Prologue

1. C. D. Ellis, The Partnership—The Making of Goldman Sachs (New York: Penguin Press, 2008), 539.

2. See http://www.nytimes.com/2006/11/02/business/02welch.html and http://www.nysun.com/obituaries/remembering-john-weinberg-of-goldman-sachs/40311/.

Chapter 1

1. http://money.cnn.com/magazines/fortune/fortune_archive/2007/02/05/8399175/.

2. M. Taibbi, “The Great American Bubble Machine,” Rolling Stone, April 5, 2009, http://www.rollingstone.com/politics/news/the-great-american-bubble-machine-20100405.

3. B. Montopoli, “Levin Repeatedly References ‘Sh**ty Deal’ at Goldman Hearing,” CBS News, April 27, 2010, http://www.cbsnews.com/8 301-503544_162-20003526-503544.html.

4. B. Groysberg, S. Snook, and D. Lane, “The Pine Street Initiative at Goldman Sachs,” Case 9-406-002 (Boston: Harvard Business School, 2006).

5. When one examines Goldman’s history over time, there are examples of Goldman putting its interests ahead of clients, especially Penn Central Transportation Company in 1970 and Goldman Sachs Trading Corp in 1928. However, both of these examples are before Whitehead codified the business principles in the late 1970s. So we cannot be sure as to what Goldman said to its clients before that time. I could only analyze from the principles being written. See http://article.washingtonpost.com/2012-03-16/opinions/35447344_1_goldman-sachs-commercial-paper-younkers.

6. http://money.cnn.es/magazines/fortune/mostadmired/2010/.

7. http://money.cnn.com/galleries/2012/pf/jobs/1205/gallery.top-MBA-employers/index.html.

8. http://hereisthecity.com/2013/01/07/mergers-acquisitions-review-financial-advisors-worldwide-ranking/.

9. http://www.goldmansachs.com/investor-relations/financials/archived/other-information/ipo-prospectus-gs-pdf-file.pdf.

10. http://www.huffingtonpost.com/2009/06/02/government-sachs-goldmans_n_210561.html.

11. Ibid.

12. Organizational drift as I describe it is neither precisely Sidney Dekker’s “cultural drift” nor Scott Snook’s “practical drift” nor Diane Vaughan’s “normalization of deviance.” Although I draw upon many elements from each, there are not only slight differences in their work but in mine as well. Also, rightly or wrongly, their concepts of drift are often associated with organizational “failure” when examining a specific event. Organizational drift does not necessarily always lead to a recognizable event of failure.

13. Paraphrased from http://www.ohsbok.org.au/downloads/chapters/5_Global_Safety.pdf.

14. Jack and Suzy Welch, “Goldman Sachs and a Culture-Killing Lesson Being Ignored,” CNNMoney, April 12, 2012, http://management.fortune.cnn.com/2012/04/12/goldman-sachs-culture-values/.

15. Lisa Endlich, Goldman Sachs—The Culture of Success (New York: Simon & Schuster, 2000), 18.

16. There are some notable exceptions, including the scandal surrounding the bankruptcy of Penn Central, a client of Goldman’s, in 1970.

17. See William Cohan, Money and Power: How Goldman Sachs Came to Rule the World (New York: Doubleday, 2012).

18. The number of partners more than doubled from 75 in 1991 to 190 in 1998. In 1999, when Goldman went public, it had 221 partners. Some additional facts: The number of total employees has grown from 3,600 people in 1984 to around 30,000, representing a growth rate of around 8 percent per year. Out of 221 total partners at the IPO, less than 10 to 15 percent of the pre-IPO partners remain today, making up less than 0.1 percent of current GS employees. Earnings before tax (EBT) has grown from $50 million in 1977 to over $6 billion in 2001, which is a compounded annual growth rate of about 15 percent—while staffing was growing at 8 percent, EBT was growing at almost two times that.

19. Goldman Sachs Group, “Letter to Shareholders,” Annual Report, 1999, http://www.goldmansachs.com/investor-relations/financials/archived/annual-reports/attachments/1999-annual-report.pdf.

20. http://levin.senate.gov.

21. When Goldman faced criticism about reserving over $16 billion for its employee compensation, just a year after it received $10 billion from the government, Blankfein said at a conference: “We participated in things that were clearly wrong and have reason to regret … we apologize” (see http://dealbook.nytimes.com/2009/11/17/blankfein-sorry-for-goldmans-role-in-crisis/). Shortly after, the firm said it would spend $500 million to help small business growth (see http://business.time.com/2009/11/18/goldman-sachs-tries-to-make-ammends/). Blankfein also wrote a letter to Congress stating, “While we regret that we participated in the market euphoria and failed to raise a responsible voice, we are proud of the way our firm managed the risk it assumed … ” (see http://dealbook.nytimes.com/2009/06/16/goldman-regrets-market-euphoria-that-led-to-crisis/.)

22. http://money.cnn.com/2010/04/27/news/companies/goldman_sachs_hearing/index.htm.

23. Goldman Sachs Group, Report of the Business Standards Committee, n.d., www.GoldmanSachs.com/Business Standards.

24. See http://www.nytimes.com/2010/05/19/business/19goldmanquestions.html?pagewanted=all&_r=0. The full question and the full answer are: “3. On the topic of putting clients first, Goldman’s Mortgage Compliance Training Manual from 2007 notes that putting clients first is ‘not always straightforward’ because the firm is a market maker for a wide variety of companies, and because the firm’s traders are in a position to gather and use information from a variety of sources— a mosaic constructed of all of the pieces of data received, is how the manual describes it. How does the firm, in practice, address this nuance? And what does Goldman mean by ‘not always straightforward’?” Goldman’s response: “We strive to provide all our sales and trading clients with excellent execution. This manual recognizes that like many businesses, and certainly all our competitors, we serve multiple clients. In the process of serving multiple clients we receive information from multiple sources. This policy and the excerpt cited from the training manual simply reflects the fact that we have a diverse client base and gives our sales people and traders appropriate guidance.”

25. Greg Smith, “Why I Am Leaving Goldman Sachs,” New York Times, March 14, 2012, http://www.nytimes.com/2012/03/14/opinion/why-i-am-leaving-goldman-sachs.html?pagewanted=all.

26. Edgar Schein writes, “Where incongruities exist between espoused values and basic assumptions, scandal and myth explosion become primary mechanisms of culture change. Nothing will change until the consequences of the actual operating assumptions create a public and visible scandal that cannot be hidden, avoided, or denied … [I]t is usually discovered that the assumption 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.” See Edgar Schein, Organizational Culture and Leadership, 4th ed. (San Francisco: Jossey-Bass, 2010), 291.

27. http://www.cnbc.com/id/49368892.

28. Securities and Exchange Commission, “Alternative Asset Management Acquisition Corp, EX-99.2,” 2008, http://www.secinfo.com/dr66r.t1Fx.b.htm.

29. The Institutional Clients Group—which includes global banking, global markets, global transaction services, Citi Private Bank, Citi Capital Advisors, and Citi Investment Research & Analysis—had about $35 billion in revenues in 2010. ICG is essentially what was Salomon Brothers plus Citibank’s corporate and investment banking businesses; it does not include Citigroup’s credit cards or the retail branch network.

30. See http://www.sec.gov/Archives/edgar/data/1393816/000089109208003155/e3206ex99-1.htm. Ultimately the deal did not close.

31. Endlich, Goldman Sachs, 18.

32. This and other Levitt quotations in this paragraph are from C. Harper and E. Schatzke, “Goldman Should Stop Saying Clients Come First, Levitt Says,” Bloomberg, March 29, 2012, http://www.bloomberg.com/news/2012-03-29/goldman-should-stop-saying-we-put-customers-first-levitt-says.html.

33. Whereas a structured interview has a formal, limited set of questions, a semistructured interview is flexible, allowing new questions to be brought up during the interview as a result of what the interviewee says. The interviewer in a semistructured interview generally has a framework of themes to be explored. I received approval from an institutional review board (IRB) at Columbia for my interview processes and procedures, interviewee consent process, and confidentiality of interviewees and study data.

34. During our discussions Whitehead did not comment on Goldman, including its culture or leadership, after 1984. I referred to public sources as they relate to Whitehead’s views after 1984.

35. A first-person narrative is unusual in scholarly writing, and for good reason: some objective distance between the researcher and his subject is needed for an unbiased study. However, I use the first person and insert myself at certain points to provide unique information and perspectives. I think there are significant advantages to my being both an academically trained researcher and an insider; without this stance, it would not be possible, in my view, to conduct such an in-depth study because of the complexity of Goldman and the deep, embedded assumptions of the interviewees, assumptions that must be raised to consciousness to be analyzed. On the other hand, it brings academic issues and baggage, something that cannot be completely avoided. Additionally, I was concerned that revisionist history might enter into the book. I wanted to make sure that my conclusions would hold true whenever this book was written. I asked myself whether, if I had conducted this study in 2006—before the financial crisis—I would have ended with the same conclusions. Therefore, I use a framework of organizational drift to help ensure consistency in the analysis. I have donated the entire advance I received from Harvard Business Review Press for this book to educational and medical charities.

36. See D. Vaughan, The Challenger Launch Decision: Risky Technology, Culture, and Deviance at NASA (Chicago: University of Chicago Press, 1996); and S. A. Snook, Friendly Fire: The Accidental Shootdown of U.S. Blackhawks over Northern Iraq (Princeton, NJ: Princeton University Press, 2002).

37. Vaughan, The Challenger Launch Decision, 238.

Chapter 2

1. A. Blitz, interview with John Whitehead, 2002, http://www.hbs.edu/entrepreneurs/pdf/johnwhitehead.pdf.

2. “I believe the most important thing I did was to set down in writing what Goldman Sachs stood for. I did it out of necessity. By the early 1960s, our business was expanding so rapidly that new people were coming in faster than we could fully assimilate them … I wondered how they would ever get inculcated with the Goldman Sachs ethic, which we old hands learned over time by osmosis. We did our best to import these values in new hires through fairly extensive training sessions, but I thought it would be helpful to identify our core values—this was long before that became a vogue term—in a short document that all employees could have to read and to remember. Values like putting the customers’ interests first, emphasizing quality, and working as a team,” from John C. Whitehead, A Life in Leadership: From D-Day to Ground Zero (New York: Basic Books, 2005), 107.

3. “In corporate management circles, culture is arguably one of the most pervasive buzzwords, often used to sum up ‘the way we do it here’—either explicitly or implicitly—and is seen as a central piece of an organization’s identity. That being said, the very term, even when used in the most general sense, has been called a ‘weasel word,’ devoid of academic legitimacy” (Chalmers Johnson, lecture, Goldman Sachs, Berkeley, CA, 1993). Eminent Japanologist Chalmers Johnson is not alone among scholars in dismissing it as a “weasel word,” devoid of academic legitimacy, http://citation.allacademic.com/meta/p_mla_apa_research_citation/1/0/9/5/9/pages109592/p109592-4.php.

4. http://www.escholarship.org/uc/item/00v999cr.

5. Mary Douglas, “Cultural Bias,” in Mary Douglas (ed.), In the Active Voice (London: Routledge, 1982), 183–254.

6. Ibid., 183.

7. Social anthropologist Mary Douglas defined culture as “a blank space, a highly respected, empty pigeonhole. Economists call it ‘tastes’ and leave it severely alone. Most philosophers ignore it—to their own loss. Marxists re-create it obliquely as ideology or superstructure. Psychologists avoid it, by concentrating on child subjects. Historians bend it any way they like. Most believe it matters, especially travel agents,” from Douglas, In the Active Voice. When it comes to the more specific term organizational culture, the definitions are just as multitudinous, with anthropologists, sociologists, and scholars from other disciplines struggling to describe the “ideational superstructure of a work organization” (G. Morgan, Images of Organization [Beverly Hills, CA: Sage, 1986], 139). Definitions of organizational culture address everything from common behavioral patterns to symbolic corporate values—e.g., Terrance Deal and Allan Kennedy, Corporate Cultures: The Rites and Rituals of Corporate Life (New York: Perseus, 1982); Thomas Peters and Robert Waterman, In Search of Excellence: Lessons from America’s Best-Run Companies (New York: HarperCollins, 1982). Of course, it is not uncommon for researchers to deploy the same terms while adhering to different connotations, thereby clouding the relevance of research results. Generally, scholars acknowledge the socially constructed role that culture plays in promulgating appropriate, productive behavior within a company. Edgar Schein, a professor emeritus of management at MIT, with the most (more than five hundred) cited articles on organizational culture, according to Google Scholar, defined organizational culture as follows:

The deeper level of basic assumptions and beliefs that are learned responses to the group’s problems of survival in its external environment and its problems of internal integration; are shared by members of an organization; that operate unconsciously; and that define in a basic “taken-for-granted” fashion in an organization’s view of itself and its environment. They come to be taken for granted because they solve those problems repeatedly and reliably … culture … is a learned product of group experience and is, therefore, to be found only where there is a definable group with a significant history.

From Edgar Schein, Organizational Culture and Leadership, 4th ed. (San Francisco: Jossey-Bass, 2010), 6–7.

8. This definition is similar to A. L. Kroeber’s and Talcott Parsons’s suggested definition when speaking of culture more broadly than organizations:

We suggest that it is useful to define the concept of culture for most usages more narrowly than has been generally the case in the American anthropological tradition, restricting its reference to transmitted and created content and patterns of values, ideas, and other symbolic-meaningful systems as factors in the shaping of human behavior and the artifacts produced through behavior.

From A. L. Kroeber and Talcott Parsons, “The Concepts of Culture and of Social Systems,” American Sociological Review 23 (1958): 582.

9. Typically, the definitions assume that culture concerns collective groups of people (not individuals), who, through their shared experiences day by day in the work environment, build a shared vision of what the organization is about and how it undertakes its purpose, and that this shared vision grows through learning how to behave for career survival and advancement. Typically, the definitions describe culture as behavior that is learned or taught and represents the general operating norms in the organization. Culture affects how people behave when no one is telling them what to do because of shared values, assumptions, and socialization experiences, which unite members and maintain a distinction from nonmembers. J. C. Collins and J. I. Porras (Built to Last: Successful Habits of Visionary Companies [New York: HarperBusiness, 1994], 253) note that the basic elements that distinguish the “visionary” companies they studied were present throughout the companies’ histories, “long before they became hugely successful, premier institutions.”

