Chapter 6
The Consequences of Going Public
WHILE THE IPO ACCELERATED MANY CHANGES ALREADY taking place at Goldman, it also brought about new ones. The newly public Goldman faced the challenges of a change in ownership and financial interdependence among the partners, the elimination of capital and growth constraints, and the need to take into account outsiders’ perceptions of the firm—all had distinct cultural consequences.
A fundamental change made because of the IPO was the addition of the new principle expressing a commitment to providing superior returns to shareholders. Many observers point to this as the biggest change over time at Goldman because the firm could no longer privately make decisions in its best long-term interests in its relationships with clients, but instead had to focus on the public market investors’ shorter-term interests. They argue that this written addition was the “smoking gun” that muddled up always putting clients’ interests first. Though as demonstrated in this book, organizational drift had begun before this, there is no question that this change introduced its own considerable effects, as did the new structure of ownership.
Shared Ownership
When Goldman went public it awarded shares to almost every employee (including assistants), with some portion being awarded according to a formula and some by the discretion of one’s manager. The formulaic part was calculated on compensation and years of service. Generally, the discretionary part was largely determined by seniority and previous years’ compensation. There was a feeling among some senior nonpartner employees (those who were within a few years of partner) that part of the IPO grant should offset the lower income that the employee had gotten versus peers at other firms, now that the firm was going public and it was unclear if the partnership was going to be considered less prestigious and be less lucrative. The IPO shares were restricted to vest over years 3, 4, and 5 after the IPO (one-third each year) to ensure that everyone focused on the future and that potential outside investors knew that employees would not sell shares overnight. Compensation at Goldman had typically been in all cash versus most of its peers, which were public and generally paid bonuses both in cash and in stock that vested over time. The stock awards were also meant to “align incentives” and give employees “a sense of ownership.” It sounded good, and everyone I spoke to was grateful to receive stock (although some questioned the fairness of the allocation process). I remember how proud I was to receive a thick envelope with information about my stock, complete with bar graphs of what it was worth at different prices. But over time I learned that wide stock ownership would not necessarily fully meet its objectives, and it also caused some unanticipated issues.
About a year after the IPO, Goldman stock rose to around $100 a share (from the $53 offering price) and the partners got approvals to sell shares “in order to improve trading liquidity for shareholders.” That increased public ownership to 27 percent. 1 To sell, the partners needed special approval from the board (the majority of which were insiders) and the shareholder’s committee (the majority of which were insiders). None of the three most senior executives sold shares, but about 160 former partners did, selling over $2 million on average, while eleven sold more than $20 million. No nonpartner employees were allowed to sell shares before the first vesting period, three years after the IPO. 2 I remember a partner sheepishly telling me he decided to sell the maximum he was allowed to in the special offering for “diversification reasons,” almost seeking or expecting some sort of understanding or reassurance that it was ok. At the time a group of my peers discussed that the partners who retired before the IPO did not have the “diversification” option and that the current employees did not have the option to sell after one year. And based on conversations with those more senior to me at the time, some of my peers were certainly not the only ones who were questioning the timing of the sales. One interviewee mentioned to me that it was eerily similar to the 1994 partners “bailing out.” (I am paraphrasing as always in interviewee quotes.)
A few years after the IPO stock grants, the tech bubble burst. The stock declined to the $70s and the firm laid off lots of employees. The information that quickly spread like wild fire was that in the fine print of the IPO stock grant was a stipulation that in order to cash out your stock when it vested, you still had to be employed by the firm. For those that were being laid off, the firm was “allowing” people to keep their 2002 stock “as a bonus” even though it had not vested (in some instances getting no cash bonus/severance), but they would lose the amounts for 2003 and 2004. I remember the shock and outrage not just from those laid off but from some of those who remained. There was a feeling by some that the firm had “handcuffed” employees with the large grants but then took them away because this helped the firm reduce the number of shares outstanding and therefore helped the firm’s reported earnings per share to investors, which would help the stock price. To make matters even worse, some felt that the firm paid people less than peers during the tech crash because it knew that it had the “handcuffs” from the IPO shares that had not vested and that managers included the value of the shares that were to vest in the employee compensation calculations. These actions had consequences for how certain employees viewed the firm.
