The Partnership: The Making of Goldman Sachs

The jury is still out on what the future of Goldman Sachs will look like, but no one can argue that the 139 year old firm has been (and, if Warren Buffett has his way, will be) the dominant investment banker and dealer on Wall Street. What does Buffett see that we on the outside do not? I‛s all about the people.

Charles D. Ellis has written a landmark book that could‛t come at a better time. The Partnership: The Making of Goldman Sachs is the colorful and fascinating story of Goldma‛s rise to power through many life-threatening changes in markets, competition, and regulation. It tells the personal history of the men and women who built the worl‛s leading financial powerhouse from a firm that was disgraced and nearly destroyed in 1929, limped along as a break-even operation through the Depression and WWII, and, with only one special service and one improbable banker, began the rise that, in half a century, took Goldman Sachs to global leadership.

A conversation with Charles Ellis:

* Is Goldman Sachs really a lot better than other firms at managing risk?

The big difference is in the cumulative power of many“smal” details. The difference in the speed, accuracy, and extent of communication inside the firm; the difference in intensity, focus, and disciplined toughness of the men and women hand selected to work there and real difference in recruiting, training, and compensation. All add up to a decisive advantage in management. Leaders and co-leaders manage Goldma‛s many business units with rigor and drive; risk management is the envy of other banks; and coordination is powerful across business units and markets around the world.

As every Olympic athlete knows, such small differences make all the difference between gold, silver or bronze – or no medal at all. In the current, very difficult test, Goldman Sachs has come in 1st – again.

* Goldman Sachs is often described as the best managed Wall Street firm. Is that true?

Yes, it is true. Goldman Sachs is the best managed“Wall Stree” firm – and the best led. Management is why Goldman Sachs is consistently rated the best firm to work for and gets top ratings from clients all over the world. Superior management is why the firm earns more profit, develops more effective people, has made itself the market leader in the U.S., U.K, Germany, France, China, Japan, and in most major lines of banking business. No other firm comes close.

One of the things you will learn in The Partnership is just how Goldman succeeded in making themselves different from any other Wall Street firm. They learned early on that in order to survive, they had to not only make money, but create a culture that was universal, that demanded absolutely loyalty and, most importantly, act as one organism.

* Why does Goldman Sachs put so much weight on its“cultur”?

Goldman Sachs culture works. In the complex, fast-changing, global, 24/7 securities business almost all the important decisions are made in highly specific and complex settings under great time pressure. These decisions cannot be made by headquarters and they cannot be deferred. They must be made locally by local market and business experts thousands of times every day.

Rules wo‛t work. If rules were written for every type of decision in all those different businesses in all the worl‛s different markets in all the different cultures, the resulting Rule Book would be far too large and complex to read or use.

Culture – its way of working – is the universal“stem cel” that enables Goldman Sachs to operate so forcefully in so many different national markets and in so many different businesses.

* With all its different business activities all over the world, does‛t Goldman Sachs have problems with conflicts of interest?

Yes! The firm certainly has many, many conflicts of interest. While it could take a defensive approach and try to avoid or minimize those risks of conflicts, the firm believes the more realistic and effective approach is to recognize those risks, be candid about them with clients and counterparties, and actively manage the conflicts. The firm strives to deal with each of them in such thoughtful and effective ways that clients and customers will know Goldman Sachs can be trusted to manage conflicts better than any other firm.

This is, of course, an assumption of enormous responsibility – particularly on the scale on which Goldman Sachs operates – so it raises the obvious next question: Who will watch the watcher?

"In this history of investment bank Goldman Sachs, Ellis (Winning the Loser's Game) covers the same ground as Lisa Endlich's Goldman Sachs: The Culture of Success — with notable stylistic differences. From Marcus Goldman's purchase of his first commercial paper in 1869 to the firm's current success, Ellis's account is lively and engaging where Endlich's is accurate but dry. Ellis sheds light on events through dialogue and detailed descriptions of people's thoughts and feelings, embellishments that the author terms 'recreations' in his epilogue. The effect of infusing such narrative techniques into the history of Goldman Sachs is entertaining, but it pushes the envelope of nonfiction, especially since the author appears to have interviewed only former partners of the firm. More damagingly, Ellis fails to report much about actual business, and attempts to do so — such as a chapter on Rockefeller Center financing — require lengthy digressions and are incomprehensible due to the complexities of the transactions. Without links to business, boardroom conflicts take on the air of petty squabbles. More a composite memoir of senior Goldman partners than a traditional history, this book will satisfy readers curious about the philosophies and personalities of the firm." Publishers Weekly (Copyright Reed Business Information, Inc.)

Goldman, like McKinsey or Cravath or Madonna, is one of those fabulously wealthy New York entities known by a single name. Goldman, of course, is Goldman Sachs, the elite among Wall Street's remaining investment banks, a 130-year-old firm that has managed to prosper in good times and bad. The last remaining major private partnership on Wall Street until it went public in 1999, Goldman has generated... Washington Post Book Review (read the entire Washington Post review) both larger-than-life profits and financial statesmen. In the past 60 years, as Charles D. Ellis notes in this doorstopper of a book, it has grown from a small-time player into "a global juggernaut ... with such strengths that it operates with almost no external constraints in virtually any financial market it chooses, on the terms it chooses, on the scale it chooses, when it chooses, and with the partners it chooses." In the months since Ellis penned those lines, Goldman, hammered by the credit crisis, has pulled in its horns significantly.