10. Collins and Porras, in Built to Last, concluded that successful companies had decentralized management combined with a strong culture.

11. To my knowledge Goldman is the only Wall Street firm that has had the same general principles for such a long time. My interviews with people from competing firms revealed that most firms that had a set of written principles have changed them significantly or abandoned them over time, as the firms underwent mergers and consolidations. In some cases, principles were routinely revised with each change in top management. McKinsey & Company, considered by many to be a world-class professional services organization, has a similar list of principles, and they can be found framed and hanging on some partners’ walls and posted on the company website. According to interviews, McKinsey’s values and principles are very well understood: they are discussed, breathed, and lived every day, from the first day of employment. They include putting the client’s interest ahead of the firm’s, behaving as professionals, keeping client information confidential, telling the truth as McKinsey sees it, and delivering the best of the firm to every client as cost effectively as possible. Citigroup also has a list of principles posted on its website, although interviewees have never seen or heard anyone discuss them during a meeting with clients. Citi’s four key principles are common purpose, responsible finance, ingenuity, and leadership.

12. Whitehead, A Life in Leadership, 110.

13. The firm’s stance on balancing family and work responsibilities changed dramatically after the Whitehead era, as evidenced by a couple of anecdotes. An out-of-state partner who passed on his first annual partners’ meeting and dinner dance to be home for his daughter’s birthday received a call from Sidney Weinberg, complimenting the partner for having the right priorities; his wife received roses. When the same issue arose years later, “Friedman let the same partner know that skipping partners’ meetings was not looked upon kindly.” (See Lisa Endlich, Goldman Sachs—The Culture of Success [New York: Simon & Schuster, 2000], 121.)

14. Whitehead, A Life in Leadership, 110.

15. Because of the many mergers, it is difficult to identify when and whether other firms had stated business principles. However, my interviews with competitors and Goldman partners indicates that if they had them, no one took them as seriously or clung to them as much as Goldman. Most agreed: no firm has had them for as long as Goldman has.

16. When I refer to a current Goldman partner, I mean someone elected into the partnership compensation program (PCP). Goldman is no longer a private partnership, and internally those elected into the PCP are referred to as partner or PMD (partner managing director) to distinguish them versus those managing directors not in the partnership participation program.

17. I am reminded of an article I read about the UBS trading fraud not being a system failure, but rather a cultural failure. The general claim was that UBS had gone through so many mergers and had grown so quickly that it had no defining culture. I found the article insightful. In my experience it is challenging even for insiders to design foolproof systems to catch fraud, because the complexity is too great. See J. B. Stewart, “Common Sense: At UBS, It’s the Culture That’s Rogue,” New York Times, September 24, 2011, www.nytimes.com/2011/09/24/business/global/at-ubs-its-the-culture-thats-rogue.html?pagewanted=all.

18. B. Groysberg and S. Snook, “Leadership Development at Goldman Sachs,” Case 9-406-002 (Boston: Harvard Business School, 2007).

19. I. Ross, “How Goldman Sachs Grew and Grew, Fortune, July 9, 1984, 158.

20. Milton C. Regan (Eat What You Kill: The Fall of a Wall Street Lawyer [Ann Arbor, MI: University of Michigan Press, 2004], 86–87) provides a concise account of the short-lived Water Street Corporate Recovery Fund.

21. C. D. Ellis, The Partnership—The Making of Goldman Sachs (New York: Penguin, 2008), 304.

22. “As a long-time employer of choice for elite undergraduates and MBAs, Goldman was able to select from a broad array of talented applicants for the traits it preferred” (see B. Groysberg and S. Snook, “Leadership Development at Goldman Sachs”).

23. In Organizational Culture and Leadership (4th ed. [San Francisco: Jossey-Bass, 2010], 231–232), Schein discusses the importance of culture carriers. Culture does not survive if the main culture carriers depart and if a critical mass of the members leave.

24. C. Harper and A. Choudhury, “Sidney Weinberg, Goldman Sachs Senior Director, Dies at 87,” Bloomberg, October 6, 2010, http://www.bloomberg.com/news/2010-10-06/goldman-sachs-senior-director-sidney-j-weinberg-jr-dies.html.

25. W. D. Cohan, Money and Power: How Goldman Sachs Came to Rule the World (New York: Doubleday, 2011), 363.

26. Whitehead remarked in an interview that his starting salary at Goldman, in 1947, was $3,600 a year. He went on to say, “$3,600 a year, not $3,600 a month. And it wasn’t $3,600 a day, as they now earn.” (A. Blitz, interview with John Whitehead, 2002, http://www.hbs.edu/entrepreneurs/pdf/johnwhitehead.pdf.)

27. Endlich, Goldman Sachs, 20.

28. Ellis, The Partnership, 561.

29. Ellis, The Partnership, 558.

30. In A Life in Leadership (p. 72), Whitehead recalls his experiences as a recruit: “After meeting with the two partners in charge of investment banking at the firm, I sat down with the top brass, a rather imposing group of older men who seemed very worldly to a business neophyte like me. For much of the afternoon, they peppered me with questions that often left me tongue-tied. But I must have handled myself adequately because a few days later, I received word that I had been accepted for employment at Goldman, Sachs & Co.” Looking back on his experiences recruiting others, he writes, “Even after I was a senior partner, I spent a lot of time twisting the arms of twenty-year olds, and that was very likely one of the most important things I did” (p. 110).

31. Robert Steven Kaplan, What to Ask the Person in the Mirror: Critical Questions for Becoming a More Effective Leader and Reaching Your Potential (Boston: Harvard Business Review Press, 2011), 60.

32. Whitehead, A Life in Leadership, 111.

33. Endlich, Goldman Sachs, 21.

34. Cohan, Money and Power, 231.

35. To ensure the acculturation of the teamwork and other values at Goldman, the organization “grew” its own talent by using entrenched recruitment and training programs. “Out of 1,500 applicants one year, only 30 individuals were given jobs; they were the ones with the brains, humor, motivation, confidence, maturity, and, needless to say, an inclination to play on the team.” (R. D. Freedman and J. Vohr, “Goldman Sachs/Lehman Brothers,” Case Studies in Finance and Economics, C49 [New York: Leonard N. Stern School of Business, 1991, rev. 1999]).

36. Cohan, Money and Power, 232.

37. G. Tett, Fool’s Gold: How the Bold Dream of a Small Tribe at J. P. Morgan Was Corrupted by Wall Street Greed and Unleashed a Catastrophe (New York: Free Press, 2009), 8.

38. “John L. Weinberg,” The Telegraph, August 11, 2006, http://www.telegraph.co.uk/news/obituaries/1526056/John-L-Weinberg.html.

39. Goldman moved into its new headquarters building, “a 43-story super-green tower of glass and steel located directly across from the World Trade Center in Battery Park” in 2009 (from Cohan, Money and Power, 242). It has “cool modern art, a bike path, and a sick gym” (from “Goldman Employees Are Psyched to Move into Their Awesome New Building,” Business Insider, December 4, 2009, http://www.businessinsider.com/goldman-employees-are-psyched-to-move-into-their-awesome-new-building-2009-12). However, the building does not bear a vanity address, and “the name of the firm appears nowhere on the exterior, or in the lobby, or even on the uniforms of the security personnel or the badges given to visitors. Forty-three stories tall and two city blocks long, the Goldman building appears to have been designed in the hope of rendering the company invisible.” Goldman’s low profile preceded the firm’s recent reputational and legal difficulties, so the design of its headquarters building is completely consistent with its “obsession with being extremely powerful and utterly inconspicuous” (from P. Goldberger, “Shadow Building,” The New Yorker, May 17, 2010, http://www.newyorker.com/arts/critics/skyline/2010/05/17/100517crsk_skyline_goldberger#ixzz1xQltbdUd).

40. In The Partnership, Ellis (p. 565) relates a discussion John Whitehead led in the late 1970s on the danger of arrogance creeping into the culture. When he asked the audience for a way to prevent arrogance at Goldman, one young banker facetiously offered this advice: “Hire mediocre people.” There was a certain truth to the young banker’s statement. Goldman hired people who were accustomed to excelling, who had done so all their lives—in the classroom, on the playing field, in almost any endeavor they attempted. No one was used to failing.

41. Cohan, Money and Power, 225.

42. Ellis, The Partnership, 187.

43. Harper and Choudhury, “Sidney Weinberg.”

44. In Gatekeepers: The Professions and Corporate Governance (Oxford, UK: Oxford University Press, 2006, 2, 3), John Coffee studied the role played by gatekeepers in corporate governance in acting as “a reputational intermediary to assure investors as to the quality of the ‘signal’ sent by the corporate issuer.” Gatekeepers include securities analysts, auditors, attorneys, investment bankers, credit rating agencies, and so on. He describes how reputational capital “can be placed at risk by the gatekeeper’s vouching for its client’s assertions or projections.”

45. Ellis, The Partnership, ix.

46. Blitz, interview with John Whitehead, 2002.

47. Harper and Choudhury, “Sidney Weinberg.”

48. Blitz, interview with John Whitehead, 2002.

49. The long-term perspective associated with success in investment banking began to lose importance as the firm’s business mix shifted toward trading. Reputational capital also starts to lose significance as a concept in a trading environment. In trading, one side provides a price, and the other side thinks it is either too high or too low. If it is low enough, they do business together. It is price that matters, not relationships. But in banking, it takes years to develop a relationship to the point that the client is willing to share confidential information, and a reputation for integrity matters a great deal (paraphrased from Endlich, Goldman Sachs, 18).

50. Today, Goldman’s focus is on “the long-term prosperity of our clients, shareholders, employees, and the communities we serve.” Shareholders, employees, and communities now rank alongside clients, and the long-term focus is supported by compensation policies and promotion processes, and not by values. Also, much of the restricted stock issued to named executive officers (NEOs) cannot be transferred for a five-year period; when Goldman was a partnership, the restriction was in effect until the partner retired. See N. Lindskoog, Long-Term Greedy: The Triumph of Goldman Sachs (Appleton, WI: McCrossen, 1998), 20.

51. Joel M. Podolny, in “A Status-Based Model of Market Competition” (American Journal of Sociology 98, no. 4 [1993]: 851, 839), cites industry research supporting the idea that “a higher-status firm can retain an employee of a given level of quality at a more favorable compensation arrangement for the firm.” He points out that “if an employee does indeed value the status of her workplace, she should be willing to accept a lower wage or salary to work for a higher-status firm than for a lower-status one.”

52. McKinsey & Company is also successful at getting recruits and employees to buy into long-term greedy while earning less as partners earn more. Diane Vaughan, in Controlling Unlawful Organizational Behavior: Social Structure and Corporate Misconduct (Chicago: University of Chicago Press, 1985, 70), offers a particularly descriptive simile for this phenomenon: “The luster of future financial rewards binds members to the organization like a pair of golden handcuffs securing their continued affiliation with the firm.”

53. Harrison C. White’s work on identity and control is relevant in explaining what, from the outside, looks like self-sacrificing ignorance of a harsh reality: “Membership in a group presumes, as the norm, lack of questioning. Character is a suitable term for what membership is to reflect.” See Harrison C. White, Identity and Control: How Social Formations Emerge (Princeton, NJ: Princeton University Press, 2008), 45.

54. In The Accidental Investment Banker: Inside the Decade That Transformed Wall Street (New York: Random House, 2006, 88–89), Jonathan Knee writes, “Any moves, even in many cases a move from being just a vice president at Goldman to being a partner somewhere else—which might well include a multi-year contract providing for guaranteed compensation above what could conceivably be secured at Goldman—usually represented a step down in the social pecking order.… But from a brand perspective, Morgan Stanley was a reasonably close second.”

55. Groysberg and Snook, “Leadership Development at Goldman Sachs,” 6.

56. I may have been too junior and inexperienced to notice or see other things at that time, and, as I gained experience, I might have noticed more. Or maybe there was more. In retrospect, when thinking about the deal, I remember that we did not have to write a fairness opinion, which provides legal liability to Goldman for its advice. I now wonder whether this had anything to do with the approach. I discuss this issue in chapter 3.

57. In hindsight, this made me think about the influence clients have on culture and behavior. The vice president could have told the potential buyer that there was a minimum price, and, to get a deal done, it was the price that needed to be reached. I should have asked why we didn’t speak to the client about approaching the buyer in that way.

58. I worked closely with partners and senior partners, and it was a relatively flat organization, so I doubt that the behavior or culture was much different at other levels. My interviews with partners, clients, and competitors, along with news articles at the time, support that view.

Chapter 3

1. http://www.goldmansachs.com/investor-relations/corporate-governance/corporate-governance-documents/culture.pdf.

2. Interdependence exists within an organization when the actors are tied together in a meaningful manner. In Goldman’s case, there was financial interdependence among partners, who shared in one another’s profits and losses, trading risks, and reputation risks. Each partner depended on the others to make money and to work to benefit the group as a whole. Partners also trusted that the others would not put them at personal risk, would not place the entire group at risk by taking excessive financial risks, and would not engage in improper behavior that could have legal or other repercussions. Partners had an unlimited liability that would make them personally liable—down to their houses and their spouses’ cars.

3. According to interviews, before the early 1990s, the review process was less formal, because the firm was smaller and managers felt they could easily assess their employees’ performance.

4. “The key to successfully managing large numbers of highly competitive, ambitious people, it seems, is to feed their most unrealistic illusions about themselves. And the best way to keep them is to instill a subconscious belief that those illusions will be shattered when exposed to the light of the outside world. I remember particularly a leadership training course that I went to with a dozen other young vice presidents at Goldman at which we were all asked to put our heads down on the table. The facilitator asked those who believed that they were among the top one percent of their peer group to raise their hand. The bar was then lowered to the top three percent and then the top five percent. When we sat up, I discovered that I was the only member of the group who had not raised his hand. It takes a special skill to keep more than 90% of the bankers believing they are in the top five percent of their class.” (See Jonathan Knee, The Accidental Investment Banker: Inside the Decade That Transformed Wall Street [New York: Random House, 2006], 58).

