Synopses & Reviews
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? Its all about the people.
Charles D. Ellis has written a landmark book that couldnt come at a better time. The Partnership: The Making of Goldman Sachs is the colorful and fascinating story of Goldmans 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 worlds 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 small 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 Goldmans 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 Street 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 culture?
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 wont work. If rules were written for every type of decision in all those different businesses in all the worlds 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 cell 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, doesnt 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.)
Just 10 days ago, Goldman Sachs chief executive Lloyd Blankfein made the stunning announcement -- during this season of jaw-dropping developments on Wall Street -- that the renowned investment-banking firm would morph into a traditional bank holding company, accepting onerous regulation in exchange for much-needed access to cash reserves. How could this happen to the country's most powerful investment bank? Charles D. Ellis's engaging history of the company, "The Partnership
," provides some clues -- about Goldman Sachs and about Wall Street writ large.
"The Partnership" follows the firm from its beginnings as a commercial- paper dealer in 1869 (essentially recruiting investors to extend lines of credit to companies) to its emergence as the world's pre-eminent financial- services firm. A much-debated decision to sell Goldman shares to the public in 1999 was a watershed event, perhaps encouraging riskier behavior than would have been tolerated by partners with their own capital at stake. Similarly, the explosion in proprietary trading profits in recent years -- from trades using the bank's own money -- propelled overconfident Goldman bankers to up their bets.
Obviously, Mr. Ellis, a longtime consultant at Goldman, finished his chronicle before the big storm hit Wall Street. Still, his reporting suggests a company that, through well more than a century of investing and trading, has repeatedly found ways of reinventing itself, by exploiting the weakness of its rivals and by mastering new financial specialities -- e.g., block trading, corporate underwriting, commodities trading and arbitrage. Though recently transformed, Goldman is unlikely to slink away.
Goldman's long ascent to Wall Street's first ranks began a century ago when Henry Goldman undertook to raise money for industrial enterprises, many of which were regarded as "Jewish" companies and shunned by the established Wall Street firms. Struggling to find investors for companies light on assets, Goldman hit on a novel concept for determining market value: earning power. In partnership with the well-capitalized Lehman Brothers, Goldman floated financing for companies that included United Cigar, Worthington Pump and Sears, Roebuck & Co.
In an eerie forerunner of today's disasters, Waddill Catchings, Henry Goldman's successor, would very nearly destroy the firm in the 1920s by placing much of the partners' capital behind Goldman Sachs Trading Corp. This "investment trust" was an excessively leveraged and complex structure that collapsed when one of the subsidiary organizations was suddenly unable to pay a dividend. As Mr. Ellis writes: "Goldman Sachs Trading . . . became one of the largest, swiftest, and most complete investment disasters of the twentieth century."
Out of the rubble emerged Sidney Weinberg, a street-smart kid from Brooklyn, who rebuilt Goldman's reputation and kept the company afloat through the largely unprofitable years from 1929 to the end of World War II. Taking advantage of Weinberg's dozens of powerful corporate directorships, Goldman became an underwriting powerhouse.
From 1930 to 1969, Weinberg ruled the roost; his aversion to publicity became part of Goldman orthodoxy. He also had a healthy disdain for arrogance. As related by John Whitehead -- who worked at Goldman for more than three decades and eventually became co-chairman in the 1970s -- Weinberg bought up Phi Beta Kappa keys from pawnshops all over Brooklyn. "If he had a stuffed shirt going on and on for too long about something," Weinberg "would pull the wire full of PBK keys out of his drawer and say admiringly, 'Gee, you're so awfully smart, you should have one of these.' "
Weinberg was followed by Gus Levy, a "shirtsleeves, no-frills guy" who pushed Goldman into the block trading of large groups of stocks or bonds. His strong work ethic and his belief in teamwork became a signature of Goldman's much- vaunted culture. During Levy's leadership, Goldman was nearly driven out of business a second time, when the Penn Central railroad went bankrupt in 1970. Because it was Penn Central's commercial-paper dealer, Goldman was sued not only for losing investors' money but also for not informing clients that its privileged information had caused the firm itself to dump Penn Central's paper. Goldman was censured by the Securities and Exchange Commission and lost tens of millions of dollars in the aftermath.