How a small peddler of commercial paper grew into an enormously profitable, highly respected firm is an epic story. But "The Partnership," though always useful and occasionally riveting, isn't an epic history. Ellis, who founded Greenwich Associates and is a longtime consultant to financial services companies, cuts through the shrouds of mystery that surround Goldman, which jealously guards its privacy, but his book reads more like a group of highly accessible, well-informed case studies.

Marcus Goldman, a German Jewish immigrant, and his son-in-law Samuel Sachs turned their firm into a powerhouse in the niche market of financing small businesses in the 1890s. The firm began to break into the mainstream of Wall Street by teaming up with Lehman Brothers and financing such companies as Sears and Woolworth. Sidney Weinberg, who hired on to clean brass spittoons in 1907 and became the first nonfamily partner 20 years later, led the firm from 1930 to 1969. Irreverent and whip-smart, Weinberg was the first Goldman Sachs leader to assume a national profile, advising President Franklin D. Roosevelt and becoming assistant to the chairman of the War Production Board. Weinberg scored a great coup by winning the assignment to manage Ford Motor Co.'s initial public offering in January 1956.

Weinberg was one of many forceful personalities to lead the firm. He was succeeded by Gus Levy, a New Orleans-born Tulane dropout who became a legendary trader and nurtured a young recruit named Robert Rubin, who eventually became a highly influential member of the Clinton administration. Ellis' descriptions of how Goldman built the components of a universal investment banking firm — asset management, institutional sales, wealth management, block trading — are highly useful, especially to young MBAs. As Ellis points out, Weinberg protege John Whitehead's "'phalanx' organization — ad hoc combinations into effective teams of interchangeable specialists — was virtually unstoppable against any competitors organized in the old-fashioned 'one banker does it all' star system."

Readers may leave the book wondering how — and why — Goldman sends so many of its leaders to Washington. Whitehead, co-chairman at Goldman in the late 1970s and early '80s, served as deputy secretary of state in the second Reagan administration. Rubin's co-managing partner, Steve Friedman, served as director of President George W. Bush's National Economic Council. Jon Corzine, who led the firm in the mid-1990s, entered politics after he was pushed out in 1999 (he is now governor of New Jersey). His ouster from Goldman was engineered by Henry Paulson, who is now the Treasury secretary.

Ellis enjoyed privileged access to the partners of Goldman, who have been his clients for many years. And while he serves up plenty of pabulum — "Niceness, intensity, and integrity are the three key words to describe Goldman Sachs," he quotes one partner as saying — he also exposes Goldman's many warts. The firm dropped a series of dot-com bombs on the public in the 1990s and had to pay a hefty fine as part of Wall Street's settlement over research practices (the firm bizarrely takes pride in having paid only $110 million, while archrival Morgan Stanley paid $125 million). He recounts in great detail the work Goldman did for rogue financier Robert Maxwell and mentions a 1970 episode in which a Goldman recruiter told a Stanford student that he couldn't be considered for a job because he was black.

Ellis is at his best in providing insight into the behavior of the firm's Type A mindset. Friedman, left to run the firm alone when Rubin joined the Clinton administration, stepped down in 1994 after suffering a health scare. Since his announcement came just after the firm had racked up big trading losses, Friedman — an all-Ivy wrestler at Cornell — was tagged as a quitter. Corzine, who doesn't seem to have sat for interviews, comes across as self-aggrandizing, a dangerous freelancer. "It's not that he always thinks he's right; it's that he knows he's right," said partner Bob Hurst of Corzine. "That's dangerous." In Ellis' telling, the coup organized against Corzine by Paulson and several others seems to have been deserved.

Given that Paulson is effectively running the economy for the next several months, I looked forward in particular to the chapter on him. He's described as "pragmatic, hard working, disciplined, and determined" and "so consistently serious that it must have been a bit much for others." While Ellis is great on how Paulson and his colleagues mastered the nuts and bolts of Wall Street, I was left wanting more insight into what, beyond money, drove these people and why they were propelled onto the national stage.

Finally, the risk of writing about existing companies is that the last chapter can frequently become inoperative. Ellis closes with a discussion of current CEO Lloyd Blankfein's strategy to marry the traditional role of agency (acting on behalf of clients) and principal (using the firm's own money). While Goldman hasn't gone bust like its old partner Lehman Brothers, it has taken some hits. A large hedge fund that Goldman started lost nearly 40 percent of its value in 2007. To avoid the fate of Bear Stearns and Lehman, Goldman is transforming itself from a sexy investment bank into a more staid commercial bank, able to take deposits. And in September, to stave off a potential run on the bank, it turned to Warren Buffett, who invested several billion dollars but demanded a 10 percent interest rate. Now a subprime borrower, Goldman faces a growing number of external constraints.

Reviewed by Daniel Gross, a columnist for Newsweek and Slate, Washington Post Book World (Copyright 2006 Washington Post Book World Service/Washington Post Writers Group)
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With unparalleled access to the firm's enigmatic leadership, "The Partnership" chronicles the men who built Goldman Sachs, one of the world's largest investment banks.

Charles D. Ellis is a consultant to large institutional investors and government agencies. For thirty years he was managing partner of Greenwich Associates, an international business strategy consulting firm he founded that serves virtually all the leading financial service organizations around the world. Ellis earned his M.B.A. from Harvard University and his Ph.D. from New York University. He has taught investment management courses at Harvard and Yale, and is the author of twelve books. Ellis has served on the boards of Harvard Business School and Phillips Exeter Academy and is currently chairman of the Whitehead Institute for Biomedical Research, a trustee of the Robert Wood Johnson Foundation, a director of Vanguard, and a trustee and chair of the investment committee at Yale University.