would be created by such a sale, thought this sounded like a good idea.

The partnership had never before openly entertained the notion of a public offering, although behind closed doors the management committee had discussed and dismissed the idea many times. In the late 1960s, Sidney Weinberg had considered it briefly and sent his top lieutenant Gus Levy to canvass the partners. It would be the first time the idea was shot down. In 1971, the management committee had decided to incorporate, going as far as printing up new business cards before changing their minds and leaving the private partnership in place.

On the morning of December 6, the partners convened in the large meeting room on the second floor of 85 Broad Street, the firm's three-year-old headquarters in lower Manhattan. For days rumors had circulated but the official agenda had not been disclosed. The management committee members had been lobbying their partners, trying to line up support before the meeting. Many of the new partners were nervous; it was their first partnership meeting, and they had little idea of what to expect. Much was at stake; the future of Goldman Sachs would be decided in the next thirty-six hours.

The members of the management committee were seated around a table on a stage at the front of the room, while the ninety-five remaining partners sat facing them. Weinberg had positioned himself some distance away from his fellow members; this action sent out what many remember as a very strong signal. During the formal presentation he said almost nothing.

Most members of the management committee spoke, but when Rubin and Friedman, who were already widely regarded as heirs apparent, stood to present their vision of the future, everyone listened more closely. Goldman Sachs would be a great global firm, they told the audience, a worldwide wholesaler of investment banking services. The firm would be transformed into a trading powerhouse, one that would challenge top-ranked Salomon Brothers, which was operating with considerably more capital. Risky, capital-intensive activities like trading (some of it for the firm's own account rather than as an agent for clients), much of which was under Rubin's management, and principal investments (long-term strategic investments made by the partnership in operating companies), Friedman's latest brainchild, could not be operated easily with the firm's existing partnership capital. Earnings would be more volatile in these new businesses, and to remain competitive a fortified capital base would need to be built.

Then the issue of unlimited liability was addressed. "What would happen if we hit a bump in the road?" those on the management committee asked. In a private partnership none of the assets of partners are shielded from liability, and the individual partners are exposed down to the pennies in their children's piggy banks. Large trading losses or lawsuits could pose a threat to the firm's capital and ultimately its existence. The actions of a rogue trader could spell personal bankruptcy (one year later a lone trader would singlehandedly lose Merrill Lynch $300 million). Although 1986 had been a very successful year, the firm had suffered a few large bond trading losses, and some partners had grown concerned. Sexual harassment and racial discrimination suits, with ever larger settlements or awards for damages, were becoming increasingly common on Wall Street. Fifteen years earlier, when Penn Central railroad, a Goldman Sachs client, had filed for Chapter 11 bankruptcy protection, the firm had been plagued by lawsuits, the dollar amount of which threatened to exceed the partnership capital. It had been a frightening experience.

Goldman Sachs's capital was inherently unstable. In any given year a substantial group of senior partners with large capital stakes might retire, taking their money with them, and the drain on the firm's resources could be debilitating. If it happened in a year when the firm performed poorly, as it would in 1994, for example, the results could be extremely damaging. By inviting outside investors, in the shape of stockholders, to join the firm, its capital base could be strengthened and its risk dispersed. Friedman and Rubin strongly supported the proposal. Their boss John Weinberg did not.

For many in that room, John Weinberg was Goldman Sachs. He had been with the firm for almost forty years, and for eight of those had shared the top position with his friend John Whitehead. But Whitehead had left Goldman Sachs and was serving as deputy secretary of state in the Reagan administration, and, at sixty-one, Weinberg was on his own. A portly gentleman with close-cropped white hair, thick jowls, and a kind face, over the years he had inspired unswerving loyalty and total devotion. Weinberg's leadership, now in its tenth year, was unquestioned and absolute. He had kept politics out of Goldman Sachs. Under Weinberg the firm retained the feeling of a family business, and the dueling egos and unrestrained greed that had plagued and even destroyed some of his competitors was not tolerated. Only two years earlier, Lehman Brothers, a first-class name in investment banking and a onetime partner of Goldman Sachs, was crippled by a power struggle at the top and had been forced to sell itself to the conglomerate Shearson American Express.

By 1986 the relationship between Goldman Sachs and the Weinbergs -- John and his father, brother, son, and nephew -- extended back seventy-nine years. The emotional bond was strong. Weinberg believed passionately in the value of the partnership, in its role as the contributing factor in the firm's success. While the management committee presented a united front, many who heard the presentation doubted Weinberg's commitment to the proposal. Goldman Sachs had just closed the books on one of its most profitable years. Through the early 1980s the firm's return on equity had risen as high as an astounding 80 percent, and many partners realized that this level of profitability was unprecedented and unsustainable. The stock market was buoyant and new issues were selling well. If the firm were to go public, it would have to seize the moment. In 1986 the press was full of uncannily accurate prognostications of the gloom and doom to follow. Any knowledgeable observer could see that Wall Street was at the giddy heights of its perennial cycle and it would not be long before the inevitable downturn began. Acceding to the management committee's unanimous wishes, Weinberg agreed to set the ownership issue before the partnership.

The presentation made to the partners that Saturday morning has been described as, at best, uninspiring and weak. Others have called it haphazard and half-baked, emphasizing that its quality was far below that of presentations the firm routinely gave to its clients. Most agree that it was an amateurish effort; what was presented was little more than a concept. Partners were given written reports that outlined the proposed structure: Overnight they would be transformed into managing directors and paid a multiple of the value of their investment in the company. Veteran partners, already very wealthy, could triple their net worth overnight.

One partner who was present remembers that the numbers, in the parlance of the business, did not "foot"; those in the audience who checked back and forth between the many exhibits in the presentation package found that the numbers did not add up and they jumped all over the inconsistencies. In various scenarios, the analyses showed how the partners' capital would grow over time if the firm remained a partnership. But many of the assumptions were questioned and investment banking partners challenged the valuations underlying the proposal. Projections of the firm's earnings as a public corporation were ridiculed. In a business where almost all of the assets go down the elevators and out the front door each night, who could guess what would be left after the firm transformed itself? Calculators came out as partners estimated what their take from the initial buyout might be, but more fundamental questions remained unanswered: What would the company be worth? To whom would shares be sold? On what kind of schedule would the partners be paid? The audience was not impressed.

By afternoon, an impassioned debate had erupted. A partnership is a much more personal organizational structure than a corporation, but even Weinberg was surprised at the level of emotion unleashed. Most of these men knew each other well. The partnership was a small, intimate organization -- a fraternity in the very best sense of the word -- in which no one was above criticism and the more senior partners regularly challenged their leaders. What was taking place this day was open and honest conversation. Partners screamed and cried, Weinberg remembers; it was a cathartic exercise.

The newest partners could not have been expected to embrace the proposal, since for them it was a financial step backward. The dividing lines between generations of partners had always existed, but now they would be drawn in the sand. Most of the members of the class of 1986 were still in their thirties, and being a partner of Goldman Sachs was a job they had aspired to since business school. The money was not bad, of course, but for some the psychic rewards were even more important. There was a sense of affiliation, of belonging to a select group with a hallowed history and a common purpose. The newest partners had worked for, and expected, a l...