Which is the real Goldman Sachs?


Peter Lee
Published on:

Goldman Sachs has risen to pre-eminence as a global securities house. It is a convincing first in Euromoney's ranking this month of the world's best investment banks. But the US firm has two faces. For its clients it is the vigilant, attentive, even enthralling provider of first-class services. For its rivals it has other qualities: it is a mean and aggressive raptor of deals; its competitors feel under threat; it gives bonds too quickly to its secondary traders. Which picture is the right one, and what is the secret of Goldman's much-envied success?

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"Goldman Sachs is a firm with a split personality," says a senior Wall Street banker. "The side which the clients see is the smooth, polished Goldman, the bluest of blue-chip firms. What they never seem to see, but we often do, is the firm's other side, which is aggressive, pushy and downright unpleasant to work with."

Goldman is the last private partnership among the world's leading investment banks. It is also the most consistently successful, or profitable, firm on Wall Street. In the late 1980s, while other large brokers recorded losses, Goldman earned about $500 million a year. By 1991, its annual earnings stretched to over $1 billion. And this year, who knows? Some recently departed staff estimate over $1.5 billion, others, even more.

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pages from
October 1993 

The firm's glory has been built on two great strengths in the US: long-lasting corporate client relationships and powerful distribution among institutional investors, particularly in equities. To these has been added an increasingly powerful presence in the international bond and equity markets.

Goldman has pursued a bold policy for the 1990s of expanding on many fronts, into new businesses such as foreign exchange and asset management, and fresh markets in Europe, Asia and Latin America. The once cautious firm that steered clear of bridge loans in the 1980s now makes large principal commitments in bonds, equities and foreign exchange.

A few years ago it did not even run a swaps book; now it is prepared to take more principal positions in derivatives. Much of its income comes from own-account trading.

But its most visible, and controversial, succss has been in the primary international equity and bond markets. Many competitors complain that Goldman has been fighting mean and that beneath the classy image which the firm displays to its clients, lurks an altogether more aggressive beast. Rivals add that despite Goldman's reputation for excellence, it fouls up deals as often as everyone else.

Desert island choice

In the past two years, the firm has managed to win more global co-ordinator mandates than any rival in the international equity markets. Earlier this year, it emerged victorious from the fiercest ever contest to lead an international equity deal, the forthcoming privatization of Singapore Telecom. Last month, Goldman arrived atop the Eurobond bookrunner league tables, thanks to a record- breaking $5.5 billion global bond for the Republic of Italy which it lead-managed with Salomon Brothers. Two years it did not rank in the top 10 Eurobond bookrunners.

"They have made some superb long-term investments in people and businesses," says a rival. Another competitor adds: "What I admire about them is their ability to move successfully into markets. They now have a lot of good bankers in Germany, they are building momentum in Hongkong and they moved very effectively into Mexico a few years ago."

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The rise and rise of a global firm

In the years following the American Civil War, when bank credit was hard to get, a Bavarian immigrant called Marcus Goldman made the rounds of businesses in downtown Manhattan, buying the promissory notes of their customers. He carried them tucked in the headband of his high silk hat and sold them to the banks. Goldman set up an office in 1869 and later brought in his son-in-law Samuel Sachs.

Commercial paper was the mainstay of the firm until well after World War 1. It built relationships with large and growing American companies. It began to sell their equity too.  Companies came to rely heavily on Goldman Sachs for their financing.

Goldman pic5

The firm's style has changed since
John Weinberg retired. His quirkiness
gave it a special character. 

The small firm was dominated by big personalities. Sidney Weinberg joined as a messenger- boy in 1907 and ran Goldman as senior partner from 1934 to 1969. A short, authoritative man with no formal education, he eventually sat on the boards of 40 leading American companies. Goldman was never shy about taking advantage of its strong market position. For decades, it demanded exclusive dealership arrangements with its customers.

In the 1980s, Goldman stood out as a defender of established companies against hostile bids by new debt-laden entrepreneurs – a tradition begun by Weinberg, and continued by his son John, senior partner from 1976 to 1990.

