Revealing the unwritten principle

FINANCE: NIAMH BRENNAN reviews The Partnership: A History of Goldman Sachs by Charles D Ellis

FINANCE: NIAMH BRENNANreviews The Partnership: A History of Goldman Sachs by Charles D Ellis

AUTHOR CHARLES ELLIS does not come to this fascinating corporate history as an entirely objective observer: his firm provides consultancy services to Goldman Sachs. In the early stages of his research, Goldman Sachs insisted he be accompanied by a firm minder when interviewing partners and former partners. This was subsequently relaxed.

He describes the firm's successes in detail, with admiration; he presents the failures in a purely factual and objective way. Ellis's claim to have written a "warts and all" account is somewhat exaggerated. But, nonetheless, dreadful scandals involving the firm are given full chapters, such as the collapse of Goldman Sachs Trading in 1929, the insolvency of Penn Central in 1970, the facilitation by the firm of secret buying of shares by Robert Maxwell, and biased research reports during the dotcom bubble in 1999-2000.

The most striking aspect of this book is its insight into high-octane capital markets organisations, where staff routinely earn multiples of millions of dollars. An entire chapter is devoted to Goldman Sachs's avowed principles/core values - such as clients' interests always coming first, "our assets are our people", "profits are key to our success", confidentiality, integrity and honesty.

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Yet, perhaps unconsciously, Ellis reveals behaviours and cultures at variance with such core principles. The facts do not match the rhetoric, because an unwritten principle of Goldman Sachs was making money - always and with no exceptions.

For example, Ellis opens with a eulogy of Sidney Weinberg, who joined the firm in 1907 and was managing partner from 1930 to 1969. We are told the real culture of Goldman Sachs can be traced back to him. He is described (almost with admiration) as having engaged in two cases of deception and one case of theft - " . . . irreverent then as later, brash young Weinberg was clearly on the make".

However, the founding Sachs family had more traditional values. After huge losses sustained by the partners as a result of the collapse of Goldman Sachs Trading, the Sachs family generously agreed to cover partners' losses, including underwriting/for-giving $1 million of Sidney Weinberg's losses. Weinberg showed no gratitude in return. He installed a round table in the partners' dining room so no Sachs could ever sit at the head of the table.

Words used frequently that capture the culture include "aggressive", "driven", "ambitious", "competitive", "tough". Partners are described as "lions", "tigers", "alpha males". Women hardly feature, other than as wives, sisters, mistresses or secretaries. Staff were expected to put the firm a very close second to family, or even to give up family life.

Notwithstanding the core value that "staff are the firm's assets"/"staff are family", long-serving partners were soon forgotten when they retired.

Senior partners made sure to be appointed to as many corporate boards as possible. Conflicts of interest arising from such arrangements did not get a mention. Managing partner Gus Levy is described as attending board meetings at which other directors sat at the boardroom table while he sat separately in a corner taking phone calls (while listening intently to the directors' discussions).

Any client of Goldman Sachs would be perturbed to read that the firm was "more clearly and more consistently focused on profits than other firms". Gus Levy is reported as saying: "We're greedy, but long-term greedy, not short-term greedy" - long-term greedy is okay! In a number of cases the firm sold financial products while at the same time withholding information that the firm was itself extracting out of those products. Clients lost huge amounts of money. In litigation that ensued, Goldman Sachs fought their clients tooth and nail and boasted of getting a great deal for the partnership from such aggressive resistance of their clients' legitimate claims.

Although confidentiality was another avowed core value - "rule one was that nobody ever talks about clients or clients' business" - the contents of this book appear to be based on systematic breaches of that standard.

Readers should be comfortable with technical financial terms which cannot be avoided in a book such as this.

Despite my misgivings of the described culture of Goldman Sachs, the book is a very good read. I recommend it to all those interested in the financial services business.

• The Partnership: A History of Goldman Sachsby Charles D Ellis, Allen Lane, 729pp. £25

• Niamh Brennan is Michael MacCormac Professor of Management at University College Dublin and is academic director of the Centre for Corporate Governance at UCD