Many people didn’t look at the grants as a sharing of ownership; they saw stock being used as a way to make it more expensive for competitors to recruit Goldman people. I remember thinking it was odd that the firm had all of these restrictions, in part to keep people and align incentives, because the firm used to pay nonpartners all cash in the early 1990s and did not seem to have a hard time retaining people then, or thinking they worked in alignment with the partners. The attrition rates were lower then than industry standards. Many employees just discounted the value of the shares—and many didn’t count it at all in their equation of compensation. I remember a few people sometimes quietly questioning if Goldman’s stock price abnormally moved up in the month of November before the grants because of Goldman manipulating the price through buybacks or talking to analysts and investors to lower the number of shares they needed to give to employees. (For this study, I analyzed this in depth and found nothing. 3 )
During my time at the firm, I do not remember ever hearing a nonpartner employee mention to me that they felt “aligned” with either the partners or the shareholders. Many seemed more concerned about the fine print of what they could sell and when they could sell it—especially the traders when I was in FICC, as they saw the risks inherent in their compensation tied to the markets, the value of their apartments/homes in the New York metropolitan area tied to the markets, and the value of their retirement plans tied to the markets. The most senior executives and partners have more restrictions regarding their stock than the rest of the firm, but obviously this is much different than not being able to receive all of your capital until you retire, and even then over many years. A partner mentioned to me that he also thought a cultural shift occurred in part due to the way the firm treated people in the tech crash. Job security seemed more ephemeral. And he believes the result was an attitude that one should take more risk to make money fast or spend a lot more time politicking and taking credit for revenues.
Changes in Financial Interdependence
Unlike many of its investment banking peers that went public, Goldman tried to remain a “partnership,” even if the partners didn’t fully recognize or understand its intended and unintended benefits. For example, Goldman created the Partnership Compensation Plan (PCP). The program retained biennial public partnership elections and gave the elected partners (internally referred to as PMDs, or partner managing directors) financial and social prestige preferences over nonpartner managing directors (MD-lites). In the original idea of the PCP, PMDs were to receive a meaningful part of their compensation as a percentage of the profits of the entire firm, as with a private partnership. That was a sign of the thoughtfulness and concern about what the partnership meant. According to interviews, the PCP was intended to combat the consequences of the IPO. A partner explained that, in the initial 1998 vote, he voted against an IPO because “I was worried that the fabric and culture of the firm would change if it were no longer a partnership.” But in the second vote, he backed the IPO because “the thing that convinced me in the end, though, was the idea of maintaining the partnership concept and structure within a public company.” 4 Many partners told me that they were concerned about how quickly the culture of Morgan Stanley changed after its IPO. However, very quickly after the IPO even the PCP changed as a result of pressures.
Soon after the IPO, more factors than a partner’s share of the profits of the “partner pool set aside for partners” began to impact their overall compensation. In addition, shares used in compensation would vest typically over a few years and could then be sold, as compared with partners’ having to wait until retirement to get to their capital. According to interviews, generally PMDs looked at their compensation as an annual bonus comparable to those of their peers at other firms, not as a percentage of the shared profits of a partnership.
According to interviews, over time, and in incremental steps, the percentage of the overall compensation of a PMD as a percentage of the firm’s profits has shrunk further, and the percentage of the “discretionary amount” paid (similar to a discretionary bonus) has become increasingly larger. This policy—in another departure from the “long-term greedy” mentality—signaled a change from the days when each partner in an elected class got the same percentage. Even the top executives were paid on a relative basis in comparison with their peers (executives at other banks), and not purely on a percentage basis. 5 The proxy statement sent to shareholders discusses how, in determining the compensation of the CEO, Goldman looks at what other CEOs at comparable firms make—a much different approach from a partnership percentage and the financial interdependence related to the collective skills, values, and judgment of the partners.