But Goldman's reputation suffered some damage when Robert Freeman, a stock arbitrage trader, was arrested in 1987 during a wide-ranging insider-dealing investigation. The firm had been a big block trader in equities since the 1950s when legendary trader Gus Levy pioneered the business. Levy was senior partner from 1969 to 1976. Robin Rubin, made co-chairman in 1990, also came from the arbitrage desk.

Goldman's support for Freeman typified the Weinberg style: tough but paternal. It has suffered the occasional high-level departure, such as that of Geoff Boisi, a star deal-maker of the 1980s, who did not get on with Rubin and Friedman and left after they became co-chairmen.

Goldman was traditionally solid and staid, slow to move into new businesses or to expand outside the US. Commodities trader J Aron, bought in 1981, was Goldman's first acquisition since 1923. The firm waited until 1988 before following the rest of Wall Street into asset management and until 1990 before running a swaps book of any size. It did not squander its capital on high-risk bridge loans to LBOs. It also resisted buying a UK broker. Instead, Goldman used its reputation as an expert defender in contested acquisitions.

It has often seemed short of capital but has never come close to going public. It sold a 12.5% non-voting stake to Sumitomo Bank in 1985 for $500 million and more non-voting shares to US and foreign insurance companies. Last year it raised $250 million from an educational trust in Honolulu.

The trading of star equity trader Eric Sheinberg in large blocks of Maxwell Communications Corp (MCC) shares between August 1990 and February 1991 embroiled Goldman in a potentially damaging brush with scandal. At that time MCC chairman Robert Maxwell (disgraced after his death) had been keen to support the MCC share price. Sheinberg was interviewed by the UK's Serious Fraud Office, which decided not to pursue the matter. The firm subsequently appointed Gregory Palm, former partner at lawyers Sullivan & Cromwell, as partner in London.

As a result of Maxwell-related investigations by the UK's Securities & Futures Authority, Goldman was fined £160,000 this July, but only for a breach of SFA back-office reporting rules.

Clients are lavish in their praise. The treasurer of one large UK borrower says: "If I were ever stranded on a desert island and could have only one investment bank adviser with me, it would be Goldman Sachs. There are a handful of firms that are top class because of their expertise and general good service in the Euromarkets and North America. I would put Goldman on top of that pile." He concludes: "I consider them the best investment bank in the world."

But there is a darker side to the Goldman success story and to the changes under way at the firm. Goldman fights fiercely for new business and makes no friends in the process. Sometimes it appears to lead to poorly executed and failed transactions. This seemed to be the case last year in the emerging country sector of the international equity market. The firm led the most widely-criticized transaction of 1992, for China Steel, and it had to postpone a global equity offer for Grupo Financiero Banamex Accival (Banacci).

The $843 million China Steel issue flopped partly because the international tranche was launched in advance of the domestic tranche, partly because some shares were placed with speculative investors with no deep knowledge of emerging markets. When investors got Mexico-jitters in summer 1992, Goldman was forced to postpone the Banacci deal. It was later revived as a convertible. During this period, Goldman conspicuously failed to drum up any US support for the doomed Guinness Peat Aviation (GPA) equity offering led by Nomura (see Euromoney, July 1992, page 26). Goldman blames these failures on market conditions. One Goldman partner says: "We have had the largest equity capital markets group of any firm since we set it up in the early 1980s."

"The firm's other side is aggressive, pushy and downright unpleasant to work with"

Goldman is also accused by its peers of often being over-pushy on its own deals, "This is a wonderfully successful firm," says a competitor, "which is not wearing its success well."

A senior Wall Streeter who once admired Goldman for its long-term strategic thinking, now criticizes it for often "being unable to see beyond the economics of a particular transaction".

It would be tempting to dismiss this as cheap talk, the product of jealousy at home, except that the name of Goldman provokes a similar response in markets around the world.

In Hongkong and Singapore, bankers are still bristling over the way Goldman handled the $250 million dragon bond for the Nordic Investment Bank (NIB) launched at the end of May. According to syndicate members, Goldman asked firms to underwrite the issue at a certain level and then suggested that, as a condition of joining, they should take more paper at the fixed re-offer price with no fees. The veiled threat was that firms who declined this suggestion might not be invited into future deals. "This meant that it was us who were finding the true level of demand," complains the head of capital markets at one firm. In the event, demand for the deal was strong and Goldman retained much of the issue.

