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Chapter 1

What Happened

GOLDMAN IS GOING STRONG” DECLARED THE TITLE OF A Fortune article in February 2007. “On Wall Street, there’s good and then there’s Goldman,” wrote author Yuval Rosenberg. “Widely considered the best of the bulge-bracket investment firms, Goldman Sachs was the sole member of the securities industry to make [Fortune’s] 2006 list of America’s Most Admired Companies (it placed 18th).”¹ Rosenberg argued that what distinguished the firm was the quality of its people and the incentives it offered. “The bank has long had a reputation for attracting the best and the brightest,” he wrote, “and no wonder: Goldman made headlines in December for doling out an extraordinary $16.5 billion in compensation last year. That works out to an average of nearly $622,000 for each employee.” And as if that weren’t enough, “[i]n the months since our list came out, Goldman’s glittering reputation has only gotten brighter.”

But only two years later, Goldman was being widely excoriated in the press, the subject of accusations, investigations, congressional hearings, and litigation (not to mention late-night jokes) alleging insensitive, unethical, immoral, and even criminal behavior. Matt Taibbi of Rolling Stone famously wrote, “The world’s most powerful investment bank is a great vampire squid wrapped around the face of humanity, relentlessly jamming its blood funnel into anything that smells like money.”² Understandably it seemed that angry villagers carrying torches and pitchforks were massing just around the corner. (In 2011, the Occupy Wall Street protest movement would begin.) The public and politicians grew particularly upset at Goldman as allegations surfaced that the company had anticipated the impending crisis and had shorted the market to make money from it. (Goldman denies this.) In addition, there were allegations that the firm had prioritized selling its clients securities in deals that it knew were, as one deal was described by an executive in an e-mail, “shitty”—raising the question of whether Goldman had acted unethically, immorally, or illegally.³

Particularly agonizing for some employees were accusations that Goldman no longer adhered to its revered first business principle: “Our clients’ interests always come first.” That principle had been seen at the firm as a significant part of the foundation of what made Goldman’s culture unique. And the firm had held up its culture of the highest standards of duty and service to clients as key to its success. A partner made this point as part of a 2006 Harvard Business School case, saying “Our bankers travel on the same planes as our competitors. We stay in the same hotels. In a lot of cases, we have the same clients as our competition. So when it comes down to it, it is a combination of execution and culture that makes the difference between us and other firms … That’s why our culture is necessary—it’s the glue that binds us together.”⁴

Some critics asserted that Goldman’s actions in the lead up to the crisis, and in dealing with it, were evidence that the firm’s vaunted culture had changed. Others argued that nothing was really new, that Goldman had always been hungry for money and power and had simply been skillful in hiding it behind folktales about always serving clients, and by doing conspicuous public service.⁵

Meanwhile, many current and former employees at Goldman vehemently assert that there has been no cultural shift, and argue that the firm still adheres as strictly as ever to its principles, including always putting clients’ interests first. They cite the evidence of the firm’s leading market share with clients and most-sought-after status for those seeking jobs in investment banking. How, they ask, could something be wrong, when we’re doing so well? In fact, while in Fortune’s 2006 list of America’s Most Admired Companies, Goldman placed eighteenth, in 2010, after the crisis, it placed eighth,⁶ and in 2012, Goldman ranked seventh in a survey of MBA students of firms where they most wanted to work (and first among financial firms).⁷ And even with all of the negative publicity, Goldman has maintained its leading market share with clients in many valued services. For example, in 2012 and 2011, Goldman ranked as the number one global M&A adviser.⁸

So has the culture at Goldman changed or not? And if so, why and how? It strains credulity to think that the firm’s culture could have changed so dramatically between 2006, when the firm was so generally admired, and 2009, when it became so widely vilified. Once I decided that these questions were worth investigating—whether Goldman’s culture had changed and, if so, how and why—I chose to start from 1979, when John Whitehead, cochairman and senior partner, codified Goldman’s values in its famous “Business Principles.” As many at Goldman will point out, those written principles are almost exactly the same today as they were in 1979. However, that doesn’t necessarily mean adherence to them or that the interpretation of them hasn’t changed. What I’ve discovered is that while Goldman’s culture has indeed changed from 1979 to today, it didn’t happen for a single, simple reason and it didn’t happen overnight. Nor was the change an inexorable slide from “good” to “evil,” as some would have it.

There are two easy and popular explanations about what happened to the Goldman culture. When I was there, some people believed the culture was changing or had changed because of the shifts in organizational structure brought on by the transformation from private partnership to publicly traded company. Goldman had held its initial public offering (IPO) on the NYSE in 1999, the last of the major investment banks to do so. In fact, this was my initial hypothesis when I began my research. The second easy explanation is that, whatever the changes, they happened since Lloyd Blankfein took over as CEO and were the responsibility of the CEO and the trading-oriented culture some believe he represents.

I found that although both impacted the firm, neither is the one single or primary cause. In many ways, they are the results of the various pressures and changes. The story of what happened at Goldman after 1979 is messy and complex. Many seemingly unrelated pressures, events, and decisions over time, as well as their interdependent, unintended, and compounding consequences, slowly changed the firm’s culture. Different elements of its culture and values changed at different times, at different speeds, and at different levels of significance in response to organizational, regulatory, technological, and competitive pressures.

But overall, what’s apparent is that Goldman’s response to these pressures to achieve its organizational goal of being the world’s best and dominant investment bank (its IPO prospectus states, “Our goal is to be the advisor of choice for our clients and a leading participant in global financial markets.” Its number three business principle is “Our goal is to provide superior returns to our shareholders.”) was to grow—and grow fast.⁹ Seemingly unrelated or insignificant events, decisions, or actions that were rationalized to support growth then combined to cause unintended cultural transformations.

Those changes were incremental and accepted as the norm, causing many people within the firm not to recognize them. In addition, the firm’s apparent adherence to its principles and a strong commitment to public and community service gave Goldman employees a sense of higher purpose than just making money. That helped unite them and drive them to higher performance by giving their work more meaning. At the same time, however, it was used to rationalize incremental changes in behavior that were inconsistent with the original meaning of its principles. If we’re principled and serve a sense of higher purpose, the reasoning went, then what we’re doing must be OK.