At the time of the IPO, Goldman partners and employees owned about 50 percent of the firm. Over time, the percentage has changed dramatically. In 2011, Goldman partners owned approximately 10 percent. And keep in mind that stock is a significant part of compensation after the IPO, meaning that the sales of the original partnership shares from insiders have been even more dramatic. For example, according to research conducted by the New York Times’ senior reporter Theo Francis and published in January 2011, Blankfein has sold a total of $94 million in shares since 1999 and Goldman’s 860 current and former partners have sold more than $20 billion in Goldman stock. Overall for the partnership, the stock sales average $24 million for each partner since the IPO. This analysis does not include the billions of dollars Goldman has paid in cash salaries and bonuses to the partners. 6
Not having a meaningful ownership stake at risk represents a significant change from the financial interdependence and attitude toward risk that formerly characterized the partnership.
Risk slowly shifted away from partners to public shareholders. Although the partners’ stake in the firm now had liquidity and the risk to their personal assets had been eliminated, the loss of ownership and the elimination of personal liability for losses suffered by the firm eventually had unintended and far-reaching consequences to the organization’s culture.
Though paying in stock was meant to align their interests closely with those of investors and discourage excessive risk taking, executives can defeat the alignment effort by using complex investment transactions to limit their downside when the stock goes down. According to the New York Times, more than one-quarter of Goldman’s partners used hedging strategies from July 2007 through November 2010. 7
Others’ Capital at Risk
When Goldman was private, partners’ finances were interconnected. At partnership meetings, partners from any area could question traders. A banking partner had every right to ask a trading partner about risk, because it was his or her capital at risk. An executive at a competing investment bank explained to me that at other banks, it was unheard of for an investment banking MD to challenge a trading MD, and the idea of collaborating—sharing ideas or information and challenging each other—would be entirely foreign. Although the performance of an MD at Goldman can have an impact on the performance of the entire firm, it is not the MD’s entire capital at risk or his personal liability, though he can be held accountable for behavior resulting in fines.
Furthermore, several current Goldman partners explained to me that in the absence of financial interdependence after the IPO, MDs had little motivation to question traders about matters outside their own areas of expertise. The increasing size of the firm and resulting specialization and functional silos, combined with the lack of financial interdependence after the IPO, changed the social network of trust and reduced the opportunities for debate. One partner told me that he heard a story from one of his fellow senior partners about when he decided to retire that speaks to how siloed the firm became. He was in an elevator, and in trying to be friendly he introduced himself to the other person in the elevator and politely asked him what he did. The person replied that they had met before because he too was a partner. He then said he ran what the senior partner called a relatively important business, and yet he hadn’t remembered meeting before. By the time the senior partner got off the elevator, he had made up his mind it was time to get out and retire.
Working with other people’s money also coincided with changing attitudes toward risk management. With the change to a bonus culture, there was more incentive to take risks, and because the partners were no longer personally liable for covering losses, the constraints on risk-taking (not just financial but also reputational) were loosened. Those in areas such as proprietary trading had the opportunity to make more money than banking partners if they made the firm significant amounts of money. The incentive was to ask for and to invest as much capital as possible, because the more money you were given, the more you could potentially make with your trades. Traders could argue that if they worked at a hedge fund they would receive 10 to 20 percent of the profits they generated and if they didn’t get paid correspondingly by Goldman, they could leave. And with so many more hedge funds cropping up, if the trades didn’t work out and you got fired, you could be almost sure you’d get a job at another bank or a hedge fund. The attitude of many was that the Goldman pedigree would get you another job somewhere for sure. 8
One might ask how the change in the attitude toward risk was evaluated by the board of directors. After 2002, when the Sarbanes–Oxley Act became law, Goldman’s board was composed largely of independent directors, most of them prominent in business and academia. However, according to interviews, none of them had ever focused on trading for a living. None would probably have been classified as an expert in risk management by most trading experts. The directors owned very little Goldman stock (less than 0.1 percent of the total company), and what they owned generally was not significant to their net worth. An interviewee speculated that the fact that Goldman’s traders were making enormous sums of money for the firm and themselves also made it unlikely the board would question that success.