Goldman agrees that it did ask some co-managers to take additional bonds at the fixed re-offer price with no underwriting fees. It says it did so because it became suspicious of some co-managers' claims that they could place large amounts of bonds with long-term institutional investors. Michael Sherwood, head of debt syndicate, says: "We were receiving some requests for 20 million bonds. As we did not want to buy these back and pay the full fees, we suggested that firms put in for a certain underwriting amount and take additional bonds at the fixed re-offer as a way of putting them to the test." He adds: "Some firms still sold back to us in the secondary market."

Taking the lion's share

In New York, bond syndication staff at other firms recite the most common complaint: Goldman's unceasing efforts to wring profits from every deal. "On a two-handed issue the lead manager normally takes 60% to two-thirds of the fees and the co-manager will take the rest," explains one source. "If Goldman is a co-manager, they will push for a 50%-50% fee split. But of course when they are lead manager, any such suggestion is suddenly preposterous."

Sources in the US equity capital markets tell a similar story. "They are by far the most diffcult firm to deal with," says one source. "Being a co-manager in a Goldman-led deal is often like being a marionette in a puppet show. And sometimes, it is a complete waste of time." The typical tactic for an unscrupulous lead manager to maximize revenues from a new issue is to control pot orders. The distribution of selling concessions among syndicate members may be split, with 30% shared out on a pre-agreed basis and 70% left up for grabs, supposedly at the discretion of investors to pay out in a way which rewards various firms' efforts. Other brokers claim that, when Goldman leads a deal, it often takes the lion's share of this second portion of the selling concessions.

Goldman pic6This is a tactic which London-based equity capital markets desks have noticed creeping into international equity deals. A recent case was the stock offering by Spanish utility Repsol. Goldman acted as global co-ordinator for this deal and also lead-managed the UK tranche. Other members of the UK syndicate feared the worst from the outset. "Here was Goldman telling other issuers that it was vital, for example, to have a US firm lead a US tranche to reach maximum demand, but they were a US firm leading a UK tranche." In the event, the Repsol deal was a great success, marred for some UK firms by low allocations.

According to Robert Steel, a partner at Goldman Sachs in London: "Controlling distribution is not about maximizing fees for the lead manager. It is instead all about ensuring proper placement and distribution. We take the selling role seriously and want to ensure that stock is placed with committed long-term buyers. If other syndicate members can produce important incremental demand we will always respond appropriately. We are not interested in maximizing our position relative to the overall good of the transaction."

Two points need to be made. First, other firms besides Goldman are accused of hogging fees when they act as global co-ordinators on equity deals: for example, Morgan Stanley on the first issue by Argentaria and SG Warburg on BT3. Second, not every firm in the UK syndicate for Repsol complains it was badly treated. Says a source at one merchant bank: "They may do many other things which annoy me, but Goldman handled Repsol fairly. We built up good quality demand and were well looked after at allocation."

In the Eurobond market, Goldman provokes, if anything, even more extreme views than in equities. A consistent theme running through the comments from many other firms is that, as a co-manager, Goldman often sells its allocation at the fixed re-offer price as soon as the syndicate breaks. These claims are supported by the 1993 Euromoney capital-raising poll. Peers rate Goldman highly as a lead-management house but it does not make the top 10 as a co-manager (see Euromoney, September 1993, page 154).

As a lead manager, Goldman has a reputation for being involved in the successful sale of issues which, it sometimes emerges, have not flown quite so quickly off its books. The syndicate manager's regular claim of "all sold" on Goldman deals has become something of a joke among sceptics at other Eurobond firms. They point to the C$750 million issue for the Kingdom of Norway and the 30-year $500 million African Development Bank (AfDB) issue, which Goldman lead-managed with Lehman Brothers.

Goldman points out that the AfDB deal was a genuine success and that though the Norway deal was not – the firm carried a residual position for several months – it never pretended otherwise. Soon after launching the Norway issue on January 7 1993, Sherwood admitted to Euroweek that it was not all sold.

Its own deal sheets show that on March 17, the day of the launch, Goldman sold $331 million of the $500 million 30-year AfDB deal in over 40 lots. As Goldman's allocation was $175 million, this created a technical short position for the firm which it covered by buying bonds from brokers and other syndicate members. At the syndicate meeting the night before the launch, only Goldman and Lehman said that a 30-year issue could succeed. "Some other firms may have been taken by surprise when the deal sold quickly," says Carlos Cordeiro, managing director at Goldman in London.

