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When a panel of nine federal jurors last week found onetime Goldman Sachs Group trader Fabrice Tourre liable for securities fraud for intentionally misleading investors in the now-infamous 2007 mortgage-linked offering called Abacus , Goldman CEO Lloyd Blankfein and his management team must have been feeling pretty good about their decision three years ago to pay a then-record $550 million to settle charges by the Securities and Exchange Commission against the firm for its role in the failed deal. Blankfein and company have been eager to put the incident behind them, says Charles (Charley) Ellis, founder of international business strategy consulting firm Greenwich Associates and author of the 2008 classic The Partnership: The Making of Goldman Sachs. At about the same time that it was settling with the SEC, Goldman created a business standards committee consisting of 17 of its most senior executives, as well as securities industry sages H. Rodgin Cohen of law firm Sullivan & Cromwell and former SEC chairman Arthur Levitt, to study every aspect of its operations. In January 2011, Goldman’s board approved the committee’s 39 recommendations , which included renewing the firm’s focus on serving clients and increasing transparency.

“I really think that they are going to pull themselves out of this,” Ellis tells Institutional Investor. “They are still the best firm in the business, have the best people and have the best systems.”

Few people know Goldman Sachs better than the 75-year-old Ellis, who turned down a job offer from the firm in 1963 after graduating from Harvard Business School because he was recently married and needed more money than Goldman was paying. (“It never occurred to me to ask if the firm gave bonuses or raises at the end of the year, so I made a terrible, boneheaded decision when I didn’t accept their offer,” he said in an October 2001 interview at HBS.) Ellis eventually ended up at Donaldson, Lufkin & Jenrette, where he worked for six years before tiring of the politics and lack of meritocracy. In 1972 he founded Greenwich Associates to focus on providing strategic advice to commercial banks, insurance companies, investment banks, investment managers and securities dealers. By the time he left in 2009, the firm had grown to more than 300 people and was advising financial institutions in 135 markets around the world.

Goldman Sachs was one of Ellis’s earliest and longest-standing clients, a relationship that began when the consultant got a call from a secretary for Gustave (Gus) Levy, who ran the firm from 1969 to 1976, saying that Mr. Levy would like to meet with him. The mission of Goldman shifted under Levy, who “put increasing emphasis on profits from arbitrage, institutional brokerage and block trading,” Ellis writes in his latest book, What It Takes: Seven Secrets of Success from the World’s Greatest Professional Firms. Although co–senior partners John Whitehead and John Weinberg turned the focus back to investment banking during their reign in the late ’70s and ’80s, their decision to acquire commodities trading firm J. Aron & Co. in 1981 laid the groundwork for the increasing shift away from client-serving businesses under Goldman’s future top executives Robert Rubin, Stephen Friedman, Jon Corzine, Henry (Hank) Paulson Jr. and current CEO (and former J. Aron precious-­metals salesman) Blankfein. As Ellis explains in the following exclusive excerpt from What It Takes, “the multiple recent crises of Goldman Sachs were at least several decades in the making.”  — Michael Peltz

What It Takes: Seven Secrets of Success from the World’s Greatest Professional Firms
Excerpt from Chapter 10

THE BEST INDICATOR OF GREAT LEADERSHIP — and of an organization’s long-term intellectual and spiritual strength — is the ability to do three things at once: adapt to external change, sustain commitment to its long-term mission and values, and correct internal problems. Organizations are, after all, living human organisms, and even the best encounter troubles. The worst troubles are usually subtle, develop gradually over a long time and, like termites, can be invisible to those absorbed in the compelling daily decisions of management.

 Charles Ellis, founder of Greenwich Associates  

The multiple recent crises of Goldman Sachs Group were at least several decades in the making. Even further back — before the Great Crash of 1929 — the mission of the Goldmans and the Sachses was to have their small firm accepted by the powers of Wall Street and to prosper by serving corporate clients with great care. All their aspirations were shattered in 1929 by the horrific failure of Goldman Sachs Trading Corp. So, for longtime firm head Sidney Weinberg, the mission of Goldman Sachs began as a desperate struggle for survival in the ’30s and early ’40s. The mission changed after World War II to gaining acceptance as a major firm in financing American business in the postwar industrial boom. Irreverent as he so often was, Weinberg cared deeply about integrity, ran a tightly disciplined ship and was devoted to serving his corporate clients as the way to advance the stature of his still small firm.

