THE PARTNERSHIP Hardback - 2008

Summary

Media reviews

'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 wereregarded 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 completeinvestment 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 engagingEllis 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 todayEllis 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 verveHe provides intriguing, specific descriptions of notable eventsHe offers astute character sketches of the principal playersMapping 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 derivativesAt this moment, The Partnership is a must-read.'
Barron's