Goldman pic7Other Eurobond firms cast doubt on the success of Goldman's $1.5 billion global bond for Ford Motor Credit, a deal which did much to enhance the American firm's standing with other borrowers. Critics claim that this was placed mainly in the US and that Goldman perversely increased the size of the issue from an original $1 billion, in an effort to disguise poor placement in Europe.

According to Goldman Sachs, the idea for the Ford Motor Credit global bond originated with a large lead order in Europe which later dropped away. "The deal was triggered by European interest. We sold some bonds there and it still trades there," says Jon Winkelreid, a partner in New York. "That European interest ultimately allowed us to launch an issue three times larger than a normal US deal. There is no question that distribution was lop-sided to the US but what is wrong with that?"

Goldman has a reputation for putting deals into the secondary market more quickly than other firms. "They are not a team player," says a syndicate source. Goldman agrees that its secondary traders take responsibility for new-issue bonds as soon as they are free to trade. Managing director Rick Garonzik in London says: "The inference that we sell bonds quickly because we do not have a new-issue trader is a misconception. New-issue positions are traded immediately by the appropriate secondary trader, but the responsibility to maintain and support positions remains with the syndicate desk as long as it is appropriate."

More and more customers

There is no sign that bond issuers are disenchanted with this other side of Goldman's reputation or even aware of it. Goldman continues to win new customers. One treasurer who tries hard to track syndicate members' performance to establish who sells bonds and where they are held, says simply: "We have not had the experience of Goldman shorting deals or dumping its allocations."

Thorsteinn Thorsteinsson, vice-president and head of borrowing at the NIB, admits to hearing some discontent regarding its dragon issue but says: "We didn't receive any specific complaints from any bank. Our view was that this was a new market for us and it was appropriate to keep a tight rein on the issue with smaller allotments and more of the issue in the hands of the lead-manager. That may have caused concern at other banks, which of course we regret."

Other large borrowers are attracted by Goldman's rising profile in the international capital markets. "Two years ago we did almost nothing with them: now they are one of our main banks," says the treasurer of one French borrower active across many currencies. Although this treasurer cannot take Goldman's credit risk, he says: "They have a very good sense of the market and often find us the right back-to-back swap at the right time. Unlike many firms, which merely follow the markets, they anticipate them."

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In the past, rivals criticised Goldman for covering only a narrow range of currencies, but that no longer seems to apply. The head of borrowing for one European sovereign borrower cites Goldman's "ability to do a great deal in a lot of markets". The treasurer of a UK borrower also praises Goldman: "It took me a while to be convinced but I have a lot of respect for their syndicate people and traders now. They have called the market right for a number of issuers." He is another recent convert to the firm who found himself convinced of its credentials by the $1.5 billion global issue for Ford Motor Credit.

This treasurer adds: "What I look for in the lead manager of a jumbo deal is an underwriter which believes in the feed-back from its own sales force and traders sufficiently that it can quote me a price without pre-selling an issue. Certain firms, either because they have weak distribution or lack capital, have to talk issues around their investors. If you ask an investor whether a deal should come at a spread of 35 basis points [bp] or 40 bp, you can bet the investor will say 40 bp. Goldman believe in their own views and quote on price, in size."

Goldman is much more aggressive today on pricing transactions. This helps to explain some of the sniping from competitors. "They fight so hard for business that when they do lose a mandate, the deal may no longer profitable for the winner," says one syndicate manager in London. This was not always the case. Treasurers recall that in the mid 1980s, Goldman rarely won mandates on price.

In Asia, rivals speculate that Goldman is buying business. For example, it has been marketing the dragon bond to European clients as an alternative to the Euromarket. Complains one rival: "Asian investors are very sophisticated. They will not buy paper that is more expensive here when they can pick up the same credit more cheaply in Europe." In New York, too, Goldman uncharacteristically appeared to be scrambling for league-table status with Merrill Lynch at the end of the half-year to June, bringing out a $2 billion issue for Fannie Mae at a spread of just 2 bp over treasuries which later widened substantially.

