Goldman Sachs’ Secret to Success Under Siege

Despite the conviction of former Goldman Sachs trader Fabrice Tourre, Lloyd Blankfein’s firm is seeking control of its struggle between trading and client service.


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.

Lloyd Blankfein, skilled in sales, trading and politics, had thrived in this era of transformation and was a creature of the new kind of firm that Goldman Sachs — and all its major competitors — was fast becoming: a profit-focused trading powerhouse that also did banking. (Blankfein’s COO, Gary Cohn, had come up through trading with Blankfein, with similar experiences and values, so the firm’s leadership did not have the advantages of balance at the top that it could have had with a banker as No. 2.) Blankfein’s mission began with further increasing the firm’s profitability and power à la the great J.P. Morgan — until the global crisis required refocusing his attention on defending the firm politically, legally and in the court of public opinion.

It might have appeared that Goldman Sachs’ mission in Blankfein’s era had come full circle to the mission in Weinberg’s era, but there had been a fundamental change. Weinberg had wanted to serve prestigious corporate clients and develop a strong business with profit as the means to the end of building a great firm. In his era payouts to partners came later and were modest. Well before Blankfein’s era, those two had been reversed: Build a powerful firm to maximize profits paid out to the partners. What insiders saw as a spectacular success, as measured by competitive rankings, profits and payouts to partners, would increasingly be seen by customers, regulators and government leaders — and by the press and the public — as excessive and suspicious.

By stages, committing capital and taking risks in trading transactions had eclipsed long-term service-based client relationships at Goldman Sachs and among its competitors. By stages too Goldman Sachs and its major competitors had transformed themselves from midsize national contenders to global behemoths striving to succeed in every market in every country. To be fully competitive, decision authority had to be dispersed from headquarters to the specialists who knew each market best, greatly weakening enforcement of past standards by central management.

The dispersal to the distant perimeter of power — the authority to make decisions, to commit capital and take risks — was one of the most important and least recognized changes in the structure of Goldman Sachs (and of its competitors). In over 300 unique markets — in commodities, currencies, stocks, bonds, real estate and private equity, and in sophisticated arbitrage operations as a prime broker to hedge funds — only “the man in the arena” could be sufficiently expert on all the competitors, customers, regulations and customs and on the capabilities of each person on his team to make the instantaneous decisions needed to become the most profitable market leader. All these markets are more competitive, more dynamic and faster paced than ever before and require more-specialized expertise and capital. Goldman Sachs was closer to being several hundred firms than one integrated firm. The common denominators increasingly became not qualitative and “all about people,” but quantitative and “all about numbers”: capital, risk and profit — particularly profit. The focus on profit kept increasing.

Taken together, the firm’s complex, fast-moving businesses form an extraordinary network of activities that enable Goldman Sachs to gather and deliver to the point of decision a plethora of proprietary information the firm can and does act on to make profits. The time horizon for conducting business moved from years — even decades to develop a primary relationship with a major corporation — down to hours, even minutes to do a trade. The language of Goldman Sachs changed: In the past it was all about clients; now it was about accounts and counterparties, and the terminology turned toward locker-room crudeness.

Power within the firm had always moved toward those divisions that made the most profit, so power moved away from banking to trading. Partnerships and compensation shifted from the bankers to the traders. The identification of profits with particular trades made it easier for specific individuals to insist on being paid for the reported profit of specific transactions. And this reality had the inevitable consequence of shifting the focus from firm to individual — from we to me. Twenty-five years ago 85 percent of the partners were bankers, and 75 percent of the profits came from banking. Today banking is less than 10 percent of the profits, and a large majority of the partners — and both the CEO and the COO — are from trading.

Trading businesses are friendless. Success depends primarily on the individual traders. So moneymaking traders are free agents, while individual investment bankers or research analysts or securities salespeople are almost captives of the complex organizations they depend on and represent. They cannot easily leave and take the firm’s clients with them. But traders can move overnight to new firms. So the competition for traders has become a “spot” market, and compensation for top traders has soared.

