Authors: William D. Cohan
She spent much of the long article analyzing how Goldman had become so successful, across so many different aspects of Wall Street’s
businesses, from investment banking to trading to investment management. McGoldrick found six main factors for Goldman’s prowess, with a devotion to teamwork at the top of the list, followed by a laserlike focus on the firm’s clients. A third factor was Goldman’s extreme reluctance to hire from other Wall Street firms, preferring instead to recruit highly selectively from the nation’s top business schools—thirty MBAs a year were hired from a pool of fifteen hundred—because “young MBAs have a certain plasticity to their character,” explained one partner. “We can mold them more easily to our values than we can someone who’s worked somewhere else.” Another factor McGoldrick cited for Goldman’s success was the firm’s willingness to let others innovate new products while waiting to see how they played in the market before deciding to jump in and emulate them.
McGoldrick also cited as factors contributing to Goldman’s success its decentralized management structure and its reluctance to focus on what competitors were doing. “We don’t need to know what other firms are like,” one Goldman banker told her. “We have a formula that works. We are hugely successful. Other firms aren’t. Why should we pay attention to what they are doing wrong?” While humble that sentiment was not, it was hard to argue with.
Indeed, Goldman also had an extraordinarily low turnover rate, despite demanding from employees and partners a near-total devotion to the firm. “Why do I work until 2:30 in the morning and then come back for breakfast at 8:00 a.m. almost every day?” asked one partner in 1984. “Because I own a piece of this. We’ve built this, and I feel a tremendous commitment to seeing it continued.”
Could Goldman be for real? “If you polled people here and asked them why they work so hard,” one partner explained, “they would probably say it’s because there is nothing else in their lives that gives them nearly the charge work does.” Or, perhaps they had better say something along those lines. McGoldrick told the story of a Goldman associate who scheduled his wedding date to coincide with the end of a project. “We didn’t tell him he couldn’t get married,” the partner said. “But we did suggest that the honeymoon not be contiguous with the wedding.” And, the article noted, for many years Goldman professionals had the highest
divorce rate on Wall Street, although the partner in charge of one particularly hard-charging group said, “[W]e haven’t had a single divorce here all year.”
Also frowned upon was the slightest display of an individual’s ego, a staple at most other Wall Street firms. “If an unwise young person walks in and starts telling me how well he did on such-and-such a deal, I
simply look at him sternly and remind him in no uncertain terms that what he thinks is
his
achievement was made possible by years of work and cooperation by everyone connected with this firm,” explained one partner. “You can be sure he gets the message.” Friedman was even blunter. At the conclusion of a successful deal, a client might think of the Goldman banker who worked on it as a “star,” he said, but “in our eyes he’s a utility infielder.” Then there was Goldman’s obsession with sharing information. “We have a mania for communication,” Friedman explained, “always asking, ‘Have you checked with so-and-so?’ and ‘Have you posted such-and-such?’ ” As technology evolved, Goldman professionals became obsessive about leaving one another voice mails with the latest scrap of information about a deal or to share credit for something good; then their collective obsession switched to e-mail.
Partners reinforced the officially condoned behaviors at Goldman through their daily interactions with others in the firm, happily delivering the sermonettes of perceived wisdom. After all, their livelihood depended on the machine remaining well oiled. For those below the partner level, Goldman used its compensation system to reward those who fell into line while banging down those who stuck out. For those below the partner level, compensation depended greatly on how well they played with others. Some 20 percent of the firm’s profits in a given year were put into a pool that would be distributed to nonpartners based on a point system designed to judge compliance with preferred behavior. The more points one received, the more compensation. But Whitehead conceded that becoming a partner at Goldman was increasingly difficult, even for those who conform. “Our challenge is to keep those professionals who do not make partner happy—both financially and in terms of career development,” he said. One example of how to do that was by creating a vice presidents’ dining room, with the same food and service as the partners received in their dining room.
