Goldman Sachs follows the timeless business principles and best practices in financial market design and investment management.

Goldman Sachs follows the timeless business principles and best practices in financial market design and investment management.

William Cohan (2011)

Money and power: how Goldman Sachs came to rule the world

 

In this book, William Cohan chronicles the corporate story of Goldman Sachs well beyond a century. Cohan focuses on the major contributions of business partners, complex deals, and legal issues. Cohan further details the various Goldman Sachs leaders, internal power struggles, a few skirmishes with the Federal Reserve, and several bouts of economic policy uncertainty and insolvency. Goldman Sachs now establishes its current position as a global investment bank. The fresh and unique Goldman Sachs investment strategy empowers the firm to circumvent economic malaise in the U.S. subprime mortgage turmoil and global financial crisis of 2008-2009. In the new century, Goldman Sachs goes through key changes in corporate culture and leadership for better business conduct and financial innovation.

German immigrant and merchant Marcus Goldman first established the New York City investment firm that would become Goldman Sachs in 1869. In 1882, Marcus Goldman made his son-in-law, Samuel Sachs, his key business partner. The family partnership focused on foreign exchange and then became one of the largest U.S. traders of gold bullion within a few years. From the early stage, the investment firm wished to be regarded as a solid pillar of American capitalism (but not an economic engine of asset market speculation).

In 1913, the second-generation principal partner, Henry Goldman, consulted with President Woodrow Wilson to design the Federal Reserve System. This structural reform built the close affiliation between Goldman Sachs and the Federal Reserve Bank of New York. This close affiliation served as the core foundation of Goldman Sachs dominance in American asset markets. In late-1917, Henry Goldman retired and therefore effectively ended any further participation of the Goldman family in Goldman Sachs. A family friend, Waddill Catchings, who was a key member of the Council for National Defense, a financial author, and a former CEO in Corporate America, joined Goldman Sachs to replace Henry Goldman.

Waddill Catchings helped pull together mergers and acquisitions that established corporate titans such as Kraft Goods and General Goods. He built the investment trust, Goldman Sachs Trading Corporation, in 1928. The investment trust bought large blocks of shares and then resold them at considerable profits to its investors. Due to the stock market crash of 1929, Goldman Sachs and trust shareholders lost hundreds of millions of dollars. The Sachs family decided to oust Catchings and then installed long-time associate Sidney Weinberg as the senior business partner in charge of Goldman Sachs.

Sidney Weinberg inherited 9 seats on American corporate boards of directors and so skillfully leveraged his business connections to create investment opportunities for Goldman Sachs. At one time, Weinberg served on 30+ corporate boards and won the confidence of many CEOs in Corporate America. He earned the accolade *Mr Wall Street* with several political connections to Presidents Franklin Roosevelt and Dwight Eisenhower.

As Weinberg was able to forge fresh friendships throughout the American business community with numerous seats on corporate boards, Goldman Sachs continued to expand its economic power and influence over time. During the Weinberg tenure, Goldman Sachs helped underwrite $300 million bonds for General Electric organic growth as well as the landmark Ford Motor IPO in 1955.

From the 1950s to the 1960s, Gus Lehmann Levy transformed the Goldman Sachs event-driven arbitrage team into one of the most active over-the-counter trading departments on Wall Street; Jay Tenenbaum specialized in trading government and corporate bonds for Goldman Sachs; Robert Rubin leveraged the Goldman Sachs team approach to arbitrage. Although senior partner Sidney Weinberg took the reins at Goldman Sachs, Levy, Tenenbaum, and Rubin specialized in taking big risks for big profits. The trio bought blocks of stocks and then resold them for hefty gains in single transactions.

In 1968, Goldman Sachs helped negotiate the merger of Pennsylvania and New York Central Railroads. In 1970, Penn Central Transportation went bankrupt and thus defaulted on its commercial loans. As a result, numerous investors filed fraud lawsuits against Goldman Sachs. In March 1971, Goldman Sachs decided to limit the liability of its business partners to the total cash that they had invested in the company (rather than their entire net worth). Levy and his team eventually reached a settlement with the Securities and Exchange Commission (SEC), and Goldman Sachs agreed to a new policy of due diligence on future transactions.

