The Rise (and Mishaps) of Goldman Sachs

A new history of the firm is stuffed with vivid family tales. It's also a rich chronicle of the Street

Editor's Rating:

The Good: A juicy, inside look at the famed Wall Street firm.

The Bad: At three-quarters the length, the book might have been twice as good.

The Bottom Line: A paean to Goldman, but it captures the firm's mixed legacy.

The Partnership:The Making of Goldman SachsBy Charles D. EllisThe Penguin Press; 729 pp.; $37.95

Time will tell whether Henry Paulson, architect of the Wall Street bailout, proves to be the savior of the U.S. financial system or just the redeemer of a lot of fellow fat cats. But the Treasury Secretary and former CEO of Goldman Sachs (GS) surely knows how to wield power. Take his role in ousting Jon Corzine, his onetime co-CEO at Goldman, after the odd couple—the methodical Paulson and the impulsive Corzine—squabbled "like teenaged kids," in the words of one colleague.

It seems the headstrong Corzine, now governor of New Jersey, acted too independently in 1998 to suit Paulson, an executive committee member at the then-privately held partnership. Corzine tied up too much capital in one risky deal and, flying solo, approached commercial banks such as Chase Manhattan about a merger. So, while Corzine, all unsuspecting, swooshed down the slopes in Telluride, Colo., on a family Christmas vacation, Paulson and three others hatched a scheme that forced Corzine out the door in a few months. The alleged plotters included John Thain, now chief of Merrill Lynch and the former head of the New York Stock Exchange (NYX), who was so close to Corzine that he was trustee-designate for his kids. Recalls a Goldman partner: "It was like living the history of imperial Rome."

That juicy tale is one of many in The Partnership: The Making of Goldman Sachs, Charles D. Ellis' 729-page paean to the famed firm. Ellis traces Goldman's evolution from a sole-proprietorship in 1869 to today, when it stands bloodied but still on its feet at the center of Wall Street.

Along the way the author provides a remarkable window into the growth of the Street. We move from genteel days, when poaching a rival's clients was something investment banks just didn't do, to more recent times, when insider-traders, dubious research analysts, and various fraudsters (there were surprisingly few at Goldman) became the subject of tawdry headlines. We watch firms move from basic stock-peddling to sophisticated derivatives-playing. And we see Goldman haltingly take its business global, although, amazingly, not in any big way until the mid-1980s. Lately, more than half of its profits in some years have come from outside of the Americas, and it is a major underwriting force in such frontiers as China.

The account is full of colorful detail. Sidney Weinberg, for instance, a seventh-grade dropout who chanced on a job as a janitor's aide at the firm in 1907, rose to steer Goldman through the Depression and lesser disasters until his death in 1969. "He ate, drove, wore, and used the products produced by [client] companies—cheese had to be Kraft (KFT), coffee had to be Maxwell House, cars were Fords, etc...." And like Paulson and a long string of Goldman honchos, Weinberg became a counselor to a President, in this case Franklin Roosevelt, for whom the Goldman executive worked during World War II. Weinberg had a son, John, who served in the U.S. Marine Corps in that war and later ran the firm until 1990.

At points, Ellis slips into inside baseball. His detailed accounts of financial dealings may interest only the most fervent market wonk. And he quotes too many executives at very great length, perhaps a result of the access he was afforded to more than 100 partners. At three-quarters the number of pages, the book might have been twice as good, especially if Ellis had dropped gushy superlatives that at times make the work read like an official history. How often must we hear how extraordinary Goldman staffers are? Can it be true that Goldman leaders "knew more about and cared more about their people" than those at any other firm, especially when market reversals pushed Goldman into hefty layoffs?

But those are quibbles. Ellis captures Goldman's mixed legacy: Its staffers have at times stood among the smartest on the Street, as when they largely sidestepped the subprime mortgage debacle. Earlier the firm narrowly missed hiring Michael Milken, the junk-bond felon, and Jack Grubman, the tainted dot-com securities analyst. But Goldman also stumbled: As the "principal financial enabler" to freebooting British publisher Robert Maxwell in 1991, Goldman was hit for $500 million in costs, most to settle with defrauded pension funds, Ellis says. And the collapse of Long-Term Capital Management, a Goldman banking client slammed by market reversals in 1998, cost the firm a bundle.

Pressed by the current financial crisis, Goldman is becoming a commercial bank, and so it may pull back on trading risks, jeopardizing its outsize returns. Clearly, times change: Paulson in 1999 vetoed an acquisition of J.P. Morgan (JPM) that would have effected the same transformation, fearing that Goldman would lose its identity. Even with all the new regulators it will face, however, Goldman will continue to run its own show, probably providing material for still more books in the future.

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