On September 22 last year, the US Federal Reserve gave permission to Goldman Sachs to become a bank holding company. This would allow it to access funds set aside by the Fed to bail out troubled banks. The iconic brand in the world of finance and mergers and acquisitions will most probably survive, but as a bank. Curtains came down swiftly on the world’s foremost investment bank.
September was a turning point for the world’s top investment banks. Goldman Sachs and Morgan Stanley became banks, Lehman Brothers went into bankruptcy and Merrill Lynch got sold to Bank of America. Of the four, none was revered more than Goldman Sachs. The best from business schools vied to join it, top companies jostled for its advice.
Clearly, nothing could have been timelier than a book that traced its history since inception, the twists and turns in its career, the men who made it what it was and its guiding philosophies. And nobody could have done a better job of it than Charles D Ellis. Greenwich Associates, the consultancy he founded, has for 30 years worked with the world’s top corporations including Goldman Sachs. This not just gave him an insider’s view but also the bandwidth to compare it with others.
Goldman Sachs was founded in 1869 by Marcus Goldman, a German-Jewish immigrant to the US. Thirteen years later, his son-in-law, Samuel Sachs, joined the firm and hence the name, Goldman Sachs. In 1896, it was invited to join the New York Stock Exchange.
Things went well for Goldman Sachs till the 1929 stock market crash. It had steadily built its reputation in the market place. In fact, it had managed the Sears, Roebuck and Company IPO in 1906, which is billed as one of the biggest such exercises till date. But the crash brought Goldman Sachs’ reputation tumbling down.
It was left for Sidney Weinberg to pick up the pieces and rebuild it from scratch. The son of a Polish liquor wholesaler and sometime bootlegger, Weinberg had joined Goldman Sachs in 1907 at the age of 16 as an assistant to the janitor. Till his death in 1969, Weinberg kept in his office the brass spittoon that he polished in his first job under Jarvis the janitor.
Working his way up, he became the senior partner in 1930 and shifted the focus from trading to investment banking. Under him, Goldman Sachs set up an investment research team, set up the municipal bond division and ventured into risk arbitrage. Then, in 1956, it was appointed the lead advisor for Ford Motor Company’s IPO. It was nothing short of a coup.
In 1969, Gus Levy took over as the senior partner of the firm from Weinberg. He was a well-known trader and once again built the trading franchise of Goldman Sachs. It was Levy who gave the firm its now famous philosophy of being long-term greedy — trading losses in the short term did not matter so long as there were profits to be made in the long haul.
In the year 1974, Goldman Sachs pioneered a new concept in mergers and acquisitions — the white knight. Electric Storage Battery faced a hostile takeover from International Nickel and Goldman Sachs’ arch rival, Morgan Stanley. The company’s stock was trading cheap when compared to its liquid assets. This made it a plum target for a takeover.
Goldman Sachs knew it could not protect the independence of Electric Storage Battery but it could get its shareholders a better price. So, it brought in United Aircraft as the white knight and International Nickel had to fork out a higher price. The client got a higher price and Goldman Sachs a fat fee. More crucial, the message went around quickly that if you are in a spot of bother, Goldman Sachs are good people to have on your side.
The most riveting chapter in the book is ‘Robert Maxwell, the Client from Hell’. Maxwell was born in Czechoslovakia. Over the years he built a huge media empire based out of London. He stood well over six feet tall, sired nine children and could speak nine languages. In 1991, he was found dead, having fallen off his yacht. Was it suicide, since he was known to have piled up bank loans of $2.8 billion and plundered $500 million from two public companies and the pensions of 33,000 British workers? Or was he bumped off by the Mossad since his bankruptcy could make him an unreliable agent?
Whatever the reason, Goldman Sachs found itself in an awkward situation as it was the chief financial “enabler” of Maxwell. In the end, Goldman Sachs had to pay a settlement of $254 million — the largest in the long history of the City of London. Like individuals, investment banks and securities firms are known by the company they keep. The book can give any racy novel a run for its money.
THE PARTNERSHIP
A HISTORY OF GOLDMAN SACHS
Charles D Ellis
Penguin (Allen Lane)
Pages: 729; Rs 995
