What Happened to Goldman Sachs: An Insider's Story of Organizational Drift and Its Unintended Consequences (4 page)

Goldman and Me

The question of what happened to Goldman has special resonance for me. I have spent eighteen years involved with the firm in one way or another: twelve years working for Goldman in a variety of capacities, and another six either using its services as a client or working for one of its competitors. I still have many friends and acquaintances who work there.

In 2010, I was about to start teaching at Columbia University’s Graduate School of Business and shortly would be accepted to the PhD program in sociology at Columbia. The sociology program in particular—which required that I find a research question for my PhD dissertation—provided me with many of the tools I needed to start to answer my question. I decided to pursue a career as a trained academic instead of relying solely on my practical experiences. The combination of the two, I thought, would be more rewarding and powerful for both my students and myself. When I began the study that would become this book, my hypothesis was that the change in Goldman’s culture was rooted in the IPO. I conjectured that what fundamentally changed the culture was the transformation—from a private partnership to a public company. As I learned more, I realized that the truth was more complicated.

My analysis of the process by which the drift happened is deeply informed by my own experiences. Though some may think this has made me a biased observer, I believe that my inside knowledge and experience in various areas of the firm—from being based in the United States to working outside the United States, from working in investment banking to proprietary trading, from being present pre- and post-IPO—combined with my academic training gives me a unique ability to gather and analyze data about the changes at Goldman. My close involvement with Goldman deeply informs my analysis, so it’s worth reviewing the relationship. A brief overview of my career also reveals how Goldman’s businesses work.

In 1992, fresh from undergraduate studies at the University of Chicago, I arrived at Goldman to work in the M&A department in the investment banking division. M&A bankers advise the management and boards of companies on the strategy, financing, valuation, and negotiations of buying, selling, and combining various companies or subsidiaries. For the next dozen years, I held a variety of positions of increasing responsibility. My work exposed me to various areas, put me in collaborative situations with Goldman partners and key personnel, and allowed me to observe or take part in events as they unfolded.

I rotated through several strategically important areas. First I worked in M&A in New York and then M&A in Hong Kong, where I witnessed the explosive international growth firsthand with the opening of the Beijing office. Next, I returned to New York to assist Hank Paulson on special projects; Paulson was then co-head of investment banking, on the management committee, and head of the Chicago office. Also, I worked with the principal investment area (PIA makes investments in or buys control of companies with money collectively from clients, Goldman, and employees). Then I returned to M&A, rising to the head of the hostile raid defense business (defending a company from unsolicited take-overs—one of the cornerstones of Goldman’s M&A brand and reputation) and becoming business unit manager of the M&A department. Finally, I ended up as a proprietary trader and ultimately portfolio manager in the fixed income, commodities, and currencies division (FICC)—similar to an internal hedge fund—managing Goldman’s own money. My rotations to a different geographic region and through different divisions were typical at the time for a certain percentage of selected employees in order to train people and unite the firm.

Throughout my career at Goldman, I served on firm-wide and divisional committees, dealing with important strategic and business process issues. I also acted as special assistant to several senior Goldman executives and board members, including Hank Paulson, on select projects and initiatives such as improving business processes and cross-department communication protocols. Goldman was constantly trying to improve and setting up committees with people from various geographic regions and departments to create initiatives. I was never a partner at Goldman. I participated in many meetings where I was the only nonpartner in attendance and prepared analysis or presentations for partner meetings, or in response to partner meetings, but I did not participate in “partner-only” meetings.

As a member of the M&A department, I worked on a team to advise board members and CEOs of leading multinational companies on large, technically complex transactions. For example, I worked on a team that advised AT&T on combining its broadband business with Comcast in a transaction that valued AT&T broadband at $72 billion. I also helped sell a private company to Warren Buffett’s Berkshire Hathaway. As the head of Goldman’s unsolicited take-over and hostile raid defense practice, I worked on a team advising a client involved in a proxy fight with activist investor Carl Icahn.

When I joined Goldman, partnership election at the firm was considered one of the most prestigious achievements on Wall Street, in part because the process was highly selective and a Goldman partnership was among the most lucrative. The M&A department had a remarkably good track record of its bankers being elected—probably one of the highest percentages of success in the firm at the time. The department was key to the firm’s brand, because representing prestigious blue chip clients is important to Goldman’s public perception of access and influence that makes important decision makers want to speak to Goldman. M&A deals were high profile, especially hostile raid defenses. M&A was also highly profitable and did not require much capital. For all these reasons, a job in the department was highly prized, and the competition was fierce. When the New York M&A department hired me, it was making about a dozen offers per year to US college graduates to work in New York, out of what I was told were hundreds of applicants.

While in the department, I was asked to be the business unit manager (informally referred to as the “BUM”). I addressed issues of strategy, business processes, organizational policy, business selection, and conflict clearance. For example, I was involved in discussions in deciding whether and how Goldman should participate in hostile raids, and in discussing client conflicts and ways to address them. The job was extremely demanding. After a relatively successful stint, I felt I had built enough goodwill to move internally and do what I was more interested in: being an investor. I hoped to ultimately move into proprietary trading or back to Principal Investment Area (PIA), Goldman’s private equity group.

Many banking partners tried to dissuade me from moving out of M&A. However, I wanted to become an investor, and a few partners who were close friends and mentors helped me delicately maneuver into proprietary investing. I was warned, “If you lose money, you will most likely get fired, and do not count on coming back to banking at Goldman. But if you make money for the firm, then you will get more money to manage, which will allow you to make more money for the firm and yourself.”