Trading, taking risks and committing capital to make more profit became the driving forces within Goldman Sachs. Observers began to define the firm as an aggressive, highly leveraged hedge fund with an appendage in investment banking. Major transformational changes gained momentum: Geographically, the firm went from a New York–Chicago-London concentration to a dispersed global organization of several hundred different “market-facing,” entrepreneurial business units connected by a powerful, centralized, level-by-level risk management and reporting system — so formidable it was dubbed “the Federation.” The securities business was changing rapidly, and Goldman Sachs was changing even more rapidly so its skillful, driven people could stay ahead of the curve of change and excel at making money.

Insiders knew the market risks taken, the many kinds of expertise required, the networks of information developed, the capital committed, the intensity of personal commitments and the capabilities of the people engaged in every transaction. They knew that in the hypercompetitive markets of the world, they fought intensely for each and every million dollars. So sure and certain were the leaders of their self-perceptions, they could not give credence to the skeptics or challengers, particularly when they were consistently hostile.

As a business strategy, the firm’s massive move away from exposure to subprime mortgages was both brilliant and lucrative. Of course it was silly to describe the firm as “a giant vampire squid,” as Rolling Stone famously did, but absurd as the charge was, it resonated throughout the media and with the public. During and after the global financial crisis, angry Americans, having been badly hurt, were looking for someone to blame for severe unemployment, collapsing house prices, credit card debts, huge federal deficits, giant bank reserves — and no end in sight.

For all his extraordinary learning capacity, Blankfein’s rise to leadership came without a personal need to fully understand the specific nature of each of the firm’s many client-based businesses. At J. Aron and in Goldman Sachs, he had come up rapidly through trading and had learned to manage businesses internally and by the numbers, not through building long-term organization-to-organization relationships. He knew the securities industry was changing on many dimensions and principal trading businesses were rising rapidly — and even more rapidly in profitability — so he had recentered the securities business on the lucrative hedge funds and private equity funds. They were the largest and most profitable customers — and swift to take action on creative ideas. Blankfein had no great enthusiasm for the “old-fashioned hand-holders” in securities sales or research or investment banking. He preferred to work with executives who had come up with him and would agree with his priorities and his management practices.

Compared with the Goldman Sachs of 20 or 30 years ago, Blankfein’s Goldman Sachs is huge, with 33,000 people and a trillion-dollar balance sheet. As the firm has grown in scale and complexity, the time horizon for management decisions has gotten shorter and shorter. As Goldman Sachs got much more aggressive and hard-dealing in its pursuit of maximum profit, it often appeared too aggressive and too profitable.

During the global financial crisis, Blankfein — one of the most capable transactional leaders the firm has ever had — had the toughest job any Goldman Sachs CEO had ever faced as a strategic leader. The firm made that job much tougher by not recognizing that when you’re the world’s leading financial organization, with a reputation for exceptional talent, skill and expertise, much more is expected — not on the hard, quantitative metrics on which the firm focused, but on the softer, qualitative dimensions on which clients, customers, regulators, the media and the public focused. No matter how skilled and powerful it is, no firm can expect to continue being the leading firm unless it is the firm with the most well-deserved client and customer trust and public goodwill and respect.

People had long admired the firm’s oft-declared values and its repeated best-of-class achievements and even its ability to create wealth — partly because the firm was and is known to be an absolute meritocracy and partly because Goldman Sachs people never flaunted their wealth. But the firm stretched and broke the covenant that all true leaders must accept: to be better in values lived by, in standards and in integrity always — even when nobody is looking. While most Goldman Sachs insiders say they believe in the firm’s first business principle, “Our clients’ interests always come first,” all too many customers, competitors, regulators — and past partners — wonder whether it is no longer a core commitment but has become just a principle of convenience. Of course, Goldman Sachs’ long-term focus has always been on maximizing profitability, but the short-term focus on trading for “profits today” conflicts with “clients first.”

As Goldman Sachs repeatedly demonstrated its ability to make money for itself, clients could react in two ways: one negative and one positive. The negative reaction would be: Goldman Sachs is good at making money for itself because that’s its whole focus — but that’s not always good for us, so we should try to avoid them. The positive reaction could be: Goldman Sachs is a superb moneymaker, so we should align ourselves with them and make money too. Senior people at Goldman Sachs were confident that the positive view would prevail because that’s how they themselves would have reasoned. But those with regular business dealings with the firm, still widely recognized as the most capable of all its competitors, judge Goldman Sachs not by what it says but by what it does and what they see day after day. All too often they experience tough “firm first” behavior. As Wall Street cynics said, “If Goldman Sachs wants to buy, you don’t want to sell, and if Goldman Sachs wants to sell, you don’t want to buy.”

