In 2003, I interviewed with Goldman Sachs (GS, Financial) for a position in its Fixed Income, Currencies and Commodities division, widely known as FICC. I got as far as a second round. A few friends of mine have worked at Goldman over the years. I’ve also been a client/counterparty of theirs at times on the trading side, and the people were always very professional and eager. One friend said working at Goldman feels more academic or intellectual than at other investment banks. Another friend said the hours were too long for him and he moved on.
Goldman Sachs is one of the greatest icons of Wall Street, and this is reflected in everything about the company and its employees. Thus, for anyone who's interested in Wall Street and the investing world, I think "Money and Power: How Goldman Sachs Came to Rule the World" by William D. Cohan is a fascinating read. The book is well-researched, covering all the highlights, both good and bad, from Goldman’s founding in 1869 through its publication in 2011.
The founding
Marcus Goldman started Commercial Paper in New York City in 1869, and by 1882, he was ready to expand and invited his son-in-law Samuel Sachs to join the business as a partner. It soon become a family affair with several Goldmans and Sachses working together in partnership. When Marcus died, his son became senior partner.
Walter Sachs, Samuel’s son, was interviewed towards the end of his life about the partnership, and he said there were four geniuses in the business. First was Henry Goldman, who grew the business rapidly and expanded it into capital markets by listing U.S. firms on the New York Stock Exchange. Second was Waddill Catchings, the first non-Goldman or Sachs partner, who brought about the infamous Goldman Sachs Trading Company, an investment trust using leverage that boomed and busted in the 1920s before being forced out. This Goldman Sachs Trading Company episode relies heavily on John Kenneth Galbraith’s classic text "The Great Crash 1929." The third genius Sidney Weinberg, who became a legend of the company and massively grew Goldman’s investment banking business. The fourth genius was Gus Levy, who was a merger arbitrager and grew Goldman’s trading business. The book goes into great detail how Weinberg was a pioneer in corporate governance, sat on many boards and drove Goldman’s underwriting business. Levy, who followed Weinberg as the senior partner of the firm, was an aggressive trader who knew the value of information, and like Weinberg was an excellent social networker.
We learn how Goldman competed with more established investment banks such as J.P. Morgan (JPM, Financial), partnered for a while with Lehman Brothers in the U.S. and Kleinwort Benson in London and got its first major coup when it ran the IPO of Ford (F, Financial) in 1956.
Active expansion
Following the “four geniuses” who laid Goldman’s foundation in investment banking and securities came John Whitehead, who launched the firm’s New Business Group. With this business, Goldman would actively chase business rather than wait for business to come to it. Whitehead wrote the firm’s 12 Business Principles (which later became 14 Business Principles). Cohan noted through the course of the book that while these principles are fundamental to Goldman, some market participants have felt that they have been ignored at times. Levy and Whitehead wanted Goldman not to work for hostile acquirers, but this has not always been the case as Cohan details on several occasions. Indeed, the book is interesting because it really covers a lot of Goldman’s conflicts of interests.
At other times, Goldman has looked at the bigger picture. For instance, when it underwrote British Petroleum’s (BP, Financial) IPO in London in 1987, the 87 crash came and Goldman couldn’t sell the stock, so it had to sit on it. Rather than cutting losses and hurting BP’s share price and trashing its reputation in London, a new market for Goldman, Goldman held the stock, fully underwriting the IPO and impressing both BP and the wider London market.
While Goldman was growing quickly in the 20th century, it really focused on hiring business school graduates, mostly from Ivy League MBAs, but not always. The company emphasized team players and people who could take initiatives for new business ideas. In one part, Cohan quotes Hank Paulson as saying Goldman is “a hard place to be hired, a hard place to be promoted and a hard place to stay.” Ultimately, Goldman’s people are its competitive advantage. Levy also noted, “We think the secret of the business is not only to be bright but to be consistent." So when Goldman entered a business, it tended to not only stick around but provide full service, with employees following processes and policies carefully. One more recent Goldman banker told Cohan the consistency of the people at Goldman was also important to its success:
“At a lot of places, you have ninety-nine percentile people, but you also have eighty-two-percentile people and seventy-four-percentile people. At Goldman, the bell curve sort of centers around ninety-five and one tail goes to ninety-nine and the other tail goes to ninety-one."
