Authors: William D. Cohan
But, again, Whitehead was ahead of the curve, and now nearly every Wall Street firm has principles by which it is supposed to live (although few actually succeed in adhering to them, of course). “I did it out of necessity,” Whitehead explained. He said he believed that as Goldman got bigger and bigger in the 1960s, more new employees were joining the firm than “we could fully assimilate,” and he fretted that they would not “get inculcated with the Goldman Sachs ethic” that “we old hands had learned over time by osmosis.” He did not want the firm’s “core values” to be lost to future generations. Nor did he want the principles to leak outside the firm. “It was not meant for external consumption,” he said.
One Sunday afternoon at home, Whitehead sat down at his desk with a pen and yellow pad and created his list. He wanted to emphasize what made Goldman a “distinctive” and “unique place to work” without “sounding too schmaltzy.” Although the original document has disappeared, much of what Whitehead wrote that afternoon remains both crucial and central—for instance, on the firm’s website and in its public filings, despite his hope that the wisdom would not be disseminated to a wide audience—in propagating the timeless myths about the firm. And though many of Goldman’s employees believe in—and try to adhere to—the principles, as the firm continued to grow during the next thirty years and became increasingly global, the behavior of its employees became harder and harder to control, despite the existence of a list of principles by which they were expected to live.
That Sunday afternoon, he originally wrote up ten principles. But
when he showed them to one of his partners, he told Whitehead, “The Ten Commandments, John? Isn’t there, in your religion, something about Ten Commandments and do you really want this to sound like it’s the Ten Commandments?” Whitehead replied that he did not. “So I made it twelve,” he said.
Whitehead’s commandments seem like banal pabulum today, especially for a service-oriented business. At the time he wrote them they were nearly revolutionary. What Wall Street firm thought of itself as important enough to lay down principles of behavior for its employees? “Our clients’ interests always come first,” Whitehead put at the top of his list, understandably. “Our experience shows that if we serve our clients well, our own success would follow.” He could have stopped there, of course, and, assuming he could get the troops to go along, be hailed a Wall Street hero.
But among those precepts that followed were some that sounded great on paper but were too easily violated, as was apparent at Goldman in the Trading Corporation and Penn Central scandals (and on others to come, in short order). “Our assets are our people, capital and reputation,” Whitehead continued. “If any of these is ever diminished, the last is the most difficult to restore. We are dedicated to complying fully with the letter and spirit of the laws, rules, and ethical principles that govern us. Our continued success depends upon unswerving adherence to this standard.” As a corollary to the importance Whitehead placed on ethical behavior at the firm, he added, “Integrity and honesty are at the heart of our business. We expect our people to maintain high ethical standards in everything they do, both in their work for the firm and in their personal lives.”
Whitehead’s remaining goals for the Goldman troops involved the expected exhortations on the importance of profitability, professionalism, creativity, and innovation. He also acknowledged how important recruiting had become to the firm. “Although our activities are measured in the billions of dollars, we select our people one by one,” he wrote. “In a service business, we know that without the best people, we cannot be the best firm.” He later elaborated on what he meant. His definition of “the best” was a combination of “brains, leadership potential and ambition in roughly equal parts.” Brains, he allowed, could be determined easily enough from test scores and grades. Leadership was apparent from extracurricular activities and summer jobs. He always looked for “take-charge people,” those with “energy and initiative, which are so critical to leadership.” Ambition was essential. “We depended on people who were
absolutely driven to succeed at everything they did.” Whitehead also wanted to make sure the people Goldman recruited had the “opportunity to move ahead more rapidly than is possible at most other places. We have yet to find limits to the responsibility that our best people are able to assume.” (This was one of the commandments that the lawyers seemed to get hold of, by adding that “[a]dvancement depends solely on ability, performance and contribution to the firm’s success, without regard to race, color, religion, sex, age, national origin, disability, sexual orientation, or any impermissible criterion or circumstances,” albeit too late for James Cofield.)