The firm’s senior executives were new to the disciplines of public ownership, the challenges of “retail” public relations and the reality of public perceptions. Unsurprisingly, public opinion did not wait for complex explanations, particularly when snap judgments and sound bites dominated the media. While tolerated in less important firms, Goldman Sachs was pilloried for its inability to appreciate that its aggressive pursuit of profits and its extraordinarily high — and highly visible — bonuses were definitely not okay when so many other people were out of work or losing homes and believed Wall Street had been bailed out by American taxpayers.

The complexity of the global financial crisis was greater than any other market event in scale, intensity, speed and impact. As a trading “machine,” Goldman Sachs’ operations for its own account were coordinated, aggressive and successful at both controlling risk and staying close to fast-changing markets. As a result, it made more profit, took less overall risk, maintained more internal discipline and control and suffered far less harm than competitors. (Only JPMorgan Chase & Co. came close in overall economic performance.) Yet no firm suffered so much loss of esteem.

When the firm had its first public stock offering, in 1999, it somehow did not fully recognize how different public share ownership would be from prior private equity investments by institutions — Sumitomo Bank and the Kamehameha Trust. Many partners had thought of the change as primarily a way to raise more permanent capital so the firm could compete effectively with the huge universal banks that were increasingly coming into the securities business and throwing around their elephantine balance sheets. A second major objective was to be so strong financially that the firm could withstand major unexpected losses as it engaged more frequently in large-scale capital-at-risk commitments. Of course, a third interest among the decision makers was personal: to become very rich.

Goldman Sachs found it difficult to be “public.” Few partners had ever been directors of publicly owned corporations, so they had little interest in or understanding of the potential importance of good governance. While the firm had taken in public capital and its shares were publicly traded and quoted, it did not reconceive itself as a firm owned by outside shareholders and accountable to the public. It was still run as a private firm to which public investors had provided extra equity capital. Initially, the firm was far from transparent in its reporting to shareholders, who legally owned the company. Its financial reporting was “innovative” in its restrained disclosures. In discussions leading up to the IPO, partners had been correctly assured that disclosure of information as a public firm would be far less detailed than was then being required by the partners. Goldman Sachs would tell its own story in its own words and numbers — the way the firm wanted to be seen.

Investment analysts found it difficult to understand how much of the firm’s reported earnings came from which businesses, and this made it hard for them to forecast future earnings. In addition, institutional investors complained that too much of the total profits were being paid to insiders as bonuses rather than to shareholders. The board of directors was widely considered weak for a publicly owned firm, particularly one as complex as Goldman Sachs, and observers worried about the lack of a clear plan of leadership succession. And, like a private firm, Goldman Sachs continued to take care of its own people in its own way. When a top executive got into a major financial jam by borrowing heavily against illiquid investment positions before the 2008 market plunge, he was allowed to sell supposedly unsalable “lock-up” positions to escape a personal investment disaster.

Whether it recognized the nonfinancial consequences of its new reality or not, when Goldman Sachs went public financially it also “went public” in other ways, particularly in reputation. Press coverage and public awareness increased substantially — initially in tones that were close to hero worship. The firm’s triumphs and successes had made good copy. Adulatory public and press attention that had increased as more and more of the firm’s alumni took senior positions in government service flipped, in just a few years, from positives to negatives. Conspiracy theorists coined the term “Government Sachs,” and columnists wondered in print whether the firm had too much power. Simultaneously, as the roaring bull market continued, payouts to top executives zoomed to record amounts — in some cases more in a day than the average worker earned in a year. Outsiders increasingly wondered: Was it right for the people of Goldman Sachs to be paid so very much?

Then the global crisis hit. In the midst of all the misery, people on Wall Street — those at the center of the storm — got paid huge bonuses, particularly those at Goldman Sachs. With a series of transactions that, while legal, did not seem right, Goldman Sachs put itself on the defensive — and then mishandled its press communications, making suspicions much worse. The firm’s explanations were either too arcane or too dismissive and sounded suspiciously protective.