Since 1979, Goldman’s commitment to public service has ballooned in both dollar amounts and time, something that should be commended. But this exceptional track record prevents employees from fully understanding the business purpose of this service, which is expanding and deepening the power of the Goldman network, including its government ties (the firm is pilloried by some as “Government Sachs”). Some at Goldman have even claimed that having many alumni in important positions has “disadvantaged” the firm.¹⁰

For example, a Goldman spokesman was quoted in a 2009 Huffington Post article as saying, “What benefit do we get from all these supposed connections? I would say we were disadvantaged from having so many alumni in important positions. Not only are we criticized—sticks and stones may break my bones but words do hurt, they really do—but we also didn’t get a look-in when Bear Stearns was being sold and with Washington Mutual. We were runner-ups in the auction for IndyMac, in the losing group for BankUnited. If all these connections are supposed to swing things our way, there’s just one bit missing in the equation.” The spokesman added that government agencies have bent over backward to avoid any perception of impropriety, explaining that when the firm’s executives would meet with then-Treasury Secretary Paulson, “it was impossible to have a conversation with him without it being chaperoned by the general counsel of Treasury.”¹¹

The vast majority of the employees, who joined Goldman decades after the original principles were written, do not really know the original meaning of the principles. Always putting clients’ interests first, for instance, originally implied the need to assume a higher-than-required legal responsibility (a high moral or ethical duty) to clients. At the time, the firm was smaller and could be more selective as it grew. However, over time, the meaning slowly shifted (generally unnoticed) to implying the need to assume only the legally required responsibility to clients. As the firm grew, the law of large numbers made it harder for Goldman to be as selective. A legal standard allowed Goldman to increase the available opportunities for growth.

In accommodating this shift, those within Goldman, including senior leaders, increasingly relied on the rationalization that its clients were “big boys,” a phrase implying that clients were sophisticated enough to recognize and understand potential risks and conflicts in dealing with Goldman, and therefore could look out for themselves. And in cases when the firm was concerned about potential legal liability, it even had clients sign a “big boy letter,” a legal recognition of potential conflicts and Goldman’s various roles and risks by the client in dealing with Goldman. This is in keeping with Goldman’s general explanation of its role in the credit crisis: it did nothing legally wrong, but was simply acting as a “market maker” (simply matching buyers and sellers of securities), and it responsibly fulfilled all its legal obligations in this role. This argument is also reflective of a shift in the firm’s business balance to the dominance of trading, as generally the interpretation of the responsibilities to a client are more often legal in nature, with required legal disclosures and standards of duty in dealing in an environment in which there is a tension in a buying and selling relationship of securities in trading, versus a more often advisory relationship in banking.

It’s important to note in examining the change at Goldman that, as we’ll explore, certain elements of the firm’s organizational culture from 1979, like strong teamwork, remain intact enough that the firm is still highly valued by clients and potential employees and was able to maneuver through the financial crisis more successfully than its competitors. The slower and less intense change in certain elements is a factor in why many at Goldman seem to either miss or willfully ignore the changes in business practices and policies. Also complicating the recognition of the changes is that some of them have helped the firm reach many of its organizational goals.

While many clients may be disappointed and frustrated with the firm, and many question both its protection of confidential client information and its rationalizations for its various roles in transactions, at the same time they feel that Goldman has the unique ability to use its powerful network and gather and share information throughout the firm, thereby providing excellent execution relative to its competitors. As for ethics, many clients reject Goldman’s general belief that it is ethically superior to the rest of Wall Street; nonetheless, many clients consider ethics only one factor in their selection of a firm, albeit one that may make them more wary in dealing with Goldman than in the past.

The frustration with the kind of analysis I’ve undertaken is that it’s tempting to ask who or what event or decision is responsible. We want to identify a single source—something or someone—to blame for the change in culture. The desire is for a clear cause-and-effect relationship, and often for a villain. The story of Goldman is too messy for that kind of explanation. Instead, we need to ask what is responsible—what set of conditions, constraints, pressures, and expectations changed Goldman’s culture.

One thing I learned in studying sociology is that the organization and its external environment matter. The nature of an organization and its connection to the external environment shape an organization’s culture and can be reflected through changes in structure, practices, values, norms, and actions. If you get rid of the few people supposedly responsible for violations of cultural or legal standards, when new ones take over the behavior continues. We need to look beyond individuals, striving to understand the larger organizational and social context at play.

I don’t intend my analysis as a value judgment on Goldman’s cultural change. I purposely set aside the question of whether the change was overall for the better or worse. My primary intent is to illuminate a process whereby a firm that had largely upheld a higher ethical standard shifted to a more legal standard, and how companies more generally are vulnerable to such “organizational drift.”

This is the story of an organization whose culture has slowly drifted, and my story demonstrates why and how. The concept of drift is established, but still developing, in the academic research literature on organizational behavior (what I refer to as organizational drift is sometimes described as practical drift or cultural drift).¹² Organizational drift is a process whereby an organization’s culture, including its business practices, continuously and slowly moves, carried along by pressures, departing from an intended course in a way that is so incremental and gradual that it is not noticed. One reason for this is that the pursuit of organizational goals in a dynamic, complex environment with limited resources and multiple, conflicting organizational goals, often produces a succession of small, everyday decisions that add up to unforeseen change.¹³

Although my study focuses on the Goldman case, this story has much broader implications. The phenomenon of organizational drift is bigger than just Goldman. The drift Goldman has experienced—is experiencing, really—can affect any organization, regardless of its success. As Jack and Suzy Welch wrote in Fortune, “‘Values drift’ is pervasive in companies of every ilk, from sea to shining sea. Employees either don’t know their organization’s values, or they know that practicing them is optional. Either way the result is vulnerability to attack from inside and out, and rightly so.”¹⁴ And leaders of the organization may not be able to see that it is happening until there is a public blow up/failure or an insider who calls it out. The signs may indicate that the culture is not changing—based on leading market share, returns to shareholders, brand, and attractiveness as an employer—but slowly the organization loses touch with its original principles and values.

Figuring out what happened at Goldman is a fascinating puzzle that takes us into the heart of a dynamic complex organization in a dynamic complex environment. It is a story of intrigue involving an institution that garners highly emotional responses. But it is more than that. It raises questions that are fundamental to organizations themselves. Why and how do organizations drift from the spirit and meaning of the principles and values that made them successful in reaching many of its organizational goals? And what should leaders and managers do about it? It also raises serious questions about future risks to our financial system.

The impressive statistics of Goldman’s many continuing successes, and of clients’ willingness to condone possible conflicts because of its quality of execution, doesn’t mean that the change in the firm’s culture doesn’t pose dangers both for Goldman and for the public in the future. For one thing, if Goldman’s behavior moves continually closer to the legal line of what is right and wrong—a line that is dangerously ambiguous—it is increasingly likely to cross that line, potentially doing damage not only to clients but to the firm, and perhaps to the financial system (some argue the firm has already crossed it). We have seen several financial institutions severely weakened and even destroyed in recent memory due to a drift into unethical, or even illegal, behavior, even though this is often blamed on one or a few rogue individuals rather than on organizational culture. Obviously this would be a terrible outcome for the many stakeholders of Goldman. However, Goldman is hardly an inconsequential or isolated organization in the economy; it is one of the most important and powerful financial institutions in the world. Its fate has serious potential consequences for the whole financial system. This doesn’t go for just Goldman, but for all of the systemically important financial institutions.