Winkelreid points out that short-dated agency-bond issues have been priced at between 1 bp below US treasuries and 5 bp over. He agrees that this issue was priced quite aggressively and that Goldman was concerned about its league-table status. "Also we took a bit of a trading view. Subsequently the market rallied and we sold huge chunks."

Awesome marketing

Borrowers praise the quality of Goldman's investor base. One treasurer of a leading international borrower says: "You can often gauge a firm's investor franchise from who attends their seminars and for how long. Whereas other firms might attract portfolio managers, Goldman gets the chief investment officer. And he's not just putting his head around the door, he's staying for a whole day or two days."

In the past, Goldman seemed to favour its investors more than its issuers. "It made them a great secondary house," says one borrower who now does more primary business with Goldman: "We need people who can go to highly sophisticated multi-currency fund managers and present sophisticated arguments to justify the low spreads on our paper. Goldman are very good at that."

None of its rivals is surprised to hear how highly issuers regard Goldman. The firm is widely ackowledged as a master in the art of marketing itself. Some competitors try to denigrate this skill, suggesting that it is at best mere public relations; at worst some kind of con trick: that Goldman appears to be working for its clients but is really only interested in maximizing fee income and trading revenue for itself. They claim that Goldman sends out its most impressive and presentable bankers, often partners in the firm, to win business. Then, once the fees are won, it leaves less talented, junior staff to execute transactions, with occasionally mixed results.

The government official in charge of one privatization programme partially supports this. "They are good at executing deals, though there are other firms that are equally good at execution, once they have won mandates. Goldman's greatest strength is at marketing Goldman Sachs. I don't mean that in a disparaging way. Their professionalism and degree of preparation leave many of their investment banking rivals wallowing some distance in their wake."

"If Goldman Sachs is a co-manager, they will push for a 50%-50% fee split"

Clients know they are being marketed to and find more than public relations when Goldman comes calling. The treasurer of one UK corporate issuer recalls holding a beauty parade over two days. The first day was taken up with presentations mainly from UK merchant banks: "The typical conversation would start with the weather and the cricket and the general state of the economy and then finally come to the point."

On the second day, the Goldman team was the first to make its presentation. "l was awe-struck at the contrast," says this treasurer. "They had clearly just had a meeting between them and were all fired up and very focused." He adds: "They can feel what is going on. If you become restless when the talk turns to, say, equity-related, or something else in which you are not interested, the talk quickly changes."

Goldman's growing prowess at proprietary trading may in time undermine its pre-eminence as a new issue house. Nevertheless, even if this is true, Goldman's trading desk allows it to price large new issues for clients and to present other more structured opportunities, such as zero-coupon stripped deals. "Sure we have had some bum steers from them from time to time," says one borrower, "but I have the highest regard for their syndicate desk. They tell it to me like it is. If they think something will not work, they say so, even if I do not always agree with them. And they come up with good ideas at the right time."

Along with increased emphasis on proprietary trading, Goldman has taken the plunge into asset management. (It shunned it for many years, for fear of offending its institutional investors.) There are sound business reasons for these moves. Asset management provides regular income to underpin cyclical brokerage profits. Almost all Goldman's rivals have asset-management arms; it is unlikely to lose accounts for this reason. "Of course I would prefer that they had not got into my business," says the chief executive of one asset- management operation in New York, "but our relationship is not adversarial, though the potential is there. In fact we use Goldman a lot. They have always been close to the top of our list; their research is excellent; they are one of the best firms on the Street."

Big positions

Proprietary trading is almost an essential business for any firm that does not have a big retail distribution network. Goldman has been doing it in equities for decades. But its proprietary trading in bonds, equities and foreign exchange, is becoming more important. "They have done more in the last two years, but they are no Salomon Brothers," says one recent departure from the debt side. Garonzik adds: "While proprietary trading is important to us, it does not interfere with our continuing emphasis on developing our client activities."

In the London foreign-exchange market, for example, Goldman is renowned as one of the largest and most successful proprietary traders. "Without a doubt they have expanded the level of risk they are prepared to take in the last year or so," says the head of foreign exchange at one large commercial bank. "In every area they are ballsy traders who get it right more often than they get it wrong."