The firm had righted itself by the mid-1970s and for the next decade flourished under Mr. Whitehead and his co-chairman, John Weinberg (Sidney's son). Lloyd Blankfein, Goldman's current chief executive, rose at the firm because of his sponsorship of principal "risk-embracing" investing -- in other words, putting the firm itself in the position of directly buying and selling securities. The last chapter of "The Partnership" is titled "Lloyd Blankfein: Risk Manager." Whether Mr. Blankfein has appropriately responded to the unprecedented challenges in today's markets or indeed whether he precipitated some of the problems through his enthusiasm for principal trading is an open question.
It might be just as well that "The Partnership" ends before Goldman's recent convulsions -- Mr. Ellis is not the ideal candidate to dig up the story of what went wrong. In his afterword, he says that his consultancy, Greenwich Associates, has worked with Goldman for more than three decades. His many friendships brought him unparalleled access to the notoriously publicity-shy firm, but his closeness also results in a book that at times sounds like an authorized corporate history. Statements such as "philanthropy and public service are more important to Goldman Sachs people . . . than to any other comparable group" will have rivals grinding their teeth. He also tends to tread carefully when discussing the firm's past problems -- an irksome quality, yes, but a tolerable one, given the attractions of an inside view of what was once a Wall Street titan and -- who knows? -- may be again.
Liz Peek, The Wall Street Journal
As Goldman Sachs faces its greatest challenge, an important new history shows that the American investment bank is no stranger to adversity.
When Marcus Goldman, a Jewish immigrant from Bavaria, founded a small commercial-paper dealer in New York in 1869, he hardly could have imagined it would one day become the worlds most envied and profitable investment bank. Equally shocking to him would have been the hurricane that has descended on markets this year, wrecking the investment-bank business model, which relies on fickle short-term funding, and laying low entire institutions. Three of Americas five independent investment banks have been swallowed by rivals or the abyss. The two that remain, Goldman Sachs and Morgan Stanley, have opted under intense pressure from market forces to become bank holding companies, a move that will subject them to tougher capital requirements and supervision.
A year that has seen the emasculation of Americas brokerages may not seem the ideal time to reflect on what made the erstwhile industry leader great. But, amid the torrent of negative news, Charles Elliss exhaustively researched history of Goldman Sachs paints a convincing picture of an institution that has got most of the important things right. It is an organisation America can be proud of, even as it is forced to reinvent itself to survive.
Mr Ellis, a consultant who has worked with the bank for more than 30 years, sees strengths aplenty. Goldman attracts the best and, with a recruitment process that redefines rigorous, hires the very best. The accent has always been on regeneration: partners are encouraged to move on to allow fresh blood to come through; many go on to public service. Hank Paulson, Americas treasury secretary and the architect of the restructuring of the banking system, and Bob Zoellick, head of the World Bank, are two examples.
The dedication of employees is legendary. Lloyd Blankfein, the chief executive, describes the culture as a blend of confidence and an inbred insecurity that drives people to keep working and producing long after they need to. We cringe at the prospect of not being liked by a client. Even before the crisis, when Goldman was earning profits to make Croesus blush (it is still profitable), Mr Blankfein seemed more anxious than arrogant. Yet loyalty sometimes spills over into inexcusable behaviour, as when a female job candidate was asked if she would have an abortion rather than lose the chance to work on a big deal.
Much of the success comes from daring to think big. When Goldman said it wanted to break Deutsche Banks stranglehold on Germanys biggest corporations, local staff laughed. But after years of persistence it managed to do just that, prompting Deutsches then boss, Hilmar Kopper, to declare: Nobody irritates me like Goldman Sachs. You get mandates we have not expected you to be even considered for!
But in fighting for business, Goldman never reached the lows of brazenness of, say, Salomon Brothers in the 1980s. Indeed, its bankers were once dubbed billionaire boy scouts, due to their talent for making lots of money while keeping their noses clean. It is, as one partner put it, long-term greedy. Better to forgo profit today than take it and alienate a client that might produce a lot more business over the long haul. Goldman refused to advise on hostile takeovers until the late 1990s.
