Mod Note (Andy): Make sure to see the comment below by @Marcus_Halberstram
I was fortunate enough to attend a lecture this past week given by Stephen Mandis about his new book, “What Happened to Goldman Sachs”. Mandis worked in various roles across several offices during his twelve year term at Goldman. After Goldman Mandis formed an Asset Management firm that he later sold (with Goldman’s help), and then entered academia at Columbia University.
The book is an extension of Mandis’ graduate thesis paper at Columbia. In the book he posits that since 1979 when John Whitehead, a former senior partner, enumerated a list of twelve values that defined Goldman Sachs, Goldman has experienced organizational drift. Of the twelve values on the list, the most important was “our clients come first”. He said that today, most would agree that Goldman does not always act that way.
Whitehead and his co-chair John L. Weinberg stressed the concept of being “long term greedy” which meant passing up a dollar today for more tomorrow. In all their actions they looked at what would bring them the most success and wealth in the long term, even if it meant taking a loss today. At the time Goldman was private partnership and most of the partner’s net worth was in the firm and they could not get it out until after they retired. This further incentivized the partners to be careful and not take on too much risk because if the firm went bankrupt, they went bankrupt.
Mandis tells a couple stories to illustrate his point. The first is that as a young analyst, he was assigned to work on various corporate options for Sara Lee. His team worked nonstop for weeks preparing the presentation. When it came time to meet with the CEO of Sara Lee, the Goldman team entered the room and the head of the team, Hank Paulson, walked over to the other side of the table at sat with the Sara Lee contingent. He then proceeded to quiz the Goldman team about their presentation and questioned every number. Paulson was asking the questions he felt that Sara Lee should ask, he was truly putting the client’s interests first.
The second story involves Goldman underwriting the sale of 32% of BP in 1987. Goldman was on the hook for a $100 million loss, which would have been born entirely out of the partners’ personal equity. The stock market crash on Black Monday forced the other firms underwriting the deal trying to figure out a way out of their commitment. John L. Weinberg refused to pursue such an option and said that Goldman would honor their commitment. Weinberg was able to be long term greedy and saw that despite the loss today, Goldman would be able to increase its share long-term of the privatization business in Europe.
Mandis closed by saying that in all his interviews with the senior people at Goldman, he asked them all if they still feel that Goldman always asks in his client’s best interests. To a man they all absolutely believe that they still do at all times.
I think the organizational drift is also the result of the increasing profitability of trading divisions until 08/09 and the promotion of traders to senior positions (Corzine, Blankfein). Customer service means completely different things to a trader and a banker.
Agree. They gave the traders too much power and once in power they took the company public. The shareholders now come first at GS (and basically every other investment bank that matters). GS has enough history and wealth to coast for a while but despite the rationalizing I see in this thread, their trustworthiness is no longer gold plated.
Welcome to McBanker's, can I take your order?
If GS weren't acting in the clients' best interest, deal flow would be nowhere near what it is. The client has every right to go somewhere else for advisory services.
I don't think there's a single day that goes by that Lloyd doesn't say that.
It is also safe to assume that despite trustworthy issues, GS bankers are:
Interesting stuff. Have you read "The making of Goldman Sachs" its similar to this but in great detail on how the firm was built, obviously, as the tittle suggests:)
Paulson is one awesome salesman. The fact that the client didn't even know he just got sold that takes a tremendous amount of skills.
I've never worked at GS so I'm not trying to say they do or they don't, I just thought it was interesting that Mandis believed it was obvious that their values have shifted. He said that now as long as they write big boy letters to clients and tell them what the risks are their consciences are clear.
I know this is anecdotal, but I talked to one alum who left Goldman after 10ish years in part because he felt a clear value/culture change.
One thing that is often overlooked, is the fact that individuals' values and perceptions change all the time, and one day they wake up and criticize things they can no longer relate to.
The motives probably vary from clearing a conscious before retirement, exploiting a topic that the media eats up, or just trying to find meaning with whatever legacy they are trying to leave behind. I don't think a single one of us is the same person we were 10 years ago.
People change.
Greg Smith's 'Why I Left Goldman Sachs: A Wall Street Story' was a pretty good read. Definitely gave a sense of the change in culture from when he started to when he left the firm.
Companies owned by partners have a sense of responsibility and keeping the brand for the next generation. I'd bet many of the partners pre float wish they'd never sold out.
While you are correct about the partners feelings, you are incorrect about them wishing they still owned the company. I have spoken to a few of the Pre- IPO partners, they said they wouldn't want to touch Goldman today with 10 foot pole.
When you put bank profits over everything you have to think like a trader. Traders from inside Goldman have spoken publicly about how the bank would put its clients on sides of trades they personally felt were loosing ones so the bank could take the other side. The fact of the mater is that entire industry has shunned responsibility in pursuits of further profits. GS needs to start promoting those individuals that will put the customers first regardless if its not in the company's best interests. @jmayham said that customers can go somewhere else. That's not exactly true. Who is left? There aren't many other options anymore. The contraction of the banking industry has hurt no one more than the clients of banking services. This works two ways, one you have less direct competition to chose from and also this allows the banks to bid lower IPO prices and higher fees. This allows the banks trading desks to make more money when they sell off their stakes in the IPO.
You're absolutely right. Just look at what percentage of their revenue is generated from investment banking and what percentage is generated from trading: it's a giant trading shop now. Blankfein and Cohn both came from the J. Aron side of Goldman and it shows.
won't the Volcker rule (whenever it's passed) change that?
