Mandis what happened to goldman sachs; an insiders story of organizational drift and its unintended consequences (2013)

STEVEN G. MANDIS

WHAT
An Insider’s Story

HAPPENED
of Organizational Drift

TO
and its

GOLDMAN
Unintended Consequences

SACHS?
Harvard Business Review Press
Boston, Massachusetts


Copyright 2013 Harvard Business School Publishing
All rights reserved
The views and opinions expressed in this book are strictly those of the author and do not necessarily reflect those of any organization
with which the author has been or is affiliated. The contents of this book have not been approved by any organization with which the
author has been or is affiliated. Analyses performed within this book are based on theories, are only examples, and reply upon very
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Library of Congress Cataloging-in-Publication Data
Mandis, Steven G.
What happened to Goldman Sachs: an insider’s story of organizational drift and its unintended consequences/Steven G. Mandis.
pages. cm
ISBN 978-1-4221-9419-5 (hardback)
1. Goldman, Sachs & Co. 2. Investment banking—United States—Management.
3. Corporate governance—United States. 4. Global Financial Crisis, 2008–2009. I. Title.
HG4930.5.M36 2013
332.660973—dc23
201301870
The web addresses referenced in this book were live and correct at the time of the book’s publication but may be subject to change.
ISBN: 9781422194195
eISBN: 9781422194201


This book is dedicated to my devoted wife, Alexandra, and my two loving
daughters, Tatiana and Isabella. They were my cheerleaders through many
long days and nights of working, studying, and writing.
I would also like to thank my parents, George and Theoni, who immigrated
to America from Greece with very little money and no knowledge of English.
They quietly sacrificed so that my brother Dean, my sister Vivian, and I
could have a better life. They taught us the meaning of values and hard work
as well as the power of the combination of these two qualities. They asked
for only one thing in return—for us to strive to give our children more opportunities
than they had been able to give us.


Contents

Prologue: A Funeral
1. What Happened
PART ONE

How Goldman Succeeded
2. Shared Principles and Values
3. The Structure of the Partnership
PART TWO

Drift
4. Under Pressure, Goldman Grows Quickly and Goes Public
5. Signs of Organizational Drift
PART THREE

Acceleration of Drift
6. The Consequences of Going Public
7. From Principles to a Legal Standard
PART FOUR

Goldman’s Performance
8. Nagging Questions: Leadership, Crisis, and Clients
9. Why Doesn’t Goldman See the Change?
Conclusion: Lessons


Appendix A: Goldman and Organizational Drift
Appendix B: Analytical Framework Applied to Goldman
Appendix C: Selected Goldman Employees and Lobbyists with Government Positions (Before or
After Goldman)

Appendix D: Value of Partners’ Shares at IPO
Appendix E: Goldman’s History of Commitment to Public Service
Appendix F: Key Goldman People
Appendix G: Goldman Timeline of Selected Events
Appendix H: Goldman’s Culture and Governance Structure
Notes
Acknowledgments
About the Author


Prologue

A Funeral

ON SEPTEMBER 25, 2006, I FILED INTO THE MEMORIAL service for John L. Weinberg, senior partner of
Goldman Sachs from 1976 to 1990. More than a thousand people filled Gotham Hall in New York to
pay their respects. John L. (as he was often referred to within Goldman, to distinguish him from other
Johns at the firm) was the product of Princeton and Harvard Business School and the son of one of the
most powerful Wall Street bankers, Sidney Weinberg, who had literally worked his way up from
janitor to senior partner of Goldman and who had served as a confidant to presidents.
The program listed a Goldman honor roll of those who would speak, including Lloyd Blankfein,
the firm’s current chairman and CEO; John Whitehead, who had run the firm with John L.—the two of
them were known as “the Johns”—and who had left Goldman in 1985 to serve as deputy secretary of
state; Robert Rubin, who had gone from co-senior partner in the early 1990s to secretary of the
Treasury; Hank Paulson, who had run Goldman when it went public on the New York Stock Exchange
(NYSE) in 1999 and had just become secretary of the Treasury; John S. Weinberg, John L.’s son and
current vice chairman of Goldman; and Jack Welch, former chairman and CEO of General Electric
and a long-standing client of John L.’s.
Welch’s eulogy stood out. His voice cracking, holding back tears, he said, “I love you, John.
Thanks for being my friend.” Imagine a CEO today saying that about his investment banker and almost