It has also trodden gingerly when it comes to grand strategic moves, avoiding the headline-grabbing mergers embraced by so many of its rivals. When he ran the firm, Mr. Paulson nearly tied the knot with JPMorgan (now JPMorgan Chase) but balked at the last moment, fearing the deal would dilute Goldmans close-knit culture. One of the firms 14 guiding Principles is that it should be big enough to serve any client, but small enough to maintain its esprit de corps.
Yet Goldmans progress has been interrupted by the occasional revolution. The biggest was its own flotation in 1999, after years of often rancorous debate among the partners. The move gave the firm permanent capital with which to expand, but exposed it to the vicissitudes of stockmarkets and, some felt, loosened the ties that had bound the firms leaders closely together.
After its public offering, Goldman, long a leader in agency businesses such as underwriting and merger advice, moved aggressively into principal investing, risking its own capital in markets. The profit margins on the latter are bigger, but so are the risks, as the credit crisis has so brutally illustrated. In magnifying its bets with large dollops of borrowed money and peddling subprime securities, Goldman played a part in bringing America to the brink of financial catastrophe.
Thanks to sharp risk management, the investment bank has managed to navigate the turmoil better than its peers. While others were still loading up on subprime mortgages, it sensed a market turn and hedged its bets; Goldman traders made a mint betting house prices would drop even as the bank continued to sell mortgage-backed securities, leading some to question its claim that clients come first.
The challenge Goldman faces may be its biggest yet. It was almost felled by Goldman Sachs Trading Corporation, a Ponzi-like misadventure that unravelled in the 1929 crash; and by Penn Central, a rail company whose collapse in 1970 left Goldman exposed to piles of worthless debt. Two market quakes in the 1990s also left it badly shaken. Each time it managed to survive, learned its lessons and emerged stronger. This time may be no different, and backing from Warren Buffett, Americas most admired investor, can only help. But, as Mr Ellis points out, its most valuable asset has always been its freedom to choose its own course. And that, for now, has been severely curtailed.
The book is rich with insider lore as well as the closed-door dramas of partnership clashes. [Elliss] experience graced him with a sure hand in writing about the world of traders, analysts and deal makers.
New York Times Book Review
At a time of economic uncertainty, Charles Ellis's banking history The Partnership may offer a kind of cathartic glance backward.
The New York Sun
Lively and engaging
Ellis sheds light on events through dialogue and descriptions of peoples thoughts and feelings
Ellis, the author of 14 books and managing partner of Greenwich Associates, a strategy-consulting firm, here provides a history of Goldman Sachs, which is arguably the most profitable and powerful investment bank in the world today
Ellis has done a thorough job of researching the prestigious organization, providing a look at the many personalities that have made the famous name what it is today.
[Ellis] explicates with clarity and verve
He provides intriguing, specific descriptions of notable events
He offers astute character sketches of the principal players
Mapping the firms tangled loyalties and fiefdoms, Ellis paints a Darwinian portrait of fierce competitors who played people along with the markets. Kirkus Reviews
In tracing its more than 100 years of history, Ellis follows a constant roller- coaster ride from life- threatening disasters to glorious triumphs and back again, showing all the while how an ever- growing penchant for risk propelled the firm into the new world of complex derivatives
At this moment, The Partnership is a must-read.
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.
The inside story of one of the world?s most powerful financial Institutions
Now with a new foreword and final chapter, The Partnership chronicles the most important periods in Goldman Sachs?s history and the individuals who built one of the world?s largest investment banks. Charles D. Ellis, who worked as a strategy consultant to Goldman Sachs for more than thirty years, reveals the secrets behind the firm?s continued success through many life-threatening changes. Disgraced and nearly destroyed in 1929, Goldman Sachs limped along as a break-even operation through the Depression and WWII. But with only one special service and one improbable banker, it began the stage-by-stage rise that took the firm to global leadership, even in the face of the world-wide credit crisis.
About the Author
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, mostly on investing, and has written nearly one hundred articles for business and professional magazines. Ellis has served on the boards of Harvard Business School and Phillips Exeter Academy. A past trustee of Yale University and Chair of its investment committee, he is trustee of Robert Wood Johnson Foundation, director of Vanguard, and chair of the Whitehead Institute of Biomedical Research and consults on investing with major institutions in Asia, Europe, and North America.