Many people found it difficult to accept that the Treasury’s bold actions to prevent the collapse of American International Group, once the nation’s leading insurance company, had not been at least partly motivated by a determination to save Goldman Sachs, which was a major AIG counterparty. Conspiracy theories abounded, particularly because Treasury Secretary Henry Paulson — so recently CEO of Goldman Sachs — had made the major bailout decision. Even as suspicions of special dealing with AIG continued to surface, the government of Greece skidded toward a financial collapse. Reporters cited a deceptive series of complex derivatives maneuvers linked to a series of bond offerings that had been orchestrated for a multimillion-dollar fee by Goldman Sachs.

The mortgage meltdown did several things. It demonstrated how disciplined, objective, tough and independent-minded Goldman Sachs was in its operating decisions when it got out of a large exposure to mortgages well ahead of the market’s collapse. This astute move also showed how profitable the firm could be, particularly in comparison with its competitors. But it deeply offended the press, public opinion, regulators and politicians that Goldman Sachs, having sold mortgage-backed securities to investors, traded against those same securities for its own account without telling investors. The firm argued accurately that each of its businesses was run separately and that it had no fiduciary responsibility to tell mortgage investors in one area of its business about its proprietary traders’ later negative expectations for the mortgage market in another area of its business. Reporters didn’t buy that. Nor did the public or politicians. The hostility escalated rapidly. Goldman Sachs had swiftly gone from an enviable position as the world’s most admired, most respected and most trusted investment bank to being hammered by political leaders and ridiculed in the media. Major corporations, institutions and governments, while recognizing that no other firm has as much capability, increasingly indicated privately that they would prefer to do more business with other firms if they could. It got worse — and worse.

In organizations the odds of someone misbehaving rise exponentially with increasing size, distributed decision power and novelty of products, markets and people. This was well known by Goldman Sachs senior management — Blankfein once observed, “I spend 98 percent of my time on 2 percent probabilities.” The firm had to know from its own experience where to be particularly wary: new products like synthetic collateralized debt obligations or new people with new powers. The firm must have known that very bright, all-too-clever, self-centered fast-trackers were high-risk people needing extra-close supervision. But it didn’t do what it should have done.


On April 16, 2010, the Securities and Exchange Commission charged Goldman Sachs and a 31-year-old vice president, Fabrice Tourre — a math whiz who called himself Fabulous Fab — with civil fraud for their roles in the offering of an issue of mortgages called Abacus 2007-ACI. The issue was backed by packages of marginal, almost sure to fail mortgages. The SEC cited “materially misleading statements and omissions” in the offering documents — in particular, not explaining that the portfolio had been jointly created by a hedge fund that wanted to sell the portfolio short while the firm deliberately gave the impression in the offering documents that the portfolio of mortgages had been selected by ACA Capital, a third party experienced in judging the credit risks of mortgages. In the transaction’s “pitch book,” 37 out of 65 pages were almost entirely about ACA and its role, capabilities and organization. In reality, ACA’s role was modest; the hedge fund performed the dominant role — and was never mentioned. The structure of the deal was highly complex, but the concept was simple: If the mortgages continued to pay off, the security would keep its value. If, on the other hand and as the short-selling hedge fund expected, homeowners started defaulting on their mortgages, the security would quickly lose value. Within just six months of the sale, 83 percent of the securities involved had been downgraded. Abacus was intended to be a house of cards, and it certainly was.

Goldman Sachs denied the SEC’s fraud charges and argued, among other things, that it had offered, but didn’t sell, Abacus. But salespeople at the firm told friends that in truth there had been internal pressure to sell Abacus, and the reason sales were not made was that institution after institution refused to buy. In its submission Goldman Sachs insisted it had conducted every aspect of its offering correctly and, apparently to overwhelm the SEC staff, submitted nearly 8 million pages of documents. Once again reminding observers that it was still run like a private firm, executives in the chain of command above Tourre were quietly terminated or transferred. There were no public hangings, and the firm insisted publicly that it had done nothing wrong.

Members of Congress were indignant, and Wall Street competitors expressed surprise that Goldman Sachs had sponsored such an obviously unsavory deal. Press coverage was extensive and unforgiving. Even if the Abacus saga wasn’t technically fraud, and the SEC’s case would have been hard to prove in court, was it in any way okay for a leading securities firm to be doing that sort of thing? To settle the issue so it could focus on future business, Goldman Sachs agreed to pay a record $550 million settlement to the SEC.

