Review by Christopher Hartman in the Christian Science Monitor, November 7, 2008

'The Partnership: The Making of Goldman Sachs,' by Charles D. Ellis

In the 139 years of its existence, Goldman Sachs has endured the Great Depression, the collapse of the high-tech hedge fund called Long Term Capital Management in the late 1990s, and, most recently, the crisis in world credit markets.

Charles Ellis, who for 30 years managed the international financial consulting firm Greenwich Associates, details the company’s rise from “marginal Eastern US commercial paper dealer” to “global juggernaut” in The Partnership: The Making of Goldman Sachs.

Ellis convincingly demonstrates, using both humorous and sober anecdotes and well-researched analysis, that this path has been anything but linear.
Founded in 1869 by Marcus Goldman, a German-Jewish emigrant who came to Philadelphia in 1848, the firm originally specialized in the brokering of commercial paper. In 1882, the company became a family affair when son-in-law Samuel Sachs joined the firm.

Throughout this period, Ellis asserts, anti-Semitism was rampant in the investment world. Two of the leading financiers of the era, J.P. Morgan and George F. Baker (head of what is now Citigroup), would not deal with “Jewish companies.” So these companies turned to “Jewish firms,” such as Goldman Sachs.

Anti-Semitism also served to exclude Goldman Sachs from underwriting the new bond and stock issues of the rapidly expanding railroad industry – leaving the firm to pursue “industrial financing” instead.

This resulted in two noteworthy successes: Sears, Roebuck and Co. and F.W. Woolworth.
Two early crises rocked the company. First, Henry Goldman (son of Marcus), who was responsible for much of its success up to and throughout World War I, was forced out for his outspoken German sympathies – which not only caused a severe rift within the closely related Goldman and Sachs families, but also threatened the firm’s very survival after Goldman withdrew his considerable capital.

Second, Goldman’s successor, senior partner Waddill Catchings, aggressively invested in the “Goldman Sachs Trading Corporation” – a trust which speculated heavily on margin.

Catchings’s dealings left the company severely overleveraged. As a result, Goldman Sachs saw both its fortunes and reputation severely depleted following the stock market crash in October 1929.

The company barely survived the Depresssion.

At its helm, however, was the “smart, tenacious and aggressive” Sidney Weinberg, who combined street savvy (“he had scars on his back from knife fights as a newspaper boy”), a legendary sense of humor, and a fierce loyalty to his clients. Known as “the body snatcher” for his ability to persuade top executives on Wall Street to participate in the World War II production effort, Weinberg “launched a series of relationships with occupants of the White House that would continue for more than thirty-five years.”

During his leadership – 1930 to 1969 – Weinberg served on more than 40 corporate boards and oversaw the largest initial public offering in history: the Ford Motor Company, which earned him the title “Mr. Wall Street.” Along the way, Weinberg established the corporate culture focused on client service that became Goldman Sachs’s trademark.

Under Weinberg, Gustave (Gus) Levy, a New Orleans native and Tulane dropout, was Goldman Sachs’s force behind “block trading,” the buying and selling of blocks of as many as tens of thousands (and eventually hundreds of thousands) of shares of stock for its institutional clients.

During the 1950s, Levy sought to dominate this field. Despite Weinberg’s reservations and attempts to rein him in, this admittedly risky business remained highly profitable for Goldman Sachs for decades following.

With the arrival of the 1980s, there was a desire to “move away from limiting the firm to ... Weinberg’s focus on client service by adding increasingly bold use of capital in disciplined, risk taking proprietary business.” Robert Rubin and Steve Friedman, now senior partners, launched a new division, Goldman Sachs Asset Management (GSAM), which they hoped would put them in the forefront of investment management.

By the time Rubin left to lead the National Economic Council in Washington in 1993 and was later named secretary of the Treasury in 1995, GSAM had a variety of mutual funds under management that were nicely exceeding S&P 500 averages.

Senior partner Jon Corzine, appointed in 1994, was seduced into disaster with Long Term Capital Management.

This secretive, complex system of derivatives and other risky financial devices, unraveled after the Russian government defaulted on its debt in 1998 and had to be rescued by the New York Federal Reserve.

This, combined with what Ellis calls Corzine’s “informal, intuitive, undisciplined way of making senior level decisions,” resulted in Corzine’s being forced out of the firm in 1999.

Under the direction of new head Henry (Hank) Paulson, however, GSAM steadily gathered assets and by 2004, its profits reached $1 billion annually. Paulson demonstrated an ability to match people and positions and acted successfully and quickly to stabilize organization of the firm’s senior management, including appointing John McNulty to head GSAM.

Simultaneously, Paulson worked to take the company in another profitable direction as both principal and client agent and to expand its investments into both private equity and real estate.

With Paulson’s appointment to Secretary of the Treasury under President Bush in 2006, Goldman Sachs has become the central player in managing the largest governmental rescue of the financial markets in American history.

And with a profusion of Goldman Sachs alumni, including Neel Kashkari, the recently appointed interim assistant secretary of the Treasury for financial stability, involved in its implementation, Goldman Sachs continues to asserts its prominence in the field of investment banking.

Christopher Hartman is the author of Advance Man: The Life and Times of Harry Hoagland, and has written extensively on the history of venture capital in the high-tech industry.

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The Partnership: The Making of Goldman Sachs, by Charles D. Ellis