5. “The culture at Goldman emphasizes a unique ‘loose-tight’ management style, where the organization is rigidly controlled at the top concerning operational procedures and overhead, yet each department is allowed autonomy concerning entrepreneurship and innovation.” See R. D. Freedman and J. Vohr, “Goldman Sachs/Lehman Brothers,” Case Studies in Finance and Economics, C49 (New York: Leonard N. Stern School of Business, 1991, rev. 1999).

6. Laurence Zuckerman, “The Good life After Goldman, “New York Times, October 16, 1994, www.nytimes.com/1994/10/16/business/the-good-life-after-goldman.html?pagewanted=all&src=pm.

7. P. Weinberg, “Wall Street Needs More Skin in the Game,” Wall Street Journal, September 30, 2009, http://online.wsj.com/article/SB10001424052748704471504574443591328265858.html.

8. The partnership committee oversees personnel development and career management issues. It focuses on such matters as recruiting, training, performance evaluation, diversity, mobility, and succession planning. Together with the management committee, it is integral in selecting and compensating partners. The partnership committee was established in 1994; before that, the management committee generally performed these functions. With the establishment of the title of managing directors, the partnership committee also included elections of nonpartner managing directors.

9. Goldman still had a partner election process after the IPO, and the partner election process continues in much the same manner as it did when the firm was a private partnership.

10. Freedman and Vohr (“Goldman Sachs/Lehman Brothers”) note that “since it is their own money on the line, partners are very disciplined and profit-oriented. Nonpartner employees share this mentality because they aspire to reach partnership ranks.” Truell (1996) comments on “the financial attractiveness of senior status in Goldman, Sachs. Partnership usually brings compensation of millions of dollars a year, and has been the brass ring the firm used to draw in talent and keep its ambitious employees working long hours.” See also P. Truell, “Goldman Sachs Partners Decide Not to Sell, After All,” New York Times, January 22, 1996, http://www.nytimes.com/1996/01/22/business/goldman-sachs-partners-decide-not-to-sell-after-all.html.

11. Robert Steven Kaplan, What to Ask the Person in the Mirror: Critical Questions for Becoming a More Effective Leader and Reaching Your Potential (Boston: Harvard Business Review Press, 2011), 82.

12. P. Maher and R. Cooper, “Image and Reality at Goldman Sachs,” Investment Dealers’ Digest, October 4, 1993, 20.

13. In hindsight, from a sociologist’s perspective, it is clear that too many partner additions or departures would have an impact on Goldman’s interdependent social network of trust, but I hesitate to suggest that the partners themselves were fully aware of or concerned about all the potential consequences or rationales at the time.

14. For a discussion of closure, see R. Burt, Brokerage and Closure: An Introduction to Social Capital (Oxford, UK: Oxford University Press, 2007).

15. Ibid.

16. Burt’s research shows that social networks create competitive advantages in and for organizations. The basic idea is that better-connected people have more social capital; as a result, they gain certain advantages. Burt’s social structure theory suggests that, when there is a gap between two individuals with complementary resources or information and the two are connected through a third individual, the gap (or hole) is filled, creating an important advantage for the third individual as well as for the organization. A company’s competitive advantage is a matter of access to the structural holes in the markets: obtaining information that allows it to make deals and connecting buyers and sellers, borrowers and lenders. The partnership provides that access by tying partners together financially, socially, and culturally. Trust is also important, and a partnership structure creates that foundation as a result of the partner screening and election process and the intertwining of partners’ financial interests. Goldman’s partnership structure provided the opportunity to connect diverse parts of an enterprise. When Goldman connected private banking with investment banking or a portfolio manager in commodities with a trader in equity derivatives, the firm played the role of the gaudius tertius, “the third who benefits.” In Brokerage and Closure, Burt suggests that the gaudius tertius is typically an individual, but the concept can be expanded to apply to organizations as well—especially in the case of a partnership wherein the partners are financially interdependent and benefit together. The “third” party may not control the relationship but still benefits by controlling the information flow between the two parties it brings together.

17. “I’ve always been a team player and, by now, I’d become a fierce partisan of Goldman Sachs. I liked being a part of a storied institution that held so much promise.” See John C. Whitehead, A Life in Leadership: From D-Day to Ground Zero (Princeton, NJ: Princeton University Press, 2005), 88.

18. C. D. Ellis, The Partnership—The Making of Goldman Sachs (New York: Penguin, 2008), 189.

19. A social network is a social structure made up of a set of actors (such as individuals or organizations) and the ties between them (such as relationships, connections, or interactions). Trust developed from the familiarity that Goldman partners had with each other by virtue of having worked together for a long time and from having undergone the same partnership election process. Trust is built up as a part of socialization and shared experiences.

20. See K. Kuwabara, “Cohesion, Cooperation, and the Value of Doing Things Together: How Economic Exchange Creates Relational Bonds” (American Sociological Review 76 [2011]) for an extended discussion of this type of network. He shows that integrative and two-way exchange lead to cooperation, and joint action produces or reinforces cohesion. In Foundations of Social Theory (Cambridge, MA: Belknap Press of Harvard University Press, 2010) J. S. Coleman discusses the cliquish nature and density of partnership networks. R. Reagans, E. Zuckerman, and B. McEvily, in “How to Make the Team: Social Networks vs. Demography as Criteria for Designing Effective Teams” (Administrative Science Quarterly 49 [2004]: 101–133), look at the power of networks and cohesion.

21. W. D. Cohan, Money and Power: How Goldman Sachs Came to Rule the World (New York: Doubleday, 2010), 474.

22. M. Graham, “Top 10 Commandments of Business Growth,” Overdrive: The Official Blog of the Entrepreneurs’ Organization, January 31, 2011, http://blog.eonetwork.org/2011/01/top-10-commandments-of-business-growth/.

23. A partner explained that cross-selling is important to Goldman’s profitability and return on equity especially relative to those of its peers. There is a fixed infrastructure cost of being in business, so if banking/M&A can notify and introduce a cross-border deal to the foreign exchange desk as part of a full solution, then the customer acquisition costs to obtain the deal would be zero and the profits would flow straight to the bottom line. In addition, the company could benefit from favorable foreign exchange pricing by avoiding a public, competitive auction, because the information had to be kept confidential.

24. See Joel M. Podolny, “A Status-Based Model of Market Competition” (American Journal of Sociology 98, no. 4 [1993]: 839, 851), for a discussion of a status-based model of market competition.

25. Although it is often overlooked, Goldman made diversity of people, including women and minorities, a priority throughout my time at the firm. However, like most Wall Street firms, Goldman struggled to attract, develop, and retain women and minorities, and they tended to represent a smaller percentage of the senior ranks. Goldman, as in many things, continued to improve throughout my tenure, and many senior partners and others put a lot of emphasis on diversity. Although Goldman has many programs for recruiting, career development, and advancement to promote diversity, like most Wall Street firms it has been sued several times for discrimination. According to Goldman, in 2010 women constituted about 29 percent of its vice presidents, 17 percent of its managing directors, 14 percent of its partners, and about 13 percent of members of its management committee. These percentages may be among the highest on Wall Street. However, diversity of people was not nearly as strong as diversity of ideas. A little-noticed provision in the Dodd–Frank legislation tries to address those low percentages. Section 342 mandates gender and racial hiring quotas for the financial services industry.

26. “The thrust of the Goldman culture has been its indomitable team spirit. Partners and staff ‘gang tackled’ problems with a near mania for interdepartmental and interpersonal communication and coordination.” See Freedman and Vohr, “Goldman Sachs/Lehman Brothers.”

27. Burt, Brokerage and Closure: An Introduction to Social Capital.

28. In Burt’s work at Raytheon, his mission was to integrate several acquisitions. Managers were set up with discussion partners in other groups and should have been sharing ideas across business units. Burt found, however, that the people they cited for discussion of ideas were overwhelmingly colleagues in their existing informal discussion network. The ideas ended up never going anywhere. Burt writes that results would have been different had the managers reached beyond their typical contacts, particularly to people having enough power to be allies but not actual supervisors. Border crossing is essential to overcoming what Burt calls “structural holes.” See R. S. Burt, Structural Holes: The Social Structure of Competition (Cambridge, MA: Harvard University Press, 1995).

29. “Open dialogue was another principle. Part of this was posting: keeping everyone informed. Part was the deliberate flat organization structure. During the seventies, the firm initiated monthly meetings of partners. Any partner whose area was doing better or worse than anticipated would be expected to stand and explain the difference.” (See Ellis, The Partnership, 190).

30. This was the case except for certain situations that arose in 1986, 1994, and 2000, which I touch upon later. Some people think Lehman Brothers failed because it had become too insular. It had a unique culture and cohesion, but it reached a tipping point where it offered limited ways to challenge the status quo. A systematic influx of new partners and elimination of older partners helped keep Goldman a private firm longer than most. New partners generally always wanted to be near retirement at the point when they had the maximum amount of ownership when selling their shares, so they wanted to delay such discussions. They wanted to invest in the business. In contrast, the more-senior partners had reached their highest ownership percentage and were likely incentivized to maximize the value and liquidity of their shares. Swedberg notes that in the case of Lehman (see R. Swedberg, “The Structure of Confidence and the Collapse of Lehman Brothers,” in Markets on Trial: The Economic Sociology of the U.S. Financial Crisis, ed. M. Lounsbury and P. M. Hirsch [Bingley, UK: Emerald, 2010], 81), CEO Richard Fuld ran Lehman in an authoritarian manner, “setting his own distinct mark on the aggressive and competitive type of corporate culture that seems to be characteristic of modern investment banks.” Fuld’s leadership and personal styles were both in sharp contrast to what was typical at Goldman.

31. See Cohan, Money and Power, (388–399) for an example of productive dissonance among management committee members.

32. Kaplan, What to Ask the Person in the Mirror, 157. This syndrome was on display during the recent economic crisis. A lack of diversity (in the broadest sense) at the top of a number of companies contributed to monolithic thinking, insulation, and, ultimately, severe damage to (or even failure of) organizations.

33. Bill Cohan, “Meet John F. W. Rogers, Goldman’s Quiet Power Player,” Business week, September 1, 2011, www.businessweek.com/magazine/meet-john-f-w-rogers-goldmans-quiet-power-player-09012011.html.

34. Ibid.

35. A. Blitz, interview with John Whitehead, 2002, http://www.hbs.edu/entrepreneurs/pdf/johnwhitehead.pdf.

36. B. Groysberg and S. Snook, “Leadership Development at Goldman Sachs,” Case 9-406-002 (Boston: Harvard Business School, 2007), 6.

37. Ibid.

38. Ibid.

39. David Stark, The Sense of Dissonance: Accounts of Worth in Economic Life (Princeton: Princeton University Press, 2009).

40. Stark argues that different criteria of worth are valuable in different domains. This different value may be an interesting nuance between traders and bankers. Clients depend on investment bankers to give advice. Clients may value longer-term investment and are willing to wait until trust is built. They also may value people smarter than they are, or who have better technical expertise or better education. They look for a banker who has access and a competitive advantage that they can leverage. This is what is sold. In trading, on the other hand, clients are looking for liquidity and price. They fear that the counterparty is smarter than they are or knows more than they do or has a different competitive advantage. Clients don’t care whether the trading counterparty went to an elite business school or has a pedigree. If clients believe a firm’s insights are being shared with them and are advantageous, they value them, but they wonder whether the counterparty is on the other side of the deal, talking up its own book.

41. Beunza and Stark, in Stark’s Sense of Dissonance, develop this theory in the context of traders’ use of models “to translate stock prices into estimates of what their rivals think.” I discuss this point in greater detail in chapter 6 in the context of performativity.

42. S. McGee, Chasing Goldman Sachs: How the Masters of the Universe Melted Wall Street Down—and Why They’ll Take Us to the Brink Again (New York: Crown, 2010).

43. Stark, The Sense of Dissonance, 15.

44. Stark, The Sense of Dissonance, 21.

45. “Interview with John Whitehead, MBA 1947,” www.hbs.edu/entrepreneurs/pdf/johnwhitehead.pdf.

46. Once Goldman became a public company, the partners had liquidity. They no longer had to wait until retirement to pull out their capital. At any time they could sell their Goldman shares—those shares that were not restricted or in a restricted time period—and they were also compensated as employees. Goldman now has five-year restrictions on selected stock grants to certain executives, a situation that clearly is much better for partners than having their equity tied up until they retire. I discuss this later.

47. Capital is usually thought of in monetary terms alone, but in the Goldman partnership, the personal capital contributed by the partners included something intangible but of great value: reputation. Reputation was so important that it was mentioned in Goldman’s second business principle:

Our assets are our people, capital and reputation. If any of these is ever diminished, the last is the most difficult to restore. We are dedicated to complying fully with the letter and spirit of the laws, rules and ethical principles that govern us. Our continued success depends upon unswerving adherence to this standard.

Partners not only were paid from the same pool of profits generated by the overall firm but also depended on each other for managing both reputational and capital risk.

48. It is, however, noted in the current description.

49. Peter Weinberg, “Wall Street Needs More Skin in the Game,” Wall Street Journal, September 30, 2009, http://online.wsj.com/article/SB10001424052748704471504574443591328265858.html.

Chapter 4

1. L. Endlich, Goldman Sachs—The Culture of Success (New York: Simon & Schuster, 2000), 124.

2. Pub L. 73-66, 48 Stat. 162 was enacted on June 16, 1933. The law established the Federal Deposit Insurance Corporation (FDIC) and introduced banking reforms, some of which were designed to control speculation. The term “Glass–Steagall Act,” however, is most often used to refer to four provisions that limited commercial bank securities activities as well as affiliations between commercial banks and securities firms. Provisions that prohibit a bank holding company from owning other financial companies were repealed on November 12, 1999, by the Gramm–Leach–Bliley Act (GLBA). Many commentators have stated that the repeal of the affiliation restrictions was an important cause of the 2007–2008 financial crisis by allowing banks to become “too big to fail.”

3. In the 1990s, a number of investment banks claimed that some commercial banks had coerced customers into hiring their Section 20 (securities) affiliates to underwrite securities in order to receive loans from the bank, in violation of the “anti-tying” provisions of the Bank Holding Company Act. Investment banks continued to make claims of illegal tying after the GLBA became law. Many Wall Street experts expected that investment banks would change their legal structures to become bank holding companies so that they could compete with securities firms affiliated with commercial banks, but no major investment bank took that route until 2008, when they did so to gain a measure of federal protection during the credit crisis.

