Introduction

This book was almost never written—several different times. In the winter of 1963 at Harvard Business School, I was, like all my classmates, 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 interest 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.*

In the early 1970s, while promising future partners that we would develop our fledgling consultancy, Greenwich Associates, into a truly superior professional 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 field 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; disproportionate devotion to client service; distinctively high professional and ethical standards; a strong culture that always reinforces professional standards of excellence; and long-term values, policies, concepts, and behavior consistently trumping near-term "opportunities." Each great organization is a "one-firm firm" with consistent values, practices, and culture across geographies, across very different lines of business, and over many years. All the great firms have constructive "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.

Armed by Greenwich Associates' extensive proprietary research and working closely as a strategy consultant with all the major securities firms, I was in a unique position to make comparisons between competing firms on the dozens of salient criteria on which they were evaluated by their own clients market by market, year after year, and particularly over time. Over the years, I became convinced that my explorations were producing important discoveries that would be of interest to others who are fascinated by excellence, who retain professional firms for important services, or who will spend their working careers in professional firms. One discovery surprised me: In each profession, one single firm is usually recognized as "the best of us" by the professional practitioners—Capital Group in investing, McKinsey in consulting, Cravath in law (nicely rivaled by Davis Polk or Skadden Arps), and the Mayo Clinic in medicine (nicely rivaled by Johns Hopkins). And Goldman Sachs in securities.

Ten or twenty years ago, many people in the securities business would have argued that other firms were as good or better, but no longer. (Much further back, few would have ever chosen Goldman Sachs.) For many years, it has seemed clear to me that Goldman Sachs had unusual strengths. Compared to its competitors, the firm recruited more intriguing people who cared more about their firm. Their shared commitments, or "culture," was stronger and more explicit. And the leaders of the firm at every level were more rigorous, more thoughtful, and far more determined to improve in every way over the longer term. They took a longer horizon view and were more alert to details. They knew more about and cared more about their people. They worked much harder and were more modest. They knew more andwere hungrier to learn. Their focus was always on finding ways to do better and be better. Their aspirations were not on what they wanted to be, but on what they wanted to do.

Goldman Sachs has, in the last sixty years, gone from being a marginal Eastern U.S. commercial-paper dealer, with fewer than three hundred employees and a clientele largely dependent on one improbable investment banker, to a global juggernaut, serially transforming itself from agent to managing agent to managing partner to principal investor 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.

Of the thirty thousand people of Goldman Sachs, fewer than half of one percent are even mentioned in this book, but the great story of Goldman Sachs is really their story—and that of the many thousands who joined the firm before them and enabled it to become today's Goldman Sachs. Goldman Sachs is a partnership.

The legal fact that after more than a hundred years it became a public corporation may matter to lawyers and investors, but the dominating reality is that Goldman Sachs is a true partnership in the way people at the firm work together, in the way alumni feel about the firm and each other, and in the powerful spiritual bonds that command their attention and commitment.

The leaders of Goldman Sachs today and tomorrow may have even tougher jobs than their predecessors. The penalties of industry leadership, particularly the persistent demand to meet or beat both internal and external expectations for excellence—over and over again on the frontiers of competitive innovation—are matched by the persistent challenges of Lord Acton's warning: "Power tends to corrupt. Absolute power corrupts absolutely."

Three great questions come immediately to any close observer: Why is Goldman Sachs so very powerful on so many dimensions? How did the firm achieve its present leadership and acknowledged excellence? Will Goldman Sachs continue to excel?

The adventures that crowd the following pages point to the answers.

Charles D. Ellis

New Haven, Connecticut

June 2008

* John Whitehead and Robert Rubin have both included a few stories about the firm in their books but have certainly not tried to provide a complete picture. Lisa Endlich, a fine writer but with limited access to the full range of partners, wrote a thoughtful and wide-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.

1. Beginnings
2. Disaster: Goldman Sachs Trading Corporation
3. The Long Road Back
4. Ford: The Largest IPO
5. Transition Years
6. Gus Levy
7. The Wreck of the Penn Central
8. Getting Great at Selling
9. Block Trading: The Risky Business That Roared
10. Revolution in Investment Banking
11. Principles
12. The Two Johns
13. Bonds: The Early Years
14. Figuring Our Private Client Services
15. J. Aron: Ugly Duckling
16. Tender Defense, a Magic Carpet
17. The Uses and Abuses of Research
18. John Weinberg
19. Innocents Abroad
20. Breaking and Entering
21. How BP Almost Became a Dry Hole
22. Changing the Guard
23. Transformation
24. False Starts in Investment Management
25. Robert Maxwell, the Client from Hell
26. Making Arbitrage a Business
27. J'Accuse
28. Building a Global Business
29. Steve Quit!
30. Collecting the Best
31. Jon Corzine
32. Long-Term Capital Management
33. Coup
34. Getting Investment Management Right
35. Paulson's Disciplines
36. Lloyd Blankfein, Risk Manager

Afterword
Acknowledgments
Notes
Index
“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 world’s 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 America’s 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 America’s 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 Ellis’s 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, America’s 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 Bank’s stranglehold on Germany’s biggest corporations, local staff laughed. But after years of persistence it managed to do just that, prompting Deutsche’s 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 Goldman’s close-knit culture. One of the firm’s 14 guiding “Principles” is that it should be big enough to serve any client, but small enough to maintain its esprit de corps.

Yet Goldman’s 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 firm’s 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, America’s 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 Economist

“The book is rich with insider lore as well as the closed-door dramas of partnership clashes. [Ellis’s] 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 people’s thoughts and feelings”
—Publishers Weekly

“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.”
—Booklist

“illuminating…[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 firm’s 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.”
—Barron’s

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 Goldman’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 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 won’t work. If rules were written for every type of decision in all those different businesses in all the world’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 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, doesn’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?

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