What Happened to Goldman Sachs: An Insider's Story of Organizational Drift and Its Unintended Consequences (25 page)
Authors: Steven G. Mandis
A Framework to Analyze Goldman and Organizational Drift
Diane Vaughan’s work on the
Challenger
disaster offers a framework for examining the influences that cause organizations to deviate from “both formal design goals and normative standards or expectations … producing a ‘suboptimal outcome.’”
23
Her framework is grounded in her observation that organizational deviation is systematically produced by the impact of the elements of environment and organization.
24
Recognizing the commonalities found in organizations, Vaughan examines the interactions between an organization’s structure and processes, influences of the environment within which this system operates, and how both shape individual choice. It is this combination of competitive pressures, organizational characteristics, and regulatory factors, this “dynamic of competition and scarce resources, together with the unclear norms regulating business behavior,” that Vaughan believes “exerts structural pressures on organizations toward misconduct.”
25
To Vaughan’s framework of regulatory, organizational, and competitive pressures, I add technological pressure.
26
Appendix B
illustrates my adaptation of Vaughan’s causal framework for my analysis of Goldman.
27
It highlights the interaction of the causative factors and pressures with key developments affecting Goldman and Wall Street over the past few decades. This appendix can be considered in tandem with the timeline in
appendix G
, which also identifies selected pressures (competitive, regulatory, technological, and organizational) associated with particular events. The result of the two is a clearer picture of the organizational changes and pressures as they developed over time. In addition, it supports my conclusion that the pressures and changes were happening before the IPO and before Blankfein became CEO.
While the frameworks set forth by the authors discussed in this appendix offer valuable insights into the process of the drift at Goldman and constitute a promising starting point for analysis, their studies are primarily focused on analyzing organizational failure in retrospect from a specific event. This is different from the Goldman case, because what has happened and is happening is messy and, depending on one’s point of view, could be labeled a variety of things; but more importantly the outcome is unknown. To their analyses, I have added consideration of the role played by residual elements of the organization’s culture and structure that have made the organization successful; these elements may mitigate drift or regulate or impact the various processes. My analysis of Goldman encompasses a period of more than three decades because it is important to evaluate organizational elements and regulatory, technological, and competitive factors dynamically over time and to appreciate how change happens at different paces and with different emphases. My analysis illustrates that the process of change is not as simple as identifying an independent variable that affects a dependent variable in a direct chain of events. Examining the changes over time helps to illuminate how many factors interact in producing the change.
Appendix B
Analytical Framework Applied to Goldman
Diane Vaughan’s analytical causal framework examines three main pressures—environmental and organizational (for simplicity, “organizational”); regulatory; and competitive—to analyze change over time.
1
In order to analyze Goldman, I utilize Vaughan’s framework and add technological pressure.
When the framework is applied to Goldman, as shown in
Table B-1
, the result illuminates changes more clearly over time. Even though the changes are presented in temporal sequence from 1979, when the firm’s business principles were written by John Whitehead, to today and are divided by who ran the firm or oversaw major changes, this is only for simplicity of presentation. The changes are related to each other, impact each other, and compound each other and have varying degrees of importance and significance. I selected 1979 because that is when the principles were written; 1990 because that year was when John L. Weinberg retired as senior partner (Whitehead had left in 1984); 1996 because it marked the legal structural change to a limited liability corporation; 1999 because it was the year of the IPO; and 2012 because it is the current year as this is written.
To help the reader understand the chart, I will give at least one example illuminated for each pressure.
Organizational pressure
: Goldman’s legal structure changed from a private partnership with full personal liability and illiquidity until retirement, to a limited liability private company with liability capped at the capital in the firm, and finally to a public company at the IPO with the liability capped at the capital in the firm, but with liquidity for shareholders. The firm changed from being completely privately held, to taking outside private capital, to taking outside public capital. The ownership changed from 100 percent Goldman partners to around 10 percent Goldman partners.Regulatory pressure
: Goldman operated under Glass–Steagall before the law was repealed in 1999 through the Gramm–Leach–Bliley Act. In 1970, the NYSE changed a rule allowing investment banks to become public.Competitive pressure
: The tech boom, the alternatives (hedge fund and private equity) boom, foreign competitors entering the US market, and US commercial banks were all factors that increased the search for talent. This impacted Goldman’s ability to attract and retain not only the best people but also people with the same values. The firm added a new level of executives, known as managing directors, in part to offer people a comparable title. The firm changed certain business practices in order to maintain and grow market share (e.g., no hostile raids, underwriting standards requiring at least three years of profits, and no gambling clients).Technological pressure
: Technology made information more of a commodity, impacting the ability for people to add value to clients. Technology added transparency to markets, lowering profitability margins and emphasizing scale.
Under the time frames, I provide some data to illustrate the changes in business mix. It’s important to keep in mind that before 1999, Goldman was a private firm and therefore not required to make certain information public.
