Authors: William D. Cohan
But one Goldman banker said that the rise of Blankfein also led to the explicit—no longer just implicit—suggestion that clients could be exploited for Goldman’s benefit. “There was this huge change that came with Lloyd where he wanted to ‘monetize client relationships,’ ” this banker said. “I think it was a euphemism for sort of harnessing the relationship banking side of the house to generate investment opportunities for both the various internal funds and the other businesses Goldman was in. So you got into a situation where there was—rather than it just being sort of a happenstance or just sort of a something like it fell out of a client situation—it became a method, became programmatic where we would push a client to pursue IPOs, or you were supposed to push secondary offerings. Or if you got an advisory assignment, you were then supposed to say, ‘Oh, by the way, we can put money into a PIPE”—a private investment in a public company—“or to see if one of the Goldman private-equity funds can get involved. Does he want to sell himself or be taken private by our private-investing group? It changed the emphasis a bit at the margin. It created more ‘relationship tension’ for bankers to manage.” Conflicts? “No, ‘relationship tension’ was the preferred descriptive,” he said.
As never before, Goldman Sachs was a beehive of global activity, across virtually every imaginable product line in finance, with the sole exception of taking deposits directly from consumers (although like many Wall Street firms, Goldman did have a small commercial bank in Utah). Goldman was now many different things to many different people. As a result, the firm’s exposure to conflicts of interest had never been greater, although its confidence that it could manage the increasing number and complexity of its conflicts had not diminished one whit. “Business conflicts continue to be a particularly important area of focus for us,” Paulson and Blankfein wrote in the firm’s early 2005 annual letter to shareholders. “How we identify, disclose and manage real and apparent conflicts will be critical to the long-term success of our business. We operate with the knowledge that what many may have considered acceptable industry practice yesterday will be the target of intense scrutiny tomorrow. We must conduct ourselves accordingly and ensure that we
have thoroughly and thoughtfully analyzed all of our business priorities. At the same time, it is naïve to think we can operate without conflicts. They are embedded in our role as a valued intermediary—between providers and users of capital and those who want to shed risk versus those who are willing to assume it.”
To try to manage the conflicts, Paulson made numerous efforts to try to indoctrinate the firm’s leaders in the ways of good behavior. He instituted a firmwide program called
“Compliance and Reputational Judgment” training to “reinforce our compliance culture,” Paulson wrote. In 2005, he began the “Chairman’s Forum,” where Paulson met with more than twenty small groups of managing directors to discuss “at length business practices, reputational judgment and compliance leadership.” He explained, “We will emphasize to all our [managing directors] that our highest priority is to enhance our reputation for integrity in every aspect of our business.”
Paulson also wanted to institutionalize the best aspects of the firm’s culture—if he could—and so he created, in 2000, a leadership institute, named “Pine Street” (after the location of the firm’s first headquarters) and modeled after GE’s highly respected John F. Welch Leadership Center at Crotonville, New York. Paulson even recruited an executive who started Crotonville,
Steven Kerr, to run Pine Street and to serve as Goldman’s chief learning officer. “Pine Street is dedicated to strengthening the culture of the firm, enhancing the success of Goldman Sachs and its clients, and developing world-class leadership and management talent,” according to Goldman’s website. “Distinguished businesspeople, noted academicians and the firm’s own leaders serve as faculty. Pine Street combines formal classroom experiences with extensive mentoring and coaching to establish a common language and skill set of leadership throughout the firm.” Observed one Goldman banker, simply, about the Goldman culture: “It was the firm, firm, firm, firm, firm, the firm, it’s the firm.”
