over $5 billion, about half of the firm’s assets, through multiple vehicles focused on the United States and Europe. Also, I helped start several other funds while also serving on all of the firm’s major investment committees. In my position, I saw firsthand the competitive, organizational, technological, and regulatory pressures facing an organization (also a private partnership) as well as the organizational challenges of growth. I maintained a close relationship with Goldman, becoming a trading and prime brokerage client and coinvested with Goldman. My partners and I also hired Goldman to represent us in selling our asset management firm. In early 2008, we announced a transaction valuing the firm at $974 million.29 So I also experienced what it meant to be a trading and banking client of Goldman’s and am able to compare the experience versus other firms.
I have also worked for one of Goldman’s competitors at a very senior level, as an executive at Citigroup from 2010 to 2012 in various roles, including chief of staff to the president and COO, vice chairman and chief of staff to the CEO of the institutional clients group (ICG), and member of the executive, management, and risk management committees of that group.30 When I joined Citi, it was under political and public scrutiny for taking government funds, and the government still owned Citi shares. It was a complex business with many organizational challenges; it was an intense experience, with me starting work at 5:30 a.m. almost every day to be prepared to meet with my boss at 6 a.m. My experience at Citigroup was critical in my development of a new perspective on Goldman and the industry. Citigroup has approximately 265,000 people in more than 100 countries. In addition to being much larger (in total assets and number of employees) than Goldman, Citigroup is much more complex, because it participates in many more businesses (such as consumer and retail banking and treasury services) and locally in many more countries. In addition, unlike Goldman, Citigroup was created through a series of mergers and acquisitions. At Citi, I had the chance to compare the practices and approaches of a Goldman competitor that had a big balance sheet (supported by customer deposits to lend money to clients) and that had grown quickly through acquisitions—two things Goldman did not really do.
Before working at Citigroup and during the financial crisis, I advised McKinsey & Company on strategic, business process, risk, and organizational issues facing financial institutions and related regulatory authorities worldwide. McKinsey is one of the most prestigious and trusted management-consulting firms in the world, with some fifteen thousand people globally. There are many differences between the firms, but as with Goldman (before Goldman became a public corporation), McKinsey is a private partnership that has a revered partnership election process. Goldman and McKinsey compete for the best and brightest graduates every year, and there are elements of the McKinsey culture that are similar in many ways to Goldman’s, especially to the Goldman I knew when I started. When attending McKinsey training programs, I could have closed my eyes and replaced the word McKinsey with Goldman, and it would have been like my 1992 Goldman training program all over again. McKinsey has an intense focus on recruiting, training, socialization of new members, and teamwork. It also has long-standing, revered, written business principles. Lastly, it has an incredible global network.
The people at McKinsey are incredibly thoughtful and hard working and have very high standards of integrity, and I learned a great deal about how they built and grew the business globally and added new practices while trying to preserve a distinct culture. McKinsey provided me the context of a large, global, growing advisory firm. McKinsey emphasized “client impact” over “commercial effectiveness” in evaluating its partners. With McKinsey, I also gained exposure to many other financial institutions, along with their senior management teams, their processes, and their cultures, and this exposure also helped put my experiences at Goldman—and the reaction of its management teams to various pressures—into context. Lastly, I had hired and worked with McKinsey as a client, and am able to compare that experience as a client versus being a client of other firms, including Goldman.
Subtle Changes Made Obvious
To give you a better sense of the shift I noticed and the organizational drift I’m talking about, I want to offer a set of comparative stories—“before” and “after” snapshots—to illuminate the differences. They illustrate the shift in the client-adviser relationship as well as in Goldman’s practice of putting the clients’ interests first.
This post-1979 historic commitment to always putting clients’ interests first and signifying more then a legal standard is demonstrated by a 1987 event. Goldman stood to lose $100 million, a meaningful hit to the partners’ personal equity at the time, on the underwriting of the sale of 32 percent of British Petroleum, owned by the British government. The global stock market crash in October had left other investment banks that had committed to the deal trying to analyze their legal liability and their legal rights to nullify their commitment, but Goldman stood firm in honoring its commitment despite the cost and despite Goldman’s legal claims. Senior partner John L. Weinberg explained to the syndicate, “Gentlemen, Goldman Sachs is going to do it. Because if we don’t do it, those of you who decide not to do it, I just want to tell you, you won’t be underwriting a goat house. Not even an outhouse.”30
The decision was not a simple matter of altruism. The principle of standing by its commitment had long-term economic benefits for Goldman. Weinberg was able to see beyond a short-term loss, even a large one, and to consider Goldman’s longer-term ambition to increase its share of the privatization business in Europe. That could be achieved only by living up to its commitments to clients, even beyond the legal commitment. His decision was consistent with the standard of the original meaning of the first principle: “Our clients’ interests always come first.” In addition, it illustrates the nuance between “long-term greedy” and “short-term greedy.”
More than twenty years later, this standard of commitment to clients beyond legal responsibility has largely been lost. Goldman policy adviser and former SEC chairman Arthur Levitt has challenged the “clients first” principle because “it doesn’t recognize the reality of the trading business.”31 He points out that Goldman’s sales and trading revenues outstrip those of the advisory businesses, financing, and money management, and there are no clients in sales and trading—only buyers and sellers. There should be transparency, Levitt suggests, but no expectation of a “fellowship of buyers and sellers that will march into the sunset” together. Goldman should stop using “clients first” in promoting itself, Levitt argues, because of the conflicts inherent in trading—the natural and ever-present tension between buyers and sellers.
This argument hit home for me when I compared one of my first experiences as an analyst at Goldman with my later experience as a Goldman client. When I was a first-year financial analyst in 1992, I was assigned to work with Paulson and a team of investment bankers to advise the Chicago-based consumer goods company Sara Lee Corporation. The project was to review Sara Lee’s financial and strategic alternatives related to a particular management decision. Paulson was demanding, and he instructed us to leave no stone unturned.
We worked 100-hour weeks, fueled by Froot Loops and Coca-Cola for breakfast and McDonald’s hamburgers and fries for lunch and dinner. We performed all sorts of financial analysis, trying to make sure we thought of every possible alternative and issue. We also collected ideas from all the experts Goldman had. In the end, we had a presentation book 50 to 70 pages long for the client, plus another 100-page backup book. We made sure that every i was dotted and t was crossed, every number corresponded to another number, every financial calculation was accurate, and every number that needed a footnote had one. Perfection and excellence were expected—not only by Paulson but also by everyone else at the firm—no matter the personal sacrifice.
At Sara Lee’s offices, all five of us from Goldman, including Paulson, waited anxiously to go into the meeting. When we were ushered into the boardroom, we took seats across the table from Sara Lee’s CEO, John H. Bryan, who would one day join the board of Goldman. After saying our hellos, we started putting our material out on the table. However, Paulson sat down next to Bryan, across the table from the rest of the Goldman team. After Paulson
