The all-round magic of Goldman Sachs

By Nigel Adam

The young business school graduate was near the end of his final interview at Goldman Sachs' New York headquarters. He'd already undergone three days of intensive tests and questioning in his attempt to win a position in the firm which many would envy.

Suddenly one of the partners leaned across the table. "What makes you tick?" he asked the candidate with heavy emphasis on the final word. His colleagues listened expectantly. "My heart," came the truculent reply.

The interviewer was not amused. And the graduate didn't get a job at Goldman. He's now rising fast inside another rival firm.

"I'd just had enough," he explained. "I found people brash and aggressive at Goldman. There was no way I could ever have worked there." He'd have to admit, though, that the firm takes its recruitment seriously. Other brokerage houses draw extensively on the leading business schools for their talent. But none pays as much attention to the quality of the individual as does Goldman Sachs.

"People are our most important asset," explained the firm's co-chairman, John Whitehead. "If we have the best people we'll have the best investment banking firm." The best people for Goldman, though, have to be a little brash, a little aggressive.

The success of Goldman Sachs is the envy of all its competitors. Where other firms have undergone major management reshuffles, Goldman has displayed remarkable continuity. And whereas others have seen their profit figures oscillate wildly, Goldman is heading for its seventh consecutive year of record earnings.

"Goldman Sachs is unique on Wall Street because it has succeeded in institutionalizing the entrepreneurial spirit," observed Donald Marron, president of Paine Webber.

If the firm picks its people carefully, it also makes sure that they work in close harness with each other. Goldman publishes for its employees a list of business principles, one of which stipulates: "We stress teamwork in everything we do. We have no room for those who put their personal interests ahead of the interests of the firm and its clients."

Goldman is also unique in its record of holding on to its young entrepreneurs. Turnover inside the firm, at around 2% annually, is unusually low by any Wall Street standard. It's not just the team spirit which holds them together, though. The financial rewards are substantial and several partners reportedly earn over $l million annually.

If the firm has always placed special emphasis on selecting and growing its own people, it hasn't always taken them from Harvard Business School. One Harvard graduate who joined Goldman Sachs 15 years ago recalled his final interview with Sidney Weinberg, the venerable senior partner of the firm.

Weinberg hadn't been at Harvard. He joined Goldman as a porter's assistant in 1907.

"He conducted the interview with his back to me most of the time. Suddenly he swung his chair round. 'You Harvard guys are all full of piss and vinegar', he exclaimed." Weinberg recognized the merits of a Harvard education. And he offered the man a job.

Weinberg is widely credited for putting Goldman Sachs on the road to its present success. He'd become a partner in 1927, only the second to be selected from outside the Goldman and Sachs families. He was still a general partner at the time of his death in 1969.

His style of management was an intensely personal one. "Sidney had been running the firm for nearly four decades," recalled one partner who worked for him shortly before his death. "Inevitably he wanted to be involved in nearly all the major decisions."

Weinberg was succeeded as senior partner by Gustave Levy. Levy continued the tradition of imposing strong personal authority over the firm and its staff. A powerful figure, he was respected by some, feared by others. "Gus never forgot an enemy and never remembered a friend," remarked one of his former rivals.

It was Levy who established Goldman's reputation as a block trader. He personally handled the floor trade of over 1 million Alcan shares on the New York Stock Exchange in October 1967. At the time the $26.5 million transaction was the largest block trade ever.

"Gus was a great trader. He believed in making markets at all times," remarked John Weinberg, now co-chairman with Whitehead, and the younger of Sidney Weinberg's two sons.

Levy developed the concept of an institutional department to keep clients constantly informed on what was going on in the markets. He also acquired the reputation of being an expert recruiter for the firm. He persuaded Sidney Weinberg Jr, brother to John, to join Goldman in 1967. Unlike his brother Sidney, Weinberg hadn't chosen to follow his father into the firm, opting for a career with Owens-Corning Fiberglas instead. Now he heads the investment banking services department, the marketing arm of the investment banking division.

Another of Levy's recruits was Frank Smeal, now running the firm's fixed income division. Smeal was formerly executive vice president and treasurer at Morgan Guaranty. Levy sensed that Smeal might be persuaded to make the move although, ironically, Smeal didn't take that decision until five months after Levy's death in November 1976.