McGoldrick’s article touched the third rail, apparently, of Goldman politics: trying to ferret out who the successors to the Two Johns might be was not something anyone at Goldman wanted to discuss. When she asked one partner about this, he “abruptly” ended their conversation and responded “snappishly” that “we just don’t think in terms of ‘heirs apparent’ around here,” which was ridiculous, of course. But reporters being pesky, she persisted nonetheless. McGoldrick reported that neither of the Two Johns would retire “for another four to six years,” but then she added that Whitehead, who had been co-chairman of the
Republican National Finance Committee, might be headed for “a top cabinet post” if President Reagan were reelected in November. If that were to happen,
she wrote, Weinberg would lead the firm alone until he retired. Naturally, that led to speculation about who were the firm’s likely next leaders. Her answer—Rubin and Friedman—was logical enough, given that they were the two rainmakers in the firm’s two main businesses, investment banking and trading. “The two are undoubtedly stars among the field of driven achievers who are Goldman partners,” she explained. Rubin, though, might have his own Washington aspirations. “[T]he top job at Goldman may not be Rubin’s ultimate goal,” she speculated. “One of the leading fund-raisers for Democratic presidential candidate
Walter Mondale, Rubin himself might be headed for Washington.”
That was as close as McGoldrick got to ferreting out that Whitehead had made the decision to leave Goldman. He kept his decision to himself “lest any rumors force my hand,” he confided. In May 1984, Whitehead told Weinberg, who was taken by surprise. “He tried to talk me out of it,” Whitehead explained, “but soon saw that I had really made up my mind.” According to Whitehead, they decided that Weinberg would stay as sole chairman of the firm while Rubin and Friedman would become vice chairmen and, “in due course,” co-chairmen. On August 15, Goldman announced Whitehead would step down on November 30 and that Weinberg, then fifty-nine, would “take the helm alone.” No mention was made of Goldman’s plans for Rubin and Friedman, both then forty-six, other than that they were among the names mentioned to potentially lead the firm in the future.
In a memo to the firm’s 3,600 employees, Whitehead wrote that his job was “very demanding” and “it was time to do some other things in the non-profit sector which are important to me.”
The next day, the
Times
profiled Weinberg, noting that he had “
maintained a remarkably low profile in one of Wall Street’s most visible firms,” a degree of anonymity that would make a CIA boss “envious.” During a “leisurely” and “rare” two-hour interview over lunch, Weinberg smoked one of his four daily cigars—“El Rope-O No. 2,” he called them—and explained, “I don’t let my ego get in the way” of work, the best of which, he said, was “anonymous.” Then came the kind of high-profile public praise from a client that cannot be bought. “I could talk about him for a week,” John F. “Jack” Welch, the chairman and CEO of GE, told the paper. “I’m really a fan; I think he’s terrific. He’s sensitive. The thing that distinguishes him is that he’s not just a deal-maker for a deal’s sake. He’s interested in what’s right for both parties. He cares about his clients and his own people in as sensitive a way as anybody in business.”
There has always been speculation that one of the reasons Whitehead left Goldman in 1984 was that with the firm’s profits and size growing
rapidly, there was increasing pressure from his partners to take the firm public, as any number of other firms had done since Donaldson, Lufkin & Jenrette started the stampede in 1970. In 1983, Goldman’s net income was around $400 million, and the firm’s capital had grown to $750 million, $500 million of which had come from the partners themselves. When Whitehead and Weinberg became Goldman partners, in 1956, the firm’s capital account stood at $10 million.
In a June 1987 interview in
Institutional Investor
with writer
Cary Reich, Whitehead argued that other investment banking firms had gone public not because they needed capital, but because of a desire on the part of the partners to “cash in.” He said that for a Wall Street firm, having limited capital was a good thing. “It forces you to make choices as to what businesses you engage in and don’t engage in. Any business that has all the capital it could possibly need is in trouble, because nobody is there making choices as to how it uses its capital.” Access to unlimited capital, he claimed, deprived firms of having to make the tough choices about what business lines to be in, or not. “But with limited capital, you have to analyze and make choices, and you pick the most profitable businesses to be involved in …,” he explained. “At Goldman we had a study going every year about whether or not we should go public or whether we should raise capital in some other way. But there was never any serious feeling that we needed to augment our capital very substantially.” This view within Goldman would change soon enough.