4. Morgan Stanley was formed by J.P. Morgan partners Henry S. Morgan (grandson of J. P. Morgan), Harold Stanley, and others, on September 16, 1935, in response to provisions of the Glass–Steagall Act that required the splitting of commercial and investment banking businesses.

5. The Securities and Exchange Commission (SEC) was established by Franklin D. Roosevelt in 1934 to address issues arising from the Great Depression. The SEC is a federal agency with primary responsibility for enforcing the federal securities laws and regulating the US securities industry, including the stock and options exchanges and other electronic securities markets. It also licenses and regulates the companies whose securities are traded on US exchanges as well as the brokers and dealers who conduct the trading.

6. Lazard went public in 2005. Although it is a very prestigious firm, it was not a “capital-intensive,” full-service investment bank. Rather, it was a boutique advisory firm with an asset management business.

7. See Alan D. Morrison and William J. Wilhelm, Jr., Investment Banking: Institutions, Politics, and Law (Oxford, New York: Oxford University Press, 2007), and Alan D. Morrison and William J. Wilhelm, “Partnership Firms, Reputation, and Human Capital,” American Economic Review 94, no. 5 (2004): 1682–1692.

8. C. D. Ellis, The Partnership—The Making of Goldman Sachs (New York: Penguin, 2008), 394–395.

9. R. D. Freedman and J. Vohr, “Goldman Sachs/Lehman Brothers,” Case Studies in Finance and Economics, C49 (New York: Leonard N. Stern School of Business, 1991, rev. 1999), 13.

10. The specific legal risks partners were exposed to were spelled out in Goldman’s IPO prospectus and include: Potential liability under securities or other laws for materially false or misleading statements made in connection with securities and other transactions; potential liability for the “fairness opinions” and other advice they provide to participants in corporate transactions and disputes over the terms and conditions of complex trading arrangements; the possibility that counterparties in complex or risky trading transactions will claim that Goldman improperly failed to tell them the risks or that they were not authorized or permitted to enter into these transactions with the firm and that their obligations to Goldman are not enforceable; exposure to claims against the firm for recommending investments that are not consistent with a client’s investment objectives or engaging in unauthorized or excessive trading; claims arising from disputes with employees for alleged discrimination or harassment, among other things. See www.goldmansachs.com/investor-relations/financials/archived/other-information/ipo/prospectus-gs-pdf-file.pdf.

11. H. Sender, “Too Big for Their Own Good,” Institutional Investor, February 1987, 63.

12. Ibid.

13. A few partners told me they asked or considered asking John L. Weinberg to come out of retirement as chairman or in another senior role.

14. W. D. Cohan, “The Rage over Goldman Sachs,” Time, August 31, 2009, http//www.time.com.

15. Ibid.

16. Ellis, The Partnership, 539.

17. W. D. Cohan, Money and Power: How Goldman Sachs Came to Rule the World (New York: Doubleday, 2010).

18. Cohan, “The Rage over Goldman Sachs.”

19. It was alleged that Maxwell stole money from Maxwell company pension plans by hiring Goldman to broker a trade between various Maxwell-controlled entities. See Endlich (Goldman Sachs, 137–160) for a detailed account of the relationship between Goldman and Robert Maxwell.

20. Endlich (Goldman Sachs, 197) notes, however, that management had “over-reserved in anticipation of such a financial charge” and was eager to put the case behind it.

21. According to A. Raghavan (“Goldman Sticks to Plan on Allocating Settlement Costs,” Wall Street Journal, April 13, 1995), “eighty-four of the more than 164 partners who will wind up footing the settlement are now ‘limited’ partners, or retired from active duty at the firm.” The firm’s management committee allocated “80 percent of the settlement cost to those who were general partners in 1991, 15 percent to those of 1990, and 5 percent to those of 1989.” Endlich (Goldman Sachs, 197) describes the “stunned” reaction of the limited partners, many of whom “were told simply to take out their checkbooks.”

22. Freedman and Vohr, “Goldman Sachs/Lehman Brothers.”

23. “New Round of Layoffs at Goldman, Sachs,” New York Times, January 25, 1995, http://www.nytimes.com/1995/01/25/business/new-round-of-job-cuts-at-goldman-sachs.html.

24. Among Corzine and Paulson’s early official acts was to announce layoffs, and they were now doing it again, but “barely a month before bankers would be entitled to their annual bonuses (which represented their annual compensation). They apologized for the timing and manner of the layoffs but promised they would never do it again. When they then [announced] another round in January 1995, many at the firm felt betrayed.” See J. A. Knee, The Accidental Investment Banker: Inside the Decade That Transformed Wall Street (New York: Random House, 2006), xvii, 48.

25. Endlich, Goldman Sachs, 256. These layoffs can have an effect on both the organization and the external environment. University of Minnesota anthropology professor Karen Ho, in her book Liquidated: An Ethnography of Wall Street (Durham, NC: Duke University Press, 2009), investigates the experiences and ideologies of investment bankers. She describes how a highly unstable market system (e.g. job insecurity, constant downsizing, continual restructuring) is understood and justified through the experiences and practices of restructuring corporations. Bankers are recruited from “elite universities” and are socialized into a short-term world of high reward. The workplace culture and network of privilege create the perception that job insecurity results in better performance. The banker’s mantra is improving “shareholder value,” but the assumptions and practices often produce crises. She finds that in many ways the investment bankers and their approaches become an example of how their clients should behave. She believes Wall Street shapes not only the stock market but also how both companies and employees value each other. Wall Street’s values are intertwined in many people’s daily lives.

26. Carol J. Loomis, “The Goldman Standard Slips,” Fortune, November 28, 1994, http://money.cnn.com/magazines/fortune/fortune_archive/1994/11/28/80028/.

27. W. D. Cohan, Money and Power: How Goldman Sachs Came to Rule the World (New York: Doubleday, 2011), 359.

28. Ibid.

29. http://www.vanityfair.com/online/daily/2011/03/william-d-cohan-on-goldman-sachs-how-secret-merger-talks-with-mellon-bank-led-to-jon-corzines-demise.

30. B. Burrough, W. D. Cohan, and B. McLean, “Jon Corzine’s Riskiest Business,” Vanity Fair, February 2012, http://www.vanityfair.com/business/2012/02/jon-corzine-201202.

31. P. Truell, “Partners Vote for Changes at Goldman,” New York Times, May 21, 1996, http://www.nytimes.com/1996/05/21/business/partners-vote-for-changes-at-goldman.html.

32. http://articles.latimes.com/1997/oct/22/business/fi-45322.

33. There is some reason to believe, however, that this change was mainly psychological; most active partners retained upward of 90 percent of their capital with Goldman while working at the firm. See Endlich, Goldman Sachs (p. 237), and P. Truell, “Goldman Sachs Partners Decide Not to Sell, After All,” New York Times, January 22, 1996, http://www.nytimes.com/1996/01/22/business/goldman-sachs-partners-decide-not-to-sell-after-all.html.

34. P. Truell, “Goldman Sachs Partners Decide Not to Sell, After All.”

35. By the time Goldman became an LLC, the reporting matrices had started to add division executive committees and then geographic executive committees. Even before the 1990s, organizational changes were occurring. Capital commitments by the firm typically went to the management committee, but as the number of decisions increased, a commitments committee was established to make them.

36. In January 1999, the executive committee was dismantled and a fifteen-member management committee was restored as the firm’s senior leadership group.

37. Endlich, Goldman Sachs, 252.

38. Freedman and Vohr, “Goldman Sachs/Lehman Brothers,” 13.

39. Cohan, Money and Power, 392.

40. Here is a clear example of the impact of a change in the organization’s legal structure. According to interviews, when Goldman was a private partnership, such a vote would have been held on a one person/one vote basis; with Goldman as an LLC, however, a majority vote by the executive committee determined the future status of the firm.

41. In a letter to the firm, Whitehead wrote, “I don’t find anyone who denies that the decision of many of the partners, particularly the younger men, was based more on the dazzling amounts to be deposited in their capital accounts than on what they felt would be good for the future of Goldman Sachs.” See J. Cassidy, “The Firm,” The New Yorker, March 8, 1999, 35.

42. A. R. Sorkin, Too Big to Fail: The Inside Story of How Wall Street and Washington Fought to Save the Financial System—and Themselves (New York: Viking, 2009).

43. The Gramm–Leach–Bliley Act is also known as the Financial Services Modernization Act of 1999, or the Citigroup Relief Act. It repealed part of the Glass–Steagall Act of 1933, removing barriers in the market between an investment bank, a commercial bank, and an insurance company. “The government’s decision … to allow the large commercial banks to aggressively pursue investment banking business put further pressure on the old way of doing things. The Depression-era legislation known as Glass–Steagall had long insulated the rarified investment banking partnerships from assault by these better-capitalized institutions. Its ultimate repeals in 1999 paved the way not only for radically intensified competition but a wave of mergers that created enormous financial supermarkets with an entirely different ethos.” (See Knee, The Accidental Investment Banker, xi.)

44. “Even with one arm tied behind their backs, these institutions [commercial banks] had been investing heavily for at least a decade in expanding their investment banking activities in anticipation of the rule’s ultimate repeal. They hired high-profile investment bankers, pressed various loopholes in the existing rules, exploited their balance sheets.” (See Knee, The Accidental Investment Banker, 24.)

45. Endlich, Goldman Sachs, 124.

46. “New organizations such as multibillion-dollar hedge funds and LBO [leveraged buyout] firms have begun to step in and play some of the roles once dominated by investment banks.” (See Knee, The Accidental Investment Banker, xvi.)

47. S. Butcher, “Deconstructing Goldman’s Q2 Conference Call: What Was Said, What It Means, What Comes Next,” Reuters, July 18, 2012, http://news.reuters-gulf.efinancialcareers.com/newsandviews_item/wpNewsItemId-107560.

48. http://faculty.chicagobooth.edu/steven.kaplan/research/km.pdf and http://www.businessinsider.com/shortest-tenure-ceo-2011-5.

49. http://www.bloomberg.com/news/2013-04-04/bond-traders-club-loses-cachet-in-most-important-market.html.

50. John Whitehead pointed this out in our discussion. In The Challenger Launch Decision: Risky Technology, Culture, and Deviance at NASA (Chicago: University of Chicago Press, 1966), sociologist Diane Vaughan writes that all organizations share certain basic aspects of structure (hierarchy, division of labor, goals, normative standards, patterns of coming and going) and certain common processes (socialization, conflict, competition, cooperation, power and inequality, and culture) and points to the “complexity of the internal processes and structure that accompany increased size” (see page 68).

51. C. Perrow, Normal Accidents: Living with High-Risk Technologies (New York: Basic Books, 1984), 308.

Chapter 5

1. Goldman Sachs Group, “Letter to Shareholders,” Annual Report 1999, http://www.goldmansachs.com/investor-relations/financials/archived/annual-reports/attachments/1999-annual-report.pdf.

2. W. D. Cohan, Money and Power: How Goldman Sachs Came to Rule the World (New York: Doubleday, 2011), 234.

3. B. McLean and A. Serwer, “Goldman Sachs: After the Fall,” Fortune, October 23, 2011, http://features.blogs.fortune.cnn.com/2011/10/23/goldman-sachs-after-the-fall-fortune-1998/.

4. Bankers Trust, Barclays, Chase, Credit Suisse First Boston, Deutsche Bank, Goldman Sachs, Merrill Lynch, J.P. Morgan, Morgan Stanley, Salomon Smith Barney, and UBS each put up $300 million.

5. C. Chandler, “Goldman’s Golden Chance: An IPO or Merger Could Reap Millions for Partners at the Wall Street Titan—But Would It Destroy What Makes Goldman Sachs Goldman Sachs?” Washington Post, June 7, 1998, H01.

6. McLean and Serwer, “Goldman Sachs: After the Fall.”

7. It was rumored that Corzine ultimately agreed to pay out the limited partners at two times book value. (See J. A. Knee, The Accidental Investment Banker: Inside the Decade That Transformed Wall Street [New York: Random House, 2006], 103.) Many limited partners believed that their historical contributions to Goldman were being seriously underappreciated and undervalued. (See J. Kahn, “Goldman, Sachs Tries to Soothe Limited Partners,” New York Times, July 30, 1998, D1.)

8. There were indications, some of them subtle, that a culture shift was already under way. In the years leading up to the IPO, adherence to Goldman’s principles was less obvious. According to interviews, it was rare for the principles to be included in the front of presentations to clients as they once were, and they were certainly not as regularly hanging on anyone’s office wall. The principles were still taught, but it would be difficult to argue that they held the same prominence as they once had.

9. L. Endlich, Goldman Sachs—The Culture of Success (New York: Simon & Schuster, 2000).

10. Ibid.

11. Until 1996, according to interviews, partners who retired and became limited partners took out half their capital at retirement but the rest remained with the firm for at least four more years. After 1996, when the firm became an LLC, that period was increased to six years.

12. McLean and Serwer, “Goldman Sachs: After the Fall.”

13. T. Metz, “The Pacifist: Goldman Sachs Avoids Bitter Takeover Fights but Leads in Mergers,” Wall Street Journal, December 3, 1982, 1.

14. Goldman also refrained from doing business with companies involved in the gambling industry.

15. Cohan, Money and Power, 225.

16. I. Ross, “How Goldman Sachs Grew and Grew,” Fortune, July 9, 1984, 158.

17. C. D. Ellis, The Partnership—The Making of Goldman Sachs (New York: Penguin, 2008), 645.

18. According to Dealogic, Goldman advised Krupp in a 1997 hostile takeover of Thyssen in Germany for a fee of nearly $10 million. Also, internationally Goldman advised Banque Nationale de Paris (BNP) in its hostile acquisition of a majority interest in Compagnie Financiere de Paribas (Paribas) in 1997. It was a large and high-profile transaction. It also gained attention because Goldman’s investment bankers had done work for Paribas. The same issue came up when Goldman advised Vodafone in its acquisition of Mannesmann in one of the largest M&A deals in history. Goldman has also represented many leading foreign companies in hostile deals, including Repsol, Air Canada, Royal Bank of Scotland, Foster’s Group, and Mittal Steel (Lakshmi Mittal is on the board of Goldman). It advised Sara Lee (John Brian, the former Sara Lee CEO, is on the board of Goldman) in its hostile M&A acquisition of Courtaulds Textiles in the United Kingdom in 2000. Also in 2000, it advised Unilever in its hostile acquisition of Bestfoods. In 2005, it represented Novartis in its hostile purchase of Chiron Corp. In 2011, Goldman advised Terex Corp in its hostile acquisition of a majority interest of Demag Cranes.

