What Happened to Goldman Sachs: An Insider’s Story of Organizational Drift and its Unintended Consequences Steven G. Mandis Submitted in partial fulfillment of the requirements for the degree of Doctor of Philosophy in the Graduate School of Arts and Science COLUMBIA UNIVERSITY 2014 ©2013 Steven G. Mandis All Rights Reserved Abstract What Happened to Goldman Sachs: An Insider’s Story of Organizational Drift and its Unintended Consequences Steven G. Mandis This is the story of the slow evolution of Goldman Sachs – addressing why and how the firm changed from an ethical standard to a legal one as it grew to be a leading global corporation. In What Happened to Goldman Sachs, Steven G. Mandis uncovers the forces behind what he calls Goldman’s “organizational drift.” Drawing from his firsthand experience; sociological research; analysis of SEC, congressional, and other filings; and a wide array of interviews with former clients, detractors, and current and former partners, Mandis uncovers the pressures that forced Goldman to slowly drift away form the very principles on which its reputation was built. Mandis evaluates what made Goldman Sachs so successful in the first place, how it responded to pressures to grow, why it moved away from the values and partnership culture that sustained it for so many years, what forces accelerated this drift, and why insiders can’t – or won’t – recognize this crucial change. Combining insightful analysis with engaging storytelling, Mandis has written an insider’s history that offers invaluable perspectives to business leaders interested in understanding and managing organizational drift in their own firms. Table of Contents Prologue: A Funeral 1 1. What Happened 7 PART ONE How Goldman Succeeded 2. Shared Principles and Values 46 3. The Structure of the Partnership 72 PART TWO Drift 4. Under Pressure, Goldman Grows Quickly and Goes Public 96 5. Signs of Organizational Drift 122 PART THREE Acceleration of Drift 6. The Consequences of Going Public 159 7. From Principles to a Legal Standard 178 PART FOUR Goldman’s Performance 8. Nagging Questions: Leadership, Crisis, and Clients 205 9. Why Doesn’t Goldman See the Change? 240 Conclusion: Lessons 250 Methodology 261 References 283 Appendix A: Goldman and Organizational Drift 285 i Appendix B: Analytical Framework Applied to Goldman 297 Appendix C: Selected Goldman Employees and Lobbyists with Government Positions (Before or After Goldman) 302 Appendix D: Value of Partners’ Shares at IPO 313 Appendix E: Goldman’s History of Commitment to Public Service 323 Appendix F: Key Goldman People 325 Appendix G: Goldman Timeline of Selected Events 335 Appendix H: Goldman’s Culture and Governance Structure 360 Notes 361 i Acknowledgments I would like to thank the faculty, graduate students, and administrators at the Department of Sociology at Columbia University, and in particular Professor David Stark, my thesis adviser and mentor, and Professor Josh Whitford, the director of graduate studies, for their training, support, and advice. In addition, I would like to thank the faculty and administrators, as well as my MBA and Executive MBA students, at Columbia Business School for their encouragement. I want to thank my agent, Susan Rabiner, who, together with my editor at Harvard Business Review Press, Tim Sullivan, saw my PhD dissertation for what it was—a book not just about Goldman Sachs, but a book that brings business and finance together with sociology to improve the study of management, sociology, and public policy. They understood my vision and helped make it a reality. Thank you to those I interviewed. I would love to recognize your contributions, patience, and time on an individual basis, but I want to respect your privacy. Many professionals, professors, students, classmates, research assistants, and friends helped with my training and/or the book. Many thanks to Gary Ashwill, Red Ayme, Peter Bearman, Erin Brown, Soman Chainani, Manu Chander, Sidney Dekker, Helena Ding, Yige Ding, Erin Dolias, Nate Emge, Gil Eyal, Michelle Fan, Stephani Finks, Joe Gannon, Jie Gao, Kyle Gazis, Katrin Giziotis, Angel Gonzalez, Angelito Gonzalez, Simon Gonzalez, Ryan Hagen, Kathryn Harrigan, Charles Harrison, Simon Head, Jon Hill, Gailen Hite, Karen Ho, Paul Ingram, Jane Jacobi, Sam Johnson, El Kamada, Ko Kuwabara, Nan Liu, Emily Loose, Yao Lu, Evangelos Lyras, Donald MacKenzie, Jeff Madrick, Kinga Makovi, Yarden Mariuma, Joanne Martin, Charles Masson, Debra Minkoff, Carlos Morei, Joy Nee, Olivia Nicol, James O’Shea, Neni Panourgia, Christina Perez, Allison Peter, Damon Phillips, Katherine Phillips, Joyce Plaza, ii Paula Reid, Ernesto Reuben, Tim Rich, Nan Rothschild, Jonathan Salky, Krista Schult, Hersche Shintre, Hana Sromova, Richard Swedberg, Noriyuki Takahashi, Matthias Thiemann, Mathijs de Vaan, Diane Vaughan, Oliver