Goldman seems to have changed its strategy recently. It used to take short-term positions over a few days, and sometimes even move the quieter markets. Now it is more likely to amass large positions quietly over longer periods, using currency options. "The volatility of the markets and the quality of Goldman's fundamental research make this approach ideal for them," says one banker. "They are masters of the risk-reward trades. If they see a trade with an 85% likelihood of being profitable, they put it on big-time."

There have been suggestions that Goldman's position-taking in the currency market has brought it into conflict with some European sovereign clients. The firm is rumoured to have made several hundred million dollars by positioning itself against the lira last year. This supposedly annoyed the Bank of Italy and briefly threatened to disrupt Goldman's relationship with the Republic of Italy as a borrower. Any ill-feeling must have blown over by the time the republic awarded Goldman the joint lead position on its recent $5.5 billion global bond issue. The firm has been appointed global co-ordinator on two of four announced forthcoming Italian privatizations: Credito Italiano and insurer, INA.

Imitate or vilify

The French authorities may have been less forgiving. Goldman was left out of a leading position in the privatization of Banque Nationale de Paris, accoiding to market rumour, as a punishment for publishing research suggesting that the French franc should weaken against the Deutschmark. Merrill Lynch was appointed to lead the US tranche, with Goldman co-manager and a co-lead manager of the rest-of-the-world tranche. This was the latest in a number of notable slips and absences for Goldman. The firm was excluded from the third sale of stock in British Telecom, while it was being investigated by the Securities and Futures Authority for its dealings with Robert Maxwell.

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Maxwell – the link that
Goldman out of BT3

But for most of its customers, negative tales about Goldman cut little ice. The head of borrowing for one European sovereign says: "Yes, I would take it into consideration, if it could be proved that a firm had planned an unwarranted speculative attack against our currency. But can you ever tell with certainty who has profited? As for Goldman Sachs, I am very pleased with them." Of the Maxwell affair, the head of privatization for one European country says: "l doubt if a single corporate client would really care about that."

What could distract Goldman, or cause it to slip? Internal rivalries, perhaps: this is a firm with two co-heads of debt, two co-heads of equity and three co-heads of investment banking who will all presumably seek to succeed Friedman. "These men are so rich, they have nothing to motivate them but advancement within the firm," says a source. Lack of capital, in comparison with universal banks, may hold Goldman back in derivatives. Goldman generates plentiful retained earnings but proprietary trading brings its own risks, as the firm discovered last year, when it bought a large block of ICI shares from Hanson and watched the market price fall before it was able to place them.

Whether the firm's strained relations with other houses will damage it is another question. Friedman says: "We consider our most valuable assets our people, our capital and our reputation. If any of these three is lost, our reputation would be the most difficult to recover."

One senior source at a rival firm says: "At some stage clients might begin to ask themselves whether Goldman is a firm which can mobilize Wall Street behind a deal." But there is no sign of the firm faltering. Some critics conclude that Goldman might be even more successful if it adopted a more mellow approach. "l would be happier working with them if they could relax a little and occasionally admit to fallibility," says the head of capital markets at one bank in London.

Clients love Goldman, competitors hate it. Doesn't that make Goldman the apotheosis of investment banking? Shouldn't rivals try to imitate it rather than vilify it? Perhaps, but there is another aspect to long-term success in these markets.

A syndicate chief recalls how his firm recently helped a struggling lead-manager to place bonds by unearthing a pocket of demand. In thanks, his firm received a high allocation of stock. "That would never happen with Goldman," he says. "First, because they would never admit to being in trouble, and second, because no one would want to help them. "

The mighty monoculture

What matters to Goldman Sachs long-term is "people and culture, culture and people, people and culture", according to chairman Stephen Friedman at a recent Securities Industry Association conference. This firm, like all life-forms, is bent on the survival of its own kind – in this case Goldman partners, working with their own capital for their own gain.

"That might explain why we work a little harder than some other people, why we might come in at the weekends more," says one partner.

"We try and choose people who enjoy winning and put them in an environment that encourages that spirit," says Robert Steel, a partner in London.

The will to win doesn't seem frustrated by those internal brawls common to other aggressive firms. "The firm acts as one," says a recently departed employee. "There is no division between capital markets and corporate finance. Partners in both areas know that they will make money from a single assignment, for example. At other firms the capital markets people often couldn't care less about what's going on in other departments." Agrees one Goldman partner: "That is our greatest strength, more important than any skills that we have: we are not endlessly comparing ourselves with other divisions."