19. Goldman represented Westmont Hospitality Group in buying its remaining interest in UniHost, a Canadian hotel operator.

20. B. McLean, “The Bank Job,” Vanity Fair, March 23, 2012, http://www.vanityfair.com/business/features/2010/01/goldman-sachs-200101.

21. Endlich, Goldman Sachs, 45.

22. Keep in mind that this is when John L. Weinberg was still at the firm.

23. Ezra Zuckerman’s work (1999, 2000, 2004) regarding analysts’ impact on the behavior of Wall Street firms also has relevance here.

24. “Goldman Sachs Lex Column [MG1],” Financial Times, April 26, 1999, 22.

25. P. S. Cohan, Value Leadership: The 7 Principles That Drive Corporate Value in Any Economy (San Francisco, CA: Jossey-Bass, 2003), 196.

26. M. Taibbi, “The Great American Bubble Machine,” Rolling Stone, April 5, 2010, http://www.rollingstone.com/politics/news/the-great-american-bubble-machine-20100405.

27. http://www.dechert.com/files/Publication/355765b1-8255-4d1c-8792-f34bf2843970/Presentation/PublicationAttachment/259fc2a6-c9fe-4448-9787-f699d9a8a5c5/FSSL_Alert_6-05.pdf.

28. Brendan Pierson, “Dismissal of Action Against Goldman Over eToys IPO Stands,” New York Law Journal, December 9, 2011, http://www.newyorklawjournal.com/PubArticleNY.jsp?id=1202534952140&slreturn=1.

29. The full list of IBS business development commandments is as follows: “1) Don’t waste your time going after business you don’t really want; 2) The boss usually decides—not the assistant treasurer. Do you know the boss?; 3) It is just as easy to get a first-rate piece of business as a second-rate one; 4) You never learn anything when you’re talking; 5) The client’s objective is more important than yours; 6) The respect of one person is worth more than an acquaintance with 100 people; 7) When there’s business to be found, go out and get it!; 8) Important people like to deal with other important people. Are you one?; 9) There’s nothing worse than an unhappy client; 10) If you get the business, it’s up to you to see that it’s well-handled.”

30. J. A. Knee, The Accidental Investment Banker: Inside the Decade That Transformed Wall Street (New York: Random House, 2006), 49.

31. The Super League is also mentioned in chapter 7.

32. Knee reports telling Thornton of his (Knee’s) plan to leave the firm and joking, when asked by Thornton to stay on to help with the global reorganization of CME, that Thornton could hire him back when Thornton took over the firm. When Thornton reminded Knee of the “cultural taboo” against rehiring people who left Goldman, Knee retorted that if Thornton were in charge, “this would probably not be the most important cultural taboo that would have already been swept aside.” (See Knee, The Accidental Investment Banker, 49, 93.)

33. B. Groysberg and S. Snook, “Leadership Development at Goldman Sachs,” Case 9-406-002 (Boston: Harvard Business School, 2007), 4.

34. Ibid.

35. The subject of conflicts is discussed in greater detail in chapter 7.

36. Garza Baldwin and Seth Huffstetler, “Staple Financing: Proceed with Caution,” M&A Update, July 3, 2007, www.wcsr.com/resources/pdfs/M%26AUpdate_3July2007.pdf.

37. R. Hall, “Stapled Finance Packages under Scrutiny,” http://www.iflr1000.com/LegislationGuide/146/Stapled-finance-packages-under-scrutiny.html.

38. Baldwin and Huffstetler, “Staple Financing.”

39. B. Klempner, D. Mathur, L. Molefe, J. Reynolds, and T. Uccellini, “Case Study: Selling Neiman Marcus,” Harvard Negotiation Law Review, Winter 2007.

40. A business standards committee report in 2011.

41. “When combined with the toxic ecology of bonus systems that emphasize short-term revenues, banks evolved a transactional business model. Deals and profits dominated at the expense of client interests and longer term relationships, a practice known as ‘scorched earth banking.’” (See S. Das, “Goldman Sachs’ Flawed Model,” The Independent, March 17, 2012, http://www.independent.co.uk/news/business/comment/satyajit-das-goldman-sachs-flawed-model-7575865.html.)

42. A. Garfinkle, “A Conversation with Robert S. Kaplan,” The American Interest, March 15, 2012, http://www.the-american-interest.com/article.cfm?piece=1223.

43. Ibid.

44. S. Gandel, “Goldman Says It Can Profit from Europe’s Bust,” Fortune, May 31, 2012, http://finance.fortune.cnn.com/tag/gary-cohn/.

45. M. Abelson and C. Harper, “Succeeding Blankfein at Goldman May Be Hurdle Too High for Cohn,” Bloomberg, July 24, 2011, http://www.bloomberg.com/news/2011-07-24/succeeding-blankfein-at-goldman-may-prove-hurdle-too-high-for-no-2-cohn.html.

46. This is after Water Street, which is not mentioned on Goldman’s website. The funds listed are only merchant banking funds.

47. Ellis, The Partnership, 537.

48. Knee, The Accidental Investment Banker, 24–25.

49. One manager said, “Things have to be done in a very high-end way. People at Goldman Sachs are pretty intolerant of weak execution and weak quality, even of things most people might think of as trivial.” (See Groysberg and Snook, “Leadership Development at Goldman Sachs.”)

Chapter 6

1. http://money.cnn.com/2000/08/01/companies/goldman/.

2. http://www.economist.com/node/28791.

3. I compared the daily change in Goldman’s stock price to the daily change in a couple of US financial indexes and looked to see whether the daily change increased over the month (i.e., if Goldman had manipulated the price in the period close to the fiscal year end). I tried a couple of different basic specifications to see if there was any non-linearity in this. Every way I looked, though, there was no increase in returns on Goldman’s price versus the indexes as we got closer to the end of the fiscal year. So it looks like Goldman wasn’t doing this.

4. http://www.efinancialnews.com/story/2012-11-12/goldman-sachs-protecting-the-partnership.

5. Compensation is described in the proxy statements filed by Goldman.

6. http://dealbook.nytimes.com/2011/01/18/study-points-to-windfall-for-goldman-partners/.

7. http://dealbook.nytimes.com/2011/02/05/stock-hedging-lets-bankers-skirt-efforts-to-overhaul-pay/.

8. Leverage is the ratio of debt to equity. At 33-to-1 leverage, a 3 percent drop in the value of an investment bank’s assets can wipe out its equity.

9. A. Garfinkle, “A Conversation with Robert S. Kaplan,” The American Interest, March 15, 2012, http://www.the-american-interest.com/article.cfm?piece=1223.

10. L. Endlich, Goldman Sachs—The Culture of Success (New York: Simon & Schuster, 2000).

11. http://dealbook.nytimes.com/2011/05/16/the-goldman-sachs-diaspora/.

12. According to interviews and publicly filed documents, however, around the time of the IPO, John L. Weinberg was put on the board and granted tens of millions of dollars in stock and a consulting agreement that paid millions of dollars.

13. “People have come to Goldman Sachs despite the promise of very long hours and possibly less compensation, because becoming a partner at Goldman Sachs was the brass ring. It was the highest accolade on Wall Street, and now that no longer exists.” (See P. Viles and J. Cafferty, “Goldman Sachs’ IPO,” CNNfn, May 4, 1999.)

14. The sources are annual reports and the Wall Street Comps Survey. The numbers for J.P. Morgan relate only to its investment bank, without commercial banking. Morgan Stanley was excluded because it includes a large brokerage business.

15. http://dealbook.nytimes.com/2011/05/16/the-goldman-sachs-diaspora/.

16. See Donald MacKenzie, An Engine, Not a Camera: How Financial Models Shape Markets (Cambridge, MA: MIT Press, 2006), and his similar works.

17. B. McLean and A. Serwer, “Goldman Sachs: After the Fall,” Fortune, October 23, 2011, http://features.blogs.fortune.cnn.com/2011/10/23/goldman-sachs-after-the-fall-fortune-1998/.

18. C. D. Ellis, The Partnership—The Making of Goldman Sachs (New York: Penguin, 2008), xvi. Goldman’s trading position marks were shown to be more accurate than those of the other Wall Street firms. Its longstanding “mark-to-market” discipline and cultural element of dissonance may have meant it was more accurate and generated more volatility in positions.

19. McLean and Serwer, “Goldman Sachs: After the Fall.”

20. The IPO prospectus can be found at http://www.goldmansachs.com/investor-relations/financials/archived/other-information/ipo-prospectus-gs-pdf-file.pdf.

Chapter 7

1. Matthew Gill explores the work of accountants and the accounting profession to find the causes of problems of trust behind scandals and the headlines. His focus is largely on the way that accountants construct knowledge, and he emphasizes the need to understand the “underlying norms according to which accountants approach the rules, rather than the rules themselves.” The uncertainty resulting from the subjectivity inherent in this situation can easily lead to moral ambiguity. See M. Gill, Accountants’ Truth: Knowledge and Ethics in the Financial World (Oxford, UK: Oxford University Press, 2009), 8.

2. They pointed to the data supporting this; it is rare for an employee of Goldman to be criminally convicted. However, that can be said for many firms and may be more of a statement on the law or enforcement, as pointed out by Senator Carl Levin (D-Mich.) when the Department of Justice dropped its criminal investigation against Goldman in 2012: “Whether the decision by the Department of Justice is the product of weak laws or weak enforcement, Goldman Sachs’ actions were deceptive and immoral,” Levin said. Goldman’s “actions did immense harm to its clients and helped create the financial crisis that nearly plunged us into a second Great Depression;” see http://www.ft.com/cms/s/0/6e032042-e315-11e1-a78c-00144feab49a.html#axzz2O5ePeAlh.

3. In discussing Goldman’s practices during the internet/technology boom, Taibbi wrote, “For a bank that paid out $7 billion a year in salaries, $110 million fines issued half a decade late were something far less than a deterrent—they were a joke. Once the Internet bubble burst, Goldman had no incentive to reassess its new, profit-driven strategy; it just searched around for another bubble to inflate.” See M. Taibbi, “The Great American Bubble Machine,” Rolling Stone, April 5, 2010, http://www.rollingstone.com/politics/news/the-great-american-bubble-machine-20100405.

4. A Chinese wall is a mechanism used to prevent conflicts of interest regarding the use of information. The word wall implies that the information cannot get out and is contained. It also implies that there is a line. Often it is a legal line concerning which information can go where, but it is as much an ethical barrier between different divisions of a financial (or other) institution to avoid conflicts of interest. A Chinese wall is said to exist, for example, between the corporate–advisory area and the brokering department of a financial services firm to separate those giving corporate advice on takeovers from those advising clients about buying shares. The wall is created to prevent leaks of inside information that could influence advice given to clients making investments or allow staff to take advantage of facts not yet known to the general public.

5. Goldman acknowledges this confusion in its business standards committee report.

6. http://www.businessinsider.com/goldman-sachs-traders-2010-12.

7. This was a weekly practice from 2006 to 2011. In 2007, Goldman launched a program that allowed research analysts to call a select group of priority clients.

8. A conviction buy list is a list of the stocks of companies that Goldman’s research analysts believe are extremely attractive for investors to buy.

9. S. N. Lynch and A. Viswanatha, “Goldman to Pay $22 Million to Settle ‘Huddles’ Case,” Yahoo!, April 12, 2012, http://news.yahoo.com/goldman-pay-22-million-settle-sec-finra-charges-154759042.html.

10. R. Lowenstein, When Genius Failed: The Rise and Fall of Long-Term Capital Management (New York: Random House, 2000), 172–173.

11. http://www.zerohedge.com/contributed/2012-11-17/greg-smith-vs-goldman-sachs.

12. http://www.sec.gov/litigation/litreleases/lr18113.htm.

13. State of Missouri, Office of Secretary of State, Securities Commission, November 25, 2003, Consent Order, Case No. AO-03-15, http://www.sos.mo.gov/securities/files/goldman_sachs.pdf. Enacted in reaction to a number of corporate and accounting scandals (such as Enron and WORLDCOM), the Sarbanes–Oxley Act of 2002 sets standards for all US public company boards, management, and public accounting firms. The act contains eleven sections, ranging from additional corporate board responsibilities to criminal penalties. The SEC had to adopt dozens of rules to implement the act.

14. State of Missouri, Office of Secretary of State, Securities Commission, November 25, 2003, Consent Order, Case No. AO-03-15.

15. There was already a John L. Weinberg award, which was given to a professional in the investment banking division who best typified Goldman’s core values.

16. In this vein, Sørensen and Phillips examine the relationship between organizational size and structural complexity and note problems arising from increasing specialization and fragmentation: “As organizations grow larger, tasks get subdivided into more specialized roles, and an increasing proportion of jobs in the organization is devoted to coordinating between the increasingly elaborate division of labor … the average worker in a large firm has less overview over what all of the organization’s vital routines are and how they fit together. Nor are they provided with the skills for the integration of the large firm’s differentiated skills.” See J. Sørensen and D. J. Phillips, “Competence and Commitment: Employer Size and Entrepreneurial Endurance,” Industrial and Corporate Change 20, no. 3 (2011), doi: 10.1093/icc/dtr025.

17. Sources for the perception variable discussion include Lulofs (R. S. Lulofs, Conflict: From Theory to Action [Scottsdale, AZ: Gorsuch Scarisbrick, 1994]) and Wilmot and Hocker (W. W. Wilmot and J. L. Hocker, Interpersonal Conflict 5th ed. [Boston: McGraw-Hill, 1998]).

18. Ellis (The Partnership—The Making of Goldman Sachs [New York: Penguin, 2008], 667) wrote that all could be lost—in fact, that all “would be lost if the firm squandered its reputation or failed to anticipate, understand, and manage the potential conflicts or failed to excel in its important agency business.”