Wai, Karl Weber, Joanne Willard, Sang Won, Stacy Xing, and Xu Zang. I would like to thank those who have researched and written about Goldman Sachs over the years, because without their diligent work it would have been impossible to write my PhD dissertation. Many are cited in my work and some are not, but I want to specifically acknowledge a few: Justin Baer, William Cohan, Susanne Craig, Charles Ellis, Lisa Endlich, David Faber, Richard Freedman, Boris Groysberg, Jonathan Knee, Susan McGee, Bethany McLean (who was in my Goldman 1992 M&A analyst class), Gretchen Morgenson, Andrew Serwer, Scott Snook, David Ross Sorkin, Louise Story, Matt Taibbi, Gillian Tett, Jill Vohr, the US Senate Subcommittee on Investigations, and the US Securities and Exchange Commission. I would like to thank some people who manage to be pragmatic and entertaining at the same time: Stephen Colbert, Jim Collins, Malcolm Gladwell, Vijay Govindarajan, Tony Kornheiser, Michael Lewis, Bill Maher, Roger Martin, Robert K. Merton, Bill Simmons, Jon Stewart, Jack (and Suzy) Welch, and Michael Wilbon. I am sure they never dreamed that they would be acknowledged in a book related to Goldman Sachs, but their work stimulates my thinking. Last, this book is a result of the love and support of my family and close friends. I didn’t specifically acknowledge each and every one of you because I hope that I do that each and every day. iii This book is dedicated to my devoted wife, Alexandra, and my two loving daughters, Tatiana and Isabella. They were my cheerleaders through many long days and nights of working, studying, and writing. I would also like to thank my parents, George and Theoni, who immigrated to America from Greece with very little money and no knowledge of English. They quietly sacrificed so that my brother Dean, my sister Vivian, and I could have a better life. They taught us the meaning of values and hard work as well as the power of the combination of these two qualities. They asked for only one thing in return—for us to strive to give our children more opportunities than they had been able to give us. v Prologue A Funeral On September 25, 2006, I filed into the memorial service for John L. Weinberg, senior partner of Goldman Sachs from 1976 to 1990. More than a thousand people filled Gotham Hall in New York to pay their respects. John L. (as he was often referred to within Goldman, to distinguish him from other Johns at the firm) was the product of Princeton and Harvard Business School and the son of one of the most powerful Wall Street bankers, Sidney Weinberg, who had literally worked his way up from janitor to senior partner of Goldman and who had served as a confidant to presidents. The program listed a Goldman honor roll of those who would speak, including Lloyd Blankfein, the firm’s current chairman and CEO; John Whitehead, who had run the firm with John L.—the two of them were known as “the Johns”—and who had left Goldman in 1985 to serve as deputy secretary of state; Robert Rubin, who had gone from co-senior partner in the early 1990s to secretary of the Treasury; Hank Paulson, who had run Goldman when it went public on the New York Stock Exchange (NYSE) in 1999 and had just become secretary of the Treasury; John S. Weinberg, John L.’s son and current vice chairman of Goldman; and Jack Welch, former chairman and CEO of General Electric and a long-standing client of John L.’s. Welch’s eulogy stood out. His voice cracking, holding back tears, he said, “I love you, John. Thanks for being my friend.” Imagine a CEO today saying that about his investment banker and almost breaking down at the banker’s memorial service. John S. tried to lighten the mood with a funny line: “My father’s favorite thing in life was talking to his dogs, because they didn’t talk back.” But he caught the essence of John L. when he 1 said, “He saw right and wrong clearly, with no shades of gray.” John L. was a veteran, having served in the US Marine Corps in both World War II and Korea, and the recessional was the “Marine Hymn.” The lyrics “keep our honor clean” and “proud to serve” seemed to provide a perfect end to the service. From 1976, when the two Johns became cochairmen, until John L.’s death in 2006, Goldman grew from a modest, privately owned investment banking firm focused on the United States—with fewer than a thousand employees, and less than $100 million in pretax profits—to the most prestigious publicly traded investment bank in the world. The firm boasted offices all over the globe, more than twenty-five thousand employees, almost $10 billion in pretax profits, a stock price of almost $200 per share, and an equity market valuation of close to $100 billion. I had left Goldman in 2004 after a twelve-year career, a few months after my Goldman IPO stock grant had passed the five-year required vesting period.