Not that Goldman is free of internal politics. "People there would be liars if they did not admit to spending an enormous amount of time on tactical manoeuvring," says one ex- employee. The atmosphere inside Goldman is intense. "They do seem to work 24 hours a day," says one client. And with good reason. The great incentive for Goldman employees is the prospect of becoming a partner and eventually earning millions of dollars. The two co-chairmen earned $15 million in 1991, before Robert Rubin left to become head of President Clinton's economic council. Outside the sports and entertainment industries, a Goldman partnership is one of the highest paying jobs in the world.

A Goldman banker with ambition has to gain the patronage of a partner and make as much money for him and for the firm as possible. This system of bonding with partners, or 'rabbis', as they are known, is copied at other firms, but has a greater substance at Goldman. "We have something similar here," says a managing director at another American broker. "But we tend to go home on a Friday night and forget about work until Monday whereas at Goldman it goes much further, you get groups of junior staff going away for week-ends with their rabbis."

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Immaculate, severe, physically and
intellectually intimidating: Friedman
incarnates a Goldman stereotype

Rivals often characterize Goldman staff as arrogant, humourless, even weird: "the Moonies", as one investment banker likes to call them. Friends who go to work there become distant and unsociable, some people say. Perhaps this is because of the sheer workload.

Inevitably, as a private partnership, Goldman fosters a clannish feel that can seem odd to outsiders. One banker at another firm recalls a Goldman partner gloating about a talented new hire: "I am so glad he has decided to join us: his wife will really fit in."

A UK merchant banker recalls a meeting about a European privatization deal held on a stormy weekend in the city of London, late last year. Realizing that nothing more could be done that evening, bankers from various firms started hailing taxis and heading their separate ways. The Goldman team, to the amazement of their British counterparts, suddenly appeared in tracksuits and set off running together through the sleet and rain towards west London.

The head of capital markets at a rival firm paints the stereotype of a Goldman banker. "This was a person who worked for us and later left for Goldman Sachs. He had wonderful qualifications from European business schools and spoke several languages. He was brilliant in some ways. But he had absolutely no sense of humour and could not fit in with the rest of the team. On the day he resigned, he came to see me and said: Aren't you even to try and persuade met to stay? I told him: 'No. I can guess where you are going and you will fit in there perfectly'."

To some people the chairman, Stephen Friedman, is the archetypal Goldman banker: immaculately dressed, severe-looking, reserved, icy, intellectually and physically intimidating, a chess-player and former wrestler. To others, Goldman is personified by some of its traders and syndicate people: "pudgy, stubble-chinned, combative types from Brooklyn or east London", says one rival. Intelligent, able, driven are the other standard epithets. Many partners give the impression that they live for the firm as much as for their own families.

Sometimes, the professionalism slips to reveal that Goldman people are as fallible as the rest. By some strange oversight during the second sale of BT stock – Goldman led the US tranche – none of the firm's US orders had been transmitted to lead manager SG Warburg. Goldman's head of equity syndicate in New York rushed to London on Concorde to appear at Warburg's office, as the deal was officially closing, to plead for time to sort out the mess.

Sometimes the punchline is vindictive rather than comic. Goldman, the bookrunner on a jumbo convertible, was worried about its reception and asked another firm to join the deal and commit to place a large block. After the launch the price quickly rose to a premium and the second firm expected to make a large trading profit. But, though it received its underwriting fee, the firm found itself under-allocated. The syndicate manager complained bitterly – too bitterly for someone at Goldman. The hapless syndicate manager soon had the chief executive of his own firm on the line asking why he was creating a disturbance that "threatened to be a relationship issue" with Goldman. The badly shaken syndicate manager left his employer soon after.

But the client's-eye-view is different: "I can think of a number of examples of investment bankers whose calls I generally did not take," says the head of borrowing at one huge bond issuer. "But after they joined Goldman, they became much more interesting." Another treasurer dismisses complaints about Goldman's over-bearing style as "mere cocktail party chatter. Do you think that people at Morgan Stanley aren't arrogant, or that people from Merrill Lynch don't hustle?"

