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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Comments
9 comments so far

This, remember, is the world’s best investment bank.

Technical foul. The world’s best investment bank is Lazard; Goldman is the best BB.

Posted by SGKingsley | Report as abusive

OK OK, SGK, so maybe what Felix meant was “the bank widely considered the world’s best investment bank” or maybe “the world’s most prestigious investment bank.” No one is knocking Lazard.

Say what you want about Goldman, but one doesn’t often hear its people getting thin-skinned about its place in the world. That would be like griping that Harvard gets no respect, or that people don’t appreciate the winningness of the New York Yankees.

Posted by SelenesMom | Report as abusive

“No one is knocking Lazard.”

Not saying anyone is. I’m not associated with Lazard in any way, but this is an incorrect statement, and more importantly, Felix should not be painting the industry with a broad brush on a false premise.

Posted by SGKingsley | Report as abusive

(And Lazard still is the world’s most prestigious bank. I object not to Goldman being the best, but to using this fallacy as a basis to limn the overall sector.)

Posted by SGKingsley | Report as abusive

This brief arxiv paper puts the issue of those 8-figure salaries for risk management expertise into perspective very effectively.

How Unlucky is 25-Sigma?
http://arxiv.org/abs/1103.5672

As [Goldmsn CFO] Mr. [David] Viniar explained, “We were seeing things that were 25-standard deviation moves, several days in a row.”

This is as likely as winning the lottery about 42 times in a row. The corresponding expected occurrence period is the square of 1.309e+135 years – that is, 1.713e+270 years – a number so vast that it dwarves even cosmological figures. As Oscar Wilde might have put it: to experience a single 25-sigma event might be regarded as a misfortune, but to experience more than one does look like
carelessness.

And yes, this qualifies precisely “as a sound basis to limn the overall sector”. (We’re laughing at you, not with you.)

Posted by melior | Report as abusive

I might be just repeating melior’s point, but this kind of calculation smacks of “garbage in, garbage out”. These calculations begin from the assumption that the events are normally distributed — and even if that assumption seems to hold 99% of the time, it does not mean you can rely on it the remaining 1%.

I strongly suspect that somebody relying on models has a better chance of losing their shirt in the markets than they do of winning the lottery even once.

Posted by TFF | Report as abusive

“This, remember, is the world’s best investment bank”

I am reminded of the joke about the guy putting on running shoes as a grizzley bear approaches. His (supposed) friend says, “you can’t outrun a bear” and he replies, “I just need to outrun you.”

Goldman just has to be smarter than The Bernank and The Timmy… which I acknowledge is unchivalrous of me saying so.

Posted by fresnodan | Report as abusive

Can you simultaneously be an investment bank AND bank holding company? Because Goldman Sachs became a “bank holding company” not long after the crash. And at the time, all the media experts felt that change would dampen down compensation for those “best and brightest.” But we all know the narrative didn’t flow that way…

Posted by MainStreetMuse | Report as abusive

Felix, by definition, those salaries are earned because the owners of the company have agreed to pay them.

Posted by TinyOne | Report as abusive
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