What Happened to Goldman Sachs. Steven G. Mandis

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      Gus Levy, a senior partner at Goldman from 1969 until his death in 1976, originated the maxim, mentioned earlier, that expressed the proper attitude for Goldman partners: “greedy, but long-term greedy.”⁴⁴ These words helped remind partners to focus on the future, as evidenced by the nearly 100 percent reinvestment of partners’ earnings. One author interprets Goldman’s long-term greedy mantra to mean that “while the firm worked in its own interest, it did so in a manner consistent with the long-term health of its industry, business, and clients.”⁴⁵ This was not purely a matter of altruism. Goldman existed to make money for its partners, not only at the moment but also for years to come. Goldman cultivated an image of responsibility, trust, and restraint by intimating that the firm held itself to a higher standard than other firms.⁴⁶

      The emphasis on long-term greedy also explains in part why employees were willing to work grueling hours for relatively modest wages. In the long term, if they made partner they would more than make up for the sacrifice. Lower wages in one’s early years with the firm were part of Goldman’s strategy for success—part of the business model—because the less that was paid to nonpartners, the more the partners got paid.⁴⁷ Goldman got its employees to buy into long-term greedy for themselves, and the Goldman culture was distinctive enough that people wanted to work there even if they worked harder and for less money than did competitors.

      Many of the partners I interviewed cautioned me that Goldman was not always all about teamwork, collaboration, and shared values. Hiring mistakes were made. Indiscretions were dealt with. Politics did enter into the picture the further one moved up, and there were sharp elbows. But in the end, the principles generally won out. People came and went, but generally the culture and principles remained. Just as the policy of not advising hostile raiders (see chapter 5) and keeping the client first were good business decisions, so was getting people to buy into a culture and a purpose—it made the partners (who were certainly greedy) more money over time and helped sustain the money machine for the next generation.

      Very few people left Goldman voluntarily. When I was an analyst, in the early 1990s, a respected associate decided to leave and join his father’s business, and we had a department meeting to discuss this shocking event. The purpose of the session was to make us feel that in this one instance, it was acceptable; he was going to work with his family, and that was just barely excusable. I would have thought that many people would leave because of the lower pay than peers and the slim chances of becoming a partner. But voluntary turnover was less than 5 percent, I was told—significantly below the industry average in the 20 percent range.

      Generally, Goldman bankers obsessed more about making partner and their relative compensation than they did about their absolute compensation. Their social identity was so bound up, through their socialization at the firm, with what Goldman valued, that bankers routinely turned down multiyear guaranteed contracts for significantly more money at other firms, even when the possibility that they would make partner at Goldman was, according to my interviews, less than 5 percent to 10 percent.⁴⁸ After their socialization into Goldman, working at any other firm, regardless of the title or compensation, would seem to them a step down, according to many of the people I interviewed.⁴⁹

      Goldman bankers were also generally convinced that they were the best—that they worked at the best firm, with the best people, and with the best brand. At the same time, they were convinced that teamwork and a team relationship with clients were so important that their own value as bankers outside Goldman would be diminished. The socialization process made well-educated, thoughtful, talented people believe that Goldman made them better bankers than they could be elsewhere. Blankfein summarized the culture as “an interesting blend of confidence and commitment to excellence, and an inbred insecurity that drives people to keep working.”⁵⁰ Although it seems he was talking about an insecurity that motivated people to keep working harder and longer, this inbred insecurity is a paradox.

      Nostalgia

      I do not want to wax nostalgically about the good old days. I did on occasion observe vice presidents and partners acting in a way that might not be considered in the best interests of clients, though those were exceptions to the rule. For example, I remember working with an associate on a project advising a company that was buying a small subsidiary of another company. The partner was extremely busy and traveling, and although we sent him our analysis and kept scheduling calls to speak to him, he always canceled our discussions. He showed up less than a few hours before our client meeting, and, based on his questions, it appeared as if he had not read anything we sent him and was not prepared. This surprised me, because usually partners were highly detail oriented and well prepared.

      He asked us for our valuation analysis, the value of the synergies, and the price the seller wanted. The asking price was higher than our valuation analysis (a breakdown that is more art than science). Moreover, our estimates of the potential synergies (the cost savings and revenue enhancement resulting from the deal), which meaningfully impacted the value, were highly subjective. When we met with the client CEO, the Goldman partner claimed that he had “been poring over the numbers all day and night” and he thought that if the company could buy the business at X price (coincidentally, the asking price we’d told the partner), then it was a good deal for strategic reasons.

      When he said this, the associate and I looked at each other and then looked down. I reasoned that he might have been poring over the numbers without my knowledge, or maybe he meant “the team” had been. The deal ultimately got done; Goldman was paid a fee; and the partner was right—it was a strategic success, and the synergies justified the price. But it was one of the few times when I was junior that I privately questioned the approach. As for the other junior associate, we never really discussed what the partner had said.⁵¹

      A few times I questioned coworkers directly when I felt it was appropriate. For example, I was tangentially helping a team led by a vice president in selling a company, and when the final bids and contracts were due from all the potential buyers at the same time in a sort of sealed auction process, only one buyer submitted a bid, and the bid price was less than the amount our client was willing to sell for. It seemed to be a delicate situation, because we had little negotiating leverage to persuade the only potential buyer to pay more. Also, the bidder was a good client of Goldman’s. However, the vice president called the sole bidder and said, “We had a number of bids” and told the bidder that to win the auction, he would have to raise his bid.

      I questioned him, and based on his facial expression and the tone of his response, I don’t think he appreciated my inquisitiveness. He pointed out to me that he had said “a number of bids,” and “in this instance, the number is one.”

      Ultimately, the bidder raised his price and ended up buying the company. When the vice president told the client exactly what he had done and said, the client chuckled approvingly.⁵²

      Then there are things I was uncomfortable with that I never raised through the proper channels—by speaking with vice presidents, partners, my big buddy, or my mentor, or by writing about the issues in “confidential and anonymous” reviews and surveys. Maybe it was because I didn’t trust the system or didn’t know how people would react. Maybe I was worried about developing a reputation as a tattletale or, worse, losing my job—something I couldn’t afford. Stories were quietly discussed and passed down—stories of people having challenged behavior or things said in confidence that got back to the wrong people, and then slowly and subtly those people would be “transitioned out.” Ironically, sometimes the guilty parties were characterized as not being team players or not embodying the culture when he or she left or was demoted. I was trying to figure out what was right and what was wrong—what was acceptable and what wasn’t—which, it seemed, wasn’t always black and white. In the story just related, the client seemed happy and the vice president didn’t “technically lie.” Technically, one could rationalize, we did put our client’s interests first.

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