In fact, it could have created the opposite effect. One partner I interviewed said that the directors were not likely to question people who made tens of millions of dollars and whose returns on equity and profits exceeded those of their peers. Another partner speculated that as trading became more important after the IPO and risk management was more critical, the board relied on Lloyd Blankfein and his number two, Gary Cohn, from trading, instead of Hank Paulson, and that may have contributed to Paulson’s decision to leave to become secretary of the Treasury.
When I was in proprietary trading, one of the partners received a voicemail from Paulson, CEO at the time, on which I was copied. It related to risk. The partner forwarded the message to Blankfein, answering the question and asking Blankfein to deal with it. I asked the partner why he had not responded directly to Paulson. He seemed more than a little annoyed at my curiosity, saying essentially that Paulson knew a lot about clients but little about trading risk, and he did not have the time to explain it to Paulson. Whether or not Paulson understood trading risk, the fact that a partner did not want to deal with the CEO was surprising to me. This was in stark contrast to when I was an analyst in the early 1990s, when the senior partner was held with the deepest respect. I remember being told that when one goes to see the senior partner of the firm, one must wear a suit jacket to show respect. In hindsight, I think I intuitively felt that Hank would probably not be around for much longer if traders didn’t have the time for him, and I privately questioned if a banker would ever again be head of Goldman. But I don’t remember giving it that much thought. I just went back to my daily routine.
Misaligned Incentives
Goldman’s incentive structure, like those of other banks, also evolved in response to the changing nature of the firm’s business mix. Rob Kaplan, former vice chairman of Goldman, said that banks’ visions changed as they placed emphasis on trading (see chapter 5). It became more about making money than about “the value-added vision.” 9
More Cultural Stress: Envy, Self-Interest, and Greed
One of the basic principles of the financial system is that risk is rewarded. Exactly how well Goldman partners were rewarded—what they earned or owned—had been a closely guarded secret, but it became public information in the filings for the IPO. Some might even say that it was in everyone’s face. When I joined Goldman as an analyst, a list was published by a finance magazine of the one hundred most highly paid people on Wall Street, and it was passed around among the junior people in great secrecy. I was told that I would be in deep trouble if a partner caught me with it. The list contained so many Goldman partner names that, except for a few top partners, the names were listed at the bottom of the page, with no bio or background, unlike the non-Goldman partners, each of whom got a short description.
The general reaction of the public disclosure of wealth within the firm was envy stoked by self-interest, and that, when coupled with freedom from personal liability, translated into greed and lack of restraint. (Bear in mind that this was during the dot-com and equity market booms, when many people were becoming extremely wealthy. And even some of the partners would privately question why people who they didn’t feel were nearly as smart or hardworking or as committed to the long term were making more money than they were.)
I cannot emphasize strongly enough the impact on the organization of the resentment stemming from knowing who was gaining how much at the IPO; there was a reason many partners did not like Goldman’s financial information being disclosed, and Jimmy Weinberg argued in 1986 that this was one of the reasons the firm should not go public. 10 The average partner received around $63 million at the IPO price, an amount that became $84 million after the first day of trading. In the class of 2000, of those who just missed making partner before the IPO, some received a fraction of that amount. The discrepancy was enough to cause a great deal of resentment, especially among those who were hired at the same time as members of the class of 1998 but were not nominated for partnership until after the IPO. 11 (See appendix D for a table showing percentages, shares, and value of partners’ shares at the IPO.)
