Where have you gone, Goldman Sachs?

September 24, 2013: 12:58 PM ET

A former top Goldman banker describes how the bank's approach to ethics and integrity has changed over the years.

By Steven Mandis

Goldman Sachs headquarters

Goldman Sachs headquarters

FORTUNE -- Steven Mandis worked at Goldman Sachs as an investment banker, primarily in its M&A department from 1992 to 2004. His forthcoming book, What Happened to Goldman Sachs?, focuses on his time at the firm and what he found out from interviewing numerous current and former partners. The following is an excerpt from the book.

On September 25, 2006, I filed into the memorial service for John L. Weinberg, a senior partner of Goldman Sachs from 1976 to 1990. More than a thousand people filled Gotham Hall in New York to pay their respects.

I had left Goldman (GS) two years earlier, after a 12-year career, to start my own asset management firm. In the fall of 2006, Goldman was near the height of its earning power and prestige. But I felt that, even at that time, in some weird way, I was mourning not only the loss of the man who had embodied Goldman's values and business principles, but also the firm's culture, which had been built on those values.

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 (GE) and a long-standing client of John L.'s.

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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.

I first met John L. in 1992, early in my time at Goldman. I was a financial analyst in M&A and was asked to make a video on the history of the department. John L. could not have been more jovial and humble. He told me that his father had once fired him in the 1950s for what seemed a minor offense -- without the proper approvals, he had committed a small amount of the firm's capital to help get a deal done for a client -- and how, lesson learned, he had groveled to get his job back. Sharing that he liked Chicago, where I was born, he advised me to work with the head of the Chicago office, Hank Paulson, because I would learn a lot from him and it would allow me to fly from New York to see more of my family, something he emphasized was important.

At the time, Goldman had less than $1.5 billion in pretax profits, and fewer than three thousand employees. But Steve Friedman and Bob Rubin, co-senior partners, had embarked on an aggressive growth plan -- growing proprietary trading and principal investing, expanding internationally, and spreading into new businesses.

I didn't see John L. again until 1994, after Goldman had lost hundreds of millions of dollars betting the wrong way on interest rates as the Fed unexpectedly raised them. There were rumors that partners' capital accounts in the firm, representing their decades of hard work, were down over 50% in a matter of months. And to make matters worse, because Goldman was structured as a partnership, the partners' liability was not limited to their capital in the firm; their entire net worth was on the line.

With the firm reeling from the losses, Steve Friedman, now sole senior partner because Rubin had left to serve in the Clinton administration, abruptly resigned. Friedman cited serious heart palpitations as the reason for his unexpected retirement. John L. viewed Friedman as a "yellowbellied coward" and his departure as tantamount to "abandoning his post and troops in combat," regardless of Friedman's stated reason for leaving.

Despite John L.'s best efforts to persuade them to stay, almost one-third of the partners retired within months. Their retirements would give their capital in the firm preferential treatment over that of the general partners who stayed -- and would allow the retirees to begin withdrawing their capital. Many loyal employees were being laid off to cut expenses.

When John L. walked onto the M&A department's twenty-third floor at 85 Broad Street that day in 1994 to calm the troops, the atmosphere was tense. I genuinely was worried Goldman might fold. Drexel Burnham Lambert had filed for bankruptcy a few years earlier -- why not Goldman? John L.'s encouraging words meant a great deal to my colleagues and me, as did the fact that he delivered them in person. The amazing thing is that he remembered me from my video project and, in a grandfatherly way, patted me on the shoulder as he said hello.

Shortly after my first meeting with John L. in 1992, I was assigned to work with Paulson and a team of investment bankers advising the Chicago-based consumer goods company Sara Lee Corporation. The project was to review Sara Lee's financial and strategic alternatives related to a particular management decision.

Paulson was demanding, and he instructed us to leave no stone unturned. We worked 100-hour weeks, fueled by Froot Loops and Coca-Cola for breakfast and McDonald's hamburgers and fries for lunch and dinner. In the end, we had a presentation book 50-to-70 pages long for the client, plus another 100-page backup book. We made sure that every i was dotted and t was crossed, every number corresponded to another number, every financial calculation was accurate, and every number that needed a footnote had one. Perfection and excellence were expected -- not only by Paulson but also by everyone else at the firm -- no matter the personal sacrifice.

At Sara Lee's offices, all five of us from Goldman, including Paulson, waited anxiously to go into the meeting. When we were ushered into the boardroom, most of us took seats across the table from Sara Lee's CEO, John H. Bryan, who would one day join the board of Goldman.

However, Paulson sat down next to Bryan across the table from the rest of the Goldman team. After Paulson made some introductory remarks, speaking to Bryan as if no one else was in the room, we started presenting our analysis, the pros and cons of the alternatives, and our recommendations. (I had no speaking role; I was at the meeting in case someone asked any questions about the numbers. This was customary at Goldman -- to watch and learn.)

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Throughout the meeting, Paulson asked questions that he felt should be on Bryan's mind, challenging us -- grilling us, really -- and posing follow-up questions to Bryan's own. I wondered, Which one is the client -- Bryan or Paulson? That's when I learned an important lesson: They were one and the same. To Paulson, and therefore to Goldman, Bryan was not a client; rather, he was a friend. This was Goldman's first business principle in action. In that meeting, Paulson embodied the spirit of that principle and of Goldman at its best. He didn't just walk a mile in the client's shoes; he ran a marathon. This rigor of service, along with his Midwestern work ethic and values, led not only to his own many professional successes but also to the many successes for his clients and for the firm he would one day lead.