Levy's sudden demise created a difficult situation for Goldman Sachs. Within seven years the firm had lost two of its most respected senior statesmen. It appeared to outsiders that a succession problem was inevitable. Most were taken aback when the firm appointed not one but two partners as co-chairmen to run the firm.

Weinberg still recalls his first meeting with Whitehead in the summer of 1950. He spent several weeks of his college vacation working in the buying department of the firm at 40 Pine Street, a department now known as corporate finance. Whitehead had already graduated from the Harvard Business School in 1947.

"In those days the buying department was housed in what were formerly squash courts. John and I had desks next to each other and that's how we got acquainted," remembered Weinberg.

The two men have been close ever since. Their offices on the seventh floor at the firm's 55 Broad Street headquarters are adjacent. If one is traveling outside New York, he'll be kept constantly in touch by his alter ego.

Critics of Goldman Sachs' dual control management system were soon confounded. "The firm has an unusual management structure but it does seem to work," admitted one competitor.

Commented Whitehead: "It may not be a good general principle to have two heads, but for us it's worked well." The two men have continued the Weinberg-Levy tradition of close involvement in the business, even though they delegate to a greater degree than their predecessors did.

"I know which issues are being priced this afternoon. I know what size of positions the arbitrage traders are holding," stressed Whitehead.

In the eyes of Goldman staff, Whitehead and Weinberg appear to complement each other well. "I'd be surprised if they ever really disagree," remarked Peter Sacerdote, partner in charge of corporate finance. "After all, they're both products of the same system."

As individuals, though, the two are markedly different. Whitehead is more articulate, more at home in the public arena than his colleague. As a former head of the Securities Industry Association he's recognized as an eloquent spokesman for that industry.

Weinberg is less at ease in the public eye. "He likes to be doing things. He hates to be pinned down," remarked one partner. Weinberg concurred with that. "John (Whitehead) is a superb organizer. He's very good at planning ahead. I'm probably more intuitive. I follow my hunches."

The two co-chairmen jointly preside over the firm's management committee, which meets every Monday at 9 a.m. Each of the five divisions is represented by a partner, although two divisions - trading and arbitrage and investment banking - sent two representatives.

"Decisions are almost always unanimous. We usually reach a consensus view," remarked Thomas Walker, the firm's Dallas partner. Walker is one of two regional partners on the committee, the other being James Gorter of Chicago, who is also joint head of the investment banking division.

They take place at a round table, a fact which Whitehead considers significant. "The discussion is free and open," he remarked. Nonetheless there's no doubt what happens in the absence of a consensus. "John and I would decide in that event," said Whitehead bluntly. "There'd be no question of a vote."

Whitehead began to put his stamp on Goldman's management after he became a partner in 1956. His aim was to decentralize the decision making process, delegating authority to the division heads and department chiefs below them. Until then, decisions had been almost entirely in the hands of the senior partner.

The area where that aim has been most visibly achieved is investment banking. The division, which embraces corporate finance, mergers and acquisitions and private finance, has two joint heads, emulating the partnership structure.

"We operate on the theory of decentralized marketing through our regional offices," explained co-head of the division, James Gorter, a lean, restless individual who contrasts sharply with his colleague Frederick Krimendahl. Gorter is a financial marketirg man who formerly ran the investment banking services department. Krimendahl is recognized as an outstanding corporate finance technician, one of whose recent successes was the deep discount bond.

"Goldman discovered the principles of sound management and marketing way ahead of the rest of the Street," admitted an executive at one of the firm's principal competitors. "That's something we are now trying to emulate."

Gorter is aware of that competition. He's also aware that his rivals label Goldman's men in the field as mere salesmen, rather than investment bankers. "The competition would say that. They're wrong. I'm proud to be a marketer of our services, but the results suggest that we are more than salesmen."

Other division heads are allowed an unusual degree of independence. Frank Smeal, in the fixed income sector, operates within "very large limits" laid down by the management committee, of which is he a member. "I delegate some of that authority to my subordinates but never all of it," he observed cautiously.

Robert Rubin, partner in charge of risk arbitrage, is another who needs and gets authority to act on his own to a very large degree. Risk arbitrage involves investing the firm's own capital in tender offer or merger situations. Rubin trained with Gus Levy, who nursed the concept of risk arbitrage into a growing part of Goldman's business.

