STEVEN G MANDIS WHAT An Insider’s Story HAPPENED of Organizational Drift TO and its GOLDMAN Unintended Consequences SACHS? Harvard Business Review Press Boston, Massachusetts Copyright 2013 Harvard Business School Publishing All rights reserved The views and opinions expressed in this book are strictly those of the author and not necessarily reflect those of any organization with which the author has been or is affiliated The contents of this book have not been approved by any organization with which the author has been or is affiliated Analyses performed within this book are based on theories, are only examples, and reply upon very limited and dated information and require various and subjective assumptions, interpretations, and judgments The author’s opinions are based upon information he considers reliable; however, it may be inaccurate or may have been misinterpreted The reader should not treat any opinion expressed in this book as a specific inducement to make a particular investment or follow a particular strategy, but only as an expression of the author’s opinion No part of this publication may be reproduced, stored in or introduced into a retrieval system, or transmitted, in any form, or by any means (electronic, mechanical, photocopying, recording, or otherwise), without the prior permission of the publisher Requests for permission should be directed to permissions@hbsp.harvard.edu, or mailed to Permissions, Harvard Business School Publishing, 60 Harvard Way, Boston, Massachusetts 02163 Library of Congress Cataloging-in-Publication Data Mandis, Steven G What happened to Goldman Sachs: an insider’s story of organizational drift and its unintended consequences/Steven G Mandis pages cm ISBN 978-1-4221-9419-5 (hardback) Goldman, Sachs & Co Investment banking—United States—Management Corporate governance—United States Global Financial Crisis, 2008–2009 I Title HG4930.5.M36 2013 332.660973—dc23 201301870 The web addresses referenced in this book were live and correct at the time of the book’s publication but may be subject to change ISBN: 9781422194195 eISBN: 9781422194201 This book is dedicated to my devoted wife, Alexandra, and my two loving daughters, Tatiana and Isabella They were my cheerleaders through many long days and nights of working, studying, and writing I would also like to thank my parents, George and Theoni, who immigrated to America from Greece with very little money and no knowledge of English They quietly sacrificed so that my brother Dean, my sister Vivian, and I could have a better life They taught us the meaning of values and hard work as well as the power of the combination of these two qualities They asked for only one thing in return—for us to strive to give our children more opportunities than they had been able to give us Contents Prologue: A Funeral What Happened PART ONE How Goldman Succeeded Shared Principles and Values The Structure of the Partnership PART TWO Drift Under Pressure, Goldman Grows Quickly and Goes Public Signs of Organizational Drift PART THREE Acceleration of Drift The Consequences of Going Public From Principles to a Legal Standard PART FOUR Goldman’s Performance Nagging Questions: Leadership, Crisis, and Clients Why Doesn’t Goldman See the Change? Conclusion: Lessons Appendix A: Goldman and Organizational Drift Appendix B: Analytical Framework Applied to Goldman Appendix C: Selected Goldman Employees and Lobbyists with Government Positions (Before or After Goldman) Appendix D: Value of Partners’ Shares at IPO Appendix E: Goldman’s History of Commitment to Public Service Appendix F: Key Goldman People Appendix G: Goldman Timeline of Selected Events Appendix H: Goldman’s Culture and Governance Structure Notes Acknowledgments About the Author Prologue A Funeral ON SEPTEMBER 25, 2006, I FILED INTO THE MEMORIAL service for John L Weinberg, senior partner of Goldman Sachs from 1976 to 1990 More than a thousand people filled Gotham Hall in New York to pay their respects John L (as he was often referred to within Goldman, to distinguish him from other Johns at the firm) was the product of Princeton and Harvard Business School and the son of one of the most powerful Wall Street bankers, Sidney Weinberg, who had literally worked his way up from janitor to senior partner of Goldman and who had served as a confidant to presidents The program listed a Goldman honor roll of those who would speak, including Lloyd Blankfein, the firm’s current chairman and CEO; John Whitehead, who had run the firm with John L.—the two of them were known as “the Johns”—and who had left Goldman in 1985 to serve as deputy secretary of state; Robert Rubin, who had gone from co-senior partner in the early 1990s to secretary of the Treasury; Hank Paulson, who had run Goldman when it went public on the New York Stock Exchange (NYSE) in 1999 and had just become secretary of the Treasury; John S Weinberg, John L.’s son and current vice chairman of Goldman; and Jack Welch, former chairman and CEO of General Electric and a long-standing client of John L.’s Welch’s eulogy stood out His voice cracking, holding back tears, he said, “I love you, John Thanks for being my friend.” Imagine a CEO today saying that about his investment banker and almost breaking down at the banker’s memorial service John S tried to lighten the mood with a funny line: “My father’s favorite thing in life was talking to his dogs, because they didn’t talk back.” But he caught the essence of John L when he said, “He saw right and wrong clearly, with no shades of gray.” John L was a veteran, having served in the US Marine Corps in both World War II and Korea, and the recessional was the “Marine Hymn.” The lyrics “keep our honor clean” and “proud to serve” seemed to provide a perfect end to the service From 1976, when the two Johns became cochairmen, until John L.’s death in 2006, Goldman grew from a modest, privately owned investment banking firm focused on the United States—with fewer than a thousand employees, and less than $100 million in pretax profits—to the most prestigious publicly traded investment bank in the world The firm boasted offices