Goldman partners reinforced the importance of the values by their actions; they didn't need to be specifically mentioned because they were understood by watching. The way these CEOs and partners acted, dressed, and behaved reinforced unwritten norms or uncodified principles. The men at the top wore Timex watches and not Rolexes (and this is before Ironman watches were fashionable). Partners did not wear expensive suits or drive fancy cars (most drove Fords because it was such a good client and many partners got a special discount). They lived relatively modestly, considering their wealth. It was simply not in the ethos to be flashy but rather to be understated, with Midwestern restraint. The unwritten commandment to keep a low profile was not, until rather recently, violated casually.

I do not want to wax nostalgically about the good old days. I did on occasion observe vice presidents and partners acting in a way that might not be considered in the best interests of clients, though those were exceptions to the rule. For example, I was tangentially helping a team led by a vice president in selling a company, and when the final bids and contracts were due from all the potential buyers, only one buyer had submitted a bid, and the price was less than the amount our client was willing to sell for. It seemed to be a delicate situation, because we had little negotiating leverage to persuade the only potential buyer to pay more. Also, the bidder was a good client of Goldman's. However, the vice president called the sole bidder and said, "We had a number of bids" and told the bidder that to win the auction, he would have to raise his bid. I questioned him, and based on his facial expression and the tone of his response, I don't think he appreciated my inquisitiveness. He pointed out to me that he had said "a number of bids," and "in this instance, the number is one."

But as I said, these examples were exceptions. The vast majority of the time that I worked in banking, the people with whom I worked did not rely on technicalities to determine what was right or wrong. I once joked to a friend that if someone found a nickel on the floor of the Goldman M&A department when I was there, he or she would go so far above and beyond what was required as to put up a "found" poster with a nickel taped to it, something that seems crazy anywhere, let alone on Wall Street. But in retrospect, "a number of bids" should have alerted me to the fact that there were multiple moralities or interpretations and that sometimes people might be obeying the letter of the law while violating its spirit, and rationalizing their behavior.

---

The most recent glaring criticism of Goldman's reputation came from Greg Smith, an employee who had worked at Goldman for twelve years. Smith delivered his resignation in an op-ed piece published in March 2012 in the New York Times: "Why I Am Leaving Goldman Sachs."

In the op-ed, Smith attributed his resignation to the drastic changes in Goldman's culture in the past decade or so: "The firm has veered so far from the place I joined right out of college that I can no longer in good conscience say that I identify with what it stands for." He pointed out specific symptoms of the current "toxic and destructive" environment, such as referring to clients as "Muppets."

Though Goldman aggressively dismissed both Smith and his accusations, some current and former employees say that there is "a sizable, yet silent contingent within the investment bank, a group of people who are increasingly frustrated with what they see as a shift in recent years to a profit-above-all mentality." But one partner I interviewed explained with reflection that in the end it didn't matter whether Smith was disgruntled or not, too junior or not, in enough strategically important areas of the firm or not, motivated by money or not, and it didn't even matter whether he got the reasons right; at a high level, his letter was making a basic claim: that the culture of Goldman had changed from when he started, and for the worse.

As a client, I had a chance to see how different Goldman's value-added proposition was. I had a potential investment idea, but it required the coordination and collaboration of several parts of a bank to execute the transaction. I took the idea to several banks, but I never got past the first meeting with any of them. The groups within the same bank couldn't agree on who would get what credit or revenues, something that would impact their bonuses (they never said this out loud, and I am reading between the lines of politically correct banker speak). So instead of executing a trade for a client, the banks did nothing.

I had a meeting with Goldman, and the partners I met with saw an overall opportunity, spoke among themselves, came to an agreement, and agreed to do the transaction (my personal relationship with them probably also helped). This teamwork in execution is a tremendous advantage for Goldman and shows that a residual social network and partnership culture still exists.

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As the deal progressed, Goldman better understood what I was doing and thought it was a great investment idea. Later, Goldman said it wanted to co-invest in the deal. This is an example of the powerful strategy Goldman claims of combining advisory work with co-investing. Goldman, to its credit, was the only bank smart enough to figure out how to get the deal done and recognize it was a good deal. Goldman's coinvestment helped execute the deal for us at attractive terms.

I was very happy with Goldman's advice and execution. However, a few months later I heard a rumor from a competitor that Goldman had done a similar deal with another client -- much larger than we were -- implying that Goldman took information about the deal and showed it to another client. I do not know whether this is true. So even though I had good feelings about Goldman getting the deal done for me, recognizing I never would have gotten it done without Goldman's approach and ability to execute, I was slightly annoyed that, allegedly, Goldman used information to benefit itself with a larger client.

When I heard the rumor (again, only a rumor), it kept me on my guard. I didn't say anything. I didn't want to upset Goldman because it is a very important player in the marketplace. I kept doing business with Goldman (and later I was involved in hiring Goldman to sell my firm). In my opinion, Goldman's people were responsive, well prepared, thoughtful, and connected. However, I did not feel as if all the people at Goldman could be trusted completely all the time. This should not be a shocking revelation in hindsight. No firm is made up of all honest people, on Wall Street or anywhere. But it was for someone who started at Goldman in the early 1990s.

Reprinted by permission of Harvard Business Review Press. Adapted from What Happened to Goldman Sachs: An Insider's Story of Organizational Drift and its Unintended Consequences. Copyright 2013 Harvard Business School Publishing. All rights reserved.

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