19. A. R. Sorkin, Too Big to Fail: The Inside Story of How Wall Street and Washington Fought to Save the Financial System from Crisis—and Themselves (New York: Viking, 2009).

20. Ibid.

21. The business standards committee investigation and report are discussed in detail in chapter 8 as one of the outcomes of Goldman’s experience during the credit crisis.

22. See, for example, Sorkin (Too Big to Fail) and W. D. Cohan, “Goldman’s Double Game,” Businessweek, March 14, 2012, http://www.businessweek.com/articles/2012-03-14/goldmans-double-game.

23. Ellis, The Partnership, 668–669.

24. A. D. Frank, “Goldman Boss Lloyd Blankfein’s Testimony Bolsters Case Against Rajat Gupta,” Daily Beast, June 5, 2012, http://www.thedailybeast.com/articles/2012/06/05/goldman-boss-lloyd-blankfein-s-testimony-bolsters-case-against-rajat-gupta.html.

25. According to court testimony, ironically when then-Goldman board member Raj Gupta wanted to work out an arrangement by which he could stay associated with Goldman and at the same time be associated with the private equity firm Kohlberg Kravis Roberts (KKR), Blankfein said that Goldman had competed with KKR in certain areas and if Gupta worked with both companies it could create a situation of conflict and therefore was not possible. “Mr. Gupta told me he was considering or deciding to accept an offer from a large private-equity group,” Blankfein recalled, “to be on their advisory board.” The Goldman CEO continued: “I told him that presented certain conflicts for us … it created a problem and I did not think it was a good idea.” Gupta told Blankfein that he could manage any potential conflicts that might arise while he also consulted with KKR, the private-equity firm first made famous in 1988 by its $25 billion hostile takeover of RJR Nabisco. Blankfein said he decided that Gupta had to give up his Goldman board seat because KKR, while a big customer of Goldman’s, also competed with the investment bank, and the conflicts for a director would be too significant to overcome while honoring his “fiduciary duty.” So it seems Goldman had decided that Gupta could not “manage conflicts.” (See Frank, “Goldman Boss Lloyd Blankfein’s Testimony Bolsters Case Against Rajat Gupta.”)

26. The conflict issues are often raised by boutique advisory firms as their competitive advantage over larger, full-service firms. Some of the executives I interviewed work at boutique investment advisory firms. They said that because they do not have large trading or financing businesses, they can offer more independent and less conflicted advice. Sorkin (Too Big to Fail, 463–464) describes boutique firms as resembling the Wall Street partnerships of the 1970s and 1980s, in that they present fewer opportunities for real or perceived potential conflicts. When Morgan Stanley’s independent board members, led by C. Robert Kidder, the lead director, decided to hire an independent adviser, they chose Roger Altman, former deputy secretary of the Treasury, who founded the boutique investment banking firm Evercore Partners. His role was to advise Morgan Stanley’s board on transactions, but within twenty-four hours of being hired, he was advising the board to think seriously about selling the firm. Some people I interviewed raised the concern that some of the boutique firms are publicly traded or have meaningful outside investors or private equity departments that might impact how the firms are managed.

27. The “doomsday scenario” Altman painted during that board meeting had some people convinced that he was interested only in collecting a big fee by advising Morgan Stanley on selling. Others worried that he might pass on information about the company’s financial health to his government contacts. Some thought that any advice about selling the firm should come from Morgan Stanley’s own bankers. Another concern was Evercore’s partnership with Mizuho Financial Group of Japan, a rival of Mitsubishi, which was in negotiations with Morgan Stanley at the time. The main theme seemed to be, “I don’t know what this guy [Altman] is up to” (Sorkin, Too Big to Fail, 463–464). I mention this story because I find it interesting how banks view each other‘s conflicts and motivations.

28. William Cohan, quoted at http://www.efinancialnews.com/story/2011-04-14/qa-cohan-goldman-money-power.

29. The categories in which members were grouped are subjective because members have various backgrounds as they have rotated, so although someone may be in one division at the time he/she is on the committee, I asked interviewees with which groups they were most affiliated. I also asked research analysts to independently look at the backgrounds of the various members and make independent judgments, which came out relatively close to my analysis and included information from interviewees.

Chapter 8

1. Goldman’s NEOs are currently Lloyd Blankfein (CEO), Gary Cohn (president and COO), David Viniar (CFO), Michael Evans (a vice chairman, global head of growth markets, and chairman of Goldman Sachs Asia), and John S. Weinberg (a vice chairman and co-head of investment banking).

2. “Without question, direct government support helped stabilize the financial system. We believe that the government action was critical, and we benefited from it.” Testimony by Lloyd Blankfein, www.goldmansachs.com/media-relations/in-the-news/archive/1-13-testimony.html.

3. R. Swedberg, “The Structure of Confidence and the Collapse of Lehman Brothers,” in Markets on Trial: The Economic Sociology of the U.S. Financial Crisis, ed. M. Lounsbury and P. M. Hirsch (Bingley, UK: Emerald, 2010), 69–112.

4. My analysis as a sociologist focusing on the organizational factors should not detract from serious questions and concerns raised by many people, such as the Senate Subcommittee on Investigations, chaired by Carl Levin (D.-Mich.), alongside Tom Coburn (R.-Okla.); and several authors including William Cohan, Bethany McLean, Matt Taibbi, and Gillian Tett.

5. In Too Big to Fail: The Inside Story of How Wall Street and Washington Fought to Save the Financial System from Crisis—and Themselves (New York: Viking, 2009), A. R. Sorkin implies that Hank Paulson, in his role as Treasury secretary, grasped the true systemic risk at hand only after the Lehman bankruptcy and Bank of America deal for Merrill Lynch. Yet Goldman had been actively trying to de-risk for months.

6. P. Jorion, “In Defense of VaR,” Derivatives Strategy, April 1997, http://www.derivativesstrategy.com/magazine/archive/1997/0497fea2.asp.

7. J. Nocera, “Risk Mismanagement,” New York Times, January 4, 2009, http://www.nytimes.com/2009/01/04/magazine/04risk-t.html?_r=1.

8. “Stark’s work, however, suggests an alternative conjecture: that it would have taken heterarchical organization to fuse together the two institutionally separate insights needed fully to grasp those dangers. The conjecture is plausible: in particular, Goldman Sachs, reported by several of my interviewees to be more heterarchical in its organization than most other major banks (it was a partnership, not a public company, until 1999), escaped financially almost unscathed. Unlike almost all other banks, Goldman hedged or liquidated its ABS and ABS CDO positions several months before the crisis. However, the systematic, comparative organizational research needed to test the conjecture is, for reasons of access, currently impossible.” (See D. MacKenzie, “The Credit Crisis as a Problem in the Sociology of Knowledge,” American Journal of Sociology 116, no. 6 (2011): 1832.)

9. One of the characteristics Weick ascribes to high-reliability organizations is the “mindfulness with which people in most HROs react to even very weak signs that some kind of change or danger is approaching.” He describes HROs as “fixated on failure” and refusing to “simplify reality.” See K. E. Weick and D. L. Coutu, “Sense and Reliability: A Conversation with Celebrated Psychologist Karl E. Weick,” Harvard Business Review, April 2003, 84–90, 123.

10. E. Derman, My Life as a Quant: Reflections on Physics and Finance (Hoboken, NJ: Wiley, 2004), 257.

11. J. Nocera, “Risk Mismanagement,” New York Times, January 4, 2009, http://www.nytimes.com/2009/01/04/magazine/04risk-t.html?_r=1.

12. Sorkin, Too Big to Fail, chapter 7. But his actions would have unintended consequences.

13. According to Goldman’s 2012 proxy statement, Goldman’s board held fifteen meetings. Its independent directors also met thirteen times in executive session without management. Goldman disclosed that its directors meet informally from time to time to receive updates from senior management, and the directors receive weekly informational packages that include updates on recent developments, press coverage, and current events related to its business. Some people I interviewed said that a board position could be almost a full-time position, with selected board members needing to sit in on risk management meetings.

14. U.S. Senate Permanent Subcommittee on Investigations, “Wall Street and the Financial Crisis Anatomy of a Financial Collapse: Majority and Minority Staff Report,” 2011, http://hsgac.senate.gov/public/_files/Financial_Crisis/FinancialCrisisReport.pdf.

15. http://www.ft.com/intl/cms/s/80e2987a-2e50-11dc-821c-0000779fd2ac,Authorised=false.html?_i_location=http%3A%2F%2Fwww.ft.com%2Fcms%2Fs%2F0%2F80e2987a-2e50-11dc-821c-0000779fd2ac.html&_i_referer=#axzz2Rrj0fwk

16. L. Endlich, Goldman Sachs—The Culture of Success (New York: Simon & Schuster, 2000), 199.

17. Ibid.

18. Ibid.

19. Endlich, Goldman Sachs, 225.

20. William Cohan, Money and Power: How Goldman Sachs Came to Rule the World (New York: Doubleday, 2012), 529.

21. http://dealbook.nytimes.com/2012/10/01/the-j-aron-takeover-of-goldman-sachs/.

22. Cohan, Money and Power.

23. W. D. Cohan, “Where Blankfein Came From,” Fortune, April 20, 2011, http://management.fortune.cnn.com/2011/04/21/where-blankfein-came-from/.

24. C. D. Ellis, The Partnership—The Making of Goldman Sachs (New York: Penguin Press, (2008), 668.

25. Ellis, The Partnership, 670–671.

26. A 2011 review of Cohan’s Money and Power published in The Economist addresses clients’ confusion about whether Goldman is an agent or competitor: “Goldman has pushed this envelope further than any other investment banks, believing it had the skill to manage the resulting conflicts.” See “Goldman Sachs: Long on Chutzpah, Short on Friends,” The Economist, April 14, 2011, http://www.economist.com/node/18557354.

27. Ellis, The Partnership, 670–671.

28. Goldman had a tradition of mobility of people among departments, divisions, and geographies. Small steps that lead to new practices, and the normalization they entail, are seldom visible or seen as significant by those who work in a department or organization for a long time (see S. Dekker, Drift into Failure: From Hunting Broken Components to Understanding Complex Systems [Farnham, UK: Ashgate Publishing, 2011], 180). It helps to have people come in from other areas to bring fresh perspectives that help insiders recalibrate what they consider normal. It also forces insiders to articulate their ideas about running their system. This can be true culturally, as well as from a risk management perspective. In both, an environment that supports rotation of employees and discussion is important.

29. Executives also need to overcome the structural secrecy inherent in the technical language of risk management.

30. M. Taibbi, “The Great American Bubble Machine,” Rolling Stone, April 5, 2010, http://www.rollingstone.com/politics/news/the-great-american-bubble-machine-20100405.

31. M. Taibbi, “The People vs. Goldman Sachs,” Rolling Stone, May 11, 2011, http://www.rollingstone.com/politics/news/the-people-vs-goldman-sachs-20110511?page=3.

32. Taibbi, “The Great American Bubble Machine.”

33. A fiduciary is someone who has undertaken to act for and on behalf of another in a particular matter in circumstances that give rise to a relationship of trust and confidence. A fiduciary duty is the highest standard of care at either equity or law.

34. Goldman is, however, a fiduciary to its shareholders and to the funds it manages for clients. Legislation was proposed (as part of the Dodd–Frank Act) that would impose a fiduciary standard rather than the current suitability standard for those selling products. The intent was to require brokers to put clients’ interests first or be held legally accountable. Within a week, that provision was dropped after intense lobbying by Wall Street.

35. However, under the federal securities laws, investment advisers (banks that manage clients’ money, such as Goldman’s asset management business or private equity business) are bound to a fiduciary standard that requires them to put their client’s interests above their own. Conflicts of interest must be disclosed, and self-dealing is generally prohibited.

36. Blankfein “basically [denied] it all” at the hearing. “The political environment we live in now is such that he would rather look like they were as dumb as the other firms on Wall Street. And yet the evidence is overwhelming. They didn’t do it nefariously. They did it because they thought they could make money. And they did. I think they made $13 billion pre-tax in 2007.” (See J. Pressler, “Goldman Chronicler William Cohan Is Doing God’s Work,” New York Magazine, April 17, 2011, http://nymag.com/daily/intelligencer/2011/04/william_cohan_is_doing_gods_wo.html.)

37. Goldman did not have a fiduciary responsibility to BP or to Sara Lee (see chapter 1) but still accorded them essentially that level of care.

38. I also heard echoes of the “higher purpose” rationalization (see chapter 9) in the fiduciary responsibility defense offered as an explanation of Goldman’s actions.

39. A Goldman spokesman said that until AIG was rescued by the government, the insurer “was viewed as one of the most sophisticated financial counterparties in the world. It wasn’t until the government intervened in September 2008 that the full extent of AIG’s problems became apparent.” The interesting comment is the next one: “‘What is lost in the discussion is that AIG assumed billions of dollars in risk it was unable to manage,’ the Goldman spokesman added.” This is a key ethical issue and source of criticism, so why was Goldman selling it to them? (See S. Ng and C. Mollenkamp, “Goldman Fueled AIG Gambles,” Wall Street Journal, December 12, 2009, http://online.wsj.com/article/SB10001424052748704201404574590453176996032.html; and http://www.npr.org/blogs/money/2010/04/is_goldman_sorry_it_sold_a_sec.html.)

40. Although the data shows a sudden spike, there were signals and public recognition of changes. For example, there were also rumbles about Goldman’s serving its own interests ahead of clients’ and questions about conflicts of interest: “Goldman Sachs has engineered many megadeals over the years. But few underscore its influence on Wall Street like the deal it brokered yesterday … The surprising merger of Archipelago, an electronic stock market, and the New York Stock Exchange cements, perhaps definitively, Goldman’s longstanding role as the premier Wall Street firm, and the one with the most sway over the Big Board’s future.… But while the merger emphasizes this notion, it also raises longstanding fears among supporters of the auction-based model that Goldman’s intent, as the largest user of the exchange, has been to divert order flow from the exchange floor to its own trading desks, a process called internalization.” See L. Thomas, “Goldman Seals a Deal, and Its Status,” New York Times, April 21, 2005, http://query.nytimes.com/gst/fullpage.html?res=9A03EFDE1731F932A15757C0A9639C8B63.