"Before Gus died, there were virtually no limits on arbitrage positions," recalled one partner. "That's no longer true, but Weinberg and Whitehead delegate a lot of authority to Rubin. He doesn't abuse it."

Rubin is a lawyer by training who's known within the firm for his extraordinary stamina. The strain of running what is probably the largest risk arbitrage portfolio on Wall Street demands nothing less. If a merger deal falls through, the arbitrageur may incur substantial losses - especially if trading in the stock is suspended, only to reopen at a much lower price.

One recent takeover which must have caused Rubin sleepless nights was the takeover of Twentieth Century-Fox by the Denver oil millionaire, Marvin Davis. "At one point it looked as though Davis might change his mind and call off the deal," said one investment banker. "Goldman almost certainly had a substantial long position in Twentieth Century stock."

In the event that deal did go through. But if Goldman did have a position it would only have taken it after the takeover was publicly announced. Explained Rubin: "If you bet a nickel on every reliable sounding rumour you'd go broke. We don't take positions based on rumours."

Rubin is one head of the trading and arbitrage division. The other is Robert Mnuchin, who controls the trading desk. Unlike Rubin, Mnuchin doesn't take positions to make a profit for the firm. "We only take positions in response to a client," he emphasized.

Mnuchin's office lies just off the trading floor, but well within earshot of its activity. Several times during his interview with Euromoney he interrupted it to attend a particular transaction. He's very much in the "hands on" mould which typifies the firm.

Mnuchin had just completed a block trade, continuing the tradition begun by Gus Levy which has given Goldman a strong lead in that area. The deal was a trade of 50,000 Merck shares.

"A customer wanted to buy. The last sale was at 101 1/4 in a strong market," related Mnuchin. "We though 102 was a fair price, one which would create supply, and we put the word around." The trade was completed in around 10 minutes, after which Merck stock was trading at 102.

Was his customer satisfied? "So satisfied I'm nervous," retorted Mnuchin.

Mnuchin has been with Goldman since 1957. Rubin joined in 1966 after two years with Cleary, Gottlieb, Steen and Hamilton, a New York law firm. James Gorter arrived in 1956 after three years in the US Navy. His colleague Fred Krimendahl joined in 1953.

That's a measure of the continuity in Goldman Sachs' top management. It's a source of satisfaction for the firm's clients, a source of envy for its rivals. "We've had an advantage over the other firms because we've had a continuous management thread," observed Krimendahl.

Krimendahl himself spent his entire career at Goldman in the corporate finance department until last year, when he was promoted to his present position. He still remembers an underwriting he worked on in 1954 which led to an argument with one of the co-managers.

"The firm said they would never appear on the same line in the tombstone as Goldman Sachs because we weren't in their league," recalled Krimendahl. He wouldn't reveal the firm in question. "It still exists in part. It's been through a number of mergers since," he added with a smile.

No-one would dispute that Goldman is now one of the strongest firms on the street. Yet 10 years ago the firm wasn't to be found in the special underwriting bracket. Now it's one of five firms in that bracket along with Salomon, Morgan Stanley, Merrill Lynch and First Boston.

As a competitor it's viewed as the toughest by those other firms. "If I polled my senior executives as to who they thought was their strongest competitor overall, I'm sure Goldman Sachs would come out top," remarked Edmond Moriarty, executive vice president at Merrill Lynch White Weld Capital Markets Group.

Another senior banker went further. "It isn't simply that they have good management and manage to hold on to their people. From Whitehead and Weinberg downwards, they really try to develop personal relations with their clients."

Goldman's areas of strength are easy to pinpoint, its weaknesses less so. Its investment banking capability is rated highly, although in the underwriting stakes it lags behind Salomon and Morgan Stanley. One reason for that is its reluctance to go in for competitive bidding on domestic utility debt.

"Goldman's commitment to that area varies with conditions in the market," remarked one banker sarcastically. That's a criticism which the firm also meets in the Eurobond market, where it has acquired a fickle reputation in the secondary area.

It's probably unfair, though. The firm sets its priorities carefully, and with profitability uppermost. By that criterion, it has its priorities right, since it has the highest return on capital of the major Wall Street firms.