Today people ask me whether I saw the writing on the wall—that the shift to proprietary trading was well under way and would continue at Goldman—and whether that’s why I moved. To be honest, I didn’t give it as much thought as I should have. My work in helping manage the M&A department and assisting senior executives on various projects exposed me to other areas of the firm and the firm’s strategy and priorities. When you’re in M&A, you work around the clock. You don’t have time for much reflection or career planning. (This may be, upon reflection, part of the business model and be a contributor to the process of organizational drift.) You’re working so intensely on high-profile deals—those that end up on page 1 of the
Wall Street Journal
—that you’re swept up in the importance of the firm’s and your work. Your bosses tell you how important you are and how important the M&A department is to the firm. They remind you that the real purpose of your job is to make capital markets more efficient and ultimately provide corporations with more efficient ways to finance. So you rationalize that there’s a noble and ethical reason for what you and the firm are doing. In general, I greatly respected most of the investment banking partners that I knew. And I certainly didn’t have the academic training, distance, or perspective to analyze the various pressures and small changes going on at the firm and their consequences. I do remember simply feeling like I should be able to do what I wanted and what I was interested in at Goldman—an entitlement that I certainly did not feel earlier in my career, and maybe one I picked up from observations or the competitive environment for Goldman-trained talent.

Paulson, a banker, was running the firm, and several others from banking whom I considered mentors held important positions. So even though it was no secret that revenues from investment banking had declined as a percentage of the total, I didn’t think very much about that, nor did I consider its consequences. One longtime colleague and investment banking partner pulled me aside to tell me that moving into proprietary trading was the smartest thing I could do and that he wished he could take my place. When I asked why, he said, “More money than investment banking partners, faster advancement, shorter hours, better lifestyle, you learn how to manage your own money, and, one day, you can leave and start your own hedge fund and make even more money—and Goldman will support you.” I assured him I was only trying to do what interested me, but I agreed it would be nice to travel less, work only twelve-hour days, and spend more time with my wife and our newborn daughter. When I asked why he didn’t tell me this before, he said, “Then we would have had to find and train someone else.”

I became a proprietary trader and then a portfolio manager in Goldman’s FICC Special Situations Investing Group (SSG). We built it into one of the largest, most successful dedicated proprietary trading areas at Goldman and on Wall Street. Created during the late 1990s, SSG initially primarily invested Goldman’s money in the debt and equity of financially stressed companies and made loans to high-risk borrowers (although we expanded the mandate over time). SSG was separated from the rest of the firm, meaning we sat on a floor separate from the trading desks that dealt with clients. We were called on as a client by salespeople at Goldman and the rest of Wall Street as if we were a distinct hedge fund. We did not deal with clients.

Even separated as we were, we had the potential for at least the perception of conflicts of interest with clients. For example, we could own the stock or debt of a company when, unknown to us, the company would hire Goldman’s M&A department to review strategic alternatives or execute a capital market transaction such as an equity or debt offering. In that case we could be “frozen,” meaning we were restricted from buying any more related securities or selling the position, something that would place us at a potential disadvantage because we could not react to new information. If we wanted to buy the securities of a company, and unbeknownst to us Goldman’s bankers were advising the company on a transaction, we could be blocked from the purchase.

The biggest advantage I believed we had over our competitors—primarily hedge funds—was that we had a great recruiting and training machine in Goldman; we could pick the very best people in the company. Most had heard that we were extremely entrepreneurial, that we gave our people a lot of responsibility and ability to make a larger impact, that we were extremely profitable, and that we paid very well. Those from SSG also had an excellent track record of eventually leaving to set up or join existing hedge funds. We also had infrastructure—technology, risk management systems, and processes—that was unmatched by Wall Street banks, because Goldman invested heavily in it, recognizing the strategic importance of the competitive advantage it gave us.

We were trained to run investing businesses (for example, evaluating and managing people and risk or setting goals and measureable metrics). We had access to almost any corporate management team or government official through the cachet of the Goldman name and its powerful network. We also had a low cost of capital, because Goldman borrowed money at very low rates from debt investors, money that we then invested and generated a return a good deal higher than the cost of borrowing. We had one client—Goldman—and this was good, because it meant we did not have to approach lots of clients to raise funds. However, it was also a bad thing, because all the capital came from one investor. If Goldman (or the regulators, as later happened with the Volcker Rule) decided it should no longer be in the business, you were out of a job, although it was likely many others would want to hire you.

When I started in proprietary trading in FICC, I immediately noticed one big difference from the banking side. Although my new bosses were smart, sophisticated, and supportive, and as demanding as my investment banking bosses, there was an intense focus on measuring relatively short-term results because they were measurable. Our performance as investors was
marked to market
every day, meaning that the value of the trades we made was calculated every day, so there was total transparency about how much money we’d made or lost for the firm each and every day. This isn’t done in investment banking, although each year new performance metrics were being added by the time I left for FICC. Typically in banking, relationships take a long time to develop and pay off. A bad day in banking may mean that, after years of meetings and presentations performed for free, a client didn’t select you to execute a transaction. You could offer excuses: “The other bank offered to loan them money,” “They were willing to do it much cheaper,” and so on. It was never that you got outhustled or that the other firm had better people, ideas, coordination, relationships, or expertise, something that would negatively reflect on you or the firm (or both). In proprietary trading, there were no excuses for bad days of losses. We were expected to make money whether the markets went up or down. There was another thing I learned quickly. One could be right as a trader, but have the timing wrong in the short term and be fired with losses that then quickly turned around into the projected profits. In addition, relative to banking, in judging performance the emphasis seemed to tilt toward how much money one made the firm versus more subjective and less immediately profitable contributions. The fear of this transparency and the potential for failure kept many bankers from moving to trading.