41. “Goldman to Review Its Business Practices,” New York Times, May 7, 2010, http://dealbook.nytimes.com/2010/05/07/goldman-toreview-its-business-practices/.

42. Endlich, Goldman Sachs, 164.

43. “Goldman Sachs Clients Lost in Translation,” London Evening Standard, January 14, 2011, http://www.this islondon.co.uk/standard-business/article-23914152-city-spy-goldman-sachs-clients-lost-in-translation.do.

44. L. Rappaport, “Goldman Opens Up to Mollify Its Critics,” Wall Street Journal, January 11, 2011, http://online.wsj.com/article/SB10001424052748703779704576074360288635474.html.

45. S. Johnson, “Goldman Sachs: ‘We Consider Our Size an Asset That We Try Hard to Preserve,’” Baseline Scenario, January 13, 2011, http://baselinescenario.com/2011/01/13/goldman-sachs-we-consider-our-size-an-asset-that-we-try-hard-to-preserve/.

46. R. Teitelman, “Goldman Sachs, Business Standards and the Critics,” Huffington Post, January 14, 2011, http://www.huffingtonpost.com/robert-teitelman/goldman-business-standard_b_808827.html.

47. J. Carney, “The Banality of Goldman’s Business Standards,” CNBC, January 12, 2011, http://www.cnbc.com/id/41040099/The_Banality_of_Goldman_s_Business_Standards.

48. Johnson, “Goldman Sachs.”

49. Carney, “The Banality of Goldman’s Business Standards.”

50. Johnson, “Goldman Sachs.”

51. Ibid.

52. Carney, “The Banality of Goldman’s Business Standards.” See also http://www.clmr.unsw.edu.au/article/ethics/embedding-ethics/basis-trust-warranted-goldman-sachs-business-standards-report-assessed: “The failure to articulate and integrate purpose, values and principles within a functioning ethical framework created toxic and socially harmful corporate cultures in urgent need of reform, which an emphasis on technical measures alone will be incapable of addressing. The critical question, therefore, is whether the revised Goldman approach, which covers client relationships, conflicts of interest, structure products, transparency and disclosure, broader governance, and training and development, represents a robust improvement or should be seen as a cynical privileging of symbolism? On this front, the evidence is mixed.”

53. http://blogs.reuters.com/financial-regulatory-forum/2013/05/30/goldman-standards-review-reflects-new-compliance-landscape/.

54. S. Craig and P. Lattman, “Goldman’s Shares Tumble as Blankfein Hires Top Lawyer,” New York Times, August 22, 2011, http://dealbook.nytimes.com/2011/08/22/goldmans-shares-tumble-as-blankfein-hires-lawyer/.

55. Greg Smith, “Why I Am Leaving Goldman Sachs,” New York Times, March 14, 2012, http://www.nytimes.com/2012/03/14/opinion/why-i-am-leaving-goldman-sachs.html?pagewanted=all.

56. I asked some Goldman partners about this survey. They said it was an internal survey and must be taken with a grain of salt. When people fill out internal surveys, they might be concerned about where the information goes and who sees what and from whom; they question the confidentiality. I found this interesting, because some clients I interviewed expressed the same skepticism about Goldman.

57. “Goldman Sachs (GS) Issues Response to Op-Ed Piece in New York Times,” Street Insider, March 14, 2012, http://www.streetinsider.com/Corporate+News/Goldman+Sachs+%28GS%29+Issues+Response+to+Op-Ed+Piece+in+New+York+Times/7268955.html.

58. “Another Ex-Goldman Banker Confesses: The Firm Became ‘Toxic,’” Daily Finance, March 15, 2012, http://www.dailyfinance.com/2012/03/15/ex-goldman-banker-confesses-toxic-smith-resignation/.

59. When Goldman went public it listed three competitive strengths: “strong client relationships,” “distinctive people and culture,” and “global reach.” It is difficult to argue that Goldman does not still have these as competitive strengths.

60. S. Cruise, “Goldman Sachs’ Greg Smith’s Letter Prompts Backlash from Clients,” Huffington Post, March 15, 2012, http://www.huffingtonpost.com/2012/03/15/goldman-sachs-backlash-clients-begins-gain-steam_n_1349576.html.

61. D. McCrum, D. Schafer, and P. Jenkins, “Goldman’s Clients Stand by Their Bank,” Financial Times, March 15, 2012, http://www.ft.com/intl/cms/s/0/db9ae576-6ebd-11e1-afb8-00144feab49a.html.

62. Taibbi, “The Great American Bubble Machine.”

63. C. Harper, “Goldman Model Championed by Blankfein Planted Seeds of Distress,” Bloomberg, July 21, 2011, http://www.bloomberg.com/news/2011-07-22/goldman-sachs-model-championed-by-blankfein-planted-seeds-of-own-distress.html.

64. Nils Pratley, “Muppets of the World Unite,” The Guardian, March 14, 2012, www.guardian.co.uk/business/nils-pratley-on-finance/2012/mar/14/goldman-sachs-greg-smith-muppets.

65. T. Samuelson, “Goldman Sachs Employee’s Op-Ed Doesn’t Surprise Some,” WYNC, March 14, 2012, http://www.wnyc.org/blogs/wnyc-news-blog/2012/mar/14/goldman-sachs-employees-op-ed-doesnt-surprise-clients/.

66. Cruise, “Goldman Sachs’ Greg Smith’s Letter Prompts Backlash from Clients.”

67. Ibid.

68. www.reuters.com/article/2012/03/16/goldman-apg-idUSL2E8EFCAW20120316.

69. In 2012, in part because Goldman was losing so many financial analysts that it committed to employ for two years to hedge funds and private equity funds after just one year of training, Goldman changed its policy and hired full-time financial analysts right out of school. If the analysts are caught interviewing, it is technically a fireable offense. The New York office’s decision came after executives grew frustrated that many graduates weren’t staying with the firm after completing the two-year period, and after Goldman fired a handful of analysts for signing on to work at other financial companies in violation of their contracts. In recent years, private-equity firms have become more aggressive in recruiting Goldman analysts, said people in the private-equity industry. The companies used to begin recruiting from Goldman’s analyst program in March of the analyst’s first year. Recently, some firms advanced their initial overtures to January, when analysts have been working at Goldman for only about six months.

70. I was curious if Goldman’s fees had been impacted, so I analyzed Goldman’s publicly disclosed sell side advisory M&A fees for $1 billion to $4 billion from 2003 to 2011. I selected this product and range because it is considered “bread and butter” assignments for the M&A department. From 2003 to 2008, the firm had a premium of the percentage of deal size over a selected peer group average each year. But since 2009, the fees have been the average.

71. P. J. Henning, “Is That It for Financial Crisis Cases?” New York Times, August 13, 2012, http://dealbook.nytimes.com/2012/08/13/is-that-it-for-financial-crisis-cases/.

72. P. Lattman, “U.S. Goldman Disclosure a Rare Break in Secrecy,” New York Times, August 10, 2012, http://dealbook.nytimes.com/2012/08/10/justice-department-closes-investigation-of-goldman/.

73. C. J. Levin, “Sen. Levin Statement on DOJ Announcement on Goldman Sachs,” August 10, 2012, http://www.levin.senate.gov/newsroom/press/release/sen-levin-statement-on-doj-announcement-on-goldman-sachs.

74. G. Bowley, “$500 Million and Apology from Goldman,” New York Times, November 17, 2009, http://www.nytimes.com/2009/11/18/business/18goldman.html.

Chapter 9

1. Criticism has been focused on Goldman’s arrangement to allow its partners to participate in the $1.5 billion Facebook offer, when some clients were being shut out.

2. C. Harper, “Goldman to Cash Out $1 Billion of Facebook Holding in IPO,” Bloomberg, May 17, 2012, http://www.bloomberg.com/news/2012-05-17/goldman-to-cash-out-1-billion-of-facebook-holding-in-ipo.html/.

3. M. Dowd, “Op-Ed Columnist; Virtuous Bankers? Really!?!” New York Times, November 11, 2009, http://www.nytimes.com/2009/11/11/opinion/11dowd.html.

4. According to J. W. Meyer and B. Rowan (“Institutionalized Organizations: Formal Structure as Myth and Ceremony,” American Journal of Sociology 83, no. 2 [1977]: 340, doi: 10.1086/226550), “[I]nstitutional theorists believe that the institutional environment can strongly influence the development of formal structures in an organization, often more profoundly than market pressures. Innovative structures that improve technical efficiency in early-adopting organizations are legitimized in the environment. Ultimately these innovations reach a level of legitimization where failure to adopt them is seen as ‘irrational and negligent’ (or they become legal mandates). At this point new and existing organizations will adopt the structural form even if the form doesn’t improve efficiency.” Meyer and Rowan argue that often these “institutional myths” are merely accepted ceremoniously in order for the organization to gain or maintain legitimacy in the institutional environment. Organizations adopt the “vocabularies of structure” prevalent in their environment, such as specific job titles, procedures, and organizational roles. The adoption and prominent display of these institutionally acceptable “trappings of legitimacy” help preserve an appearance of organizational action based on “good faith.” Legitimacy in the institutional environment helps ensure organizational survival.

5. John Whitehead, Bob Rubin, Hank Paulson, Jon Corzine, Steve Friedman, and many others have gone on to hold high-level government positions. In addition, Goldman’s community service and philanthropy are mentioned often in Goldman’s public filings.

6. C. D. Ellis, The Partnership—The Making of Goldman Sachs (New York: Penguin, 2008), 664.

7. B. McLean, “The Bank Job,” Vanity Fair, March 23, 2012, http://www.vanityfair.com/business/features/2010/01/goldman-sachs-200101.

8. http://www.thedailyshow.com/watch/thu-april-28-2011/exclusive-william-cohan-extended-interview-pt-2.

9. Stephen Colbert, “Greg Smith’s Goldman Sachs Op-Ed,” The Colbert Report (Viacom), March 14, 2012.

10. W. D. Cohan, “Doing God’s Work: How Goldman Became the Vampire Squid,” Institutional Investor, April 25, 2011, http://www.institutionalinvestor.com/Popups/PrintArticle.aspx?ArticleID=2813008.

11. http://businesshighbeam.com/435607/article-1G1-16396594/inside-goldman-college-cardinals.

12. James Quinn and James Hall, “Goldman Sachs Vice-Chairman Says: ‘Learn to Tolerate Inequality,’” The Telegraph, www.telegraph.co.uk/finance/recession/6392127/Goldman-Sachs-vicechairman-says-Learn-to-tolerate-inequality.html.

13. William Cohan, Money and Power: How Goldman Sachs Came to Rule the World (New York: Doubleday, 2012).

14. McLean, “The Bank Job.”

15. L. Endlich, Goldman Sachs—The Culture of Success (New York: Simon & Schuster, 2000), 8.

16. See R. S. Kaplan, What to Ask the Person in the Mirror: Critical Questions for Becoming a More Effective Leader and Reaching Your Potential (Boston: Harvard Business Review Press, 2011), 15. This attitude seems to have changed in recent years. Gary Cohn has stated that competitive pressures limit how much the firm can cut compensation: “There is enormous pressure out there, even in a market environment like this, for the best people … There’s always a competitor, or in some cases a client, willing to hire our good people.” See also “Goldman’s Cohn Warns of Poaching Risks from Further Cuts,” Bloomberg, May 31, 2012, http://www.bloomberg.com/news/print/2012-05-31/goldman-s-cohn-warns-of-poaching-risks-from-further-cuts.html.

17. Many people have noted that Goldman’s political contributions and money spent on lobbying put it in an ethical gray zone. John Fritze noted that Goldman Sachs is “one of the financial industry’s most generous political givers”(John Fritze, “Goldman Political Contributions Under Attack, USA Today, April 23, 2010 www.intellectualtakeout.org/library/articles-commentary-blog/goldman-political-contributions-under-attack). According to Jonathan Salant, Goldman increased its lobbying in 2010 when the Senate considered the rewriting of financial regulations (Jonathan D. Salant, “Goldman Doubled Lobbying Expenses Amid Financial Revamp, SEC, Probe,” Bloomberg.com, July 21, 2010, www.bloomberg.com/news/2010-07-21/goldman-sachs-doubled-lobbying-expenses-amid-financial-revamp-sec-probe.html). Further, Felix Salmon charged that former Secretary of the Treasury Hank Paulson gave insider tips to Goldman employees. Salmon writes, “Paulson was giving inside tips to Wall Street in general, and to Goldman types in particular: exactly the kind of behavior that ‘Government Sachs’ conspiracy theorists have been speculating about for years. Turns out, they were right” (Felix Salmon, “Hank Paulson’s Inside Jobs,” Reuters.com, November 29, 2011, http://blogs.reuters.com/felix-salmon/2011/11/29/hank-paulsons-inside-jobs/). Madison Ruppert says that Paulson’s actions epitomize “the plague upon our economy, and the greater global economic system, that is crony capitalism” (see “Turns Out the ‘Government Sachs’ Conspiracy Theorists Were Right All Along,” December 1, 2011, http://www.activistpost.com/2011/12/turns-out-government-sachs-conspiracy.html).

18. L. Wayne, “The Corridor from Goldman to Washington Is Well Traveled,” New York Times, December 13, 2002.

19. Ibid.

20. J. Grant, “Goldman Shrinks an Adage; Long-Term Greedy Can’t Wait,” Observer, February 15, 1999, http://www.observer.com/1999/02/goldman-shrinks-an-adage-longterm-greedy-cant-wait/.

21. S. Lohr, “Goldman’s Pitch for Deals in Russia,” New York Times, March 12, 1992.

22. CBS News Investigates, “Goldman Sachs’ Revolving Door,” CBS News, April 7, 2010, http://www.cbsnews.com/8301-31727_162-20001981-10391695.html.

23. M. Lynn, “Goldman Sachs Has Gained Too Much Political Power,” Bloomberg News, June 4, 2006, http://www.bloomberg.com/apps/news?pid=newsarchive&refer=columnist_lynn&sid=aGS6lvr8ipiw.

24. A. R. Sorkin’s Too Big to Fail (New York: Penguin Press, 2009) provides a detailed timeline of events that occurred as the financial system teetered on the brink of collapse. It documents a number of phone calls and other communications between Blankfein and Goldman and between Paulson and former Goldman employees, which a few people have pointed to as evidence of Goldman benefiting from its ties to government.