TABLE B-1
Analytical framework of Goldman Sachs
| 1979 | 1990 | 1996 | 1999 | 2012 | |
| Head of firm (background)/#2* | Weinberg (banker) | Friedman (banker) | Corzine (trader) | Paulson (banker) | Blankfein (trader) |
| Whitehead (banker) | Rubin (trader) | Paulson (banker)* | Thain/Thornton (banker/multi)* | Cohn (trader)* | |
| Organizational characteristics | |||||
| Private/public structure | Private partnership | Private partnership | Private LLC | Public corporation | Public corporation |
| Investment bank (IB)/Bank | IB | IB | IB | IB | Bank |
| Liability | Personal | Personal | Limited | Limited | Limited |
| Ownership | 100% partners | 87.5% partners, 12.5% Sumitomo | 82.5% partners, 12.5% Sumitomo, 5% Bishops | 48% partners, 12% public, 40% other | 11.5% partners, 8% Berkshire, 80% /files/02/76/80/f027680/public/other |
| Compensation Partners/Nonpartners | Fixed % cash | Fixed % cash | Fixed % cash | Fixed % plus discretionary Cash and stock | Discretionary plus fixed % Cash and stock |
| Partner liquidity | Starting at retirement | Starting at retirement | Starting at retirement | Public market with vesting | Public market with vesting |
| Partner election | Every 2 years | Every 2 years | Every 2 years | Every 2 years | Every 2 years |
| Partner titles | Partner | Partner | MD | MD | MD |
| Departnering process | Public | Public | Public | Not public | Not public |
| Partner compensation philosophy | % based on tenure | % based on tenure and performance | % based on tenure and performance | % based on tenure/performance and comparables | Discretionary and % based on tenure/performance and comparables |
| Employee compensation average | Below peers | Below peers | Below peers | At peers | Above peers |
| Regulation | |||||
| Number of business principles | 12 | 12 | 12 | 14 | 14 |
| Clients’ interests first | Yes | Yes | Yes | Yes | Yes |
| Shareholder returns | No | No | No | Yes | Yes |
| Board | 100% partners | 100% partners | 100% partners | Majority “insiders” | Majority “outsiders” |
| Banking activities | Glass–Steagall | Glass–Steagall | Glass–Steagall | Glass–Steagall repealed | Dodd–Frank |
| Competition | |||||
| Employees | US IBs | US IBs | US IBs | US IBs, banks, foreign banks, tech firms, hedge funds, private-equity firms | US IBs, banks, foreign banks, tech firms, hedge funds, private-equity firms |
| Turnover | ~5% | ~5%–10% | ~20%–25% | ~20%–25% | ~20%–25% |
| Capital | GS private | GS private | GS private | GS private | GS private |
| (competitors public) | (competitors public) | (competitors public) | (competitors public) | (competitors public) | |
| Clients | |||||
| No-hostile policy | Yes Limited | Yes ~20% | No ~30% | No ~40% | No 40%–50% |
| International | |||||
| HF dedicated group | No | No | No | No | Yes |
| PE dedicated group | No | No | No | Yes | Yes |
| GSAM | No | Yes | Yes | Yes | Yes |
| Average tenure of CEO | ~8 years | ~7 years | ~6 years | ~6 years | ~5 years |
| Returns | |||||
| IB % revenues | >50% | ~50% | ~30%–35% | ~30%–35% | ~10%–15% |
| Prop % revenues | <10% | <10%–20% | ~20%–30% | ~60%–70% | ~50% |
| Technology | |||||
| Voice mail | No | Limited | Yes | Yes | Yes |
| e-mail | No | No | Limited | Yes | Yes |
| Credit derivatives | No | No | Limited | Yes | Yes |
Note:
This table is based on publicly filed information and general consensus of estimates from interviews. Much of the information has not been reported by Goldman, especially prior to Goldman, is subjective, and requires varoius assumptions and interpretation.