"We've placed less emphasis on competitive bidding," agreed Krimendahl. "The reasons are partly historical. When I first joined the firm some of the partners thought the practice was immoral."

Goldman caused a stir, though, when it formed its own group last year to bid for bonds issued by subsidiaries of American Telephone and Telegraph. Until then, the bidding was done by two groups, one of which was headed by Morgan Stanley and included Goldman.

"We broke away and formed a third group with EF Hutton, Dean Witter and Bear Stearns," explained Krimendahl. "I think ATT would agree that it made the bidding more interesting."

Within the investment banking area, the firm has also established a strong presence in the merger and acquisition business. That department is headed by Stephen Friedman who, like most of his contemporaries, was home grown at Goldman. Friedman, along with Rubin, is almost certainly among the higher paid partners. In return for those earnings, he accepts that his working week has no limitations.

Goldman has built its reputation in the raid defence area - that at least, is the impression gained by outsiders. Friedman conceded that raid defence is an important part of the department's business. "It's far from the major part, though. Our basic activity is overwhelmingly derived from negotiated transactions."

Nonetheless, the experience he's gained as a champion of the oppressed is extremely valuable. It began in earnest in 1974 when the hostile takeover was again becoming prevalent. International Nickel, represented by Morgan Stanley, went after Electric Storage Battery (ESB). Goldman was chosen for the defence.

"I got back from a trip to Oklahoma well after midnight," recalled Friedman. "I found an urgent message from one of my colleagues, asking me to ring him. That morning I was in Philadelphia by 9 a.m."

International Nickel won its fight, but only after United Aircraft entered the struggle as a white knight. That had the effect of pushing the ESB stock price well above International Nickel's initial $30 offer. "ESB stockholders were very happy," noted Friedman.

More recently Goldman was involved in a $235 million deal involving the takeover of Franklin Mint by Warner Communications. That deal took several weeks to complete. It was finally concluded in the early hours of a March morning at Franklin's headquarters outside Philadelphia.

Friedman is generally rated along with Morgan Stanley's Robert Greenhill and Lazard Freres' Felix Rohatyn as the most sought-after merger expert. He's reluctant, though, to discuss his competitors by name.

"It's important that they should be skillful. We're not going to gain a lot by having patsies on the other side of the table. Every client needs good advice."

Goldman's investment banking division has been a focal growth point for the firm in the last 25 years. In 1954, just after Krimendahl joined the firm, Goldman had very little corporate finance business. "I worked on two underwritings in the first 18 months," recalled Krimendahl. "That was all the business we had."

The firm first built its base on commercial paper activity. Its first corporate clients were not in heavy industry, but commercial enterprises such as Sears Roebuck. Morgan Stanley and First Boston, on the other hand, each had a large stable of industrial clients.

If Goldman's emphasis on growing its own people and forging strong teamwork has contributed to that expansion, so too has its marketing skill. "Whitehead is extremely well programmed by the firm's marketing people," observed one of Goldman's competitors. "The chances are that he'll be wheeled out at the River Club of New York for a closing ceremony at least once a week."

James Gorter, who until recently headed the division's marketing arm, recognized the advantage of using his senior executives in that way. "Sometimes it helps, sometimes it doesn't. Some chief financial officers would prefer to know who's actually going to be working on their account."

Investment banking services is now run by Sidney "Jimmy" Weinberg Jr. It comprises around 60 people who market Goldman's investment banking capability worldwide. "I provide some direction," observed Weinberg modestly, "but we really work as a unit."

Weinberg was a product of Harvard like his brother. Strangely, though, he wasn't inclined to join Goldman initially. "I never thought in my wildest dreams that I'd work for the firm," he said. "I didn't want to work in New York. I like being out on my own."

Instead, Weinberg went to Newark, Ohio to work for Owens-Corning Fiberglas. The company hadn't hired Harvard men before. "I spent my first days sweeping the floor. That's what they did with Harvard men in Newark."

Weinberg's relaxed and courteous manner conceals a determination and a capacity for hard work much admired by his subordinates. He wouldn't talk about his successes. "If I were a Goldman Sachs client I wouldn't like to be known as one of Jimmy Weinberg's successes."

He's distressed, though, when one of the firm's clients defects. That doesn't happen often. More than most other major firms, Goldman has managed to keep its client list intact.