I am not arguing or predicting that Goldman’s drift will inevitably lead to organizational failure, or an ensuing disaster for the public (although there are those who believe that this has already happened), I am saying that the organizational drift is increasing that possibility. This is why it’s important to illuminate why and how the organizational drift has come about.

A Little History

In considering how and why Goldman’s interpretation of its business principles has changed, it’s important to consider some key aspects of the firm’s history, and why the principles were written.

According to my interviews with former Goldman co-senior partner John Whitehead, who drafted the principles, there was something special about the Goldman culture in 1979, one that brought it success and kept it on track even in tough times. He thought codifying those values, in terms of behaviors, would help transmit the Goldman culture to future generations of employees. The business principles were intended to keep everyone focused on a proven formula for success while staying grounded in the clear understanding that clients were the reason for Goldman’s very existence and the source of the firm’s revenues.

Whitehead emphasized the fact that he did not invent them; they already existed within the culture, and he simply committed them to paper. He did so because the firm was expanding faster than new people could be assimilated in 1979, and he thought it was important to provide new employees a means to acquire the Goldman ethic from earlier generations of partners who had learned by osmosis. Though by no means the force in the market the firm is today, Goldman had grown and changed a great deal from its early days and its size, complexity, and growth were accelerating.

Goldman Sachs was founded in 1869 in New York. Having made a name for itself by pioneering the use of commercial paper for entrepreneurs, the company was invited to join the NYSE in 1896. (For a summary timeline of selected events in Goldman’s history, see appendix G.)

In the early twentieth century, Goldman was a player in establishing the initial public offering market. In 1906, it managed one of the largest IPOs of that time—that of Sears, Roebuck. However, in 1928 it diversified into asset management of closed end trusts for individuals who utilized significant leverage. The trusts failed as a result of the stock market crash in 1929, almost causing Goldman to close down and severely hurting the firm’s reputation for many years afterward. After that, the new senior partner, Sydney Weinberg, focused the firm on providing top quality service to clients. In 1956, Goldman was the lead adviser on the Ford Motors IPO, which at the time was a major coup on Wall Street. To put Goldman’s position on Wall Street in context at the time, in 1948 the US Department of Justice filed an antitrust suit (U.S. v. Morgan [Stanley] et al.,) against Morgan Stanley and eighteen investment banking firms. Goldman had only 1.4 percent of the underwriting market and was last on the list of defendants. The firm was not even included in a 1950 list of the top seventeen underwriters. However, slowly the firm continued to grow in prestige, power, and market share.

The philosophy behind the firm’s rise was best expressed by Gus Levy, a senior partner (with a trading background) at Goldman from 1969 until his death in 1976, who is attributed with a maxim that expressed Goldman’s approach: “greedy, but long-term greedy.”¹⁵ The emphasis was on sound decision-making for long-term success, and this commitment to the future was evidenced by the partners’ reinvestment in the firm of nearly 100 percent of the earnings.¹⁶

Perhaps surprisingly, although it’s had many triumphs, over its history Goldman has had a mixed track record.¹⁷ It has been involved in several controversies and has come close to bankruptcy once or twice.

Another common misperception among the public is that today Goldman primarily provides investment banking services for large corporations because the firm works on many high-profile M&A deals and IPOs; however, investment banking now typically represents only about 10 to 15 percent of revenue, substantially lower than the figure during the 1980s, when it accounted for half of the revenue. Today, the majority of the revenues comes from trading and investing its own capital. The profits from trading and principal investing are often disproportionately higher than the revenue because the businesses are much more scalable than investment banking.

Even though the firm was growing when Whitehead wrote the principles, its growth in more recent years has been even more accelerated, particularly overseas. In the early 1980s the firm had a few thousand employees, with around fifty to sixty partners (all US citizens), and less than 5 to 10 percent of its revenue came from outside the United States. In 2012, Goldman had around 450 partners (around 43 percent are partners with non-US citizenship) and 32,600 employees.¹⁸ Today about 40 percent of Goldman’s revenue comes from outside the United States and it has offices in all major financial centers around the world, with 50 percent of its employees based overseas.

Once regulations were changed in 1970 to allow investment banks to go public on the NYSE, Goldman’s partners debated changing from a private partnership to a public corporation. The decision to go public in an IPO was fraught with contention, in part because the partners were concerned about how the firm’s culture would change. They were concerned that the firm would change to being more “short-term greedy” to meet outside stock market investors’ demands versus being “long-term greedy,” which had generally served the firm so well. The partners had voted to stay a privately held partnership several times in its past, but finally the partners voted to go public, which it did in 1999. Goldman was the last of the major investment banking firms to go public, with the other major holdout, its main competitor Morgan Stanley, having done so in 1986. In their first letter addressing public shareholders in the 1999 annual report, the firm’s top executives wrote, “As we begin the new century, we know that our success will depend on how well we change and manage the firm’s rapid growth. That requires a willingness to abandon old practices and discover new and innovative ways of conducting business. Everything is subject to change—everything but the values we live by and stand for: teamwork, putting clients’ interests first, integrity, entrepreneurship, and excellence.”¹⁹ They specifically stated they did not want to adjust the firm’s core values, and they included putting clients’ interests first and integrity, but they knew upholding the original meaning of the principles would be a challenge and certain things had to change.

Although the principles have generally remained the same as in 1979, there was one important addition to them around the time of the IPO—“our goal is to provide superior returns to our shareholders”—which introduced an intrinsic potential conflict or ambiguity between putting the interests of clients first (which was a Goldman self-imposed ethical obligation) and those of outside shareholders (which is a legally defined duty), as well as the potential conflict of doing what was best for the long term versus catering to the generally short-term perspective from outside, public market investors. There’s always a natural tension between business owners who want to make the highest profits possible and clients who want to buy goods and services for as low as possible, to make their profits the highest possible. Being a small private partnership allowed Goldman the flexibility to make its own decisions about what was best in its own interpretation of long term in order to help address this tension. Having various outside shareholders all with their own time horizons and objectives, combined with Goldman’s legal duty to put outside shareholders’ (not clients’) priorities first, makes the interpretation and execution of long term much more complicated and difficult.

When questioned about the potential for conflict, Goldman leaders have asserted that the firm has been able to ethically serve both the interests of clients and those of shareholders, and for many years, that assertion for the most part was not loudly challenged. That was largely due to Goldman’s many successes, including leading market position and strong returns to shareholders, and rationalized by the many good works of the firm and its alumni, which served to address concerns about conflicts, even most of the way through the 2008 crisis.