When Whitehead finished his list, he shared it with Goldman’s
Management Committee, which tweaked it and then approved its distribution to everyone at the firm. A copy was also sent to each employee’s home “in hopes that the family would see it, too, and be proud of the firm where Dad (or in a few cases, Mom) worked, and spent so much of his time.” Whitehead explained that “travel was pretty extensive in those days, especially for new businessmen” and he shared the principles with wives and children “to impress the families” that Dad “worked for a high-grade firm that did have high standards” and helped to “assuage our employees’ feelings of guilt toward their families for their absenteeism by saying ‘Look at the character of our firm.’ ” To Whitehead, the principles were “a big hit” and “respected throughout the firm.” Indeed, managers were expected to meet with their groups—“including secretaries,” he said—at least once a quarter for “at least an hour” to discuss the business principles and how they applied to the transactions the department was doing. “[T]he department heads were required to send in minutes of their meeting and what was raised and what questions came up about ethics,” Whitehead said. “[The] management committee would look at that and contemplate whether or not there was a need to make some formal change in policies.” These meetings continue at Goldman Sachs today.
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HITEHEAD’S OTHER PET
project at Goldman was forcing the firm to expand internationally. He criticized both Levy and Sidney Weinberg for being painfully parochial. “Sidney Weinberg’s contacts were all American and, later on, so were Gus Levy’s,” Whitehead explained. “I don’t think Sidney ever left the United States, even for vacations.” As for Levy, he observed, “When Gus had to fly to London one time for a business meeting, he flew back the next day. There was nothing more for him to do there.”
During the more than forty years these two men ran Goldman there were a few stabs at being part of the international community. There was Goldman’s long-standing “correspondence” relationship with Kleinwort Benson in
London. But that was more of a relationship based on mutual favors. “If a client needed something done in London,” Whitehead explained, “we always recommended Kleinwort.” In return, Goldman expected Kleinwort to direct its U.K. clients to Goldman if they wanted to do something in the United States.
But Goldman’s competitors were more aggressively establishing themselves in Europe. In the early 1960s, Morgan Stanley had opened an office in London.
First Boston had an office in Europe. Merrill Lynch had several brokerage offices across Europe, and Salomon Brothers “was doing a brisk business in bonds overseas,” Whitehead observed. Goldman had barely done anything. In 1967, General Electric’s chairman called Sidney Weinberg and informed him that the company had hired Morgan Stanley to underwrite a bond issue for it in Europe. “[T]hat was a dark day for the firm,” Whitehead allowed. “We had to get into Europe or else.”
The next year, Henry Fowler, the outgoing treasury secretary, joined Goldman as a partner and as chairman of the firm’s new International Advisory Committee. “I thought it would give our international efforts a great boost to have a former treasury secretary such as Joe”—as everyone called Fowler—“with us …,” Whitehead explained. “With his political and financial contacts around the world, Joe proved a tremendous asset.” Fowler worked closely with
Michael Coles, a British citizen and
Harvard Business School graduate who Whitehead asked to move to London in early 1970 to open Goldman’s first European office.
A few years later, Whitehead flew to Washington to try to persuade another former senior government official—Secretary of State
Henry Kissinger—to join Goldman as a partner. At first, Kissinger demurred. But the Two Johns persisted and met with him “at least a dozen times to try and win him over,” figuring he would be even a more valuable door-opener than Fowler. In the end, Kissinger opened his own consulting firm—Kissinger Associates—but agreed to consult with Goldman two days a month and become head of the International Advisory Committee. Kissinger provided Goldman with “tremendous advice about the political side of world affairs” and his judgment was “invariably sound.” The relationship lasted eight years. The relationships with Fowler and Kissinger were further evidence of a key Goldman strategy of forging relationships with powerful government officials, one that would become increasingly crucial to the firm.