But the bad news didn’t stop:

• Complex multibillion-dollar dealings with Libya’s cruel dictator were yet another unseemly revelation. Driss Ben-Brahim, a Moroccan, had made partner and collected a bonus of £30 million ($54 million) in 2004 when he was key to the Libyan sovereign wealth fund’s $1.3 billion investment with Goldman Sachs Asset Management — an investment that was nearly wiped out during the financial crisis. (A $50 million fee to one of Muammar Qaddafi’s sons, which some said was really a bribe, was apparently never paid.) Ben-Brahim left the firm in 2008.

• Goldman Sachs agreed to pay the SEC a $10 million fine and stop conducting investment decision “huddles” — meetings of analysts and traders gathered together to identify short-term trading opportunities in stocks that had a Goldman Sachs research recommendation for long-term investment. The settlement said that Goldman Sachs “engaged in dishonorable or dishonest conduct” — but added that this was not to be construed as a finding or admission of fraud.

• In a private placement of stock in Facebook, Goldman Sachs did as it had done before on other deals, taking better terms for itself than were later offered to outside investors. (On the subsequent IPO the firm made a quick profit.)

• In September 2011 newspapers reported that Goldman Sachs had sent a long, well-documented bearish report on the stock market to hedge fund clients two weeks before that same report’s existence became known to the firm’s traditional institutional clients. This was blatant customer favoritism. The firm’s explanation was at least artful: The report had not come from the firm’s research department. Somehow, someone near the top of Goldman Sachs had decided that it was okay to have an important analysis go to some clients but not to others — and that it was up to the clients either to ask exactly the right question or to accept others’ being favored by one part of the firm while they were left dealing with another part.

• In a Delaware court the firm was criticized in 2012 for its role in advising Kinder Morgan, the biggest U.S. pipeline operator, on its acquisition of El Paso Corp. Later Goldman Sachs gave back its $20 million fee.

• While factually wrong in his accusation that Goldman Sachs went “massively short” in residential mortgages, Senator Carl Levin captured headlines at the televised hearing of the Senate permanent subcommittee on investigations. As the New York Times gingerly acknowledged later: “This isn’t meant to say that part of the firm didn’t go short — it did and the firm has repeatedly said so. But the suggestion that the short was a huge directional bet by the firm to profit off a real estate collapse may not completely stand up.” The Senate report stated: “The problem isn’t that Goldman went short and reduced risk — it’s how this was done. To establish many of its short positions, Goldman created new securities, backed them with its good name, and then strung together misleading statements to its customers about what it was actually doing. By shorting the way it did, the bank perverted the market instead of correcting it.”

Like the famous monkeys, insiders saw no evil and heard no evil. And the firm continued to play hardball with the press — a game it was certain not to win. Clients and past partners wondered aloud: What’s going on at Goldman Sachs? Where are the directors? How long can Blankfein last? When will clients leave the firm?

Even with all the missteps and misbehavior, Goldman Sachs remains the largest aggregation of talented, skillful, committed men and women ever combined so effectively into a powerful securities firm. It still recruits the most capable and highly motivated young people; is still the best place to learn the business; still has the strongest culture; still is the market leader in a vast array of specific markets and products; still has the largest number of important relationships with major corporations, investing institutions, central banks and governments; still has the most effective internal communications; still has the best financial management, operating management and risk management at all levels and particularly at the top; and still can get more complex deals done faster. And, of course, it still makes more money.

But qualitatively, Goldman Sachs is not considered by clients, customers and competitors to be as fine a firm as it was ten years ago. And ten years ago it was not as fine as it had been ten years before that. Part of the change is because the securities business has changed, but even more is because the firm itself has changed. Now the firm would need to change again, and the changes would have to be qualitative and visible.

After nearly two punishing years of being behind the curve, not appearing to recognize the validity of the public furor, Goldman Sachs accepted that the SEC’s fraud charges and the record-setting settlement paid by the firm gave substance to the aggressive pieces in the press and the hostile questions posed in the Washington hearings. At the May 2010 annual meeting, undertaking an initiative larger and more public than any corporation had ever taken before, Lloyd Blankfein announced the creation of a major self-examination by a committee co-chaired by vice chairman J. Michael Evans, head of Goldman Sachs Asia, and partner E. Gerald Corrigan, for many years chairman of the powerful firmwide risk committee. This business standards committee would include 17 of the firm’s most senior leaders, plus a distinguished Wall Street attorney and securities industry wise man, Rodgin Cohen of Sullivan & Cromwell, and former SEC chairman Arthur Levitt — but no clients. As part of the committee’s extensive exploration effort, more than 100 partners led small study groups in examining every facet of every business for six intense months. In January 2011 the committee presented 39 specific recommendations. All were promptly approved by the board of directors and by senior management.