In my mind, the fact that Goldman was the last major investment bank to go public also meant the partner focus on its capital was intense, and the book covers partner meetings and disputes many times.
Goldman goes public
Unlike most peers, Goldman didn’t do many acquisitions. Its acquisition of commodity trader J. Aron didn’t start off well, and Bob Rubin, a Levy protégé, was given it to turn around, which he did over the course of a few years before it was finally merged with into the FICC business.
The book talks a lot about Rubin and how he got in with Bill Clinton, using his autobiography "In an Uncertain World: Tough Choices from Wall Street to Washington"for a lot of information. I’ve not read Uncertain World, but I now plan to as Rubin seems to be quite an interesting person - not especially aggressive, but analytical and political.
Then there was the build up to the Goldman Sachs IPO, which was voted down by partners many times. I hadn’t know that Goldman was involved in the Robert Maxwell scandal in London in the late 1980s, and this is covered in detail. Then the bond market turbulence in 1994 caused Goldman’s trading business to lose money, after Rubin had built it up over several years. This caused tension between the bankers and the traders.
After Rubin left for the Clinton administration, Jon Corzine came in and soon had to deal with the LTCM crisis, which Cohan explains in part using references from the excellent book "When Genius Failed" by Roger Lowenstein. Interestingly Corzine wanted to merge with Salomon Brothers, now part of Citigroup (C, Financial), which was then a leader in Fixed Income in the 80s and 90s. Hank Paulson engineered the removal of Corzine and his own ascent to CEO, finally leading to the Goldman IPO in 1999. The book details a lot of the internal politics between partners and egos fighting for the top jobs within the company.
The Financial Crisis
Towards the end of the book, Cohan discusses the Financial Crisis in great detail. He references interviews with the protagonists, the excellent book "The Greatest Trade Ever" by Gregory Zuckerman and documents released by the Financial Crisis Inquiry Commission, including emails and hearing transcripts. We learn all about Goldman’s “Big Short," where Goldman managed to come relatively well out of the mortgage crisis. Ultimately, the company took John Paulson (Trades, Portfolio)’s idea and ran with it, but it helped that senior management had the structures and information to give them the intuition to reduce mortgage department risk, which really saved them.
We learn all about the dealings with AIG (AIG, Financial), with the ABACUS structured products platform and how Josh Birnbaum moved up through the ranks from Wharton finance major to Goldman intern, to head of mortgage trading and his key role in dealing with John Paulson (Trades, Portfolio) and Goldman’s mortgage trading books. Cohan goes into more detail on Goldman than Michael Lewis does in "The Big Short," which focuses more on some of Goldman’s clients and also Morgan Stanley’s (MS, Financial) losses.
What’s good about this book is that Cohan interviewed pretty much all the living Goldman partners from the 80s and 90s and pretty much all the senior management from the Financial Crisis era. The book gives a lot of detail on the main characters, including their upbringing and career trajectory, before detailing what they did at Goldman and why.
We learn that Goldman’s high-achieving team players who are absolutely committed to Goldman’s franchises were not necessarily that innovative in business but more aggressive in getting new business, managing risk, tweaking what worked and taking on and managing businesses that were rife with conflicts of interest. A key theme is Goldman’s transition from agent to principal. Goldman was traditionally in banking and trading, but the more recent business of asset management caused it to compete with many of its clients, and Cohan covers this well.
Conclusion
Where Goldman seems to have been more successful was through better internal communication and sharing of information and internal controls. Goldman never rushed on decision making, giving it more time to find the highest present value route.
"Money and Power" was published in 2011, so doesn’t cover the Malaysia 1MBD scandal of a few years ago.
Cohan seems to be balanced in his writing. He clearly explains the conflicts of interests and has admiration for the “Big Short” period, and he has admiration too for Goldman’s rapid growth in the 20th century, covering the most important partners at length. Interestingly, some partners clearly focused on money, and others on power, but some did focus on reputation and keeping Goldman’s partnership heritage alive for as long as possible.
The bottom line is, the book is well worth reading in my opinion. It also makes me want to read William D. Cohan's other books on business and finance.