Appendix C
Selected Goldman Employees and Lobbyists with Government Positions (Before or After Goldman)
J
OSHUA
B
OLTENGovernment:
President George W. Bush’s chief of staff, 2006–2009; director of Office of Management and Budget, 2003–2006; White House deputy chief of staff, January 20, 2001–June 2003Goldman:
Executive director of legal affairs for Goldman based in London (the bank’s chief lobbyist to the EU), 1994–1999K
ENNETH
D. B
RODYGovernment:
President and chairman of the Export-Import Bank of the United States, 1993–1996Goldman:
Former adviser and board member of the management committee at Goldman, where he worked from 1971 to 1991K
ATHLEEN
B
ROWNGovernment:
Former California state treasurerGoldman:
Senior adviser responsible for public finance, western regionM
ARK
C
ARNEYGovernment:
Governor of the Bank of Canada since 2008Goldman:
Thirteen-year career with Goldman; left in 1995R
OBERT
C
OGORNOGovernment:
Former aide to Richard Gephardt (D.-Mo.) and one-time floor director for Steny Hoyer (D-Md.), the number two House DemocratGoldman:
Works for [Steve] Elmendorf Strategies, which lobbies for GoldmanK
ENNETH
C
ONNOLLYGovernment:
Staff director of the Senate Environment and Public Works Committee, 2001–2006Goldman:
Vice president at Goldman from June 2008 to presentE. G
ERALD
C
ORRIGANGovernment:
President of the New York Fed, 1985–1993Goldman:
Joined Goldman in 1994, currently a partner and managing director; also appointed chairman of GS Bank USA, the firm’s holding company, in September 2008J
ON
C
ORZINEGovernment:
Governor of New Jersey, 2006–2010; US Senator, 2001–2006, where he served on the Banking and Budget committeesGoldman:
Former Goldman CEO; worked at Goldman from 1975 to 1998G
REGORY
C
RAIGGovernment:
White House Counsel in Obama administrationGoldman:
Took position as Goldman’s chief lawyer to defend against an SEC suitG
AVYN
D
AVIESGovernment:
Former chairman of the BBC, 2001–2004Goldman:
Chief economist at Goldman, where he worked from 1986 to 2001P
AUL
D
IGHTONGovernment:
Chief executive of the London Operating Committee of the Olympic Games (LOCOG)Goldman:
Worked at Goldman for twenty-two years beginning in 1983M
ARIO
D
RAGHIGovernment:
Governor of the Bank of Italy since January 2006; since 2011, President of the European Central BankGoldman:
Vice chairman and managing director of Goldman Sachs International; member of the firmwide management committee, 2002–2005W
ILLIAM
D
UDLEYGovernment:
President, Federal Reserve Bank of New York, 2009 to presentGoldman:
Partner and managing director; worked at Goldman from 1986 to 2007S
TEVEN
E
LMENDORFGovernment:
Senior adviser to then–House minority leader Richard GephardtGoldman:
Runs his own lobbying firm; Goldman is a clientD
INA
F
ARRELLGovernment:
Deputy director, National Economic Council, Obama administration, since January 2009Goldman:
Financial analyst at Goldman, 1987–1989E
DWARD
C. F
ORSTGovernment:
Adviser to Treasury Secretary Henry Paulson in 2008Goldman:
Former global head, investment management division at Goldman, where he worked from 1994 to 2008R
ANDALL
M. F
ORTGovernment:
Assistant secretary of state for intelligence and research, November 2006–January 2009Goldman:
Director of global security, 1996–2006H
ENRY
H. F
OWLERGovernment:
Secretary of the Treasury, 1965–1968Goldman:
After leaving the Treasury Department, joined Goldman in New York as a partnerS
TEPHEN
F
RIEDMANGovernment:
Chairman, President’s Foreign Intelligence Advisory Board and of the Intelligence Oversight Board; chairman, Federal Reserve Bank of New York, 2008–2009; former director of National Economic Council under George W. Bush; economic adviser to Bush, 2002–2004Goldman:
Joined Goldman in 1966; former cochairman; left in 1994; was board member until April 2013G
ARY
G
ENSLERGovernment:
Chairman of the US Commodity Futures Trading Commission since 2009; undersecretary of the Treasury, 1999–2001; assistant secretary of the Treasury, 1997–1999Goldman:
Former co-head of finance worldwide; worked at Goldman from 1979 to 1997R
ICHARD
G
EPHARDTGovernment:
US Representative, 1977–2005Goldman:
President and CEO, Gephardt Government Affairs (since 2007); represents Goldman interests on issues related to TARPJ
UDD
G
REGGGovernment:
Three-term New Hampshire senator; ranking Republican on the Appropriations, Banking, Housing and Urban Affairs Committee and on the Health Education Labor and Pensions CommitteeGoldman:
International adviserL
ORD
B
RIAN
G
RIFFITHSGovernment:
Head of the prime minister’s policy unit, 1985–1990Goldman:
International adviser since 1991T
HOMAS
H
EALEYGovernment:
Assistant Secretary of Treasury for Domestic Finance in Reagan administrationGoldman
: Started at Goldman in 1985; founded the Pension Services Group in 1990J
IM
H
IMESGovernment:
