in the room, we started presenting our analysis, the pros and cons of the alternatives, and our recommendations. (I had no speaking role; I was at the meeting in case someone asked any questions about the numbers. This was customary at Goldman—to watch and learn.)
Throughout the meeting, Paulson asked questions that he felt should be on Bryan’s mind, challenging us—grilling us, really—and posing follow-up questions to Bryan’s own. I wondered, Which one is the client—Bryan or Paulson? That’s when I learned an important lesson: they were one and the same. To Paulson, and therefore to Goldman, Bryan was not a client; rather, he was a friend. This was Goldman’s first business principle in action. In that meeting, Paulson embodied the spirit of that principle and of Goldman at its best. He didn’t just walk a mile in the client’s shoes; he ran a marathon. This rigor of service, along with his Midwestern work ethic and values, led not only to his own many professional successes but also to the many successes for his clients and for the firm he would one day lead.
Flash-forward to 2008. After I left Goldman and my partners and I decided to review strategic alternatives for our firm, I moved to the other side of the table as a Goldman banking client. After interviewing several investment banks, I voted to hire Goldman because it had the best overall team, knowledge about the markets, understanding of how to present our firm, and access to the key decision makers at potential buying firms. However, I noticed a contrast with my early years at Goldman. I certainly did not feel as though anyone from Goldman was looking at things from my perspective in the same way Paulson had at Sara Lee. No Goldman banker sat on my side of the table and raised the questions I should have been considering. In fact, I was concerned that Goldman cared more about its larger and more important clients that might consider buying our firm (and would remain Goldman clients) than about us. I had the same sense with most of the other banks that pitched for the assignment. Maybe I held Goldman to a higher standard. When we hired Goldman, I requested that John S. Weinberg—the grandson and son of former Goldman senior partners, and someone I had worked for at Goldman—help oversee the project. I felt he embodied the spirit and standards that had been in effect when I had joined the firm. Goldman was highly professional and extremely capable, but for some reason the shift was enough for me to want John S. Weinberg involved. (For more information about the Weinberg family and other key Goldman partners, see appendix F.)
The Study
While my experiences at Citigroup and McKinsey, as well as in helping build a firm, combined with distance, time, and maturity, helped put my experiences at Goldman into perspective, my insider experience also made me aware of how difficult it can be to perceive this kind of change from within, even though examples such as these may seem to suggest that the change should be obvious. Also, recognizing that change had occurred and understanding why and how that’s the case are very different propositions. This is why the perspective from sociological theory is so helpful. Personal perspective isn’t enough.
The analysis of Goldman that I offer here is based on established sociological approaches to studying organizational change, behavior, and innovation, an approach I’ve learned at both the sociology department and the business school at Columbia University. It doesn’t come naturally to me. Having been a banker, consultant, and investor, typically I try to understand problems quantitatively. Those in the financial industry seem to share this trait, because they have a certain comfort with quantifying things and using numbers and metrics to hold people accountable. This approach is also followed by many regulators, policy makers, and economics and finance professionals. They focus on quantitative measures—such as imposing regulatory capital requirements or limiting activities to certain percentages—as the best way to prevent other crises.
The quantitative approach is reasonable, but it is not complete. Those trying to regulate Goldman and similar financial institutions have focused relatively little on the social activity, structures, and functions of their organizational culture—the hallmarks of the sociological approach—and I believe this focus will help get us closer to the root of the issues.
This book is based on my doctoral dissertation in sociology at Columbia, work that I started in 2011. It is the result of more than 100 hours of semistructured interviews with over fifty of Goldman’s partners, clients, competitors, equity research analysts, investors, regulators, and legal experts.32 I also researched business school case studies, news reports, and books about Goldman; quotations from those sources are peppered throughout the book. In addition, I analyzed publicly available documents filed by Goldman with the SEC (including financial data), congressional testimony, and legal documents filed in lawsuits against Goldman.
The purpose of going beyond interviews was to challenge, support, and illuminate the interviewees’ and my own conclusions. I suspect that many of the people to whom I spoke are bound by nondisclosure agreements, but I never asked. I did agree that I would keep their participation confidential and not quote them. I did not take notes during the interviews, nor did I use a recording device. The only interviewee whose name I disclose, with his permission, is John Whitehead. He worked at Goldman from 1947 to 1984. Since he wrote the original business principles, he was able to clearly describe what he meant when he wrote them and what the culture was like at the time.33
It is not my intent to glorify or vilify any individual, group, or era in Goldman’s history, although I suspect parts will be used to do so. I’ve tried not to be influenced by nostalgia for the Goldman that once was, and I’ve tried to recognize that the people I interviewed were looking back in hindsight and may have had agendas or other issues, something I tried to overcome by speaking to many different people and by balancing the interview data with other information and analysis. I’ve tried not to be affected by many people’s contempt for the firm or by the recent economic recovery. I have relied on publicly available data to confirm and disprove various claims and theories advanced by those I interviewed.34
I do not wish to assert that the change in culture at Goldman I’ve analyzed is necessarily change for the worse, or that the changes will lead to an organizational failure or a disaster (though some would argue that it does). The concept of drift, loosely defined, has often been used to study how a series of small, seemingly inconsequential changes can lead to disaster, such as the explosion of the space shuttle Challenger or the accidental shooting of two Black Hawk helicopters over Iraq in 1994 by US F-15 fighter jets. Though the change at Goldman is different in a number of regards from both of those examples, they do nonetheless offer important insights into why and how Goldman’s culture has drifted. In both cases—analyzed by Columbia University sociologist Diane Vaughan and Harvard Business School professor Scott Snook, respectively—pressures to meet organizational goals generally caused an unintended and unnoticed slow process of change in practices and the implementation of them, which in those cases led to major failures.35 Each tiny shift made perfect sense in the local context, but together they created a recipe for disaster.
My analysis also draws on the sociological literature about the normalization of deviant behavior, which illuminates processes by which a deviance away from original values and culture can become socially normalized and accepted within an organization. Another factor that clearly comes through is that Goldman’s business has become more complex, and that there is less cross-department and other communication, which contributed to what Diane Vaughan calls structural secrecy—the ways in which organizational structure, the flow of information, and business processes tend to undermine the understanding of change that may be taking place.35 (For more on these concepts and an academic study of organizational cultural drift, see appendix A.)
My argument, in essence, is that Goldman came under numerous types of pressure—organizational, competitive, regulatory, technological—to achieve growth, and that pressure, from both inside and outside of Goldman, resulted in many incremental changes. Those included changes in the structure of the firm, from a partnership to a public company, which in turn accelerated many changes already occurring at the firm. The change in structure also limited executives’ personal exposure to risk, as well as ushering in changes in compensation