For Gus Levy in the ’60s and early ’70s, the mission shifted, causing Sidney Weinberg to worry. It was still important to become a major investment banking firm, but Levy put increasing emphasis on profits from arbitrage, institutional brokerage and block trading. And Levy had no fear of making extra profits through astute trading for the firm on market opportunities he discovered while doing business for customers. He increasingly focused investment banking on acquisitive conglomerates: Their dealings fit well with his strengths in arbitrage and block trading.

In the ’70s and ’80s, John Whitehead and John Weinberg brought the mission back toward Sidney Weinberg’s focus on investment banking for corporations and building Goldman Sachs into a leading Wall Street and eventually international firm. Their mission was to serve clients so well that Goldman Sachs would rise to a leading position at each client organization and win more and better corporate clients.

The firm’s aspirations and standards encountered no sudden “light-switch” change. Before they left Whitehead and Weinberg may have quite unintentionally launched the firm into businesses that were by nature destined (if successful) to be incompatible with the service-intensive, risk-averse concept of the business on which their kind of Goldman Sachs had flourished. They had committed the firm to becoming the global leader in finance, acquired J. Aron & Co.’s commodities business, built up the bond dealing business, launched investment management and increased profitability, capital and the firm’s prowess in capital-at-risk trading.

Bob Rubin and Steve Friedman differed from the Two Johns in significant ways. Both saw being senior partner as a job, not as a career or a calling. The firm was a vehicle, not a destination. To increasing numbers of partners, Goldman Sachs was important, but not that important. As Friedman later said, “There is life after Goldman Sachs.” Impatient to increase profitability, they accelerated the pace of activity and empowered those with the drive and determination to make it happen.

Rubin and Friedman focused increasingly on changing the mix and pace of the firm’s many businesses to increase profits and payouts to partners. Serving clients more intensively was still considered important as a means of augmenting profits, but client service was increasingly matched and even superseded by trading skills and capital commitments — deliberately taking market risks in bonds, foreign exchange, oil and other commodities — and increasingly gathering and applying proprietary information. Numerous accomplished people were hired in from other firms and never learned to treasure the iconic values of the Whitehead-Weinberg era. Rubin was primarily a strategic leader and Friedman primarily a transactional leader. Friedman’s leaving abruptly — during a loss-making bond market and without a plan in place for leadership succession — went a major step further in putting personal interests ahead of the firm’s. Trading and transactional leadership — and increasingly visible and forceful power politics — were becoming dominant at Goldman Sachs.

For Jon Corzine the initial goal was stark: Save the firm by terminating enough people to cut out a billion dollars in bloated costs and trading out of money-losing bond positions. Later, seeing the investment banking agency business — doing transactions for others — as slow-growth, low-margin and passé, his objectives became to expand proprietary trading for the firm’s own account, make acquisitions and go public. As Corzine twisted arms in the drive to get votes for the initial public offering, politics flourished and prospects for individuals to get huge payoffs magnified everyone’s focus on self-interest. Even for those who had been almost romantic about the mission of serving clients, the real purpose had become clear: It was all about the money. Far too little attention was given to the “soft” values and protecting the primacy of the firm’s culture.

Hank Paulson, a former relationship banker and a forceful, pragmatic CEO, kept the focus on increasing the independent strength of the firm as an aggressive, profit-maximizing global capitalist. He built up private equity investing, joined in hostile takeovers (a major change) and expanded asset management, technology and trading while making more than 70 trips to establish the firm in China. Paulson’s ability to play hardball showed in his leading the putsch of Corzine and later dismissing his promise to pass the baton of leadership to the others.

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