Recently, however, Coca-Cola moved its commercial paper account away from Goldman to Bankers Trust and Merrill Lynch. The company wanted two dealers instead of just one, although it took Bankers and Merrill nearly a year to get the account.

"My feeling is that the company made a mistake," remarked Weinberg. "But then Coca-Cola has two suppliers of everything." John Whitehead commented on that defection: "All our commercial paper clients use us as sole dealer. That's the way we prefer it, because the accountability is clear-cut."

The commercial paper area has been one of the firm's major strengths, ever since Marcus Goldman opened his business as a dealer in 1869. The partner in charge of that department is George van Cleave. He works closely with the investment banking services department in the marketing of his product.

Unusually, van Cleave isn't a product of Harvard but began as a clerk. He's been in the commercial paper market for 23 years.

"When I started, the total volume of outstandings was only $3 billion. Now it's around $142 billion." Goldman has the lion's share of those outstandings. Its own estimates show it with a market share of 35%, followed by AG Becker with 24%.

That's one reason why van Cleave has no inducement to leave the firm. "If you work for an organization which is a leader, it's more of a challenge to stay than to move to a firm further down the list."

Both Goldman and Becker, as the major dealers in commercial paper, are now facing a challenge from the banks. Late in 1978, Bankers Trust began acting as agent to commercial paper issuers. That, in the eyes of the two dealers, was a clear violation of the Glass-Steagall Act. But the Federal Reserve Bank of New York last year took the side of Bankers Trust, and the Securities Industry Association now has a lawsuit pending against the Fed.

Becker also has its own private suit against Bankers Trust, although Goldman is not a litigant.

"Becker clearly has more to lose than Goldman, since commercial paper represent a large part of its business," remarked another dealer. Nonetheless Goldman, and Whitehead in particular, are known to be especially unhappy about the commercial banks' move.

It isn't easy for Goldman's rivals on the street to find chinks in the firm's armour. In fixed income trading, it's generally considered second only to Salomon in its market-making ability. The firm's government desk is headed by Jon Corzine, so highly regarded by his superiors that he was made a partner last year at 31.

"Governments are our best and most profitable trading area," stated Frank Smeal. Goldman's corporate trading desk is run by Eric Sheinberg, who is held in awe by some of his rivals because of his tough dealing methods. "He'll trade every last point out of you, given the chance," remarked one dealer.

One senior member of a special bracket firm thought he had found a chink in Goldman's armour. "They've failed to leverage their trading and distribution capability as much as they should. They're not making the big hit in pricing new issues as much as they should."

He pointed to IBM's $l billion issue of October 1979. "That's just the kind of issue which Goldman should have landed." It's now recognized that the IBM offering lost money for nearly every brokerage house, not just on Wall Street but throughout the country, Nevertheless, lead managers Salomon and Merrill stole IBM away from Morgan Stanley's client list, a feat which Goldman must have envied. "Maybe we weren't as aggressive in courting IBM as we should have been," admitted Goldman's Jim Gorter.

If there is one area where Goldman Sachs' rivals can justifiably point to a head's start over the firm it's international. Merrill Lynch has its own banking presence in London. Salomon has developed a Euromarket trading capability which is respected by its clients. But Goldman appears to be still feeling its way.

"I wouldn't exactly deny the criticism that we are weak internationally," responded John Whitehead carefully. "But I'd also say that the other firms aren't especially good either. None of the US houses is truly international yet."

To establish a more powerful international presence is one of Whitehead's stated aims. Apart from that, where did he see the need for most improvement? "I don't want to sound smug, but I don't think we have any really weak areas. We have some which aren't doing especially well at the moment. That doesn't make them weak."

If Goldman has been too slow to make its international pitch, that was probably deliberate. Whitehead saw more profitable opportunities at home. One of those was a commodities operation. Another: a brokerage service for wealthy individuals, sometimes disparagingly referred to as the carriage trade.

The commodities operation comes under the watchful eye of arbitrage partner Bob Rubin. It's run by Dan Amstutz, who was brought in from an outside firm. "We're pretty close-mouthed about this operation and we always will be," stated Amstutz, displaying a secrecy uncharacteristic of his partners. But it's evident that Goldman had been focusing on the financial futures markets, including gold, as opposed to the more traditional commodities.

