The Partnership: The Making of Goldman Sachs

745 Pages·2009·1.83 MB·English

by  Charles D. Ellis

h

The

Pa r t n e r s h i p

T H E M A K I N G O F
GOLDMAN SACHS
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First published in 2008 by The Penguin Press,

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Copyright © Charles D. Ellis, 2008

All rights reserved

library of congress cataloging in publication data
Ellis, Charles D.

The partnership : the making of Goldman Sachs / Charles D. Ellis.

p. cm.

Includes bibliographical references and index.
ISBN : 1-4406-4439-X
1. Goldman, Sachs & Co. 2. Investment banking—United States. I. Title.

HG4930.5.E45 2008

332.660973 — dc22

2008025228

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To my grandchildren

Jade, Morgan, Charles, and Ray

C ON T E N T S
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Introduction xiii

1. Beginnings 1
2. Disaster: Goldman Sachs Trading Corporation 17
3. The Long Road Back 30
4. Ford: The Largest IPO 53
5. Transition Years 63
6. Gus Levy 73
7. The Wreck of the Penn Central 96
8. Getting Great at Selling 116
9. Block Trading: The Risky Business That Roared 132
10. Revolution in Investment Banking 153
11. Principles 183
12. The Two Johns 192
13. Bonds: The Early Years 215
14. Figuring Out Private Client Services 232
15. J. Aron: Ugly Duckling 250
16. Tender Defense, a Magic Carpet 269
17. The Uses and Abuses of Research 283
18. John Weinberg 297
19. Innocents Abroad 320
20. Breaking and Entering 345
21. How BP Almost Became a Dry Hole 356
22. Changing the Guard 373
23. Transformation 399
24. False Starts in Investment Management 415
25. Robert Maxwell, the Client from Hell 437
26. Making Arbitrage a Business 463
27. J’Accuse 481
28. Building a Global Business 512
29. Steve Quit! 533
30. Collecting the Best 552
31. Jon Corzine 566
32. Long- Term Capital Management 582
33. Coup 606
34. Getting Investment Management Right 615
35. Paulson’s Disciplines 636
36. Lloyd Blankfein, Risk Manager 665
Afterword 679

Acknowledgments 687

Notes 689

Index 711

I N T R ODUC T ION
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T
his book was almost never written—several different times. In the
winter of 1963 at Harvard Business School, I was, like all my class­
mates, looking for a job. My attention was drawn to a three-by-five
piece of yellow paper posted at eye level on a bulletin board in Baker Library. In
the upper left corner was printed “Correspondence Opportunities” and typed to
the right was the name “Goldman Sachs.” As a Boston securities lawyer, my dad
had a high regard for the firm, so I read the brief description of the job with inter­
est but was stopped by the salary: $5,800.
My then wife had just graduated from Wellesley with three distinctions: she
was a member of Phi Beta Kappa, a soprano soloist, and a recipient of student
loans. I was determined to pay off those loans, so I figured I’d need to earn at least
$6,000. With no thought of the possibility of earning a bonus or a raise, I naively
“knew” I could not make it on $5,800. So Goldman Sachs was not for me. If I had
joined the firm, like everyone else who has made a career with Goldman Sachs I
would never have written an insider’s study of Goldman Sachs.*
* John Whitehead and Robert Rubin have both included a few stories about the firm in their books but have cer­
tainly not tried to provide a complete picture. Lisa Endlich, a fine writer but with limited access to the full range of
xiv · Introduction
In the early 1970s, while promising future partners that we would develop
our fledgling consultancy, Greenwich Associates, into a truly superior profes­
sional firm, I had to laugh at myself: “You dummy! You make the promise, but
you don’t even know what a truly superior professional firm is all about or how to
get there. You’ve never even worked for one. You’d better learn quickly.”
From then on, at every opportunity I asked my friends and acquaintances in
law, consulting, investing, and banking which firms they thought were the best
in their fi eld and what characteristics made them the best. Over and over again,
well past the bounds of persistence, I probed those same questions. Inevitably, a
pattern emerged.
A truly great professional firm has certain characteristics: The most capable
professionals agree that it is the best firm to work for and that it recruits and keeps
the best people. The most discriminating and significant clients agree that the firm
consistently delivers the best service value. And the great firms have been and
will be, sometimes grudgingly, recognized by competitors as the real leaders in
their field over many years. On occasion, challenger firms rise to prominence—
usually on the strength of one exciting and compelling service capability—but do
not sustain excellence.
Many factors that contribute to sustained excellence vary from profession to
profession, but certain factors are important in every great firm: long-serving and
devoted “servant leaders”; meritocracy in compensation and authority; dispro­
portionate devotion to client service; distinctively high professional and ethical
standards; a strong culture that always reinforces professional standards of excel­
lence; and l ong-term values, policies, concepts, and behavior consistently trump­
ing n ear-term “opportunities.” Each great organization is a “one-firm firm” with
consistent values, practices, and culture across geographies, across very differ­
ent lines of business, and over many years. All the great firms have construc­
tive “paranoia”—they are always on the alert for and anxious about challenging
competitors. However, they seldom try to learn much from competitors: they see
themselves as unique. But like Olympic athletes who excel in different events,
they are also very much the same.
partners, wrote a thoughtful and w ide-ranging study centered on the development of the firm in the 1980s and 1990s.
Bob Lenzner, a gifted writer for Forbes who had worked in arbitrage at Goldman Sachs a generation ago, started a
book but set it aside, saying he didn’t want to lose his friends at the firm.