h The Pa r t n e r s h i p T H E M A K I N G O F GOLDMAN SACHS h the penguin press Published by the Penguin Group Penguin Group (USA) Inc., 375 Hudson Street, New York, New York 10014, U.S.A. Penguin Group (Canada), 90 Eglinton Avenue East, Suite 700, Toronto, Ontario, Canada M4P 2Y3 (a division of Pearson Penguin Canada Inc.) Penguin Books Ltd, 80 Strand, London WC2R 0RL, England Penguin Ireland, 25 St. Stephen’s Green, Dublin 2, Ireland (a division of Penguin Books Ltd) Penguin Books Australia Ltd, 250 Camberwell Road, Camberwell, Victoria 3124, Australia (a division of Pearson Australia Group Pty Ltd) Penguin Books India Pvt Ltd, 11 Community Centre, Panchsheel Park, New Delhi–110 017, India Penguin Group (NZ), 67 Apollo Drive, Rosedale, North Shore 0632, New Zealand (a division of Pearson New Zealand Ltd) Penguin Books (South Africa) (Pty) Ltd, 24 Sturdee Avenue, Rosebank, Johannesburg 2196, South Africa Penguin Books Ltd, Registered Offices: 80 Strand, London WC2R 0RL, England First published in 2008 by The Penguin Press, a member of Penguin Group (USA) Inc. Copyright © Charles D. Ellis, 2008 All rights reserved library of congress cataloging in publication data Ellis, Charles D. The partnership : the making of Goldman Sachs / Charles D. Ellis. p. cm. Includes bibliographical references and index. ISBN : 1-4406-4439-X 1. Goldman, Sachs & Co. 2. Investment banking—United States. I. Title. HG4930.5.E45 2008 332.660973 — dc22 2008025228 Designed by Claire Naylon Vaccaro Without limiting the rights under copyright reserved above, no part of this publication may be reproduced, stored in or introduced into a retrieval system, or transmitted, in any form or by any means (electronic, mechanical, photocopying, or otherwise), without the prior written permission of both the copyright owner and the above publisher of this book. The scanning, uploading, and distribution of this book via the Internet or via any other means without the permission of the publisher is illegal and punishable by law. Please purchase only authorized electronic editions and do not participate in or encourage electronic piracy of copyrightable materials. Your support of the author’s rights is appreciated. To my grandchildren Jade, Morgan, Charles, and Ray C ON T E N T S h Introduction xiii 1. Beginnings 1 2. Disaster: Goldman Sachs Trading Corporation 17 3. The Long Road Back 30 4. Ford: The Largest IPO 53 5. Transition Years 63 6. Gus Levy 73 7. The Wreck of the Penn Central 96 8. Getting Great at Selling 116 9. Block Trading: The Risky Business That Roared 132 10. Revolution in Investment Banking 153 11. Principles 183 12. The Two Johns 192 13. Bonds: The Early Years 215 14. Figuring Out Private Client Services 232 15. J. Aron: Ugly Duckling 250 16. Tender Defense, a Magic Carpet 269 17. The Uses and Abuses of Research 283 18. John Weinberg 297 19. Innocents Abroad 320 20. Breaking and Entering 345 21. How BP Almost Became a Dry Hole 356 22. Changing the Guard 373 23. Transformation 399 24. False Starts in Investment Management 415 25. Robert Maxwell, the Client from Hell 437 26. Making Arbitrage a Business 463 27. J’Accuse 481 28. Building a Global Business 512 29. Steve Quit! 533 30. Collecting the Best 552 31. Jon Corzine 566 32. Long- Term Capital Management 582 33. Coup 606 34. Getting Investment Management Right 615 35. Paulson’s Disciplines 636 36. Lloyd Blankfein, Risk Manager 665 Afterword 679 Acknowledgments 687 Notes 689 Index 711 I N T R ODUC T ION h T his book was almost never written—several different times. In the winter of 1963 at Harvard Business School, I was, like all my class­ mates, looking for a job. My attention was drawn to a three-by-five piece of yellow paper posted at eye level on a bulletin board in Baker Library. In the upper left corner was printed “Correspondence Opportunities” and typed to the right was the name “Goldman Sachs.” As a Boston securities lawyer, my dad had a high regard for the firm, so I read the brief description of the job with inter­ est but was stopped by the salary: $5,800. My then wife had just graduated from Wellesley with three distinctions: she was a member of Phi Beta Kappa, a soprano soloist, and a recipient of student loans. I was determined to pay off those loans, so I figured I’d need to earn at least $6,000. With no thought of the possibility of earning a bonus or a raise, I naively “knew” I could not make it on $5,800. So Goldman Sachs was not for me. If I had joined the firm, like everyone else who has made a career with Goldman Sachs I would never have written an insider’s study of Goldman Sachs.* * John Whitehead and Robert Rubin have both included a few stories about the firm in their books but have cer­ tainly not tried to provide a complete picture. Lisa Endlich, a fine writer but with limited access to the full range of xiv · Introduction In the early 1970s, while promising future partners that we would develop our fledgling consultancy, Greenwich Associates, into a truly superior profes­ sional firm, I had to laugh at myself: “You dummy! You make the promise, but you don’t even know what a truly superior professional firm is all about or how to get there. You’ve never even worked for one. You’d better learn quickly.” From then on, at every opportunity I asked my friends and acquaintances in law, consulting, investing, and banking which firms they thought were the best in their fi eld and what characteristics made them the best. Over and over again, well past the bounds of persistence, I probed those same questions. Inevitably, a pattern emerged. A truly great professional firm has certain characteristics: The most capable professionals agree that it is the best firm to work for and that it recruits and keeps the best people. The most discriminating and significant clients agree that the firm consistently delivers the best service value. And the great firms have been and will be, sometimes grudgingly, recognized by competitors as the real leaders in their field over many years. On occasion, challenger firms rise to prominence— usually on the strength of one exciting and compelling service capability—but do not sustain excellence. Many factors that contribute to sustained excellence vary from profession to profession, but certain factors are important in every great firm: long-serving and devoted “servant leaders”; meritocracy in compensation and authority; dispro­ portionate devotion to client service; distinctively high professional and ethical standards; a strong culture that always reinforces professional standards of excel­ lence; and l ong-term values, policies, concepts, and behavior consistently trump­ ing n ear-term “opportunities.” Each great organization is a “one-firm firm” with consistent values, practices, and culture across geographies, across very differ­ ent lines of business, and over many years. All the great firms have construc­ tive “paranoia”—they are always on the alert for and anxious about challenging competitors. However, they seldom try to learn much from competitors: they see themselves as unique. But like Olympic athletes who excel in different events, they are also very much the same. partners, wrote a thoughtful and w ide-ranging study centered on the development of the firm in the 1980s and 1990s. Bob Lenzner, a gifted writer for Forbes who had worked in arbitrage at Goldman Sachs a generation ago, started a book but set it aside, saying he didn’t want to lose his friends at the firm.