The Volcker rule is a ban on prop trading, which Blankfein promised to wind down anyway (shamefully however GS was caught engaging in prop trading earlier this year again). The significant portion of revenues now come from market making, which is a lot less profitable, hence the decline in GS' profits.
GS just doesn't have the luster anymore, could be said of the industry as a whole I guess...
Yes, and organizations who would previously agree on deals over a handshake in the 60's and 70's have also suffered organizational drift.
This is kind of a silly concept if you ask me. Goldman hasn't changed, the world has. They just adapted.
The "clients first" approach didn't exist because of some service-thy-fellow-man for the greater good altruism. It existed because you maximized shareholder value by putting the clients first... essentially you played the long game.
The bank would take it on the chin and make little to no money on occasion in order to demonstrate their goodfaith and invest in the relationship, knowing this modest sacrifice would pay handsome dividends as the client remained a loyal for years to come.
Its not organizational drift, its a change in the way clients do business with Wall Street. And the reason (among others) is because Wall Street clients were previously corporate CEOs and CFOs who really didn't care if they were paying their bankers handsomely because it wasn't their money, it was shareholders. Nowadays, who dominates Wall Street's client base? Hedge funds and private equity funds. And any money they leave on the table isn't someone else's... its their own... and when that dynamic shifts you start to hear a lot more "its nothing personal"s.
You just can't make money "putting the client" first anymore. And Wall Street isn't a not for profit. They made money by serving clients, now its every man for himself and you either adapt or die.
I typically learn something from you. The world is the same hell hole it always was, and Wall Street is still the same shark tank. What changed is the commoditization of financial services and the inability of those firms to adjust the incentive structure. Since the banks failed to adapt, and continued to rationalize their defective business models right into the crash of 2007, the gov't effectively took over the industry for a short time and is restructuring the entire legal structure they operate within.
The buyside dominates the income stream only so far, but ultimately the investors that play both sides are in complete control. Someone with shares of GS and a stake in a fund in CT will grind the companies against each other until there's nothing left. That's the larger dynamic that has made it's way front and center to the political arena, but is beyond the scope of this post. The whole "every man for himself" paradigm tends not to last long and tends not to end well. Hence the regulatory ass raping the industry has experienced the last few years. You think it won't get worse if the banks screw up more? I've seen the amount of compliance paperwork triple since I've been here, and I'm still very new. It's basic cause and effect: if a civilization breaks down in one area, other sectors tend to take up the slack in order to stave off total systemic failure. In this case, the entire financial sector no longer possesses the internal controls necessary to ensure the same attention to good results (that despite changes in the world, still matter to the client) so another sector has moved in: the government.
The way forward for banks is to understand that they did this to themselves. How are you supposed to trust a business when they blame all of their problems and screwups on every one else? It's my primary gripe with Dick Fuld: he can't take onus for a damn thing. If it were just their money, no one would care what happened, but they've lost sight of the fact that their real function is getting paid for administering OPM and that function also affects every other facet of every other thing. I'm not sure why the current generation of bankers are so intent on trying to convince themselves that it should be normal for capitalism to not work. I'm also not sure why it's so damn hard to get this through in some cases. Maybe people are so caught up in their current situation they've lost sight of this, but take a step back, look at the dynamic with fresh eyes, and be honest with yourself what you see.
The whole "this business is about every man for himself" as a management paradigm will only result in more gov't intrusion. Compete, make a buck, knife the competition....but don't screw the client. I'm baffled how this attitude persists in this business and how people think they have a future here with that outlook. If you want to take a shot at robbing people, go for it, but the ramifications are all on you.
WTF? I hate Goldman more than anyone. Why are you bringing me into this?
Another excellence comment.
^ nice little PTJ quote at the end
Goldman is still Goldman. Nostalgia is for people who have time for nostalgia.
Just cashed out last week. When the tide settles, we'll see who's been swimming naked.....
Fuga ad nihil nemo odio voluptate. Error dolorem qui eligendi dicta velit. Porro consectetur et eos. Rerum explicabo quisquam a ipsa laudantium incidunt. Eaque voluptatem reprehenderit exercitationem amet quis. Aspernatur nostrum voluptatibus harum nobis voluptate tenetur totam. Facilis tenetur quisquam corporis blanditiis.
Blanditiis qui quidem dolorum distinctio reprehenderit. Labore nihil praesentium maiores soluta illo. Nobis iusto dolor delectus sed omnis dolores omnis. Est est quasi repudiandae. Qui nihil atque rerum aliquam rem quia voluptatem.
Molestias odit sit officia aspernatur aliquid rerum. Vel libero at voluptas sunt ut.
At delectus qui non libero. Dolor voluptatem rerum sint architecto.
See All Comments - 100% Free
WSO depends on everyone being able to pitch in when they know something. Unlock with your email and get bonus: 6 financial modeling lessons free ($199 value)
or Unlock with your social account...
Quaerat praesentium tempora vero. Quidem dolorum et maxime dolore eligendi vitae placeat.
Suscipit voluptatibus consequatur molestias ipsum itaque soluta. Sed iure voluptas repellendus et voluptas saepe magni explicabo. Voluptatum consequatur adipisci quidem soluta provident numquam facilis.
Sequi non possimus nemo dicta. Velit quia eum maxime impedit eum. Aut laudantium occaecati voluptatem dicta voluptatibus sit.