Slowly but surely, Goldman built up its London operations, staffing it with one ambitious man after another willing to call on British companies that for generations had never done any business with an American investment bank, let alone a Jewish firm like Goldman. (Even for long-established European firms such as Lazard Brothers—which was one of seventeen banks favored by the British government—doing business in London often proved difficult because of how recognizably “Jewish” it was.) Whitehead’s tactic for making progress was very much the same one he pioneered in expanding Goldman’s business in the United States: a concerted, organized calling effort by Goldman’s best and brightest. But the process of winning new business in Europe was even more difficult than it proved to be at home, and many of Goldman’s partners grumbled about the ongoing losses in London. But Whitehead rebuffed these concerns. Goldman had to make the investment in Europe “or the consequences for the firm would be dire.” That’s when he lighted on the idea of changing the way the losses in London were accounted for. Instead of treating London as a stand-alone business, he decided to net its investment banking losses against the overall investment banking profits. He made a similar calculation for the other business lines in London. All the expenses in London should be netted off against the gains in the United States, he reasoned, since “[w]hen you’re starting a new activity in a new place you have to add people before you can expect revenues.” He had learned that very lesson when he started the New Business Group, “which had taken a long time to produce a substantial return on our investment.” Like magic, the attitudes toward the London office “swung around 180 degrees” since “every division head now felt some responsibility for what happened in London, and the results began to show it.”
Notwithstanding the accounting change, Goldman’s slog in Europe continued to be a tough one. The firm was competing not only against other upstart American firms but also against an entrenched establishment of British merchant banks, where corporate executives “were reluctant to change bankers for fear of offending some old classmate from Harrow or Eton who now worked at Morgan Grenfell or Schroders.” But, according to Whitehead, the “different style” of Goldman’s new-business bankers “began to catch on” in London because “[t]hey were younger, seemed brighter, were better informed, had new ideas,” and “sometimes were a little brash but didn’t waste time talking about their golf game.” Word slowly got around that Goldman’s bankers were worth talking to.
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HATEVER
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OLDMAN WAS
doing in the years after Levy’s untimely death seemed to be working. After its record $50 million pretax earnings
in 1977, the firm made $60 million pretax in 1978, a 20 percent increase. When asked about the increased earnings, Whitehead declined to comment, but the firm did allow—in what the
Wall Street Journal
described as an “
understatement that has become something of an annual tradition”—that “[d]uring the past five years, the firm’s net income before income taxes has averaged well over $25 million annually,” putting Goldman in the same league—in terms of profitability—with the much larger retail-oriented firms Merrill Lynch and
E. F. Hutton. In 1978, Goldman handled nearly 15 percent of the block trades—of ten thousand shares or more—on the
New York Stock Exchange, indicating that Levy’s competitive spirit lived on. It managed, or comanaged, eighty-seven corporate underwritings, totaling $7.6 billion. Goldman also managed $2.6 billion private-placement financings—those sold to specific institutional investors, not to the public—and raised some $16 billion for state and local governments.
In October 1980, such was Goldman’s increasing prominence on Wall Street that the firm announced it was building a new twenty-nine-story, $100 million headquarters building at 85 Broad Street, down the street from the New York Stock Exchange.
Skidmore, Owings & Merrill was the building’s architect (although the nondescript brownish precast concrete façade was not one of the firm’s proudest achievements). It was to be the first major office building built by a Wall Street firm in Manhattan in more than a decade. New York City gave Goldman ten years of tax abatements on the building, starting at a 50 percent annual abatement and decreasing by five percentage points each year thereafter. The Goldman partners had decided to build 85 Broad Street instead of one of the alternatives, which was to take a bunch of top floors in one of the World Trade Center towers.
But what made the new building controversial—at least from the Goldman partners’ perspective—was that the firm decided it would
own
the building and the land itself, rather than just rent the space it needed, meaning the equity for it would come from the Goldman partners individually. In typical Goldman fashion, the Two Johns presented a united front about the decision to build and own a new headquarters building, but the reality was not so clear-cut. “
There was a lot of debate about whether to build Eighty-five Broad Street,” Bob Rubin recalled. The idea of sinking so much of their own net worth into a building in lower Manhattan did not sit well with many of the Goldman partners. But once the generals made the decision to proceed, the troops got in line. In the end, Goldman made the building work. “
When we all first moved in there,
there were cigarettes at every table, in a silver holder,” former partner
Richard Witten recalled. “The chef was famous for his chocolate chip cookies, and they were served at every meal.” According to the
New York Observer,
“A partner running a meeting got a button that looked like a garage door opener. It summoned the uniformed waiter.”