Conclusion

1. According to the New York Times, since the close of its May 1999 IPO to September 2011, Goldman’s stock has returned nearly 175 percent. The Standard & Poor’s 500-stock index over the same period has lost almost 2.9 percent; see http://dealbook.nytimes.com/2011/01/18/study-points-to-windfall-for-goldman-partners/.

2. http://money.cnn.com/2012/07/21/news/economy/dodd-frank/index.htm.

3. Ibid.

4. www.followthemoney.org/press/ReportView.phtml?r=425.

5. P. Weinberg, “Wall Street Needs More Skin in the Game,” Wall Street Journal, September 30, 2009, http://online.wsj.com/article/SB10001424052748704471504574443591328265858.html.

6. Bear Stearns recently agreed to settle a 2009 class action suit brought by its shareholders, who lost most of their investments when the firm started to collapse, the value of their shares falling from more than $170 per share to as little as $2, although J.P. Morgan paid them $10 per share when it bought Bear Stearns. According to Tom Braithwaite and Tracy Alloway of the Financial Times, the $275 million settlement, agreed upon without any admission of wrongdoing, is “a rare example of senior Wall Street figures being held accountable for allegations of misconduct.” Certain executives and the firm itself were accused of “misleading investors about the true health of the investment bank … [The] company used its misleading models to inflate asset values and revenues and to offer the public artificially low calculations of its value at risk, an estimate of the amount a bank could lose over a single day.” The executives’ portion of the settlement will most likely be covered by insurance.

7. C. A. Hill and R. W. Painter, “Another View: A Simpler Rein Than the Volcker Rule,” New York Times, October 28, 2011, http://dealbook.nytimes.com/2011/10/28/another-view-a-simpler-rein-than-the-volcker-rule/.

8. Ibid.

9. According to Jack and Suzy Welch, “In fact, soft culture matters as much as hard numbers … And yet, for some reason, too many leaders think a company’s values can be relegated to a five-minute conversation between HR and a new employee. Or they think culture is about picking which words—do we ‘honor’ our customers or ‘respect’ them?—to engrave on a plaque in the lobby. What nonsense … Look, it’s Management 101 to say that the best competitive weapon a company can possess is a strong culture. But the devil is in the details of execution. And if you don’t get it right, it’s the devil to pay.” See Jack and Suzy Welch, “Goldman Sachs and a Culture-Killing Lesson Being Ignored,” CNNMoney, April 12, 2012, http://management.fortune.cnn.com/2012/04/12/goldman-sachs-culture-values/.

10. A senior financing banker at Goldman, who made partner in 2008, said, “Goldman looks at three things: your commercial effectiveness; your managerial and entrepreneurial skills; and your culture and values. All three are weighted equally and it is the right balance of the three combined that will determine whether you make partner or not.” However, another current partner said: “Unofficially, commercial effectiveness is above [the rest]. It helps you stand out.” See www.efinancialnews.com/story/2012-11-12/goldman-sachs-protecting-the-partnership.

11. Jack and Suzy Welch wrote that when an employee is not behaving consistently with the principles, there needs to be a public message. “And the only antidote is that Jim and Sally need to be sent home, and not with the usual ‘They want to spend more time with their families’ BS out of the lawyers and HR, but with the truth. ‘Jim and Sally had great numbers,’ everyone needs to be told, ‘but they didn’t demonstrate the values of this company.’ We guarantee that such a public ‘diss play,’ to put it more politely, will have more impact than a hundred ‘Our values really, really matter!’ speeches by the CEO.” See Welch and Welch, “Goldman Sachs and a Culture-Killing Lesson Being Ignored.”

12. J.P. Morgan has been criticized recently because the committee responsible for overseeing risks “wasn’t up to the task of monitoring the bank’s risk.” The committee includes, for example, Ellen Futter, head of the American Museum of Natural History, who served on AIG’s governance committee just before AIG collapsed. “Other committee members include the CEO of a defense contractor and a man who hasn’t worked on Wall Street for 25 years. What the committee’s missing that all the other big banks have: people who worked as financial risk managers.” (See J. Berman, “JPMorgan Chase Risk Management Committee Missing Bank Directors, Financial Risk Managers,” Huffington Post, May 25, 2012, http://www.huffingtonpost.com/2012/05/25/jpmorgan-chase-risk-management-committee_n_1546215.html.)

13. According to Jack and Suzy Welch, “An organization’s culture is not about words at all. It’s about behavior—and consequences. It’s about every single individual who manages people knowing that his or her key role is that of chief values officer, with Sarbanes–Oxley-like enforcement powers to match. It’s about knowing that at every performance review, employees are evaluated for both their numbers and their values …” See Welch and Welch, “Goldman Sachs and a Culture-Killing Lesson Being Ignored.”

14. Jack Welch with Suzy Welch, Winning (New York: HarperCollins, 2005).

Appendix A

1. Scott A. Snook, Friendly Fire: The Accidental Shootdown of U.S. Blackhawks over Northern Iraq (Princeton, NJ: Princeton University Press, 2002), 225.

2. S. Dekker, Drift into Failure: From Hunting Broken Components to Understanding Complex Systems (Farnham, UK: Ashgate Publishing, 2011). Johan Bergstrøm (“Listen to Sidney Dekker Lecturing about Drift into Failure,” October 10, 2011, http://johanniklas.blogspot.com/2011/10/listen-to-sidney-dekker-lecturing-about.html.) notes, “The drift concept offers the theory of how organizational failure and success emerge in incubation periods not characterized by incomplete interaction, but by non-linear effects of local interactions in environments characterized by goal-conflicts, competition and uncertainties.”

3. S. Dekker, Drift into Failure, 179.

4. Ibid.

5. Dekker, Drift into Failure, 14.

6. Dekker, Drift into Failure, 17.

7. Dekker, Drift into Failure, 17, 116.

8. Snook points out that the word “drift” implies a subtle movement. He believes that detecting such movement “requires a sensitivity to the passage of time. Single snapshots won’t do.” (See Snook, Friendly Fire, 225.) All explanations assume some passage of time. One of the goals of my study is to extend it further, beyond an event.

9. In Normal Accidents: Living with High-Risk Technologies (New York: Basic Books, 1984), Charles Perrow explains a normal accident as normal “not in the sense of being frequent or being expected … it is normal in the sense that it is an inherent property of the system to occasionally experience their interaction.”

10. Barry A. Turner, Man-Made Disasters (London: Wykeham Publications, 1978), 85.

11. Turner, Man-Made Disasters, 72.

12. L. Peattie, “Normalizing the Unthinkable,” Bulletin of Atomic Scientists, no. 3 (1984): 34.

13. E. S. Herman, Triumph of the Market: Essays on Economics, Politics, and the Media (Cambridge, MA: South End Press, 1999), 99.

14. Ibid.

15. D. Vaughan, The Challenger Launch Decision: Risky Technology, Culture, and Deviance at NASA (Chicago: University of Chicago Press, 1996), 61.

16. Vaughan, The Challenger Launch Decision, xiii.

17. Vaughan, The Challenger Launch Decision, 39.

18. Normalization differs from Snook in that it starts in a subunit, but the subunit alters the beliefs, understandings, and practices of the whole organization. Also, the normalization of deviance is pushed forward by characteristics such as structural secrecy, organizational culture, and the external competitive environment. NASA organizational culture is changed by the external environment, so NASA, formerly R&D-focused when apolitical and provided with abundant funding, becomes more like a business organization—competing for scarce resources, making deadlines. The normalization of deviance refers to people making decisions and enacting practices over time so that at the first decision they accepted a technical anomaly that deviated from expectations, then continued to use that as a base, incrementally expanding the amount of deviation they found acceptable. It is agency, shaped by organizational and environmental factors. So what happened at NASA was not drift in the way Snook defines it because drift detaches outcomes from people’s action which is different than Vaughan’s normalization. From a personal communication with Vaughan, 2013.

19. Vaughan, The Challenger Launch Decision, 55.

20. Vaughan, The Challenger Launch Decision, 42.

21. Vaughan, The Challenger Launch Decision, 238. The compartmentalizing, divisive effects of rapid organizational growth are also evident in the appearance of structural and functional “silos.” The more complex an organization’s structure becomes, the more likely silos are to emerge, as the result of the division of labor. G. Tett (Fool’s Gold: How the Bold Dream of a Small Tribe at J.P. Morgan Was Corrupted by Wall Street Greed and Unleashed a Catastrophe [New York: Free Press, 2009]) recognizes such silos as one of the big issues at a large bank, noting that the silos are widely accepted self-contained realms of activity and knowledge that only the experts in the silos can truly understand.

22. Vaughan, The Challenger Launch Decision, 67. In the Challenger case, Vaughan points out that the NASA culture changed when the politics of the space shuttle program changed. The culture of the organization did not drift slowly over time. The organization culture impinged upon decision making for practices that changed over time, and the normalization of deviance was a cultural belief in the work group that was spread throughout the organization—in relation to one particular component. Snook’s argument in practical drift is that the practices drifted over time.

23. Vaughan, The Challenger Launch Decision, 273.

24. Vaughan’s theory and framework were laid out in her 1985 book, Controlling Unlawful Organizational Behavior: Social Structure and Corporate Misconduct (Chicago, University of Chicago Press, 1985). The normalization of deviance and culture and institutional theory in The Challenger Launch Decision expanded on that original framework because Challenger gave her different data. Diane Vaughan first described structural secrecy in 1983.

25. Vaughan, The Challenger Launch Decision, 15. Perhaps Goldman had an advantage over many of its peers in this regard, because it had clear norms in its business principles; problems arose when behavior started to shift away from those norms.

26. Technology, technically, is still an organizational characteristic in Vaughan’s framework because the capability is internal to each organization. One also could logically address technology as a separate component within Vaughan’s competitive environment category, as everyone was using the same devices to stay in the competition and therefore it became normative, so it fits both those central concepts. However, I believe that technology should be extracted out of organization or competition as its own factor in order to analyze and monitor it more closely. Technology is playing such an important role in organizational change, and is changing so rapidly, that I believe for this case it was helpful to isolate it.

27. There are other sociological processes and theories that I considered for my framework, such as societal pressures. There has been some discussion about whether to include society as a factor in the framework, and if so, how that might be accomplished. Organization scholars have incorporated it as environment or institutions, paring it down from the more global term, society. Aldrich wrote Organizations and Environments in the 1970s (Englewood Cliffs, NJ: Prentice Hall, 1979), and A. L. Stinchcombe wrote “Social Structure and Organizations” in 1965 (J. G. March, Handbook of Organizations [Chicago: Rand McNally & Co., 1965], 142–193). More recently, Sagiv and Schwartz (“Cultural Value in Organizations: Insights for Europe,” European Journal of International Management 1 [2007]: 176–190) argue that the surrounding society, the personal value priorities of organizational members, and the nature of the organization’s primary tasks influence organizational culture because organizations operate under societal pressure. In other words, organizations must comply with norms and values of societies. Further, organizations consist of individuals who introduce their own value preferences to the organization, which represents the way people select actions, evaluate individuals and events, and explain their actions and evaluations—all of which shape organizational culture. Therefore, frameworks need to account for the possibility of societal pressure as well as the different natures of businesses. Sagiv and Schwartz believe no ethnographer would overlook the important variable of society.

I think this is a very interesting idea and is just one example in which this case study could have been improved. However, I found in this case that it would be challenging for me to have a framework that included society in depth over a long period of time. In 1958, Kroeber and Parsons recommended that culture and social system (society) be analyzed as independent (“The Concept of Culture and Social System,” American Sociological Review 23, no. 5 [1958]: 582–583). This, of course, was not to say that the two systems are not related, or that various approaches to the analysis of the relationship may not be used. They thought it was often beneficial to researchers to hold constant either cultural or societal aspects of the same concrete phenomena while addressing attention to the other. For this study, I adopted Kroeber and Parsons’ recommendations because I found that in my empirical work it was too vague over long periods of time and needed to be broken into its relevant categories.

Appendix B

1. See Diane Vaughan, The Challenger Launch Decision: Risky Technology, Culture, and Deviance at NASA (Chicago: University of Chicago Press, 1996); and Diane Vaughan, “The Dark Side of Organizations: Mistake, Misconduct, Disaster,” Annual Review of Sociology 25, no. 1 (1999): 271–305, doi: 10.1146/annurev.soc.25.1.271.

Appendix C

1. “Goldman Sachs’ Revolving Door,” CBS News, April 7, 2010.

2. http://www.nytimes.com/2008/10/19/business/19gold.html?pagewanted=all&_r=0.

Appendix D

1. http://www.businessweek.com/1999/99_20/b3629102.htm.

Appendix E

1. J. Creswell and B. White, “The Guys from ‘Government Sachs,’” New York Times, October 17, 2008, http://www.nytimes.com/2008/10/19/business/19gold.html?pagewanted=all&_r=0.

Appendix G

1. D. Vaughan, “The Dark Side of Organizations: Mistake, Misconduct, and Disaster,” Annual Review of Sociology 25, no. 1 (1999): 271–305, doi: 10.1146/annurev.soc.25.1.271.

2. Allan Sloan, “An Unsavory Slice of Subprime,” Washington Post, October 16, 2007, http://www.washingtonpost.com/wp-dyn/content/article/2007/10/15/AR2007101501435.html.

3. Andrew Clark, “Success Shines Unwelcome Spotlight on to Goldman Sachs,” The Guardian, December 21, 2007, http://www.guardian.co.uk/business/2007/dec/21/goldmansachs.useconomy.

4. M. Taibbi, “The Great American Bubble Machine,” Rolling Stone, April 5, 2010, http://www.rollingstone.com/politics/news/the-great-american-bubble-machine-20100405.

5. “Mergers & Acquisitions Review,” Thomson Reuters, 2011, http://dmi.thomsonreuters.com/Content/Files/4Q11_MA_Financial_Advisory_Review.pdf.

6. G. Smith, “Why I Am Leaving Goldman Sachs,” New York Times, March 14, 2012, http://www.nytimes.com/2012/03/14/opinion/why-i-am-leaving-goldman-sachs.html?pagewanted=all.