Annals of C-suite dysfunction, Goldman Sachs edition

By Felix Salmon
April 8, 2011
Ian McGugan has a good review of Bill Cohan's huge new book on Goldman Sachs which includes an intriguing quote about how Bob Rubin "encouraged a culture of undisciplined risk taking" -- something which goes directly against the reputation he's spent many years cultivating.

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Ian McGugan has a good review of Bill Cohan’s huge new book on Goldman Sachs which includes an intriguing quote about how Bob Rubin “encouraged a culture of undisciplined risk taking” — something which goes directly against the reputation he’s spent many years cultivating. It comes from Chapter 15, which starts in the dangerous year of 1994 and which is full of juicy gossip about the very human frailties of the people running Goldman. Here’s more of it:

“For a long time he just sort of sat in his office,” one partner said of Corzine. “He would sit in his office breaking out in tears at various times while the firm was losing all this money.”…

As the losses in 1994 mounted, many partners became increasingly nervous that the firm was at risk… Some forty partners left Goldman at the end of 1994, the first time anything like that many partners had voted with their feet. “People resigned out of fear,” one partner said. “That should tell you something.”… Howard Silverstein, the partner in charge of Goldman’s Financial Institutions Group, left. “He was perceived as being an expert,” one partner on the Management Committee said. “And all he did was just do a simple calculation if this continues. You know: wiped out.”…

Paulson cut people, travel expenses, allowances for overseas living, and many of Goldman’s vaunted perks. He even cut back on the use of a corporate jet and recalled grueling overseas trips flying around Europe and Asia on commercial flights…

Goldman’s problems at that time weren’t only ones of cost and bad bets. A culture of undisciplined risk taking had built up over many years. “A lot of these practices were set up when [Rubin] was there,” one top partner said. “Okay? The lack of a risk committee, trusting individual partners, model-based analytics — that by God you can be smart and figure it all out — and letting traders become too important and being afraid to confront them if they’ve been big moneymakers. All that sort of stuff built up.” …

Aside from why Friedman had seemingly botched his departure, the other lingering question that remained among many of the Goldman partners was how Corzine could have emerged as the firm’s leader when he was leading the very division — fixed- income — that had lost hundreds of millions of dollars in 1994…

Goldman had selected as its new leader the very person who had just presided over a complete meltdown in Goldman’s fixed- income business and who, as a result, never fully had the trust and faith of the firm’s investment bankers. “That is one good question,” one Goldman trading partner said. “At a normal place, it would be discordant. You couldn’t imagine it. And I guess at this place, somehow you could.”

This, remember, is the world’s best investment bank. It’s worth bearing in mind when you see those eight-figure salaries and wonder whether they’re earned. And when you hear politicians bellyaching about the importance of keeping US banks “competitive” on the international stage. If this is competitive, it might well be best to just drop out of the competition all together.

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