For Goldman employees, the unpleasant aspect of the firm's close integration is that failure is as visible as success. "If you lose a $100,000 piece of business, the partners will all be taking out their pocket calculators to see how much you have cost them personally," says one source. "And because the partners clearly care about it so much, so do the younger staff. For the guys who haven't made it, it's all about printing numbers." Head of capital markets in London Fred Garonzik denies there is any "definitive correlation between partner selection and individual revenue contribution. There are many factors in the equation".

As part of their pay reviews, Goldman employees report on each other's performance, upwards on their bosses and across disciplines so that salesmen report on the traders and vice versa. It is a diffcult system to work – one source recalls speaking to a Goldman partner who, on the day before he left for his annual holiday, had received more than 100 reports to be completed by the day after his return.

"It used to be that if you were good, stayed around and worked hard, you had a pretty good chance of making partner. Now you would have to stab five or six other people in the back to make sure."

Goldman's competitors believe that the intense pressure to succeed and the tremendous potential rewards explain why Goldman is such a rough and uncompromising firm to work with. "They will do anything, say anything, when they are competing for a mandate. They become so single-minded that it's as if there's no such thing as ethics," says one source. "Goldman people will stay on the phone all night long with an issuer, badgering for a more senior role in a transaction so that they can bring in more fees," says another source. But once they have secured such positions, they can be stretched to the limit to process deals. "I am amazed at how much we used to do, considering how thinly-staffed we were," says one recently departed source.

Yet even for good producers at Goldman the road to partnership is uncertain. Outward shows of ambition are sometimes frowned on: yet it is only the truly ambitious who become partners. Every two years existing partners submit the names of prospective new candidates and these are discussed among all the partners. Only 10 or 15 senior partners, essentially the firm's management committee, have the power to ensure partnerships for their protegees.

According to former employees and senior figures at other Wall Street firms, the intensity inside Goldman Sachs has increased markedly in the past few years. Some equate this with accelerating changes at the firm since Friedman and Rubin took over. One symbol of this change is the firm's decision to open a sizeable office in Germany. A source who recently left Goldman says: "The reason Weinberg never opened an office in Germany is simply because he is Jewish. He didn't care about how much money the firm would have made there, he stuck by his principles. He just did not think it the kind of thing a Jewish family firm should do. It was that kind of quirkiness that gave Goldman its special character."

The chances of making partner have got slimmer. "It used to be," says one source, "that if you were good, stayed around and worked hard, you had a pretty good chance of making partner. Now you would have to stab five or six other people in the back to make sure."

To some talented staff, the strain and effort of gunning for a partnership no longer seem worth it. Another recently departed staffer says: "More and more people are leaving early because the prospect of a partnership is so remote." There are even tales of a few Goldman employees and even young partners suffering mental breakdown and drug and alcohol problems. Junior partners are being pruned occasionally, which never used to happen. Some employees in line for a partnership either do not want to have their whole wealth tied into the firm for five years, or do not want to become administrators of an increasingly large organization. That was reportedly the reason why Henry Bedford, a highly successful trader, left Goldman between being given a partnership and taking it up: an event previously unheard of.

Since the early 1980s, the head-count has risen from fewer than 3,500 employees to 7,900. Profits have increased from around $400 million a year to an estimated $1.5 billion. But the number of partners has remained tightly controlled, rising from 75 a decade ago to just 161 at the latest count.

"The management style of the whole firm is now being set by a group of comparatively young and aggressive partners," says one senior Wall Streeter who claims to know more than 20 of them personally. "Remember this is not like some classic ideal of a post-War Wall Street partnership, with permanent tenure, senior partners in their 60s managing the firm and partners in their 50s running transactions. Goldman Sachs is not a life-long commitment, it is a mid-life commitment."

After a number of years, Goldman partners are to retire and make way for younger blood. One partner describes this as "holding ownership in trust for future generations of Goldman partners." A rival offers a more cynical analysis: "You have 10 years from age 25 to 35 to make it as a partner at Goldman Sachs and another 10 years from 35 to 45 to make as much money as possible. There are very few partners in their 50s." A Goldman partner agrees that partly because of this time limit "we operate on one speed only, and that's fast forward".