all over the globe, more than twenty-five thousand employees, almost $10 billion in pretax profits, a stock price of almost $200 per share, and an equity market valuation of close to $100 billion I had left Goldman in 2004 after a twelve-year career, a few months after my Goldman IPO stock grant had passed the five-year required vesting period I had moved on to become a trading and investment banking client of Goldman’s I went to John L.’s memorial service out of respect for a man I had known and admired—a Wall Street legend, although one would never have guessed that from his demeanor I also wanted to support John S., whom I considered (and still consider) a mentor and a friend (See appendix F for an annotated list of key Goldman partners over the years.) I first met John L in 1992, when I was a Goldman financial analyst six months out of college The legend of Sidney and John L Weinberg was one of the things that had attracted me to Goldman, and I was excited at the prospect of meeting him I identified with John L because we were both sons of parents who came from humble beginnings I figured if John L.’s father could start by emptying spittoons and end up running Goldman, then anything was possible for me, the son of Greek immigrants My father had started as a busboy at the Drake Hotel in Chicago, and my mother worked at a Zenith TV assembly factory I met John L early in my time at Goldman, as a financial analyst in the M&A department, when I interviewed him as part of a work assignment I was asked to make a video on the history of the M&A department to be shown at an off-site department outing Goldman was enthusiastic about documenting and respecting its history and holding off-site outings to promote bonding among the employees In the interview John L could not have been more jovial and humble At t46/annurev.soc.25.1.271 Allan Sloan, “An Unsavory Slice of Subprime,” Washington Post, October 16, 2007, http://www.washingtonpost.com/wp- dyn/content/article/2007/10/15/AR2007101501435.html Andrew Clark, “Success Shines Unwelcome Spotlight on to Goldman Sachs,” The Guardian, December 21, 2007, http://www.guardian.co.uk/business/2007/dec/21/goldmansachs.useconomy M Taibbi, “The Great American Bubble Machine,” Rolling Stone, April 5, 2010, http://www.rollingstone.com/politics/news/thegreat-american-bubble-machine-20100405 “Mergers & Acquisitions Review,” Thomson Reuters, 2011, http://dmi.thomsonreuters.com/Content/Files/4Q11_MA_Financial_Advisory_Review.pdf G 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 Acknowledgments I would like to thank the faculty, graduate students, and administrators at the Department of Sociology at Columbia University, and in particular Professor David Stark, my thesis adviser and mentor, and Professor Josh Whitford, the director of graduate studies, for their training, support, and advice In addition, I would like to thank the faculty and administrators, as well as my MBA and Executive MBA students, at Columbia Business School for their encouragement I want to thank my agent, Susan Rabiner, who, together with my editor at Harvard Business Review Press, Tim Sullivan, saw my PhD dissertation for what it was—a book not just about Goldman Sachs, but a book that brings business and finance together with sociology to improve the study of management, sociology, and public policy They understood my vision and helped make it a reality Thank you to those I interviewed I would love to recognize your contributions, patience, and time on an individual basis, but I want to respect your privacy Many professionals, professors, students, classmates, research assistants, and friends helped with my training and/or the book Many thanks to Gary Ashwill, Red Ayme, Peter Bearman, Erin Brown, Soman Chainani, Manu Chander, Sidney Dekker, Helena Ding, Yige Ding, Erin Dolias, Nate Emge, Gil Eyal, Michelle Fan, Stephani Finks, Joe Gannon, Jie Gao, Kyle Gazis, Katrin Giziotis, Angel Gonzalez, Angelito Gonzalez, Simon Gonzalez, Ryan Hagen, Kathryn Harrigan, Charles Harrison, Simon Head, Jon Hill, Gailen Hite, Karen Ho, Paul Ingram, Jane Jacobi, Sam Johnson, El Kamada, Ko Kuwabara, Nan Liu, Emily Loose, Yao Lu, Evangelos Lyras, Donald MacKenzie, Jeff Madrick, Kinga Makovi, Yarden Mariuma, Joanne Martin, Charles Masson, Debra Minkoff, Carlos Morei, Joy Nee, Olivia Nicol, James O’Shea, Neni Panourgia, Christina Perez, Allison Peter, Damon Phillips, Katherine Phillips, Joyce Plaza, Paula Reid, Ernesto Reuben, Tim Rich, Nan Rothschild, Jonathan Salky, Krista Schult, Hersche Shintre, Hana Sromova, Richard Swedberg, Noriyuki Takahashi, Matthias Thiemann, Mathijs de Vaan, Diane Vaughan, Oliver Wai, Karl Weber, Joanne Willard, Sang Won, Stacy Xing, and Xu Zang I would like to thank those who have researched and written about Goldman Sachs over the years, because without their diligent work it would have been impossible to write my PhD dissertation Many are cited in my work and some are not, but I want to specifically acknowledge a few: Justin Baer, William Cohan, Susanne Craig, Charles Ellis, Lisa Endlich, David Faber, Richard Freedman, Boris Groysberg, Jonathan Knee, Susan McGee, Bethany McLean (who was in my Goldman 1992 M&A analyst class), Gretchen Morgenson, Andrew Serwer, Scott Snook, David Ross Sorkin, Louise Story, Matt Taibbi, Gillian Tett, Jill Vohr, the US Senate Subcommittee on Investigations, and the US Securities and Exchange Commission I would like to thank some people who manage to be pragmatic and entertaining at the same time: ... Data Mandis, Steven G What happened to Goldman Sachs: an insider’s story of organizational drift and its unintended consequences/ Steven G Mandis pages cm ISBN 97 8-1 -4 22 1-9 41 9-5 (hardback) Goldman, ...STEVEN G MANDIS WHAT An Insider’s Story HAPPENED of Organizational Drift TO and its GOLDMAN Unintended Consequences SACHS? Harvard Business Review Press Boston, Massachusetts Copyright... Doesn’t Goldman See the Change? Conclusion: Lessons Appendix A: Goldman and Organizational Drift Appendix B: Analytical Framework Applied to Goldman Appendix C: Selected Goldman Employees and Lobbyists