At the beginning of the crisis, Goldman was mostly praised for its risk management. During the credit crisis, Goldman outperformed most of its competitors. Bear Stearns was bought by J.P. Morgan with government assistance. Lehman Brothers famously went bankrupt, and Merrill Lynch was acquired by Bank of America. Morgan Stanley Dean Witter & Co. sold a stake to Mitsubishi UFJ. But the overall economic situation deteriorated very quickly, and Goldman, as well as other banks, accepted government assistance and became a bank holding company. The company got a vote of confidence with a multi-billion-dollar investment from Berkshire Hathaway, led by legendary investor Warren Buffett. But soon after, things changed, and Goldman, along with the other investment banks, was held responsible for the financial crisis. The fact that so many former Goldman executives held positions in the White House, Treasury, the Federal Reserve Bank of New York, and the Troubled Asset Relief Program in charge of the bailouts (including Hank Paulson, the former CEO of Goldman and then secretary of the Treasury) even as the bank took government funds and benefited from government actions, raised concerns about potential conflicts of interest and excessive influence. People started to question if Goldman was really better and smarter, or wasn’t just more connected, or engaged in unethical or illegal practices in order to gain an advantage.

In April 2010, the Securities and Exchange Commission (SEC) charged Goldman with defrauding investors in the sale of a complex mortgage investment. Less than a month later, Blankfein and other Goldman executives attempted to answer scorching questions from Senator Carl Levin (D-Mich.), chair of the Permanent Subcommittee on Investigations, and other senators about the firm’s role in the financial crisis. The executives were grilled for hours in a publicly broadcasted hearing. The senators pulled no punches, calling the firm’s practices unethical, if not illegal. Later, after a Senate panel investigation, Levin called Goldman “a financial snake pit rife with greed, conflicts of interest, and wrongdoing.”²⁰ But lawmakers at the hearings made little headway in getting Goldman to concede much, if anything specific, that the company did wrong.²¹

In answering questions about whether Goldman made billions of dollars of profits by “betting” on the collapse in subprime mortgage bonds while still marketing subprime mortgage deals to clients, the firm denied the allegations; Goldman argued it was simply acting as a market maker, partnering buyers and sellers of securities. Certain Goldman executives at the time showed little regret for whatever role the firm had played in the crisis or for the way it treated its clients. One Goldman executive said, “Regret to me is something you feel like you did wrong. I don’t have that.”²²

There does seem to have been some internal acknowledgment that the culture had changed or at least should change. Shortly after the hearing, in response to public criticism, Goldman established the business standards committee, cochaired by Mike Evans (vice chairman of Goldman) and Gerald Corrigan (chairman of Goldman’s GS Bank USA, and former president of the Federal Reserve Bank of New York), to investigate its internal business practices. Blankfein acknowledged that there were inconsistencies between how Goldman employees viewed the firm and how the broader public perceived its activities. In 2011, the committee released a sixty-three page report, which detailed thirty-nine ways the firm planned to improve its business practices. They ranged from changing the bank’s financial reporting structure to forming new oversight committees to adjusting its methods of training and professional development. But it is unclear in the report whether Goldman specifically acknowledged a need to more ethically adhere to the first principle. The report states, “We believe the recommendations of the Committee will strengthen the firm’s culture in an increasingly complex environment. We must renew our commitment to our Business Principles—and above all, to client service and a constant focus on the reputational consequences of every action we take.”²³ The use of the word “strengthen” suggests that the culture had been weakened, but the report is vague on this. According to the Financial Times, investors, clients, and regulators remained underwhelmed in the wake of the report by Goldman’s efforts to change.²⁴

A Goldman internal training manual sheds some more light on whether the firm acknowledged its adherence to its first business principle has changed. The New York Times submitted a list of questions in May 2010 to Goldman for responses that included “Goldman’s Mortgage Compliance Training Manual from 2007 notes that putting clients first is ‘not always straightforward.’”²⁵

The point that putting clients first is not always straightforward is telling. It indicates a clear change in the meaning of the original first principle.

The notion that Goldman’s culture has changed was given a very public hearing when, on March 14, 2012, former Goldman employee Greg Smith published his resignation letter on the op-ed page of the New York Times. In the widely distributed and read piece, Smith criticized the current culture at Goldman, characterizing it as “toxic,” and specifically blamed Blankfein and Goldman president Gary Cohn for losing “hold of the firm’s culture on their watch.”²⁶

Years ago, an academic astutely predicted and described this type of “whistle blowing” as being a result of cultural change and frustration. Edgar Schein, a now-retired professor at the MIT Sloan School of Management, wrote “… it is usually discovered that the assumptions by which the organization was operating had drifted toward what was practical to get the job done, and those practices came to be in varying degrees different from what the official ideology claimed … Often there have been employee complaints identifying such practices because they are out of line with what the organization wants to believe about itself, they are ignored or denied, sometimes leading to the punishment of the employees who brought up the information. When an employee feels strongly enough to blow the whistle, a scandal may result, and practices then may finally be reexamined. Whistle blowing may be to go to the newspapers to expose a practice that is labeled as scandalous or the scandal may result from a tragic event.”²⁷ The publishing of Smith’s letter certainly resulted in a scandal and an examination.²⁸

Goldman and Me

The question of what happened to Goldman has special resonance for me. I have spent eighteen years involved with the firm in one way or another: twelve years working for Goldman in a variety of capacities, and another six either using its services as a client or working for one of its competitors. I still have many friends and acquaintances who work there.

In 2010, I was about to start teaching at Columbia University’s Graduate School of Business and shortly would be accepted to the PhD program in sociology at Columbia. The sociology program in particular—which required that I find a research question for my PhD dissertation—provided me with many of the tools I needed to start to answer my question. I decided to pursue a career as a trained academic instead of relying solely on my practical experiences. The combination of the two, I thought, would be more rewarding and powerful for both my students and myself. When I began the study that would become this book, my hypothesis was that the change in Goldman’s culture was rooted in the IPO. I conjectured that what fundamentally changed the culture was the transformation—from a private partnership to a public company. As I learned more, I realized that the truth was more complicated.

My analysis of the process by which the drift happened is deeply informed by my own experiences. Though some may think this has made me a biased observer, I believe that my inside knowledge and experience in various areas of the firm—from being based in the United States to working outside the United States, from working in investment banking to proprietary trading, from being present pre- and post-IPO—combined with my academic training gives me a unique ability to gather and analyze data about the changes at Goldman. My close involvement with Goldman deeply informs my analysis, so it’s worth reviewing the relationship. A brief overview of my career also reveals how Goldman’s businesses work.

In 1992, fresh from undergraduate studies at the University of Chicago, I arrived at Goldman to work in the M&A department in the investment banking division. M&A bankers advise the management and boards of companies on the strategy, financing, valuation, and negotiations of buying, selling, and combining various companies or subsidiaries. For the next dozen years, I held a variety of positions of increasing responsibility. My work exposed me to various areas, put me in collaborative situations with Goldman partners and key personnel, and allowed me to observe or take part in events as they unfolded.