I remember working with an MD-lite who had just missed making partner before the IPO. Upon finding out the difference between her payout and that of those who were elected in 1998, she did not come to the office or return calls or voicemail for days. It was like a “mini strike,” and it worked: the shares she received were increased. It sent a strong message about how one needed to act to get what one believed was promised, fair, and/or justifiable.
Some of the tensions were eerily similar to many of those who were around in 1994, when so many partners retired, when the prevailing sentiment was that the retirees were “sellouts,” leaving to save themselves. After 1999, MD-lites and VPs, like the partners who remained in 1994, wondered whether they had been sold “motherhood and apple pie” or principles of brotherhood, only to realize that there was a limit to the values and the bond. I was also surprised that some nonpartners mentioned they felt that the retirees who stayed in 1994 but left before the IPO, and even those who really built the firm but had retired, were being treated unfairly.
Weinberg and Whitehead’s ideas about being custodians of the firm for future generations of partners seemed to be less of a priority. For those who believe that greed was always prevalent at Goldman, imagine that if the earlier partners had decided to go public sooner—they would have received multiples on their capital instead of book value when they retired. In particular, interviewees estimated that John L. Weinberg and Whitehead each owned about 5 percent of the firm, which would represent billions of dollars today. 12
As a Goldman partner explained to me in an interview, Goldman was slowly losing its allure: the prestige of partnership, the mystique that had always marked the difference between Goldman and its competitors. 13 At the time of the IPO, no one knew that Goldman would (or would have to, as explained in some interviews with partners) become the highest-paying firm on Wall Street. It had traditionally paid less than its peers, except for partners, a business practice Whitehead felt reflected long-term greedy and attracted the right people who had this perspective. Before the IPO, Goldman partners made outsized returns, in part by pocketing the difference in lower compensation for the nonpartners. One partner with whom I spoke said that what made Goldman unique was that it found really smart and dedicated people with certain values to “drink the Kool-Aid” and buy into the culture instead of taking more money. He felt, over time, people didn’t value the “Kool-Aid” or buy into the culture enough anymore, and Goldman raised the compensation level to be competitive—another signal of the drift at the firm. Goldman was not special enough, its culture not distinct enough, the value of the partnership not high enough for people to be “long-term greedy” and accept lower pay for a long period of time.
In addition, Goldman faced heated new competition for talent from other firms as well as other opportunities. The firm reacted by significantly increasing compensation, becoming the highest-paying firm on Wall Street. Also, compensation per employee increased with the profits from proprietary trading and growth—and the changes. For example, in 2004 the average compensation per employee at Goldman was $445,390, compared with $279,755 and $199,230 at J.P. Morgan and Lazard, respectively. In 2007, the numbers were $661,490, $311,827, and $466,003 for Goldman, J.P. Morgan, and Lazard. 14 According to interviews, before Goldman went public, it typically paid its nonpartners less than its peers paid their nonpartners.
The idea of making partner, and its social meaning and identity, had been taken down a notch—or at least there was a market price for it. Before the IPO it was highly unusual for retired Goldman partners to work at other firms, but after the IPO this phenomenon increased. Many partners who had just made their fortunes in the IPO were primed to retire, and when they left, they took not only their money but also their expertise and their knowledge and respect for the firm’s history and traditions. Of 221 total partners at the IPO in 1999, only 39 (16 percent) remained as of 2011. 15
Changes in the Social Network of Trust
The net $2.6 billion in proceeds raised by the IPO allowed Goldman to expand rapidly, and the partnership pool grew to meet the demands created by rapid growth, changing what had once been a close social network. The firm had started selectively hiring more lateral senior people in the mid-1980s, and this accelerated in the 1990s as the firm grew. But after the announced and expected retirements after the IPO, hiring outsiders as partners became a necessity. Within five years of the IPO, almost 60 percent of the original partners were gone. Goldman did not have the luxury of time to build product and geographic expertise from within.