The committee’s 63-page report was made public, an extraordinary, highly visible commitment to action. Its first page was devoted to the iconic Goldman Sachs business principles, beginning with “Our clients’ interests always come first,” and concluding: “Integrity and honesty are at the heart of our business. We expect our people to maintain high ethical standards in everything they do.”

For a skeptical audience familiar with spin, the obvious question was whether the report would lead to vigorous corrective actions. Corrigan was determined to see it done. He had come to Goldman Sachs after 25 years in the Federal Reserve System, culminating in nine years as president and CEO of the powerful New York Fed. Genially Irish with a ready smile, he is a tough career public servant who earned a reputation as a man of integrity who gave no quarter even in past negotiations with the U.S. Treasury. Fifteen years before, he and John Thain had designed and installed Goldman Sachs’ sophisticated risk management system, and ever since he had cochaired the powerful, firmwide risk committee. This position had given him great credibility with the firm’s many traders; they knew they depended on that system for every major decision every day.

Recently, Corrigan summarized his view of reality: “There is only one word to describe our business today — complex. Risk metrics and the information we need to manage risks are evolving quite rapidly. Over the past five years, there has been a major change in our business due to quantification and computers.” Then he turned from the industry to focus on Goldman Sachs: “There has been culture slippage. The industry and the firm are more short-term focused. The orientation is less about clients and more about the firm and current profits.” Then he reflected: “All great firms go through difficult periods. The key question is whether a calamity is seen for what it really is and taken as an opportunity to self-evaluate and rebuild.”

Phrases throughout the business standards committee’s report signaled determination to get things right: “fundamental recommitment,” “not just can we, but should we,” “making the firm a better institution,” “transparency,” “strengthen our culture,” “focus on serving clients,” “we must be clear to ourselves and to our clients about the capacity in which we are acting.” The committee’s primary organizational recommendation was to change the firm’s structure to move mortgage-backed securities product distribution over into investment banking, where due diligence disciplines were traditionally strong. For reporting purposes the firm’s three major business segments would be made into four, with principal investing and lending clearly segregated. Securities services would move from investment management to institutional client services, where it belonged.

Evans, a Canadian Olympic oarsman who still looks the part, now chairs the committee tracking the implementation of each of the 39 recommendations: “We get weekly reports on progress and meet every month for four hours to hear the progress on each recommendation and discuss ways to keep advancing and keep the pressure on. Some are already done, but some — like the new software required for pricing pre- and posttrading — just have to take longer. We intend to complete all 39 actions this year.”

Regular reports on progress are made to the Federal Reserve, the firm’s regulator, which has several of its people full time at Goldman Sachs (as it does with all major banks), as well as to the board of directors and to employees. But no public reports on progress will be made until everything has been accomplished. The firm is not considering going public with progress reports any more than it went public about the quiet removal of those with management responsibilities in mortgages who should have stopped Abacus.

Recentering an enormously complex organization competing in dozens of markets with hundreds of products will be an extreme test of leadership. Regulatory changes will require many stellar individuals to accept significantly lower compensation when hedge funds and private equity firms are paying top dollar and are always looking for proven talent. Exemplary people who could never have been recruited away ten years ago have been leaving — some promising young future stars and some with 20 or more years of developing expertise and strong relationships with clients. Others say they would leave if it were not for the money.

In publicly endorsing the committee report, Blankfein said, “We believe the recommendations in this report represent a fundamental recommitment of Goldman Sachs to our clients and to reputational excellence in everything the firm does.” Setting aside the no-longer-credible assertion that each business of the firm was separate, Blankfein declared: “Goldman Sachs has one reputation. It can be affected by any number of decisions and activities across the firm,” and added, “It is important to articulate clearly both to our people and to clients the specific roles we assume in each case.” In private conversation, as he was about to leave for another trip to China to conduct a few more of the three dozen Chairman’s Forum meetings he has been holding around the world to articulate the firm’s commitments, answer questions and give clients access to the CEO, Blankfein was clear: “This will be my legacy.” Given the firm’s bad press, he usually opens those sessions with a few self-deprecating jokes to acknowledge the problems the firm continues to have and to encourage people to ask their real questions.