I rotated through several strategically important areas. First I worked in M&A in New York and then M&A in Hong Kong, where I witnessed the explosive international growth firsthand with the opening of the Beijing office. Next, I returned to New York to assist Hank Paulson on special projects; Paulson was then co-head of investment banking, on the management committee, and head of the Chicago office. Also, I worked with the principal investment area (PIA makes investments in or buys control of companies with money collectively from clients, Goldman, and employees). Then I returned to M&A, rising to the head of the hostile raid defense business (defending a company from unsolicited take-overs—one of the cornerstones of Goldman’s M&A brand and reputation) and becoming business unit manager of the M&A department. Finally, I ended up as a proprietary trader and ultimately portfolio manager in the fixed income, commodities, and currencies division (FICC)—similar to an internal hedge fund—managing Goldman’s own money. My rotations to a different geographic region and through different divisions were typical at the time for a certain percentage of selected employees in order to train people and unite the firm.

Throughout my career at Goldman, I served on firm-wide and divisional committees, dealing with important strategic and business process issues. I also acted as special assistant to several senior Goldman executives and board members, including Hank Paulson, on select projects and initiatives such as improving business processes and cross-department communication protocols. Goldman was constantly trying to improve and setting up committees with people from various geographic regions and departments to create initiatives. I was never a partner at Goldman. I participated in many meetings where I was the only nonpartner in attendance and prepared analysis or presentations for partner meetings, or in response to partner meetings, but I did not participate in “partner-only” meetings.

As a member of the M&A department, I worked on a team to advise board members and CEOs of leading multinational companies on large, technically complex transactions. For example, I worked on a team that advised AT&T on combining its broadband business with Comcast in a transaction that valued AT&T broadband at $72 billion. I also helped sell a private company to Warren Buffett’s Berkshire Hathaway. As the head of Goldman’s unsolicited take-over and hostile raid defense practice, I worked on a team advising a client involved in a proxy fight with activist investor Carl Icahn.

When I joined Goldman, partnership election at the firm was considered one of the most prestigious achievements on Wall Street, in part because the process was highly selective and a Goldman partnership was among the most lucrative. The M&A department had a remarkably good track record of its bankers being elected—probably one of the highest percentages of success in the firm at the time. The department was key to the firm’s brand, because representing prestigious blue chip clients is important to Goldman’s public perception of access and influence that makes important decision makers want to speak to Goldman. M&A deals were high profile, especially hostile raid defenses. M&A was also highly profitable and did not require much capital. For all these reasons, a job in the department was highly prized, and the competition was fierce. When the New York M&A department hired me, it was making about a dozen offers per year to US college graduates to work in New York, out of what I was told were hundreds of applicants.

While in the department, I was asked to be the business unit manager (informally referred to as the “BUM”). I addressed issues of strategy, business processes, organizational policy, business selection, and conflict clearance. For example, I was involved in discussions in deciding whether and how Goldman should participate in hostile raids, and in discussing client conflicts and ways to address them. The job was extremely demanding. After a relatively successful stint, I felt I had built enough goodwill to move internally and do what I was more interested in: being an investor. I hoped to ultimately move into proprietary trading or back to Principal Investment Area (PIA), Goldman’s private equity group.

Many banking partners tried to dissuade me from moving out of M&A. However, I wanted to become an investor, and a few partners who were close friends and mentors helped me delicately maneuver into proprietary investing. I was warned, “If you lose money, you will most likely get fired, and do not count on coming back to banking at Goldman. But if you make money for the firm, then you will get more money to manage, which will allow you to make more money for the firm and yourself.”

Today people ask me whether I saw the writing on the wall—that the shift to proprietary trading was well under way and would continue at Goldman—and whether that’s why I moved. To be honest, I didn’t give it as much thought as I should have. My work in helping manage the M&A department and assisting senior executives on various projects exposed me to other areas of the firm and the firm’s strategy and priorities. When you’re in M&A, you work around the clock. You don’t have time for much reflection or career planning. (This may be, upon reflection, part of the business model and be a contributor to the process of organizational drift.) You’re working so intensely on high-profile deals—those that end up on page 1 of the Wall Street Journal—that you’re swept up in the importance of the firm’s and your work. Your bosses tell you how important you are and how important the M&A department is to the firm. They remind you that the real purpose of your job is to make capital markets more efficient and ultimately provide corporations with more efficient ways to finance. So you rationalize that there’s a noble and ethical reason for what you and the firm are doing. In general, I greatly respected most of the investment banking partners that I knew. And I certainly didn’t have the academic training, distance, or perspective to analyze the various pressures and small changes going on at the firm and their consequences. I do remember simply feeling like I should be able to do what I wanted and what I was interested in at Goldman—an entitlement that I certainly did not feel earlier in my career, and maybe one I picked up from observations or the competitive environment for Goldman-trained talent.

Paulson, a banker, was running the firm, and several others from banking whom I considered mentors held important positions. So even though it was no secret that revenues from investment banking had declined as a percentage of the total, I didn’t think very much about that, nor did I consider its consequences. One longtime colleague and investment banking partner pulled me aside to tell me that moving into proprietary trading was the smartest thing I could do and that he wished he could take my place. When I asked why, he said, “More money than investment banking partners, faster advancement, shorter hours, better lifestyle, you learn how to manage your own money, and, one day, you can leave and start your own hedge fund and make even more money—and Goldman will support you.” I assured him I was only trying to do what interested me, but I agreed it would be nice to travel less, work only twelve-hour days, and spend more time with my wife and our newborn daughter. When I asked why he didn’t tell me this before, he said, “Then we would have had to find and train someone else.”

I became a proprietary trader and then a portfolio manager in Goldman’s FICC Special Situations Investing Group (SSG). We built it into one of the largest, most successful dedicated proprietary trading areas at Goldman and on Wall Street. Created during the late 1990s, SSG initially primarily invested Goldman’s money in the debt and equity of financially stressed companies and made loans to high-risk borrowers (although we expanded the mandate over time). SSG was separated from the rest of the firm, meaning we sat on a floor separate from the trading desks that dealt with clients. We were called on as a client by salespeople at Goldman and the rest of Wall Street as if we were a distinct hedge fund. We did not deal with clients.

Even separated as we were, we had the potential for at least the perception of conflicts of interest with clients. For example, we could own the stock or debt of a company when, unknown to us, the company would hire Goldman’s M&A department to review strategic alternatives or execute a capital market transaction such as an equity or debt offering. In that case we could be “frozen,” meaning we were restricted from buying any more related securities or selling the position, something that would place us at a potential disadvantage because we could not react to new information. If we wanted to buy the securities of a company, and unbeknownst to us Goldman’s bankers were advising the company on a transaction, we could be blocked from the purchase.

