What Happened to Goldman Sachs: An Insider's Story of Organizational Drift and Its Unintended Consequences (29 page)

Appendix G

Goldman Timeline of Selected Events

Following is a timeline summarizing selected key events for Goldman and its industry. Although the timeline covers events starting in 1869, the book starts its analysis from 1979, when the business principles were codified. The timeline goes through most of 2012. In order to help demonstrate that pressures started impacting the firm before its IPO in 1999 and before Blankfein took over as CEO, the events are categorized in terms of the analytical framework used for the analysis in the book.
¹

As discussed in
appendix B
, the framework categorizes four main pressures (or responses to those pressures) that impact an organization: organizational (O), regulatory (R), technological (T), and competitive (C). Although many events may apply or occur in response to multiple pressures, for simplicity in this timeline I use “O,” “R,” “T,” or “C” to indicate what I believe was the primary set of factors at work. It is challenging to precisely characterize each event. Also, I may inadvertently have missed selected events.

1869:
Marcus Goldman moves to New York and starts selling promissory notes (early commercial paper) from a one-room office on Pine Street.

1882:
Samuel Sachs, Goldman’s son-in-law, joins the business.

1885:
The firm becomes a general partnership, Goldman Sachs & Company.

1896:
The company joins the New York Stock Exchange.

1900:
Goldman’s first branch office opens in Chicago.

1904:
The firm’s capital reaches $1 million.

1906:
Goldman co-manages its first IPO for one of its clients, United Cigar Manufacturers. The same year, Goldman handles the initial equity sales for Sears, Roebuck, pioneering the IPO business.

1907:
Walter Sachs (grandson of Marcus Goldman) joins the firm as a commercial paper salesman. Sidney Weinberg is hired as assistant janitor.

1909:
Marcus Goldman dies, and Henry Goldman leads the firm.

1910:
Goldman now has a few partners, all members of the Goldman or Sachs families.

1917:
Henry Goldman’s pro-German stance causes a rift between the Goldman and Sachs families. Henry Goldman retires and withdraws his capital. Sidney Weinberg leaves to serve in the US Navy during World War I.

1920:
Sidney Weinberg returns to Goldman as a bond trader.

1925:
Weinberg buys a seat on the NYSE with money from his own earnings, not from trading.

1927:
Weinberg becomes only the second partner from outside the Goldman and Sachs families.

1929:
Waddill Catchings, who joined the firm eleven years earlier to head up underwriting, holds the largest single percentage in the partnership and takes over leadership. He pushes for the creation of Goldman Sachs Trading Corporation, a collection of highly leveraged investment trusts. When the stock market collapses, Goldman Sachs Trading Corporation suffers heavy losses, and Goldman’s reputation is severely damaged.

1930:
After devastating trading losses, Catchings is forced to resign. The Sachs brothers name Sidney Weinberg senior partner. Weinberg takes over leadership of Goldman and builds its investment banking operation. The Sachs family covers the partners’ losses. Goldman will not reenter the asset management business again for nearly forty years.

1933:
Weinberg organizes the Business and Advisory Council for President Franklin D. Roosevelt, creating a bridge between business and government during the New Deal. Congress passes the Securities Act of 1933, creating the Securities and Exchange Commission. The Banking Act of 1933, known as the Glass–Steagall Act, is passed, prohibiting commercial banks from engaging in investment activities.

1937:
Sidney Weinberg’s percentage of the partnership has tripled since 1927 and stands at 30 percent.

1942:
Weinberg takes a leave from the firm and enters government service as assistant to the chairman of the War Production Board, forming relationships with America’s top executives, many of whom will later become Goldman clients.

1945:
At the end of the war, Weinberg resigns from government service.

1947:
John C. Whitehead joins Goldman from Harvard Business School.

1948:
The Justice Department files an antitrust suit (
U.S. v. Morgan
[Stanley]
et al
.) against nineteen investment banking firms. Goldman had only 1.4 percent of the underwriting market and was last on the list of defendants. Goldman would not be included in a 1950 list of the top seventeen underwriters. Sixty years later, of the nineteen firms named in the suit, only Goldman and Morgan Stanley remain as independent firms.

1950:
John L. Weinberg, Sidney’s son, joins Goldman. A list of the top seventeen underwriters does not include Goldman.