According to one of the Goldman executives who worked at Pine Street, Paulson was very concerned that when the firm went public something special about Goldman would be lost. “You have a company that is going public,” remembered this person, “and their whole culture is about apprenticeship and leaders teaching leaders. Then, suddenly it’s going to change. How could the company then, after going public, justify that decision and say, ‘We’re still all about an apprenticeship. We’re still all about leaders teaching leaders. We’re all about a culture. How can we make sure that culture remains a competitive advantage at Goldman Sachs? How do we make sure we don’t lose our secret sauce?’ ” John Rogers, Goldman’s consigliere, explained how important culture was—and
is—to Goldman Sachs’s continued survival, echoing one of the firm’s common refrains. “
Our bankers travel on the same planes as our competitors,” he said. “We stay in the same hotels. In a lot of cases we have the same clients as our competition. So when it comes down to it, it is a combination of execution and culture that makes the difference between us and other firms. Behavior is shaped by it. People who think culture is just a bunch of bacteria in yogurt set a tone that strips values from a company. That’s why our culture is necessary—it’s the glue that binds us together. We hold on to the values, symbols and rituals that have guided us for years, and anything new that we add to the culture always supports what already exists.”
Pine Street was an idea born of paranoia, Blankfein said, since Goldman Sachs was “
an interesting blend of confidence and commitment to excellence, 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. People who go on to other commercial pursuits frequently self-identify as a former Goldman Sachs employee, long after they have left the firm. Alumni take a lot of pride in having worked here.”
The future leaders of the firm were selected to attend, making the experience “aspirational,” the former employee explained. The rewards for those selected became clear, too, as they seemed to be promoted more rapidly than their peers. “Pine Street was presented to me from the start as a way to make senior people here feel special, to connect them to one another—as some group of them will continue to rise and lead parts of the firm, as well as lead practical projects within their business,” explained one Goldman banker. “When I realized it had the full sponsorship of the executive office, that gave credibility to the program for me.”
The genius of Pine Street was that about half of the programs were geared to Goldman’s clients, not just its future leaders. The firm’s coverage bankers would offer their clients the opportunity to attend a very special seminar or lecture or discussion and then be able to spend “quality time” together, away from the typical boring banker flip-book pitch. “We would create these small, intimate, world-class programs where, as a relationship manager—as a banker, all you want to do is spend time with your client and learn what’s going on in their organization—these programs were the ultimate way for that sort of information to be exchanged,” according to one Goldman banker. “They’re coming because during the breaks or during the actual sessions, when you break out with your client and discuss with them the changes they’re facing and their challenges that they’re facing in the organization, you probably learn
more during that day than you do taking your client to dinner or to a Rangers game.” In November 2006,
Harvard Business School professor
Boris Groysberg published a thirty-eight-page laudatory “A” case about Pine Street, how it got started, and what, ideally, it would accomplish. As a follow-up to that case, Groysberg also drafted a “B” case about how effective Pine Street turned out to be in practice. He checked quotes with various people but then never published the B case. Goldman decided the A case should be the only document published about Pine Street.
Just in case the managing directors did not get the message about the importance of maintaining the culture, the firm also had a “reputational risk” department in the basement of 85 Broad Street, staffed by an Orwellian mix of former CIA operatives and private investigators. Its purpose was “to protect the reputation of Goldman Sachs,” explained one Goldman executive. What this meant was once a potential new hire survived the firm’s arduous interview process but before an official offer of employment was made, the candidate had to be investigated thoroughly by the reputational risk department. “They turn your life inside out,” one Goldman banker recalled. “I mean they check everything. They call your high school.”
Explained one Goldman trader, “After I went through the processes of being offered the job by businesspeople, then you have to run through the legal and background checks, where they basically ream, steam, and dry clean you. They look into every aspect of your life. It was just a license to ask anybody anything. They tell you if you lie about any of this, we rescind our job offer. I was always sort of convinced that they did that to build a dossier on you, so if you ever gave them a problem, they could use it against you.” He remembered once when a former head of Goldman Sachs Asset Management, who had been fired, wanted to trade with Goldman at his new firm and the Goldman legal department told him he had to first submit the idea to reputational risk to have them clear the firm’s association with its former partner. “This guy there explained to me—it was this big guy who looked like an ex-cop—that their job was to look into everybody and everything and to watch out for the interest of the partners,” the former Goldman executive recalled. “I was told a story that there had been a partner who had a problem with an extramarital affair and the reputational risk department handled it. The stuff I took away from it was, that this is basically an internal police force that would also take care of any issues outside the firm that were threatening the firm. Almost like a mob kind of feeling. There was an aura about it that was pretty scary.”
