THE STASH DECEMBER 16, 2009
Jenny Anderson has an interesting and well-reported piece in today's Times about the concern among some Goldman alumni that the current CEO, Lloyd Blankfein, has changed the culture of the company. As Anderson sums it up, "[S]ome current and former Goldman executives say Mr. Blankfein has built a money machine that, while it still values its customers, culture and reputation, puts profits above all." But I'm not completely persuaded that the changes we're talking about have happened on Blankfein's watch.
Anderson focuses on what she says are two features of Blankfein's tenure: The elevation of short-term profit over long-term client relationships (which, I assume, is basically another way of saying long-term profits); and, relatedly, the triumph of Goldman's traders (the people who place bets for the company's own portfolio) over its investment bankers (the people who advise clients on mergers and acquisitions, and offerings of debt and equity). But in the first case, I'd guess the change goes back at least a decade, to Goldman's 1999 public offering. Prior to the IPO, Goldman relied on its partners' equity for capital, and the partners basically had to keep their money in the company until they left. That generally created incentives to think long-term. Post-IPO, it became easier for employees to cash out their stake in the company. And, of course, the public offering meant Goldman was often betting with other people's money. (Not surprisingly, the likely cultural effect of the IPO was much-debated among Goldman's partners beforehand.)
As for the triumph of the traders over the bankers--this has been the story on Wall Street for the past 25 or 30 years, as various structural changes in the industry (like the end of fixed commissions in 1975 and SEC Rule 415 in 1982, which made underwriting a commodity rather than a relationship business) squeezed profits from investment banking and other client-focused activities. (See Ken Auletta's Greed and Glory on Wall Street for the story of how the rise of the bankers split Lehman Brothers back in the late '70s/early '80s.) What's more, Goldman's trading culture dates back well before that. As Ron Chernow wrote in House of Morgan, his excellent history of Wall Street:
Contrary to the views of more myopic partners, Bob Baldwin saw Morgan Stanley as fighting for its life [in the late '60s and early '70s]. He queasily note the rise of Salomon Brothers and Goldman, Sachs, which were using their trading skills to chip away at the four dominant firms--Morgan Stanley, First Boston, Kuhn, Loeb, and Dillon, Read. At this point, Morgan Stanley still exhibited vinatage snobbery about "traders" being socially inferior to "bankers"--a tradition dating back to Pierpont Morgan. ... Trading was still though a coarse commodity business best left to Jewish firms such as Salomon and Goldman, Sachs. In the Salomon Brothers culture, in contrast, traders stigmatized corporate finance people (i.e., invstment bankers) as "light-bulb changers" or "order-takers."
In fairness, Goldman was a very different (and far more genteel) firm than Salomon. And the relationship between the bankers and traders at Goldman was historically more equal, and therefore more stalemated, than it has become more recently. On the other hand, it's not like the traders never ran the company before Blankfein. Hank Paulson, Blankfein's immediate predecessor, came from a banking background; but his predecessor, Jon Corzine, was a trader.
Anderson suggests Goldman was something of a holdout as Wall Street evolved over the last generation, and notes that Blankfein has made certain changes that institutionalize the profit-seeking ethos. For example:
[E]xecutives under Mr. Blankfein changed the way investment bankers were measured. Goldman instituted banker “profiles,” a sort of daily profit and loss statement, to see how much business its employees and clients were doing. While such assessments have long been common elsewhere on Wall Street, Goldman disdained them until Mr. Blankfein became chairman and chief executive.
But this strikes me as a minor tweak alongside the bigger cultural and institutional shifts at work over the last few decades. The trading ethos had won out long before Blankfein became CEO. More likely, Blankfein just formalized certain elements that already existed in practice.
P.S. I added the last two sentences shortly after originally posting the item.