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- and post-IPO—combined with my academic training gives me a unique ability to gather 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