Even though the trader had been gone from Goldman for more than a decade, the firm’s power and its tentacles still frightened him. “Not that they would come to my house and beat me up or something or kill my children,” he said. “But certainly they would drag you through court or do something to screw up your life. If you did anything to hurt that firm in any way, all bets were off, because God knows I saw what they did to their customers. That was bad enough—they’d steal from them, rape them, anything they could do.”
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Goldman’s clients had noticed the way the firm was treating them and they were not happy about it. This was not necessarily a new or recent development but rather one with a lineage that went far back into the firm’s history. For instance, the Chicago investor
Samuel Zell—who had a serious run-in with Goldman in the late 1980s about the sale of Rockefeller Center, which he lost in a heated battle to Goldman and the developer
Jerry Speyer—remembered that Rubin and Friedman came to see him in his Chicago office in the hope of getting Zell to do more business with Goldman Sachs. “
I am happy to do business with you,” Zell told the men, “just tell me whether you are my agent or my competitor. I am happy with either one, just not both.” Although Rubin and Friedman assured Zell that Goldman had “Chinese walls” to prevent any confusion, the truth was that Goldman was constantly blurring the lines and more and more clients were getting angry. Despite their anger, many clients seemed reluctant to do anything that would end up alienating the firm, since it was generally acknowledged that Goldman had the best deal flow and had access to the best investment opportunities. Pissing off Goldman Sachs—it turned out—would be bad for business.
Despite Blankfein’s concern that Goldman did not want its clients upset with the firm, sometimes the firm left its clients little choice. For instance, in February 1999, somewhat out of the blue,
Société Générale, the big French bank, announced a preliminary agreement to acquire Banque
Paribas, another important French bank with a big investment banking business. The deal was large—more than $17 billion—and took people by surprise because it had basically been negotiated between the two leaders of the banks,
Daniel Bouton, at SocGen, and André Lévy-Lang, at Paribas. Once the two banks had figured out what the chairmen had done, there was a push made after the fact to hire legal and M&A advisers to make sure everything was buttoned up properly. Naturally, every Wall Street firm wanted to be part of the deal, including Goldman, which at the time had been working on three separate projects for SocGen: a review of its investment banking business with a look at potential
acquisition targets, a review of its investment management business, and a global review for the bank’s top management of strategic initiatives, complete “with all the inside information you could imagine,” said a knowledgeable SocGen insider. “They were in our pants in a big way.”
Goldman was as surprised as anyone by the news of the SocGen/Paribas merger and, understandably, wanted to be hired as an M&A adviser. Goldman’s message to the bank was simple: “If you won’t hire us then somebody else will.” (This was not an unusual veiled threat on Wall Street.) In the end, SocGen hired
Morgan Stanley for M&A advice and
Sullivan & Cromwell for legal advice. Goldman, miffed, rounded up a new client—Banque Nationale de Paris, or BNP as it was known—and began working hard to disrupt the SocGen/Paribas deal. The battle raged for the next year, with BNP at one point launching hostile takeover bids against both Paribas and SocGen. (So much for the policy against launching a hostile bid, although in fairness this was
two
hostile bids.) In May 2000, BNP emerged the victor with an agreement to acquire Paribas, while SocGen was able to remain independent.
Goldman’s behavior left some executives at SocGen stunned. “It was extraordinary to me that armed with all of this inside information that they actually had the chutzpah to come out and make a competing bid at the same time that they had access to all this information about our strategy,” explained one insider. “And they did it in the usual way, by saying that they had a separate team and ‘Chinese walls’ and all sorts of things. I was so livid about that I pushed hard for a lawsuit against them based on the conflict. It seemed to me, and others, that we had the better of that argument. But even if we didn’t, the fact was throwing that kind of dirt in their face where it belonged was something that I wanted to do because I knew that we had a good chance of getting a preliminary injunction. But even if we didn’t get that far, we would do a lot of damage to just slow them down and to be able to take discovery of how they were using this information and how the Chinese walls were working, because it was just so outrageous to me. It was about as outrageous as anything I’ve seen, frankly, in the business.”