Risk is complex and deceptive. At the margin, managing risk is more of an art than a science and depends on experience and judgment.”
The story of the last man standing on Wall Street is an interesting look at globalistion from the other end of the table. A swashbuckling tale of investment banking, Charles Ellis’ account of Goldman Sachs is inextricably linked to the evolution of capitalism from the middle of the 19th century as money — that most fungible of commodities — found itself flowing to ever-new areas of the American, and later the world, economy. From commercial paper to collateralised debt obligations, it is also a tale as much of imagination as of avarice.
There’s sweep here: from taking Ford public to privatising British Petroleum to organising Krupp’s lightning raid on Thyssen. And beyond that is the innovation: from underwriting the Sears Roebuck issue based on the company’s earning potential to hiring Fischer Black, co-inventor of the Black-Scholes options pricing model that spawned the $150 trillion derivatives industry.
The firm, as it is still called, emerges as an incubator of entrepreneurship where the partner riding the latest financial wave — and bringing in most of the bacon — rises to head it. It was an underwriting for Sidney ‘Mr Wall St’ Weinberg in the 1940s; block trading in the 1960s with Gus Levy; tender defence under the ‘Two Johns’ — Whitehead and Weinberg — in the 1980s; arbitrage during Robert Rubin’s watch and the private equity of Henry ‘Hammer’ Paulson. All were money-spinners.
As newer businesses accumulated, the proprietership founded by Marcus Goldman and Samuel Sachs in 1888 morphed, not without deep and long soul-searching, into a listed company in 1999 and, eventually, into something of a commercial bank, which in part explains why it has outlived Lehman Brothers and Bear Stearns.
Ellis’ point is Goldman Sachs got it right more often, and wrong less frequently. But wrong they did go, horribly on occasion. An investment trust floated on the eve of the Great Depression went bust in “one of the largest, swiftest, and most complete investment disasters of the twentieth century”; Robert Maxwell “the client from hell” hurt the firm’s reputation more than its balance sheet as did an instance of insider trading.
Lessons taken well and alongside those from the competition. Goldman Sachs can credit itself with designing internal structures that have kept it contemporary without losing its identity — “powerful bonds and values that tie its people together, a culture of intensive recruiting, entrepreneurial creativity and disciplined risk taking”.
The story plays out as a series of anecdotal accounts, at times overwhelming but understandable because Ellis is writing about arguably the most secretive bunch of suits on this planet. The former managing partner of strategy consulting firm Greenwich Associates admits this book was never written, several times. It finally was after Goldman Sachs got a buy-in. The collective memory of over 100 partners fleshes out the personalities and corroborates the events. Some of which remain tantalisingly out of reach. A case in point being the traffic between Goldman Sachs and the US government: Treasury Secretary Paulson used to run the firm, as did former Treasury Secretary Rubin and former Deputy Secretary of State Whitehead.
The partnership today presents itself “as an organisation of skillful, smart, experienced people connected to corporations, governments, institutions, and expertise all over the world — an organisation with its own capital, access to all the major markets, and a formidable appetite for risk… The firm’s strategic objective is to be recognised widely as the world's best solutions provider so that it will get the first call and will always have the freshest information, the most traffic, and the best opportunity to innovate — at the highest profits.”
The McBurger of capitalism, with extra cheese.