style="font-size:15px;"> When questioned about the potential for conflict, Goldman leaders have asserted that the firm has been able to ethically serve both the interests of clients and those of shareholders, and for many years, that assertion for the most part was not loudly challenged. That was largely due to Goldman’s many successes, including leading market position and strong returns to shareholders, and rationalized by the many good works of the firm and its alumni, which served to address concerns about conflicts, even most of the way through the 2008 crisis.
At the beginning of the crisis, Goldman was mostly praised for its risk management. During the credit crisis, Goldman outperformed most of its competitors. Bear Stearns was bought by J.P. Morgan with government assistance. Lehman Brothers famously went bankrupt, and Merrill Lynch was acquired by Bank of America. Morgan Stanley Dean Witter & Co. sold a stake to Mitsubishi UFJ. But the overall economic situation deteriorated very quickly, and Goldman, as well as other banks, accepted government assistance and became a bank holding company. The company got a vote of confidence with a multi-billion-dollar investment from Berkshire Hathaway, led by legendary investor Warren Buffett. But soon after, things changed, and Goldman, along with the other investment banks, was held responsible for the financial crisis. The fact that so many former Goldman executives held positions in the White House, Treasury, the Federal Reserve Bank of New York, and the Troubled Asset Relief Program in charge of the bailouts (including Hank Paulson, the former CEO of Goldman and then secretary of the Treasury) even as the bank took government funds and benefited from government actions, raised concerns about potential conflicts of interest and excessive influence. People started to question if Goldman was really better and smarter, or wasn’t just more connected, or engaged in unethical or illegal practices in order to gain an advantage.
In April 2010, the Securities and Exchange Commission (SEC) charged Goldman with defrauding investors in the sale of a complex mortgage investment. Less than a month later, Blankfein and other Goldman executives attempted to answer scorching questions from Senator Carl Levin (D-Mich.), chair of the Permanent Subcommittee on Investigations, and other senators about the firm’s role in the financial crisis. The executives were grilled for hours in a publicly broadcasted hearing. The senators pulled no punches, calling the firm’s practices unethical, if not illegal. Later, after a Senate panel investigation, Levin called Goldman “a financial snake pit rife with greed, conflicts of interest, and wrongdoing.”20 But lawmakers at the hearings made little headway in getting Goldman to concede much, if anything specific, that the company did wrong.21
In answering questions about whether Goldman made billions of dollars of profits by “betting” on the collapse in subprime mortgage bonds while still marketing subprime mortgage deals to clients, the firm denied the allegations; Goldman argued it was simply acting as a market maker, partnering buyers and sellers of securities. Certain Goldman executives at the time showed little regret for whatever role the firm had played in the crisis or for the way it treated its clients. One Goldman executive said, “Regret to me is something you feel like you did wrong. I don’t have that.”22
There does seem to have been some internal acknowledgment that the culture had changed or at least should change. Shortly after the hearing, in response to public criticism, Goldman established the business standards committee, cochaired by Mike Evans (vice chairman of Goldman) and Gerald Corrigan (chairman of Goldman’s GS Bank USA, and former president of the Federal Reserve Bank of New York), to investigate its internal business practices. Blankfein acknowledged that there were inconsistencies between how Goldman employees viewed the firm and how the broader public perceived its activities. In 2011, the committee released a sixty-three page report, which detailed thirty-nine ways the firm planned to improve its business practices. They ranged from changing the bank’s financial reporting structure to forming new oversight committees to adjusting its methods of training and professional development. But it is unclear in the report whether Goldman specifically acknowledged a need to more ethically adhere to the first principle. The report states, “We believe the recommendations of the Committee will strengthen the firm’s culture in an increasingly complex environment. We must renew our commitment to our Business Principles—and above all, to client service and a constant focus on the reputational consequences of every action we take.”23 The use of the word “strengthen” suggests that the culture had been weakened, but the report is vague on this. According to the Financial Times, investors, clients, and regulators remained underwhelmed in the wake of the report by Goldman’s efforts to change.24
A Goldman internal training manual sheds some more light on whether the firm acknowledged its adherence to its first business principle has changed. The New York Times submitted a list of questions in May 2010 to Goldman for responses that included “Goldman’s Mortgage Compliance Training Manual from 2007 notes that putting clients first is ‘not always straightforward.’”25
The point that putting clients first is not always straightforward is telling. It indicates a clear change in the meaning of the original first principle.
The notion that Goldman’s culture has changed was given a very public hearing when, on March 14, 2012, former Goldman employee Greg Smith published his resignation letter on the op-ed page of the New York Times. In the widely distributed and read piece, Smith criticized the current culture at Goldman, characterizing it as “toxic,” and specifically blamed Blankfein and Goldman president Gary Cohn for losing “hold of the firm’s culture on their watch.”26
Years ago, an academic astutely predicted and described this type of “whistle blowing” as being a result of cultural change and frustration. Edgar Schein, a now-retired professor at the MIT Sloan School of Management, wrote “… it is usually discovered that the assumptions by which the organization was operating had drifted toward what was practical to get the job done, and those practices came to be in varying degrees different from what the official ideology claimed … Often there have been employee complaints identifying such practices because they are out of line with what the organization wants to believe about itself, they are ignored or denied, sometimes leading to the punishment of the employees who brought up the information. When an employee feels strongly enough to blow the whistle, a scandal may result, and practices then may finally be reexamined. Whistle blowing may be to go to the newspapers to expose a practice that is labeled as scandalous or the scandal may result from a tragic event.”27 The publishing of Smith’s letter certainly resulted in a scandal and an examination.28
Goldman and Me
The question of what happened to Goldman has special resonance for me. I have spent eighteen years involved with the firm in one way or another: twelve years working for Goldman in a variety of capacities, and another six either using its services as a client or working for one of its competitors. I still have many friends and acquaintances who work there.
In 2010, I was about to start teaching at Columbia University’s Graduate School of Business and shortly would be accepted to the PhD program in sociology at Columbia. The sociology program in particular—which required that I find a research question for my PhD dissertation—provided me with many of the tools I needed to start to answer my question. I decided to pursue a career as a trained academic instead of relying solely on my practical experiences. The combination of the two, I thought, would be more rewarding and powerful for both my students and myself. When I began the study that would become this book, my hypothesis was that the change in Goldman’s culture was rooted in the IPO. I conjectured that what fundamentally changed the culture was the transformation—from a private partnership to a public company. As I learned more, I realized that the truth was more complicated.
My analysis of the process by which the drift happened is deeply informed by my own experiences. Though some may think this has made me a biased observer, I believe that my inside knowledge and experience in various areas of the firm—from being based in the United States to working outside the United States, from working in investment banking to proprietary trading, from being present pre-