Medical doctors make a clear separation between symptoms and signs. Symptoms are the signals we all recognize: nausea, aches and pains that cause us concern. We go to our doctor, get examined and sometimes get a prescription. Usually, our doctor comforts us that the problem is not life threatening and we’ll feel fine in a week or so — and, happily, we do recover. Signs in medicine are different. You may feel and look good, but if you have early-stage brain cancer, oncologists recognize the deadly signs and know that you have only a few months to live. Symptoms for Goldman Sachs include a series of deeply disconcerting reports of past business misbehavior, sound bites from angry senators, innuendos in the press and, more important, confrontations with regulators. What could be signs portending more trouble are a simultaneous loss of confidence by outsiders that Goldman Sachs will always treat clients as clients and the questionable insistence by senior insiders that the commitment to clients is as strong as ever and should be trusted.

Change on the scale that is now needed will not come easily or rapidly: Too many people within the firm have gotten used to and succeeded personally in the culture and with the practices of recent years, and many, many individuals and business units will have to change for Goldman Sachs to change. Yet insiders clearly know real change is needed and point to successes with past challenges — the collapse of Goldman Sachs Trading in the ’20s and the firm’s embarrassing role in the demise of Penn Central Railroad in the ’60s, its unsavory dealings with rogue publisher Robert Maxwell in the ’80s, the analysts case in 2008, and others. Most maintain that the firm has always learned and has always come out stronger.

Goldman Sachs is important to America and the global financial system. The many superbly talented and ambitious professionals who work there will strive to get it right and keep it right — if only for its own benefit. But if insiders do not believe they each need to change and so “just check the boxes,” how can Lloyd Blankfein achieve his stated objective? Nothing is more difficult in leadership than sufficiently upgrading the tarnished culture of a large, complex commercial organization to earn back the trust an industry leader always needs.

The firm has recast its public relations strategy and leadership, and the climate has been shifting in its favor. One small indicator in mid-2012 was an admiring report in the New York Times of how thoughtfully Goldman Sachs had created a delightfully engaging community of shops, stores and restaurants around its massive new downtown headquarters building. Another was the report that senior partner Jim O’Neill was being seriously considered to head the Bank of England. Yet another was Lloyd Blankfein’s taking a high-profile leadership position in support of the Gay and Lesbian Alliance Against Defamation. In August 2012 the firm got another positive: The Justice Department not only decided to close its examination of the firm’s actions during the financial crisis, it took the unusual step of saying so publicly. The next month CFO David Viniar announced his intention to step down at age 57 after 32 years with the firm. To close observers this meant he believed the firm had weathered the storm.

Goldman Sachs continues to perform more skillfully in more areas than any competitor, but much more will be needed to rebuild its reputation. Doing so will first require that no more examples be found of Goldman Sachs’ breaking the rules or laws. Recognition of such a positive negative can come only with time. Second, the final report on specific actions taken to implement the 39 recommendations of the business standards committee must be convincing. And third, surely the most difficult for a firm that feels a need to believe its own promises, will be to recognize that the iconic statement “The needs of our clients always come first” can be promised and delivered only to its traditional relationship-based clients in such businesses as investment banking and asset management.

Most of the organizations Goldman Sachs works with are not clients. Some are customers — even important customers — but not clients. And still others are not customers but just counterparties. They should all know from experience which they are and what the securities business has become, and the firm should be clear with them — and with itself too — about its responsibilities, limits and promises. The most important step toward attaining the respect and trust the market leader must have is to give up unrealistic promises and stop asking for unrealistic credence. The next important step will be to implement the day-to-day behavior that would bring the recommended actions of the business practices committee to life in the real world of transactions with clients, customers and counterparties. The firm has a lot to prove. Surely, it has the resources. Time will tell whether it has the inner values and the discipline to earn again the mantle of unquestioned leadership.

Content was first published in What It Takes: Seven Secrets of Success from the World’s Greatest Professional Firms. © 2013, All Rights Reserved. Reprinted by permission of John Wiley & Sons.