Congressman from Connecticut (on Committee on Financial Services) since 2009Goldman:
Began working at Goldman in 1995, eventually promoted to vice presidentR
OBERT
D. H
ORMATSGovernment:
Under secretary of state for economic, energy and agricultural affairs-designate since July 2009; assistant secretary of state for economic and business affairs, 1981–1982Goldman:
Vice chairman of Goldman Sachs International; worked at Goldman from 1982 to 2009O
TTMAR
I
SSINGGovernment:
Bundesbank board member and ex-chief economist of the European Central BankGoldman:
Senior adviserC
HRIS
J
AVENSGovernment:
Ex-tax policy adviser to Senator Chuck Grassley (R.-Iowa)Goldman:
Lobbies for GoldmanR
EUBEN
J
EFFERY
IIIGovernment:
Under secretary of state for economic, business, and agricultural affairs, 2007–2009; chairman of the Commodity Futures Trading Commission, 2005–2007Goldman:
Former head of the Goldman Paris office; worked at Goldman from 1983 to 2001D
AN
J
ESTERGovernment:
Former Treasury adviserGoldman:
Former Goldman vice president and deputy chief financial officerJ
AMES
J
OHNSONGovernment:
Selected to serve on Obama’s vice presidential section committee but stepped downGoldman:
On board of directors since May 1999N
EEL
K
ASHKARIGovernment:
Interim head, Treasury’s Office of Financial Stability, October 2008–May 2009; assistant secretary for international economics (confirmed 2008); special assistant to Treasury Secretary Henry Paulson, 2006–2008Goldman:
Vice president, 2002–2006L
ORI
E. L
AUDIENGovernment:
Former counsel for the Senate Finance Committee, 1996–1997Goldman:
Lobbyist since 2005A
RTHUR
L
EVITTGovernment:
Chairman, SEC, 1993–2001Goldman:
Adviser, June 2009 to presentM
ARIO
M
ONTIGovernment:
Prime minister of ItalyGoldman:
International adviser, 2005 until his nomination to lead the Italian government; also worked closely with Goldman to reduce the apparent size of Italian government debtP
HILIP
M
URPHYGovernment:
US ambassador to Germany since 2009Goldman:
Former partner of Goldman, where he worked from 1983 to 2006M
ICHAEL
P
AESEGovernment:
Top staffer to House Financial Services Committee Chairman Barney FrankGoldman:
Director of government affairs/lobbyist, 2009M
ARK
P
ATTERSONGovernment:
Treasury Department chief of staff since February 2009Goldman:
Lobbyist, 2003–2008H
ENRY
“H
ANK
” P
AULSONGovernment:
Secretary of the Treasury, March 2006–January 2009; White House Domestic Council, serving as staff assistant to the president, 1972–1973; staff assistant to the assistant secretary of defense at the Pentagon, 1970–1972Goldman:
Former CEO; worked at Goldman from 1974 to 2006R
OMANO
P
RODIGovernment:
Two-time prime minister of ItalyGoldman:
From March 1990 to May 1993 and when not in public office, acted as a consultant to Goldman SachsR
ICHARD
Y. R
OBERTSGovernment:
Former SEC commissioner, 1990–1995Goldman:
Principal at RR&G LLC; retained by Goldman to lobby on TARPJ
OHN
F. W. R
OGERSGovernment:
Served as undersecretary of state for management at the US Department of State, 1991–1993Goldman:
Executive vice president since April 2011; chief of staff and secretary to board of directors since November 2001; joined in 1994 in the fixed income division and served in various positions, 1994–2001R
OBERT
R
UBINGovernment:
Treasury secretary, 1995–1999; chairman, National Economic Council, 1993–1995Goldman:
Former co-senior partner at Goldman, where he worked from 1966 to 1992S
TEVE
S
HAFRANGovernment:
Adviser to Treasury Secretary Henry PaulsonGoldman:
Worked at Goldman from 1993 to 2000S
ONAL
S
HAHGovernment:
Director, Office of Social Innovation and Civic Participation (April 2009); advisory board member, Obama-Biden Transition Project; variety of positions in the Treasury Department, 1995–2002Goldman:
Vice president, 2004–2007F
ARYAR
S
HIRZADGovernment:
Served on the staff of the National Security Council at the White House, March 2003–August 2006; assistant secretary for import administration at US Department of Commerce in the Bush administrationGoldman:
Global head of government affairs (lobbyist) since 2006G
ENE
S
PERLINGGovernment:
Director of the National Economic Council in Obama administrationGoldman:
Consultant to Goldman in 2008R
OBERT
K. S
TEELGovernment:
Under secretary for domestic finance, Treasury, 2006–2008Goldman:
Former vice chairman of Goldman, where he worked from 1976 to 2004A
DAM
S
TORCHGovernment:
Managing Executive of the SEC’s enforcement division, October 2009 to presentGoldman:
Former vice president at Goldman, where he worked from 2004 to 2009M
ARTI
T
HOMASGovernment:
Assistant secretary in legal affairs and public policy, 2000; deputy assistant secretary for tax and budget, Treasury Department, 1998–1999; executive floor assistant to Richard Gephardt, 1989–1998Goldman:
Joined Goldman as federal legislative affairs leader, 2007–2009