According to the partners I interviewed, the priority of recruiting, training, and mentoring changed. The process of identifying and nurturing partner candidates was pushed aside in favor of those who could show immediate results—metrics, revenue production, and Super League relationships—and measurable results such as a trading P&L. And if the firm did not have the right people, the feeling was that it could hire them from other firms by using the valuable currency of Goldman stock. The firm’s executives did not want to wait and slowly develop people internally for partnership positions. It would constrain growth. According to my interviews, candidates for partner or lateral hires at the partnership level were not vetted as thoroughly for the match between their personal values and the firm’s business principles and culture—a consequence in part of the drop in financial interdependence and the greater emphasis on the financial contribution. Some partners I interviewed believed that this coincided with an increasing shift of balance in considering people for partner to more weight being given to a person’s ability to contribute commercially and less to other considerations, like values and culture.
The Effects of Wall Street Models
A distinct change as the result of going public was the deep effect of Wall Street investors and analysts on the firm. A partner who voted for the IPO, whom I interviewed, said that the firm way under-estimated the scrutiny it would receive as a public company. He said at the time of the IPO the firm had a handful of employees in public relations who essentially said “No comment” when the press asked about its business. Today, he estimated that over a dozen people were involved in public relations, talking to the press, investors, and analysts and preparing information for them.
The new scrutiny came from many camps. Each of these groups used different tools, including the firm’s valuation, to assess Goldman as an investment opportunity. Now having to compete in this way with other firms for investors’ cash and positive analyst assessments, Goldman became concerned with how it appeared when assessed by models, and therefore it instituted some new practices that made it more similar to its competitors. In a process that is described by academics as performativity, the models used by Wall Street to assess the firm had a reflexive effect on how the firm chose to perform. 16
Formerly, Goldman had generally held itself apart from the crowd, to a separate standard of its own devising. A colleague once explained to me in the mid-1990s during a late-night pizza break in a conference room, which Goldman regularly paid for in order to promote bonding, that at Goldman, people never spoke badly about other firms. (Goldman principle number 13 states, “Never denigrate other firms.”) According to him, Goldman employees didn’t really care what the other firms did, or that other firms badmouthed Goldman or told people they were better than Goldman. He said that Goldman was “the Harvard of investment banking.” I asked what he meant, and he elaborated by saying, “You know how people at very good colleges wear t-shirts saying things like ‘XYZ college, the Harvard of the Midwest? It’s like a subconscious insecurity about where they actually did go, or an acknowledgment that they wanted to go to Harvard instead.” He then asked rhetorically, “Have you ever seen anyone at Harvard wearing a shirt with the name of another college on it?” I thought the example was a little absurd, and in part to be a smart-aleck I asked him, “So do you think people at Morgan Stanley are wearing t-shirts saying, ‘Morgan Stanley, the Goldman Sachs of Midtown?’” Annoyed, he got up and walked away, and I couldn’t stop myself as I called out after him, “I am going to copyright that.”