In the first few months of his retirement, Whitehead appeared daily in his same office at Goldman and spent his time researching and writing a book he intended to title
The Social Responsibilities of Business,
about how companies were able to make money for shareholders while also “doing good works.”
McGraw-Hill had paid him a “modest retainer,” as he referred to his advance, and he’d written one chapter by April 1985. He had also written an op-ed for the
New York Times
on the eve of his retirement where he observed, “It begins to appear that the tide of Soviet power, the principal threat to stability in the world for many years, has begun to ebb. Beset by aging, unstable leadership, serious internal economic problems, an embarrassingly unsuccessful war in
Afghanistan, and recurring rebellion within its own orbit, Russia has lost its appeal to third world nations and may now be slipping backward. Over time, these developments may permit some moderation in the increase of defense expenditures and lead to a more easily balanced budget.”
One late April afternoon, Whitehead’s phone rang and, since his secretary had left for the day, he answered it himself. It was George
Shultz, the secretary of state. “
Can you be in my office in Washington at eight tomorrow morning?” he asked.
“If you’d like me to be there, of course I’ll come,” Whitehead told Shultz, thinking that he might have to alter his long-existing plans for a trip to the Far East. “But George,” he continued, “if you can tell me what it’s about, I can be thinking about it overnight.” Shultz wouldn’t tell him anything. “It’s not something I can discuss over the phone,” he said before hanging up. Whitehead started to think about what Shultz could have wanted to see him about, and he decided it must have something to do with Latin America because the “whole region was beset with serious economic problems that had everyone on Wall Street concerned” because banks had made numerous loans in
Argentina and
Brazil that looked on the verge of default. Convinced that was the topic, he found a young assistant at her desk in the Goldman library and told her he needed the latest economic and financial news and data on Argentina and Brazil. He studied his briefing documents on the shuttle down to Washington and into the night at his hotel, the Madison.
As soon as he showed up in Shultz’s office the next morning, Shultz greeted him briskly and told him they were going over to the White House to see the president. Whitehead thought the crisis in Latin America must be worse than he thought. Shultz said nothing to him during the car ride, preferring to stare out the window at the blooming cherry trees. They made their way to the Oval Office. Whitehead had met Reagan before when he had hosted a large dinner in New York during the
1980 election campaign. He had sat next to Reagan at that dinner and come away impressed by his “confidence and conviction.” This time, Whitehead was meeting him as the president of the United States.
“Have you told him yet?” Reagan asked Shultz, who shook his head no.
“We understand you’ve retired from Goldman Sachs,” Reagan began, “and we want you to come to Washington to join the State Department as deputy secretary of state.” Shultz then looked at Whitehead and said, “I want you to be my partner.”
Whitehead thought long and hard before agreeing to accept the post—an appointment that harkened back to Sidney Weinberg’s long career as a behind-the-scenes presidential adviser but presaged something new. From then on, senior government service became part and parcel of a Goldman executive’s mind-set and would forge increasingly close ties between money on Wall Street and power in Washington.
On April 19, the
Times
ran the announcement of Whitehead’s
appointment on its front page, along with his picture. In describing Whitehead’s attributes for the job, Shultz noted that Whitehead was a member of the Council on Foreign Relations and had been a frequent dinner guest of
Henry Kissinger’s. The web of relationships that had begun with the hiring of former treasury secretary Henry Fowler was beginning to crystallize. Shultz also spoke approvingly of Whitehead’s having been an investment banker. “Having had a little experience in that area, I noticed that investment bankers have all those characteristics that we need here and hope to have,” Shultz said. “You’ve got to think pretty fast sometimes and you’ve got to keep cool and you’ve got to be able to bounce back a little.” He added, “[O]perating at the strategic level, I think investment bankers tend to get involved when the big deals come along.” He made no mention of Whitehead’s role as finance co-chairman of the RNC, in which he raised millions of dollars for the president’s party.