and analyze data about the changes at Goldman. My close involvement with Goldman deeply informs my analysis, so it’s worth reviewing the relationship. A brief overview of my career also reveals how Goldman’s businesses work.
In 1992, fresh from undergraduate studies at the University of Chicago, I arrived at Goldman to work in the M&A department in the investment banking division. M&A bankers advise the management and boards of companies on the strategy, financing, valuation, and negotiations of buying, selling, and combining various companies or subsidiaries. For the next dozen years, I held a variety of positions of increasing responsibility. My work exposed me to various areas, put me in collaborative situations with Goldman partners and key personnel, and allowed me to observe or take part in events as they unfolded.
I rotated through several strategically important areas. First I worked in M&A in New York and then M&A in Hong Kong, where I witnessed the explosive international growth firsthand with the opening of the Beijing office. Next, I returned to New York to assist Hank Paulson on special projects; Paulson was then co-head of investment banking, on the management committee, and head of the Chicago office. Also, I worked with the principal investment area (PIA makes investments in or buys control of companies with money collectively from clients, Goldman, and employees). Then I returned to M&A, rising to the head of the hostile raid defense business (defending a company from unsolicited take-overs—one of the cornerstones of Goldman’s M&A brand and reputation) and becoming business unit manager of the M&A department. Finally, I ended up as a proprietary trader and ultimately portfolio manager in the fixed income, commodities, and currencies division (FICC)—similar to an internal hedge fund—managing Goldman’s own money. My rotations to a different geographic region and through different divisions were typical at the time for a certain percentage of selected employees in order to train people and unite the firm.
Throughout my career at Goldman, I served on firm-wide and divisional committees, dealing with important strategic and business process issues. I also acted as special assistant to several senior Goldman executives and board members, including Hank Paulson, on select projects and initiatives such as improving business processes and cross-department communication protocols. Goldman was constantly trying to improve and setting up committees with people from various geographic regions and departments to create initiatives. I was never a partner at Goldman. I participated in many meetings where I was the only nonpartner in attendance and prepared analysis or presentations for partner meetings, or in response to partner meetings, but I did not participate in “partner-only” meetings.
As a member of the M&A department, I worked on a team to advise board members and CEOs of leading multinational companies on large, technically complex transactions. For example, I worked on a team that advised AT&T on combining its broadband business with Comcast in a transaction that valued AT&T broadband at $72 billion. I also helped sell a private company to Warren Buffett’s Berkshire Hathaway. As the head of Goldman’s unsolicited take-over and hostile raid defense practice, I worked on a team advising a client involved in a proxy fight with activist investor Carl Icahn.
When I joined Goldman, partnership election at the firm was considered one of the most prestigious achievements on Wall Street, in part because the process was highly selective and a Goldman partnership was among the most lucrative. The M&A department had a remarkably good track record of its bankers being elected—probably one of the highest percentages of success in the firm at the time. The department was key to the firm’s brand, because representing prestigious blue chip clients is important to Goldman’s public perception of access and influence that makes important decision makers want to speak to Goldman. M&A deals were high profile, especially hostile raid defenses. M&A was also highly profitable and did not require much capital. For all these reasons, a job in the department was highly prized, and the competition was fierce. When the New York M&A department hired me, it was making about a dozen offers per year to US college graduates to work in New York, out of what I was told were hundreds of applicants.
While in the department, I was asked to be the business unit manager (informally referred to as the “BUM”). I addressed issues of strategy, business processes, organizational policy, business selection, and conflict clearance. For example, I was involved in discussions in deciding whether and how Goldman should participate in hostile raids, and in discussing client conflicts and ways to address them. The job was extremely demanding. After a relatively successful stint, I felt I had built enough goodwill to move internally and do what I was more interested in: being an investor. I hoped to ultimately move into proprietary trading or back to Principal Investment Area (PIA), Goldman’s private equity group.
Many banking partners tried to dissuade me from moving out of M&A. However, I wanted to become an investor, and a few partners who were close friends and mentors helped me delicately maneuver into proprietary investing. I was warned, “If you lose money, you will most likely get fired, and do not count on coming back to banking at Goldman. But if you make money for the firm, then you will get more money to manage, which will allow you to make more money for the firm and yourself.”
Today people ask me whether I saw the writing on the wall—that the shift to proprietary trading was well under way and would continue at Goldman—and whether that’s why I moved. To be honest, I didn’t give it as much thought as I should have. My work in helping manage the M&A department and assisting senior executives on various projects exposed me to other areas of the firm and the firm’s strategy and priorities. When you’re in M&A, you work around the clock. You don’t have time for much reflection or career planning. (This may be, upon reflection, part of the business model and be a contributor to the process of organizational drift.) You’re working so intensely on high-profile deals—those that end up on page 1 of the Wall Street Journal—that you’re swept up in the importance of the firm’s and your work. Your bosses tell you how important you are and how important the M&A department is to the firm. They remind you that the real purpose of your job is to make capital markets more efficient and ultimately provide corporations with more efficient ways to finance. So you rationalize that there’s a noble and ethical reason for what you and the firm are doing. In general, I greatly respected most of the investment banking partners that I knew. And I certainly didn’t have the academic training, distance, or perspective to analyze the various pressures and small changes going on at the firm and their consequences. I do remember simply feeling like I should be able to do what I wanted and what I was interested in at Goldman—an entitlement that I certainly did not feel earlier in my career, and maybe one I picked up from observations or the competitive environment for Goldman-trained talent.
Paulson, a banker, was running the firm, and several others from banking whom I considered mentors held important positions. So even though it was no secret that revenues from investment banking had declined as a percentage of the total, I didn’t think very much about that, nor did I consider its consequences. One longtime colleague and investment banking partner pulled me aside to tell me that moving into proprietary trading was the smartest thing I could do and that he wished he could take my place. When I asked why, he said, “More money than investment banking partners, faster advancement, shorter hours, better lifestyle, you learn how to manage your own money, and, one day, you can leave and start your own hedge fund and make even more money—and Goldman will support you.” I assured him I was only trying to do what interested me, but I agreed it would be nice to travel less, work only twelve-hour days, and spend more time with my wife and our newborn daughter. When I asked why he didn’t tell me this before, he said, “Then we would have had to find and train someone else.”
I became a proprietary trader and then a portfolio manager in Goldman’s FICC Special Situations Investing Group (SSG). We built it into one of the largest, most successful dedicated proprietary trading areas at Goldman and on Wall Street. Created during the late 1990s, SSG initially primarily invested Goldman’s money in the debt and equity of financially stressed companies and made loans to high-risk borrowers (although we expanded the mandate over time). SSG was separated from the rest of the firm, meaning we sat on a floor separate from the trading desks that dealt with clients.
