Goldman Shrinks an Adage; Long-Term Greedy Can’t Wait

Goldman Sachs: The Culture of Success , by Lisa Endlich. Alfred A. Knopf, 319 pages, $27.50.

Recently, I complained to a partner of Goldman, Sachs & Company about the treatment I had received many years before at the hands of the firm’s press spokesman, who would never return a call except after a deadline had passed. Or, if through inadvertence he did call back right away, it was to regret that Goldman would have no comment. He was unfailingly polite.

The partner beamed like a teacher who has heard a student give the right answer.

“Yes,” he said, approximately. “That’s the kind of service we paid for.”

No more: Goldman, the last great partnership in American finance, can’t seem to stay out of the news. It alternately is, or is not, about to go public; and it has, or has not, changed its chief executive by means of a palace coup. One message is ungarbled, at least: According to its world-famous stock-market strategist, Abby Joseph Cohen, the Standard & Poor’s 500 index will only continue to go up and up and up.

Up, certainly, has been the prevailing direction in the fortunes of Goldman over the past 130 years. Yet the interesting undercurrent in Lisa Endlich’s Goldman Sachs: The Culture of Success , is the propensity of even this most brilliant institution to run off the rails. “Greedy,” adjured Gus Levy, a legendary Goldman partner, “but long-term greedy.” Lately, this adage has been functionally shortened to just “greedy.” And when, as in 1994, fear happens to overtake greed, the partners seem to be shaken down to their very bank accounts. They have lost touch with adversity.

The first thing to be said about Lisa Endlich’s book is that the author has run into some bad luck. No sooner was the manuscript in type than world financial markets were convulsed by the Russian debt default and the collapse of Long-Term Capital Management. No sooner were the page proofs in the mail than Jon Corzine, the firm’s co-chairman, was forced to walk the plank, turning over the firm to his co-chairman, Hank Paulson. Thus, concerning current events at Goldman, the reader will know more than the writer appears to know. When Ms. Endlich writes, for example, “The firm Corzine and Paulson envisaged would be entirely transformed from the one he and Paulson inherited,” the reader will be tempted to put the book down and pick up the latest copy of Business Week instead.

The temptation should be resisted, even though Ms. Endlich, a former Goldman foreign exchange trader, habitually writes about her mentors and heroes at the firm as if they were already dead and canonized. Concerning the firm itself, she faithfully presents both the pro and the con, but the pro is often expressed in the language of a Goldman recruiting brochure. “Total commitment to the firm is expected,” she writes in one such gush of devotion. “It is this atmosphere that has challenged everyone who worked there and allowed people to give the performance of their lives.” A little of this goes a long way-and, besides, as Ms. Endlich herself demonstrates with her candor about the partnership’s shortcomings, total commitment to the firm has been superseded in not a few cases by total commitment to oneself, the employee.

At its best, Ms. Endlich’s book is a miniature history of the cycles of financial markets, told through one illustrious institution. For example, so great were the losses stemming from the collapse of the Goldman-promoted investment funds in the early 30’s, she writes, that the firm “did not lead an underwriting for five years, and the partners waited until 1935, when the firm had ceased losing money, to involve themselves in the distribution of securities brought to market by other firms.” When, at last, in the 80’s, the firm did re-enter the money-management business, the partners “debated long and hard about attaching the firm’s name to the new business. The lessons of 1929 died hard.” (For the next edition of her book, Ms. Endlich should not fail to consult The Crash and Its Aftermath: A History of the Securities Markets in the United States, 1929-1933 , a unique and overlooked study by Barrie A. Wigmore, a limited partner of none other than Goldman, Sachs & Company.)

Unless I read right over her name, the book does not so much as mention Abby Cohen, although it does dwell instructively on the rise and fall of Waddill Catchings, a Goldman partner in the 20’s who single-handedly drove the firm to the brink of disaster by his leveraged investment creations, including the Goldman Sachs Trading Corporation, and his reckless New Era optimism.

The secular faith of the 90’s-a belief in technology, business, central banking and the wit of man-is just as great as it was in the pre-Crash 1920’s. The issue before the house is whether it is any more solidly grounded in human behavior. John Weinberg, son of the founder of the modern Goldman, Sidney Weinberg, was sent around to meet his father’s business colleagues before he joined the firm. And the best advice he got, Ms. Endlich relates, was from a corporate salvage specialist, Floyd Odlum, who had made his fortune by picking up some of the pieces of the 20’s boom at a discount. “Watch for the excesses,” Odlum, whose nickname was “50 Percent,” after the price he preferred to pay for distressed securities, told young Weinberg. “No one is going to tell you what they are or when they will arise; each time they will look different.” Is a stock market selling at all-time valuations, far higher that those prevailing in the late 20’s, an excess? Is Goldman, in its persistent public bullishness, re-enacting the salient error made by Catchings in the 20’s? Ms. Endlich has no comment, but it will be a dull reader who does not take the cue to reflect for himself.

Goldman hardly made a dime in the 30’s and through most of the 40’s, Ms. Endlich relates. Indeed, John Whitehead, who was hired in 1947 and who would later share the leadership of the firm with John Weinberg, rarely saw a profitable year during his first nine. “[A]nd when Whitehead was made a partner in 1956,” Ms. Endlich writes, “he invested his life savings, all $5,000 of it, in Goldman Sachs.”

Just how brilliant an investment this would turn out to be is difficult to grasp, but Ms. Endlich helps us to understand. Thus, in the gold-plated year of 1993, the firm earned $2.6 billion before taxes: “To put this in context, that same year, Microsoft made $953 million, Disney earned $671 million, and the firm’s largest investment bank competitor, Merrill Lynch, saw profits of $1.3 billion.”

How was this miracle wrought? By taking stupendous trading risks, risks that-as it presently became clear-were every bit as stupendous as the profits that the risk-takers produced. And when, in 1994, the risks caught up with the traders, the firm suffered a monetary setback, a rare occurrence in the decade following the Decade of Greed. The partners’ capital actually fell, by 10 percent. (You may remember that, in 1994, interest rates went up instead of down; Goldman’s traders, no less than most other Wall Street mortals, were caught wrong-footed by the change in trend.) The partners, not used to red ink, took the loss hard, and many resigned from the firm. “Just when the partnership needed to stand firm and united,” according to Ms. Endlich, “it was unraveling.”

It re-raveled, of course, just as it had done in the 1930’s, post-Crash, and in the 1970’s, following the bankruptcy of the Penn Central Railroad, in which Goldman lost heavily. Yet the very size of the firm now raises questions. If it ever came close to the edge, would it even be allowed to fail?

Ms. Endlich tells a remarkable story about a trader of long standing who had a drink one evening in 1994 with a senior partner. The partner had recently met with a member of the Federal Reserve Board “and was feeling good about the firm,” the trader recalled. “We’re too big to fail,” the partner told the trader. “A $100 million loss, a $50 million loss, it means nothing. We’re too big now, they won’t let us fail.”

It is probably no accident, as the Marxists used to say, that the ex-president of the Federal Reserve Bank of New York, Gerald Corrigan, is today a managing director of Goldman. Mr. Corrigan would be just the right man to have on the premises in case the firm should trade itself into the kind of financial crisis from which only the Federal Reserve could help to extricate it. It’s what Wall Street has come to in the highly leveraged 1990’s; these days, the silent partners are the taxpayers.