breaking down at the banker’s memorial service.
John S. tried to lighten the mood with a funny line: “My father’s favorite thing in life was talking
to his dogs, because they didn’t talk back.” But he caught the essence of John L. when he said, “He
saw right and wrong clearly, with no shades of gray.” John L. was a veteran, having served in the US
Marine Corps in both World War II and Korea, and the recessional was the “Marine Hymn.” The
lyrics “keep our honor clean” and “proud to serve” seemed to provide a perfect end to the service.

From 1976, when the two Johns became cochairmen, until John L.’s death in 2006, Goldman grew
from a modest, privately owned investment banking firm focused on the United States—with fewer
than a thousand employees, and less than $100 million in pretax profits—to the most prestigious
publicly traded investment bank in the world. The firm boasted offices all over the globe, more than
twenty-five thousand employees, almost $10 billion in pretax profits, a stock price of almost $200
per share, and an equity market valuation of close to $100 billion.


I had left Goldman in 2004 after a twelve-year career, a few months after my Goldman IPO stock
grant had passed the five-year required vesting period. I had moved on to become a trading and
investment banking client of Goldman’s. I went to John L.’s memorial service out of respect for a man
I had known and admired—a Wall Street legend, although one would never have guessed that from
his demeanor. I also wanted to support John S., whom I considered (and still consider) a mentor and
a friend. (See appendix F for an annotated list of key Goldman partners over the years.)
I first met John L. in 1992, when I was a Goldman financial analyst six months out of college. The
legend of Sidney and John L. Weinberg was one of the things that had attracted me to Goldman, and I
was excited at the prospect of meeting him. I identified with John L. because we were both sons of
parents who came from humble beginnings. I figured if John L.’s father could start by emptying
spittoons and end up running Goldman, then anything was possible for me, the son of Greek
immigrants. My father had started as a busboy at the Drake Hotel in Chicago, and my mother worked
at a Zenith TV assembly factory.
I met John L. early in my time at Goldman, as a financial analyst in the M&A department, when I
interviewed him as part of a work assignment. I was asked to make a video on the history of the M&A

department to be shown at an off-site department outing. Goldman was enthusiastic about
documenting and respecting its history and holding off-site outings to promote bonding among the
employees. In the interview John L. could not have been more jovial and humble. At t46/annurev.soc.25.1.271.
2. Allan Sloan, “An Unsavory Slice of Subprime,” Washington Post, October 16, 2007, />

dyn/content/article/2007/10/15/AR2007101501435.html.
3. Andrew Clark, “Success Shines Unwelcome Spotlight on to Goldman Sachs,” The Guardian, December 21, 2007,
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“Mergers
&
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Reuters,
2011,
/>6.
G.
Smith,
“Why
I
Am
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2012,
/>