Amstutz hired two senior professionals outside the firm and two more from within. He became operational almost two years ago and is already contributing to Goldman's bottom line.

Partner Roy Zuckerberg looks after the firm's individual brokerage business which forms part of the securities sales division. He dislikes the term "carriage trade." "I prefer to call my clients substantial investors. We go after wealthy individuals and identify their needs."

That may sound a simple task, but it's taken Zuckerberg around most of the states in the Union. He also travels to Europe in search of wealthy individuals, including Americans living abroad. He has to be careful not to alienate local European banks. "We don't call on clients in Switzerland," he added by way of example.

Statistics are hard to come by at Goldman Sachs. But individual investors make up 25% of the division's total brokerage income. That's surprisingly high in view of Goldman's traditional reliance on institutional brokerage.

As Goldman's chief architects, Whitehead and Weinberg have to consider the future of the partnership structure. Only Goldman and Salomon, among the leading houses, remain partnerships. Merrill Lynch went public 10 years ago, and most have followed suit.

Will Goldman follow? "We routinely reappraise that," explained Whitehead. "We see no reason to change our structure in the foreseeable future. Morale is a very important ingredient in our success. Even the most junior (63rd) partner knows he's sharing in the firm's profits."

Whitehead is aware, though, of Wall Street's growing thirst for capital. That has been clearly demonstrated by the proposed merger between Shearson Loeb Rhoades, already ranked second by capitalization, and American Express. On the other hand, Goldman Sachs is immune from unwanted takeover bids in its present form.

The prospect of a partnership is a useful carrot with which to lure young business graduates into the firm. And Goldman desperately needs an infusion of new talent to keep pace with its growing volume of business.

The 1981 recruitment season ended last month. For its investment banking division alone, the firm took in 23 MBA graduates, of which 10 are destined for corporate finance. "It was a banner season for recruitment," proclaimed Whitehead. "We've already started next year's season by taking in some students this summer between their first and second year."

Most of the new entrants are from Harvard Business School, which has traditionally provided the cream of the firm's talents. But it also recruits from foreign business schools such as INSEAD and the London Business School.

"We try to hire foreign nationals to work with the local institutions," explained Richard Menschel, the partner who runs the equity sales division. Menschel takes around 20 graduates each year for his division, which has its own seven-month training programme. To go with that programme, the new entrant is handed an introduction manual containing nearly 100 pages. It describes at length the operations of each division. "Remember always to be curious, be competitive and be selfish," is the advice given in the introduction.

His starting salary will be around $35,000. In addition, he can expect a bonus of around a fifth which, according to one partner, is broadly in line with the other major firms.

"We pay the going wage," said Whitehead emphatically. "We don't want the person who'll go to the highest bidder. On the other hand, our professional people are better paid at a later state than those at other firms, because we're more profitable."

If they're talented and a little lucky, the graduates will become partners in their early thirties. According to one insider, the key requirement is dedication to the firm and not just the ability to perform. "Social connections will get you nowhere," said a Goldman employee flatly.

Those who don't succeed to a partnership often become prey to talent seekers from outside the firm. "We've hired people in their forties and fifties from Goldman who've become stuck on the career ladder," confirmed an executive at another major firm.

Such defections may not worry Goldman 's top management. But one which outsiders saw as a serious blow was the loss of Robert Kock 18 months ago. Kock ran Goldman's bond trading desk in London before his sudden departure to become managing director of Smith Barney in Paris.

"Bob wanted to become a partner. He wanted to be more than just a bond salesman," said a former associate. "The firm didn't want to accommodate him."

Early in 1983 Goldman Sachs is due to move into its new building at 85 Broad Street. The firm's 1500 New York employees, now divided among four buildings in the financial district, will be reunited. Typically, though, the building won't have a Goldman Sachs name plate outside it.

"Can we maintain our espirit de corps as we continue to grow? That's the question which worries me most," admitted John Weinberg. "And that's the reason why we wanted the new building, to keep everybody together."

It's likely that Weinberg and Whitehead will be watching over the house of Goldman for some time to come. Both men have yet to reach their sixties and both display ceaseless energy. But the challenge posed by the current upheaval in the financial services industry will have to be met and met soon. In its own quiet way Goldman Sachs will probably accept that challenge and win.