1956:
Goldman leads the underwriting of Ford Motor Co.’s IPO, building the firm’s reputation in investment banking. Whitehead and John L. Weinberg become partners. Goldman’s capital stands at $10 million.

1969:
Upon retiring, banking-oriented Sidney Weinberg has reservations about leaving Gus Levy, a trader, as senior partner, so he introduces an eight-man management committee with seven older banking partners to supervise Levy. Sidney Weinberg dies. Gus Levy, now senior partner, takes charge of Goldman and rebuilds its trading business. Because of the potential for direct conflicts with its large block-trading clients and because of the Goldman Sachs Trading Corporation debacle, Goldman steers clear of asset management until Gus Levy creates the investment management services (IMS) unit.

1970:
The NYSE amends its rules to admit publicly traded members, prompting investment banks to consider abandoning their partnership structures and offering shares for sale to the public. Credit ratings are created for every issuer of commercial paper after the Penn Central Transportation Company goes bankrupt with more than $80 million in commercial paper outstanding, much of it issued by Goldman. The ensuing litigation threatens the firm’s existence. Goldman opens its first international office in London.

1971:
Merrill Lynch goes public.

1972:
Goldman starts a private wealth division and a fixed income division. Goldman pioneers a “white knight” strategy, defending Electric Storage Battery against a hostile take-over bid from International Nickel and Goldman rival Morgan Stanley.

1973:
Fischer Black and Myron Scholes first describe their Black-Scholes model to price options.

1975:
May 1 marks the end of fixed trading commissions in the stock market, forcing investment banks to compete in negotiations over transaction fees.

1976:
After Gus Levy’s death, John L. Weinberg (Sidney’s son) and John Whitehead take over as senior partners and continue to build Goldman’s investment banking business. This is the beginning of Goldman’s tradition of having co-heads, setting a Wall Street precedent. The firm sets a record for pre-tax profits of $40 million.

1979:
John Whitehead drafts a set of business principles that codifies Goldman’s core values, setting a Wall Street precedent (O).

1980:
Goldman’s capital stands at $200 million.

1981:
Salomon Brothers goes public (C). Goldman diversifies by absorbing the commodities trading company J. Aron & Co. Lloyd Blankfein, who worked at J. Aron before the merger, joins Goldman. J. Aron becomes Goldman’s currency and commodities trading division (C). In 1997, it is merged with the fixed income division.

1982:
Goldman makes its first international acquisition, London-based First Dallas, Ltd., later renamed Goldman, Sachs, Ltd (C). Stocks in the late 1970s and early 1980s are in a bear market. The Dow Jones Industrial Average bottoms at 777 on August 12, 1982. But a steady decline in interest rates—with yields on thirteen-week treasuries having eased to 8.6 percent from nearly 13 percent in the previous month and a half—finally gets stock moving. On August 17, the Dow leaps a then-record 38.81, or 4.9 percent, to 831.24, and the equity market begins a long bull run, with some bumps. Massive wealth creation over the course of the next twenty-five years, the likes of which the United States and the world had never seen, would follow.

1983:
The firm’s capital has grown to $750 million, some $500 million from the active partners themselves. In 1983, John L. Thornton co-founds Goldman’s European M & A business in London (O).

1984:
Continental Illinois National Bank and Trust becomes the largest-ever bank failure in US history. Continental was at one time the seventh-largest bank in the United States as measured by deposits, with approximately $40 billion in assets. Because of the size of Continental Illinois, regulators are not willing to let it fail (R). The term “too big to fail” becomes popularized.

1985:
Bear Stearns goes public (C). Whitehead leaves Goldman after thirty-eight years and later becomes deputy secretary of state to George Schultz, serving until 1989 (O). Steve Friedman, a former M&A banker, and Bob Rubin, a former equities proprietary trader, co-head Goldman’s fixed income division (O).

1986:
Goldman’s capital has grown to $1 billion, almost entirely through retained earnings. Morgan Stanley, Goldman’s primary competitor, goes public (C). Goldman’s growing trading business is capital intensive (C). The management committee conducts a study, led by Steve Friedman and Bob Rubin, and recommends taking Goldman public (O, C). John L. Weinberg and Jimmy Weinberg do not support the idea, and it is not brought to a vote (O). To raise capital, Goldman accepts a $500 million private equity investment from Sumitomo Bank, as a silent partner, in exchange for 12.5 percent of Goldman’s annual profits and appreciation in equity value (O, C). One of Goldman’s largest partner classes is voted in (twice as large as any previous class), including three partners from other firms who have never worked at Goldman, as well as Goldman’s first female partner and first African American partner (O, C). Goldman takes Microsoft public and joins the London and Tokyo stock exchanges (C).