After Levy passed away in 1976, John Whitehead and John Weinberg took on new roles as joint senior partners. Whitehead was a World War II veteran who attended Harvard Business School. One of his main contributions was a list of revolutionary business principles for Goldman Sachs:

 

1. Our client interests always come first, and success relies on best client service.

 

2. Our core assets are people, capital, and reputation.

 

3. We take pride in the professional quality of our work. We have determination to achieve excellence in what we try to accomplish. In a wide variety and heavy volume of work, we would rather be best than biggest.

 

4. We stress creativity and imagination in what we try to accomplish. We strive to find better solutions to the problems that our clients may face. We pioneer many of the best practices that have become standard in the financial industry.

 

5. We make a conscious effort to recruit the best person for every job. Although we can measure our activities in billions of dollars, we select our people one by one. In a service business, we cannot be the best firm without the best people.

 

6. We offer our team members the opportunity to move ahead faster (in contrast to business opportunities at most other places). Advancement depends solely on capability, performance, and contribution to our corporate success without regard to race, color, age, creed, gender, or national origin.

 

7. We emphasize teamwork in what we attempt to accomplish in time. While we encourage individual creativity, the results of a team effort are often better than the sum of the parts.

 

8. Our profits are a key to our success, replenish our capital, and attract and retain our best people. We share our profits generously with all team members.

 

9. Our people dedicate their key collegial team efforts to their jobs. This dedication exceeds what one finds in most other organizations.

 

10. We try hard to preserve the size of total assets under management. We want to be big enough to undertake the largest project that any of our clients could contemplate. Yet, we want to be small enough to maintain customer loyalty and esprit de corps that we all treasure as part of our business success.

 

11. Integrity and honesty are at the heart of our business. We expect our people to maintain high ethical standards in what our team members try to accomplish (both in their professional and personal lives).

 

12. We broaden our client relationships across the competitive industry spectrum. However, we serve as fair competitors and must never denigrate other firms.

 

During his tenure, Whitehead accelerated the global expansion of Goldman Sachs with transformative political connections. Through many mergers and acquisitions, Whitehead and Weinberg collaboratively boosted the capital account balance for Goldman Sachs from about $10 million to $750 million. In 1968, former Treasury Secretary Henry Fowler served as a senior partner and chairman of the Goldman Sachs International Advisory Committee. Whitehead persuaded State Secretary Henry Kissinger to head this committee with regular consultation at least twice per month. Whitehead retired in 1984. In 1985, he became Deputy Secretary of State in the Reagan administration.

Goldman Sachs suffered significant losses in the stock market crash of October 1987. In August 1990, Weinberg announced his retirement and then designated Robert Rubin and Steve Friedman as his co-successors. In 1991, Rubin served as the economic spokesman for the Bill Clinton presidential campaign. When Clinton won his presidential bid, Rubin accepted a White House post as the chairman of the National Economic Council and then left Goldman Sachs. His departure left Steve Friedman in sole charge of the investment bank. In the mid-1990s, Goldman Sachs made $2.7 billion pre-tax profits primarily from trading foreign currencies.

In September 1994, Friedman announced his retirement. At that time, there was an internal power struggle among the senior partners because there was no clear successor. The executive management committee eventually decided that senior partners Jon Corzine and Hank Paulson would become Goldman Sachs CEO and COO respectively.

When Corzine and Paulson took the reins, the investment bank was in a precarious financial position as the partners contributed only about $2 billion equity capital in support of $100 billion total assets under management. In June 1997, almost 75% of Goldman Sachs senior partners voted to proceed on an IPO. However, one of Goldman Sachs major counterparties, Long-Term Capital Management (LTCM), suffered significant losses due to the abrupt devaluation of the Russian ruble with a moratorium on the LTCM repayment of $13.5 billion in U.S. Treasury debt. These unforeseen events forced Goldman Sachs to recall its IPO on the basis of collateral damage from both the LTCM and Russian currency crises.