The biggest advantage I believed we had over our competitors—primarily hedge funds—was that we had a great recruiting and training machine in Goldman; we could pick the very best people in the company. Most had heard that we were extremely entrepreneurial, that we gave our people a lot of responsibility and ability to make a larger impact, that we were extremely profitable, and that we paid very well. Those from SSG also had an excellent track record of eventually leaving to set up or join existing hedge funds. We also had infrastructure—technology, risk management systems, and processes—that was unmatched by Wall Street banks, because Goldman invested heavily in it, recognizing the strategic importance of the competitive advantage it gave us.

We were trained to run investing businesses (for example, evaluating and managing people and risk or setting goals and measureable metrics). We had access to almost any corporate management team or government official through the cachet of the Goldman name and its powerful network. We also had a low cost of capital, because Goldman borrowed money at very low rates from debt investors, money that we then invested and generated a return a good deal higher than the cost of borrowing. We had one client—Goldman—and this was good, because it meant we did not have to approach lots of clients to raise funds. However, it was also a bad thing, because all the capital came from one investor. If Goldman (or the regulators, as later happened with the Volcker Rule) decided it should no longer be in the business, you were out of a job, although it was likely many others would want to hire you.

When I started in proprietary trading in FICC, I immediately noticed one big difference from the banking side. Although my new bosses were smart, sophisticated, and supportive, and as demanding as my investment banking bosses, there was an intense focus on measuring relatively short-term results because they were measurable. Our performance as investors was marked to market every day, meaning that the value of the trades we made was calculated every day, so there was total transparency about how much money we’d made or lost for the firm each and every day. This isn’t done in investment banking, although each year new performance metrics were being added by the time I left for FICC. Typically in banking, relationships take a long time to develop and pay off. A bad day in banking may mean that, after years of meetings and presentations performed for free, a client didn’t select you to execute a transaction. You could offer excuses: “The other bank offered to loan them money,” “They were willing to do it much cheaper,” and so on. It was never that you got outhustled or that the other firm had better people, ideas, coordination, relationships, or expertise, something that would negatively reflect on you or the firm (or both). In proprietary trading, there were no excuses for bad days of losses. We were expected to make money whether the markets went up or down. There was another thing I learned quickly. One could be right as a trader, but have the timing wrong in the short term and be fired with losses that then quickly turned around into the projected profits. In addition, relative to banking, in judging performance the emphasis seemed to tilt toward how much money one made the firm versus more subjective and less immediately profitable contributions. The fear of this transparency and the potential for failure kept many bankers from moving to trading.

I later discovered that Goldman’s proprietary trading areas actually maintained a longer-term perspective than did most trading desks and hedge funds, where a daily, weekly, or (at most) monthly focus was generally the norm. Our bosses reviewed information about our investments daily, but they tended to have a bias toward evaluating performance on a quarterly and even yearly basis (but much shorter than evaluating a client relationship in banking, which could take years). We were held accountable and were compared on risk-based performance against hedge fund peers, as well as other Goldman desks. If we found good opportunities, we got access to capital and invested it. Theoretically, when we didn’t see attractive opportunities, we were to sell our positions and return the money to Goldman, with the understanding that we had access to it when we felt there were attractive opportunities.

However, I learned there was a perverse incentive to keep as much money as possible and invest it to make the firm as much money as possible—and yourself as much money as possible—even if the risk and reward might not be as favorable as other groups’ opportunities. There was a feeling that we were “paid to take risks,” and the larger the risks you took, or were able to take, the more important you were to the organization. We did have a critical advantage over most banks—we knew that many of our bosses and those at the very top of the firm understood, and were not afraid of, risk. Many had managed risk and knew how to evaluate it. They also would sometimes leave us voicemails or discuss in meetings their feelings or perspectives on the current environment and risks.

In my conversations with former competitors, I later learned that Goldman’s approach to managing proprietary traders was substantially different from theirs. For example, if we lost a meaningful amount of money in an investment while I was at SSG, we would sit down with our bosses (and sometimes other traders not in our area) to rationally discuss and debate alternatives, such as exiting all or some of the position, buying more (“doubling down”), hedging the downside, or reversing our position and making an opposite bet. I learned that traders from other firms generally did not sit down with others to discuss alternatives. Rather, most often they were simply told to sell and realize the loss of money-losing investments (“cut your losses”), because their bosses or their bosses’ bosses didn’t understand the risks. Competitors’ traders told me they couldn’t comprehend the idea of our getting together with someone as senior as the president of the firm, and especially traders outside our area, to discuss and debate the attractiveness of an investment. For this reason, traders at other firms did not get as many great learning opportunities or would make poor decisions.

When I left in 2004, the firm was very successful in reaching certain organizational goals. It had the best shareholder returns and continued to recruit the best and brightest people in the industry. It had access to almost any important decision maker in the world. The culture and working environment were such that a motivated, creative person felt as if he or she could accomplish just about anything; all one had to do was convince people of the merits of the idea. But the firm felt different: it was much larger, it was more global, and it was involved in many more businesses. One could certainly start to feel the greater emphasis on trading and principal investing. The bureaucracy had grown, and as SSG grew and diversified we were increasingly encountering turf wars with other areas. I knew fewer people, especially senior partners, many of whom had retired by 2004, so I also felt a weaker social tie to the firm.

At the same time, there was great demand from outside investors (including Goldman Sachs Asset Management) to give money to Goldman proprietary traders to start their own firms and invest. Also the firm’s prime brokerage business and alumni network had a great track record for helping former proprietary traders start their own firms. I felt I had a good track record and reputation, and enough support from Goldman and many of its employees and alums who were friends, to start my own investment business.

With my savings from bonuses, and with my 1999 IPO stock grant and other shares fully vested on the fifth anniversary of the IPO, I left Goldman in 2004 to cofound a global alternative asset management company with an existing hedge fund that already had approximately twenty people and $2 billion in assets under management. Shortly after, several Goldman investment professionals joined me. Less than four years later, I had helped expand the firm to 120 people and $12 billion in assets under management.²⁸ I was the chief investment officer and helped manage and oversee over $5 billion, about half of the firm’s assets, through multiple vehicles focused on the United States and Europe. Also, I helped start several other funds while also serving on all of the firm’s major investment committees. In my position, I saw firsthand the competitive, organizational, technological, and regulatory pressures facing an organization (also a private partnership) as well as the organizational challenges of growth. I maintained a close relationship with Goldman, becoming a trading and prime brokerage client and coinvested with Goldman. My partners and I also hired Goldman to represent us in selling our asset management firm. In early 2008, we announced a transaction valuing the firm at $974 million.²⁹ So I also experienced what it meant to be a trading and banking client of Goldman’s and am able to compare the experience versus other firms.