While those at Goldman might still have thought of the firm as the Harvard of Wall Street after the IPO, they started to care a great deal about how the other firms were doing. According to interviews, after the IPO, both Goldman’s investors and its employees constantly compared its performance to that of other firms. In addition, partners’ and CEO compensation was compared to peers’. Before the IPO, Goldman was not required to report its earnings—and chose not to do so. Earnings, compensation, and similar information were closely guarded secrets and helped to add to the Goldman mystique. The prevailing sentiment was that the firm’s record of success meant it did not have to care how others were managing their business, the ratios they looked at, their margins, or their return on equity. Goldman might choose to compare itself to these models and benchmarks, but it did not have to manage to them to appease outsiders. The partners reported only to themselves and could choose to measure risk or performance however they saw fit. They did not have to explain their decisions to outside board members, and, because they did not have to answer to the outside world (the previous outside private investors had no say in management), the partners could make the decisions that were best for the partnership in the long term. This ability to protect confidential information was one of the arguments used for remaining a private partnership. “Are you ready to lose the flexibility we now have in reporting up and down earnings?” Whitehead and Weinberg wrote in a letter to Corzine and Paulson. 17
As a public company, in contrast, Goldman had to comply with the demands and requirements of the capital markets. Among these is the preference for all companies to have common measures, so Goldman was expected to employ the financial models used by the street and capital markets, including the desired measures of risk and performance. Ellis notes, “The persistent demand to meet or beat both internal and external expectations of excellence [is one of the] penalties of industry leadership.” 18
Traditionally, firms want to meet or exceed expectations, believing it demonstrates how well they are run. I analyzed Bear Stearns, Goldman, Lehman, Merrill Lynch, and Morgan Stanley’s ability to meet or beat analyst EPS and revenue published expectations from 1999 (when Goldman went public) to 2008 (the credit crisis). There was a statistically significant difference between the firms. Bear Stearns and Lehman more consistently met or exceeded analyst expectations and showed the highest correlations, implying that they were “managing to analyst models.” Obviously those two firms failed. Goldman showed a correlation to meeting or exceeding expectations (demonstrating the effect of analyst models) but actually had the least correlation among the firms; it was the worst, implying that it was willing to accept losses or deviate from the analysts more than the other firms. This may reflect cultural characteristics and possibly elements that helped Goldman do relatively better in the credit crisis (discussed later).
Source of Revenues
At the time of the IPO, analysts and investors wanted to see Goldman increase its asset management revenues because of the resulting more-consistent fees. They also discussed Goldman’s international growth and placed a premium on it, because Goldman had market share opportunities internationally. International growth had already been a priority, a benchmark by which the firm measured itself. Whitehead knew that if Goldman could not take care of its clients’ banking needs anywhere in the world, it risked losing them to firms that could. Rubin and Friedman pushed for more international growth and executed the vision. Corzine and Paulson had pushed even further. But still Wall Street wanted more, according to interviews from analyst investors at the time.
Analysts did not place a high value on the sales and trading revenues and revenues from private equity, even though they were highly profitable and important for Goldman, because of their volatility and inconsistency. Goldman made a larger percentage of its profits related to trading than its peers in 1998. Largely for this reason, the firm’s revenue mix became a topic of avid discussion among analysts and investors in the months leading up to the IPO, because the revenue mix was more volatile than that of firms that were less reliant on trading. The greater stability of asset management revenues can provide a cushion against market volatility, but in the mid- to late 1990s, the firm lagged behind its rivals in building its asset management business.
Only a few short years later, however, Goldman’s asset management business was strong enough to attract more of the firm’s top talent to move over from other areas of the firm, as well as some “outside honchos [brought in with] the promise that they [would] become partners (which is rarely done at Goldman).” 19
Thus, growth was particularly strong in both asset management and international expansion. Asset management grew faster than banking over time, and international growth was higher than domestic. Goldman even said so in its prospectus: “We pursue our strategy to grow our core business through an emphasis on: expanding high value-added businesses … increasing the stability of our earnings … pursuing international opportunities … [and] leveraging the franchise.” 20 When discussing “increasing the stability of our earnings,” Goldman said it would emphasize “growth in investment banking and asset management.” Goldman’s investment banking revenues, however, actually declined as a percentage over time. Growing banking was a good story for analysts and investors (though not necessarily a representation of reality), especially in light of potential investors worrying about the impact of trading. Analysts I interviewed said it was probably better to have Paulson, from a banking background, lead the firm during the IPO instead of Corzine, because it made Goldman’s story of emphasis on advisory businesses more believable, although some had their doubts.
What really happened in the following years, though, was that trading became an increasingly dominant part of Goldman’s business, and this had a significant impact on drift.