1987:
In October, the Dow Jones Industrial Average drops 508 points, a stunning 22.6 percent, on “Black Monday,” raising fears that the US economy is headed for a severe recession. The Federal Reserve acts quickly to cut interest rates and pump cash into the banking system, helping end the threat. The October market crash, in part, causes Goldman to reduce overhead; several hundred employees are laid off by the end of the decade (O). It is the first time in recent memory that Goldman lays people off. Robert Freeman, Goldman’s head of arbitrage, receives a prison sentence for insider trading. As a result of the crash, Value at Risk models receive more emphasis (R, T, O). Wall Street begins to increasingly focus on hiring academically trained and quantitatively oriented traders and risk managers and increase spending on financial innovation (T, O).

1988:
Leon Cooperman, head of equity research, assumes responsibilities for building the investment management business, and a new division is launched: Goldman Sachs asset management (GSAM) (O, C). Hundreds of savings and loans (S & Ls) are shut down, at a total cost of more than the reserves in the federal insurance fund. US taxpayers make up the difference.

1989:
As an alternative to going public to raise capital, Goldman forms a ten-year consortium with seven insurance companies, bringing in $225 million in new capital to expand Goldman’s merchant-banking capabilities. The insurance companies receive a fixed return on their investment but do not share in profits or management and have no voting rights (O, C). The firm also creates a holding company, Goldman Sachs Group (technically not subject to NYSE capital requirements), and spins off several subsidiaries (R, C). The Berlin wall falls, igniting global expansion for American businesses (C, O).

1990:
Bob Rubin and Steve Friedman take charge as co-senior partners and co-chairs of the management committee, expanding global operations and seeking other opportunities for growth, including proprietary trading (O, C). They make partners’ compensation more dependent on performance than on tenure, and they initiate the firm’s first lateral hiring initiatives (O, C). High-yield bond investors threaten to boycott Goldman after accusations that GSAM and Goldman improperly used proprietary information gained in its underwriting role (O, C); Cooperman is forced to change GSAM’s strategy to focus on mutual fund sales to individual investors rather than institutional clients. Drexel Burnham Lambert, once the fifth-largest US investment bank, is forced into bankruptcy in February.

1991:
Goldman’s management committee again studies the option of going public but drops the idea before the proposal can be put before the partnership (C, O). Warren Buffett helps save Salomon Brothers from bankruptcy (C). Goldman shuts down debt investing fund Water Street (O). Goldman creates GSCI, a benchmark for investment performance in the commodities markets (T).

1992:
Bob Rubin leaves Goldman to become assistant to the president on economic policy (O). The move adds to the Goldman mystique but is unusual in that Rubin’s is one of the shortest tenures as senior partner. A Hawaiian educational trust, the Kamehameha Schools/Bishop Estate, invests $250 million in Goldman and receives a stake of more than 5 percent in the firm. It is a passive investment; the trust has no voting privileges but will participate in Goldman’s profits and losses. In an effort to further link pay to performance, and to create a new source of developmental feedback, Goldman institutes 360-degree performance reviews (meaning that even junior staff reviews senior staff). New offices are opened in Frankfurt, Milan, and Seoul (O, C).

1993:
Goldman is one of the most profitable firms in the world with record profits and experiences rapid growth and global expansion. A federal appeals court rules against Goldman and prohibits investment banking firms from advising corporate clients with which they had a business relationship in bankruptcy proceedings (R, O). This limits money-making opportunities for Goldman and other investment banks (R). Goldman conducts another formal study of the possibility of taking the firm public (O). There are now approximately 160 partners. Goldman advises business tycoon Li Ka-shing and his family in selling a majority stake to Rupert Murdoch’s News Corp (C, O). Goldman’s involvement in such a high-profile deal with two major business tycoons in Asia puts Goldman on the map in Asia. It also highlights Goldman’s strategy of focusing on very important people. Credit derivatives are pioneered at J.P. Morgan (C, T). By 1996, credit derivatives would be a $40 billion market and by 2008 it would be measured in the trillions of dollars.