I have also worked for one of Goldman’s competitors at a very senior level, as an executive at Citigroup from 2010 to 2012 in various roles, including chief of staff to the president and COO, vice chairman and chief of staff to the CEO of the institutional clients group (ICG), and member of the executive, management, and risk management committees of that group.³⁰ When I joined Citi, it was under political and public scrutiny for taking government funds, and the government still owned Citi shares. It was a complex business with many organizational challenges; it was an intense experience, with me starting work at 5:30 a.m. almost every day to be prepared to meet with my boss at 6 a.m. My experience at Citigroup was critical in my development of a new perspective on Goldman and the industry. Citigroup has approximately 265,000 people in more than 100 countries. In addition to being much larger (in total assets and number of employees) than Goldman, Citigroup is much more complex, because it participates in many more businesses (such as consumer and retail banking and treasury services) and locally in many more countries. In addition, unlike Goldman, Citigroup was created through a series of mergers and acquisitions. At Citi, I had the chance to compare the practices and approaches of a Goldman competitor that had a big balance sheet (supported by customer deposits to lend money to clients) and that had grown quickly through acquisitions—two things Goldman did not really do.

Before working at Citigroup and during the financial crisis, I advised McKinsey & Company on strategic, business process, risk, and organizational issues facing financial institutions and related regulatory authorities worldwide. McKinsey is one of the most prestigious and trusted management-consulting firms in the world, with some fifteen thousand people globally. There are many differences between the firms, but as with Goldman (before Goldman became a public corporation), McKinsey is a private partnership that has a revered partnership election process. Goldman and McKinsey compete for the best and brightest graduates every year, and there are elements of the McKinsey culture that are similar in many ways to Goldman’s, especially to the Goldman I knew when I started. When attending McKinsey training programs, I could have closed my eyes and replaced the word McKinsey with Goldman, and it would have been like my 1992 Goldman training program all over again. McKinsey has an intense focus on recruiting, training, socialization of new members, and teamwork. It also has long-standing, revered, written business principles. Lastly, it has an incredible global network.

The people at McKinsey are incredibly thoughtful and hard working and have very high standards of integrity, and I learned a great deal about how they built and grew the business globally and added new practices while trying to preserve a distinct culture. McKinsey provided me the context of a large, global, growing advisory firm. McKinsey emphasized “client impact” over “commercial effectiveness” in evaluating its partners. With McKinsey, I also gained exposure to many other financial institutions, along with their senior management teams, their processes, and their cultures, and this exposure also helped put my experiences at Goldman—and the reaction of its management teams to various pressures—into context. Lastly, I had hired and worked with McKinsey as a client, and am able to compare that experience as a client versus being a client of other firms, including Goldman.

Subtle Changes Made Obvious

To give you a better sense of the shift I noticed and the organizational drift I’m talking about, I want to offer a set of comparative stories—“before” and “after” snapshots—to illuminate the differences. They illustrate the shift in the client-adviser relationship as well as in Goldman’s practice of putting the clients’ interests first.

This post-1979 historic commitment to always putting clients’ interests first and signifying more then a legal standard is demonstrated by a 1987 event. Goldman stood to lose $100 million, a meaningful hit to the partners’ personal equity at the time, on the underwriting of the sale of 32 percent of British Petroleum, owned by the British government. The global stock market crash in October had left other investment banks that had committed to the deal trying to analyze their legal liability and their legal rights to nullify their commitment, but Goldman stood firm in honoring its commitment despite the cost and despite Goldman’s legal claims. Senior partner John L. Weinberg explained to the syndicate, “Gentlemen, Goldman Sachs is going to do it. Because if we don’t do it, those of you who decide not to do it, I just want to tell you, you won’t be underwriting a goat house. Not even an outhouse.”³⁰

The decision was not a simple matter of altruism. The principle of standing by its commitment had long-term economic benefits for Goldman. Weinberg was able to see beyond a short-term loss, even a large one, and to consider Goldman’s longer-term ambition to increase its share of the privatization business in Europe. That could be achieved only by living up to its commitments to clients, even beyond the legal commitment. His decision was consistent with the standard of the original meaning of the first principle: “Our clients’ interests always come first.” In addition, it illustrates the nuance between “long-term greedy” and “short-term greedy.”

More than twenty years later, this standard of commitment to clients beyond legal responsibility has largely been lost. Goldman policy adviser and former SEC chairman Arthur Levitt has challenged the “clients first” principle because “it doesn’t recognize the reality of the trading business.”³¹ He points out that Goldman’s sales and trading revenues outstrip those of the advisory businesses, financing, and money management, and there are no clients in sales and trading—only buyers and sellers. There should be transparency, Levitt suggests, but no expectation of a “fellowship of buyers and sellers that will march into the sunset” together. Goldman should stop using “clients first” in promoting itself, Levitt argues, because of the conflicts inherent in trading—the natural and ever-present tension between buyers and sellers.

This argument hit home for me when I compared one of my first experiences as an analyst at Goldman with my later experience as a Goldman client. When I was a first-year financial analyst in 1992, I was assigned to work with Paulson and a team of investment bankers to advise 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. We performed all sorts of financial analysis, trying to make sure we thought of every possible alternative and issue. We also collected ideas from all the experts Goldman had. 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, we took seats across the table from Sara Lee’s CEO, John H. Bryan, who would one day join the board of Goldman. After saying our hellos, we started putting our material out on the table. 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.)

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.

Flash-forward to 2008. After I left Goldman and my partners and I decided to review strategic alternatives for our firm, I moved to the other side of the table as a Goldman banking client. After interviewing several investment banks, I voted to hire Goldman because it had the best overall team, knowledge about the markets, understanding of how to present our firm, and access to the key decision makers at potential buying firms. However, I noticed a contrast with my early years at Goldman. I certainly did not feel as though anyone from Goldman was looking at things from my perspective in the same way Paulson had at Sara Lee. No Goldman banker sat on my side of the table and raised the questions I should have been considering. In fact, I was concerned that Goldman cared more about its larger and more important clients that might consider buying our firm (and would remain Goldman clients) than about us. I had the same sense with most of the other banks that pitched for the assignment. Maybe I held Goldman to a higher standard. When we hired Goldman, I requested that John S. Weinberg—the grandson and son of former Goldman senior partners, and someone I had worked for at Goldman—help oversee the project. I felt he embodied the spirit and standards that had been in effect when I had joined the firm. Goldman was highly professional and extremely capable, but for some reason the shift was enough for me to want John S. Weinberg involved. (For more information about the Weinberg family and other key Goldman partners, see appendix F.)

The Study

While my experiences at Citigroup and McKinsey, as well as in helping build a firm, combined with distance, time, and maturity, helped put my experiences at Goldman into perspective, my insider experience also made me aware of how difficult it can be to perceive this kind of change from within, even though examples such as these may seem to suggest that the change should be obvious. Also, recognizing that change had occurred and understanding why and how that’s the case are very different propositions. This is why the perspective from sociological theory is so helpful. Personal perspective isn’t enough.