In March 1999, Goldman Sachs approved a successful IPO. The Corzine-Paulson co-rule had been tumultuous, and so Corzine announced his involuntary retirement. He later became a U.S. senator and governor of New Jersey. Paulson served as the next CEO of Goldman Sachs.

During 1999, Goldman Sachs became a public corporation, and its pre-tax income surged from $2.9 billion to more than $4 billion. In 2000, Goldman Sachs made its largest ever acquisition of Spear, Leeds, and Kellogg LLP and hence became the largest market-maker on the New York and American stock exchanges and further the second largest investment firm on Nasdaq.

From 1998 to 2005, Goldman Sachs traded lots of financial derivatives such as credit default swaps (CDS) and collateralized debt obligations (CDO). Most credit rating agencies such as S&P, Moodys, and Fitch had consistently issued top AAA and Aaa investment grades for key subprime mortgage-driven securities. In Spring 2006, the main credit rating agencies began to shed skeptical light on the subprime mortgage loans. Goldman Sachs decided to offload its mortgage-driven securities toward the end of the same year.

After Paulson consolidated control of Goldman Sachs, he identified Lloyd Blankfein as his heir apparent (even though Blankfein ranked behind 2 co-presidents in the corporate hierarchy). As a Harvard law graduate and former key corporate attorney, Blankfein had been managing the vital Goldman Sachs units that vigorously traded both currencies and commodities. In 2004, Paulson promoted Blankfein to serve as president and chief operating officer (COO). In May 2006, President George W. Bush nominated Paulson to be Treasury Secretary, so Blankfein became the next chairman and chief executive officer (CEO) at Goldman Sachs in July 2006. During his tenure, Blankfein ushered in a new era of explicit client exploitation as Goldman Sachs dominated financial markets worldwide.

By 2007, Goldman Sachs had underwritten $4 billion subprime mortgage securities and CDS deals and $8.4 billion CDOs. In the dramatic episode from June 2007 to September 2008, some firms such as Bear Stearns, American International Group (AIG), and Lehman Brothers began to experience key financial hardship in the U.S. subprime mortgage crisis. Treasury and Federal Reserve had to pour $85 billion taxpayer money into a government bailout to circumvent the negative Wall Street repercussions of financial trouble from Lehman to AIG. Throughout the subprime mortgage turmoil and global financial crisis of 2008-2009, Goldman Sachs betted on the big short with handsome profits amid substantial asset market uncertainty. From Goldman Sachs and JPMorgan Chase to Citigroup and Wells Fargo, most financial institutions recovered healthy profits in the next decade of an economic expansion after the global financial crisis of 2008-2009.

In 2018, David Solomon succeeded Lloyd Blankfein as the new chairman and CEO of Goldman Sachs. Unlike his predecessors, David Solomon had been an asset specialist throughout his professional career. As an investment banker, Solomon served as a major financial product specialist who sold investment-grade corporate bonds. Solomon had prescient insights into global asset market development and the importance of marking-to-market the actual market values (but not fair values) of stocks and bonds etc on the Goldman Sachs balance sheet. Moreover, Solomon appreciated the intrinsic value of sound and efficient financial risk management.

At Goldman Sachs, Solomon supported a comprehensive reformation of corporate culture with better work-life balance. He preached an active interest in keeping the maximum number of employee work hours about 70-to-75 hours per week. Under his leadership, Goldman Sachs raised salaries and bonuses for programmers and technical specialists, modernized computer systems and digital devices, protected intellectual properties (e.g. proprietary software solutions and platforms), instituted new video interviews, and maintained smart-casual dress codes. Solomon inspired many fresh talents to join Goldman Sachs for better financial literacy and inclusion.

Despite legal issues, potential conflicts of interest, and other controversies through its corporate history, Goldman Sachs continues be a world-class investment bank with core business insights and principles.

 

 

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