Acknowledgments

I would like to thank the faculty, graduate students, and administrators at the Department of Sociology
at Columbia University, and in particular Professor David Stark, my thesis adviser and mentor, and
Professor Josh Whitford, the director of graduate studies, for their training, support, and advice. In
addition, I would like to thank the faculty and administrators, as well as my MBA and Executive
MBA students, at Columbia Business School for their encouragement.
I want to thank my agent, Susan Rabiner, who, together with my editor at Harvard Business
Review Press, Tim Sullivan, saw my PhD dissertation for what it was—a book not just about
Goldman Sachs, but a book that brings business and finance together with sociology to improve the
study of management, sociology, and public policy. They understood my vision and helped make it a
reality.
Thank you to those I interviewed. I would love to recognize your contributions, patience, and time
on an individual basis, but I want to respect your privacy.
Many professionals, professors, students, classmates, research assistants, and friends helped with
my training and/or the book. Many thanks to Gary Ashwill, Red Ayme, Peter Bearman, Erin Brown,
Soman Chainani, Manu Chander, Sidney Dekker, Helena Ding, Yige Ding, Erin Dolias, Nate Emge,
Gil Eyal, Michelle Fan, Stephani Finks, Joe Gannon, Jie Gao, Kyle Gazis, Katrin Giziotis, Angel
Gonzalez, Angelito Gonzalez, Simon Gonzalez, Ryan Hagen, Kathryn Harrigan, Charles Harrison,
Simon Head, Jon Hill, Gailen Hite, Karen Ho, Paul Ingram, Jane Jacobi, Sam Johnson, El Kamada,
Ko Kuwabara, Nan Liu, Emily Loose, Yao Lu, Evangelos Lyras, Donald MacKenzie, Jeff Madrick,
Kinga Makovi, Yarden Mariuma, Joanne Martin, Charles Masson, Debra Minkoff, Carlos Morei, Joy
Nee, Olivia Nicol, James O’Shea, Neni Panourgia, Christina Perez, Allison Peter, Damon Phillips,
Katherine Phillips, Joyce Plaza, Paula Reid, Ernesto Reuben, Tim Rich, Nan Rothschild, Jonathan
Salky, Krista Schult, Hersche Shintre, Hana Sromova, Richard Swedberg, Noriyuki Takahashi,
Matthias Thiemann, Mathijs de Vaan, Diane Vaughan, Oliver Wai, Karl Weber, Joanne Willard, Sang
Won, Stacy Xing, and Xu Zang.
I would like to thank those who have researched and written about Goldman Sachs over the years,
because without their diligent work it would have been impossible to write my PhD dissertation.

Many are cited in my work and some are not, but I want to specifically acknowledge a few: Justin
Baer, William Cohan, Susanne Craig, Charles Ellis, Lisa Endlich, David Faber, Richard Freedman,
Boris Groysberg, Jonathan Knee, Susan McGee, Bethany McLean (who was in my Goldman 1992
M&A analyst class), Gretchen Morgenson, Andrew Serwer, Scott Snook, David Ross Sorkin, Louise
Story, Matt Taibbi, Gillian Tett, Jill Vohr, the US Senate Subcommittee on Investigations, and the US
Securities and Exchange Commission.
I would like to thank some people who manage to be pragmatic and entertaining at the same time:


Stephen Colbert, Jim Collins, Malcolm Gladwell, Vijay Govindarajan, Tony Kornheiser, Michael
Lewis, Bill Maher, Roger Martin, Robert K. Merton, Bill Simmons, Jon Stewart, Jack (and Suzy)
Welch, and Michael Wilbon. I am sure they never dreamed that they would be acknowledged in a
book related to Goldman Sachs, but their work stimulates my thinking.
Last, this book is a result of the love and support of my family and close friends. I didn’t
specifically acknowledge each and every one of you because I hope that I do that each and every day.


About the Author

STEVEN G. MANDIS worked at Goldman Sachs from 1992 to 2004 in the investment banking, private
equity, and proprietary trading areas. He assisted Hank Paulson and other senior executives on
special projects and was a portfolio manager in one of the largest and most successful proprietary
trading areas at Goldman. After leaving Goldman, he cofounded a multibillion-dollar global
alternative asset management firm that was a trading and investment banking client of Goldman’s.
During the financial crisis, Mandis was a senior adviser to McKinsey & Company before
becoming chief of staff to the president and COO of Citigroup and serving on executive, management,
and risk committees at the firm.
Currently, he is an adjunct professor at Columbia Business School. He teaches classes of MBA
and executive MBA students on strategic issues facing investment banks and the European financial
crisis. In addition, Mandis is a PhD candidate and an honorary Paul F. Lazarsfeld Fellow in the

Department of Sociology at Columbia University. He focuses on economic sociology as well as
organizational culture and innovation. This book is based on work for his PhD dissertation.
Mandis holds an AB from the University of Chicago and an MA and MPhil from Columbia
University.
He was awarded the Ellis Island Medal of Honor, given to children of immigrants who exemplify
a life dedicated to community service.