rest of Wall Street as if we were a distinct hedge fund. We did not deal with clients.
Even separated as we were, we had the potential for at least the perception of conflicts of interest with clients. For example, we could own the stock or debt of a company when, unknown to us, the company would hire Goldman’s M&A department to review strategic alternatives or execute a capital market transaction such as an equity or debt offering. In that case we could be “frozen,” meaning we were restricted from buying any more related securities or selling the position, something that would place us at a potential disadvantage because we could not react to new information. If we wanted to buy the securities of a company, and unbeknownst to us Goldman’s bankers were advising the company on a transaction, we could be blocked from the purchase.
The biggest advantage I believed we had over our competitors—primarily hedge funds—was that we had a great recruiting and training machine in Goldman; we could pick the very best people in the company. Most had heard that we were extremely entrepreneurial, that we gave our people a lot of responsibility and ability to make a larger impact, that we were extremely profitable, and that we paid very well. Those from SSG also had an excellent track record of eventually leaving to set up or join existing hedge funds. We also had infrastructure—technology, risk management systems, and processes—that was unmatched by Wall Street banks, because Goldman invested heavily in it, recognizing the strategic importance of the competitive advantage it gave us.
We were trained to run investing businesses (for example, evaluating and managing people and risk or setting goals and measureable metrics). We had access to almost any corporate management team or government official through the cachet of the Goldman name and its powerful network. We also had a low cost of capital, because Goldman borrowed money at very low rates from debt investors, money that we then invested and generated a return a good deal higher than the cost of borrowing. We had one client—Goldman—and this was good, because it meant we did not have to approach lots of clients to raise funds. However, it was also a bad thing, because all the capital came from one investor. If Goldman (or the regulators, as later happened with the Volcker Rule) decided it should no longer be in the business, you were out of a job, although it was likely many others would want to hire you.
When I started in proprietary trading in FICC, I immediately noticed one big difference from the banking side. Although my new bosses were smart, sophisticated, and supportive, and as demanding as my investment banking bosses, there was an intense focus on measuring relatively short-term results because they were measurable. Our performance as investors was marked to market every day, meaning that the value of the trades we made was calculated every day, so there was total transparency about how much money we’d made or lost for the firm each and every day. This isn’t done in investment banking, although each year new performance metrics were being added by the time I left for FICC. Typically in banking, relationships take a long time to develop and pay off. A bad day in banking may mean that, after years of meetings and presentations performed for free, a client didn’t select you to execute a transaction. You could offer excuses: “The other bank offered to loan them money,” “They were willing to do it much cheaper,” and so on. It was never that you got outhustled or that the other firm had better people, ideas, coordination, relationships, or expertise, something that would negatively reflect on you or the firm (or both). In proprietary trading, there were no excuses for bad days of losses. We were expected to make money whether the markets went up or down. There was another thing I learned quickly. One could be right as a trader, but have the timing wrong in the short term and be fired with losses that then quickly turned around into the projected profits. In addition, relative to banking, in judging performance the emphasis seemed to tilt toward how much money one made the firm versus more subjective and less immediately profitable contributions. The fear of this transparency and the potential for failure kept many bankers from moving to trading.
I later discovered that Goldman’s proprietary trading areas actually maintained a longer-term perspective than did most trading desks and hedge funds, where a daily, weekly, or (at most) monthly focus was generally the norm. Our bosses reviewed information about our investments daily, but they tended to have a bias toward evaluating performance on a quarterly and even yearly basis (but much shorter than evaluating a client relationship in banking, which could take years). We were held accountable and were compared on risk-based performance against hedge fund peers, as well as other Goldman desks. If we found good opportunities, we got access to capital and invested it. Theoretically, when we didn’t see attractive opportunities, we were to sell our positions and return the money to Goldman, with the understanding that we had access to it when we felt there were attractive opportunities.
However, I learned there was a perverse incentive to keep as much money as possible and invest it to make the firm as much money as possible—and yourself as much money as possible—even if the risk and reward might not be as favorable as other groups’ opportunities. There was a feeling that we were “paid to take risks,” and the larger the risks you took, or were able to take, the more important you were to the organization. We did have a critical advantage over most banks—we knew that many of our bosses and those at the very top of the firm understood, and were not afraid of, risk. Many had managed risk and knew how to evaluate it. They also would sometimes leave us voicemails or discuss in meetings their feelings or perspectives on the current environment and risks.
In my conversations with former competitors, I later learned that Goldman’s approach to managing proprietary traders was substantially different from theirs. For example, if we lost a meaningful amount of money in an investment while I was at SSG, we would sit down with our bosses (and sometimes other traders not in our area) to rationally discuss and debate alternatives, such as exiting all or some of the position, buying more (“doubling down”), hedging the downside, or reversing our position and making an opposite bet. I learned that traders from other firms generally did not sit down with others to discuss alternatives. Rather, most often they were simply told to sell and realize the loss of money-losing investments (“cut your losses”), because their bosses or their bosses’ bosses didn’t understand the risks. Competitors’ traders told me they couldn’t comprehend the idea of our getting together with someone as senior as the president of the firm, and especially traders outside our area, to discuss and debate the attractiveness of an investment. For this reason, traders at other firms did not get as many great learning opportunities or would make poor decisions.
When I left in 2004, the firm was very successful in reaching certain organizational goals. It had the best shareholder returns and continued to recruit the best and brightest people in the industry. It had access to almost any important decision maker in the world. The culture and working environment were such that a motivated, creative person felt as if he or she could accomplish just about anything; all one had to do was convince people of the merits of the idea. But the firm felt different: it was much larger, it was more global, and it was involved in many more businesses. One could certainly start to feel the greater emphasis on trading and principal investing. The bureaucracy had grown, and as SSG grew and diversified we were increasingly encountering turf wars with other areas. I knew fewer people, especially senior partners, many of whom had retired by 2004, so I also felt a weaker social tie to the firm.
At the same time, there was great demand from outside investors (including Goldman Sachs Asset Management) to give money to Goldman proprietary traders to start their own firms and invest. Also the firm’s prime brokerage business and alumni network had a great track record for helping former proprietary traders start their own firms. I felt I had a good track record and reputation, and enough support from Goldman and many of its employees and alums who were friends, to start my own investment business.
With my savings from bonuses, and with my 1999 IPO stock grant and other shares fully vested on the fifth anniversary of the IPO, I left Goldman in 2004 to cofound a global alternative asset management company with an existing hedge fund that already had approximately twenty people and $2 billion in assets under management. Shortly after, several Goldman investment professionals joined me. Less than four years later, I had helped expand the firm to 120 people and $12 billion