The analysis of Goldman that I offer here is based on established sociological approaches to studying organizational change, behavior, and innovation, an approach I’ve learned at both the sociology department and the business school at Columbia University. It doesn’t come naturally to me. Having been a banker, consultant, and investor, typically I try to understand problems quantitatively. Those in the financial industry seem to share this trait, because they have a certain comfort with quantifying things and using numbers and metrics to hold people accountable. This approach is also followed by many regulators, policy makers, and economics and finance professionals. They focus on quantitative measures—such as imposing regulatory capital requirements or limiting activities to certain percentages—as the best way to prevent other crises.

The quantitative approach is reasonable, but it is not complete. Those trying to regulate Goldman and similar financial institutions have focused relatively little on the social activity, structures, and functions of their organizational culture—the hallmarks of the sociological approach—and I believe this focus will help get us closer to the root of the issues.

This book is based on my doctoral dissertation in sociology at Columbia, work that I started in 2011. It is the result of more than 100 hours of semistructured interviews with over fifty of Goldman’s partners, clients, competitors, equity research analysts, investors, regulators, and legal experts.³² I also researched business school case studies, news reports, and books about Goldman; quotations from those sources are peppered throughout the book. In addition, I analyzed publicly available documents filed by Goldman with the SEC (including financial data), congressional testimony, and legal documents filed in lawsuits against Goldman.

The purpose of going beyond interviews was to challenge, support, and illuminate the interviewees’ and my own conclusions. I suspect that many of the people to whom I spoke are bound by nondisclosure agreements, but I never asked. I did agree that I would keep their participation confidential and not quote them. I did not take notes during the interviews, nor did I use a recording device. The only interviewee whose name I disclose, with his permission, is John Whitehead. He worked at Goldman from 1947 to 1984. Since he wrote the original business principles, he was able to clearly describe what he meant when he wrote them and what the culture was like at the time.³³

It is not my intent to glorify or vilify any individual, group, or era in Goldman’s history, although I suspect parts will be used to do so. I’ve tried not to be influenced by nostalgia for the Goldman that once was, and I’ve tried to recognize that the people I interviewed were looking back in hindsight and may have had agendas or other issues, something I tried to overcome by speaking to many different people and by balancing the interview data with other information and analysis. I’ve tried not to be affected by many people’s contempt for the firm or by the recent economic recovery. I have relied on publicly available data to confirm and disprove various claims and theories advanced by those I interviewed.³⁴

I do not wish to assert that the change in culture at Goldman I’ve analyzed is necessarily change for the worse, or that the changes will lead to an organizational failure or a disaster (though some would argue that it does). The concept of drift, loosely defined, has often been used to study how a series of small, seemingly inconsequential changes can lead to disaster, such as the explosion of the space shuttle Challenger or the accidental shooting of two Black Hawk helicopters over Iraq in 1994 by US F-15 fighter jets. Though the change at Goldman is different in a number of regards from both of those examples, they do nonetheless offer important insights into why and how Goldman’s culture has drifted. In both cases—analyzed by Columbia University sociologist Diane Vaughan and Harvard Business School professor Scott Snook, respectively—pressures to meet organizational goals generally caused an unintended and unnoticed slow process of change in practices and the implementation of them, which in those cases led to major failures.³⁵ Each tiny shift made perfect sense in the local context, but together they created a recipe for disaster.

My analysis also draws on the sociological literature about the normalization of deviant behavior, which illuminates processes by which a deviance away from original values and culture can become socially normalized and accepted within an organization. Another factor that clearly comes through is that Goldman’s business has become more complex, and that there is less cross-department and other communication, which contributed to what Diane Vaughan calls structural secrecy—the ways in which organizational structure, the flow of information, and business processes tend to undermine the understanding of change that may be taking place.³⁵ (For more on these concepts and an academic study of organizational cultural drift, see appendix A.)

My argument, in essence, is that Goldman came under numerous types of pressure—organizational, competitive, regulatory, technological—to achieve growth, and that pressure, from both inside and outside of Goldman, resulted in many incremental changes. Those included changes in the structure of the firm, from a partnership to a public company, which in turn accelerated many changes already occurring at the firm. The change in structure also limited executives’ personal exposure to risk, as well as ushering in changes in compensation policies, which led to different incentives. The pressure for growth resulted in the mix of business also shifting over time, with trading becoming more dominant, which carried its own impetus for change. The growing complexity of the company’s business also led both to more structural secrecy and to more potential for conflicts of interest. At the same time the external environment was also rapidly changing and impacting the firm.

These and many other changes, added up over time, caused Goldman to drift from the original interpretation of the firm’s principles, most notably from the first principle of always putting clients’ interests first. As the firm got larger and growth became more challenging because of the law of large numbers, there was even more pressure to change the standards to allow the maximum opportunities. Those within Goldman were unable to appreciate the degree of change at the time, and are unable to now, due in part to a process of normalization of the deviance from the firm’s principles that occurred as those changes unfolded. That blindness (or willful blindness) to the degree of change was enabled in part by rationalization and also by the sense that the firm serves a higher purpose because of the good works of the firm and its alumni, which mitigated against recognition from within that the firm was engaging in conflicts.

Whether or not this process of drift is a harbinger of potential failure at the firm is an open question. Certainly there is reason to worry that the many interdependent and compounding pressures that led Goldman to slowly change and adopt its new standard of ethics from one that was a higher than legal requirement to meeting only the legal requirements will combine with its increasing size, more complexity, and greater interrelatedness, and the consequences will be an increasing risk of conflicts and organizational failure.

Since Goldman plays such a prominent role in the economy, as do other investment banks, this is an urgent issue for further exploration. Maybe even more so because I believe that Goldman is becoming even more important and powerful in our economic system. Goldman almost went bankrupt in the late 1920s, was struggling in 1994, and took government money directly and indirectly in order to hold off possible collapse in 2009 (Goldman denies this), even despite the profits or protection (depending on one’s view) from the infamous “hedging” bets taken against toxic mortgage assets. Many other financial firms disappeared, of course; the economy was near collapse, and taxpayers were left with an enormous bill. I hope the analysis in this book can demonstrate that sociology can contribute to the public understanding and debate about risks in the system.

I also hope the book will help leaders and managers consider the dangers that can accompany the responses to organizational, competitive, technological, and regulatory pressures in striving to meet organizational goals.

Finally, I hope the book is an interesting journey inside Goldman, with which I’ll also seek to answer a handful of questions that continue to nag other observers: why Goldman performed so well (relatively speaking) during the financial crisis, what role Lloyd Blankfein and the trading culture he is associated with played in the change, and why clients continue to flock to Goldman.

This book isn’t intended as a history of Goldman—there are several authors who have admirably tackled that job (and without which this study would not be possible)—but I have also included a Goldman timeline and short biographies on selected Goldman executives in the appendices to help a reader unfamiliar with Goldman’s history or people.