Book Review

Of Note:

One of the largest events in the firm's history was its own IPO in 1999.

With the firm's 1999 IPO, Henry Paulson became Chairman and Chief Executive Officer of the firm.

In May 2006, Henry Paulson left the firm to serve as U.S. Treasury Secretary.

Former Goldman employees head the New York Stock Exchange, the World Bank, the U.S. Treasury
Department, the White House staff, and firms such as Citigroup and Merrill Lynch.


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Goldman Sachs Before the Storm
Through more than a century, the firm has found ways of reinventing itself.
The Wall Street Journal

Just 10 days ago, Goldman Sachs chief executive Lloyd Blankfein made the stunning announcement -- during this season of jaw-dropping developments on Wall Street -- that the renowned investment-banking firm would morph into a traditional bank holding company, accepting onerous regulation in exchange for much-needed access to cash reserves.How could this happen to the country's most powerful investment bank?Charles D. Ellis's engaging history of the company, "The Partnership,"provides some clues -- about Goldman Sachs and about Wall Street writ large.

[Business Bookshelf]

"The Partnership" follows the firm from its beginnings as a commercial-paper dealer in 1869 (essentially recruiting investors to extend lines of credit to companies) to its emergence as the world's pre-eminent financial- services firm. A much-debated decision to sell Goldman shares to the public in 1999 was a watershed event, perhaps encouraging riskier behavior than would have been tolerated by partners with their own capital at stake. Similarly,the explosion in proprietary trading profits in recent years -- from trades using the bank's own money -- propelled overconfident Goldman bankers to up their bets.

Obviously, Mr. Ellis, a longtime consultant at Goldman, finished his chronicle before the big storm hit Wall Street. Still, his reporting suggests a company that, through well more than a century of investing and trading, has repeatedly found ways of reinventing itself, by exploiting the weakness of its rivals and by mastering new financial specialities -- e.g., block trading, corporate underwriting,commodities trading and arbitrage. Though recently transformed, Goldman is unlikely to slink away into irrelevance -- witness Warren Buffett's voting with his wallet by investing in the firm last week.

The Partnership
By Charles D. Ellis
(Penguin Press, 729 pages, $37.95)

Goldman's long ascent to Wall Street's first ranks began a century ago when Henry Goldman undertook to raise money for industrial enterprises, many of which were regarded as "Jewish"companies and shunned by the established Wall Street firms. Struggling to find investors for companies light on assets, Goldman hit on a novel concept for determining market value: earning power. In partnership with the well-capitalized Lehman Brothers, Goldman floated financing for companies that included United Cigar, Worthington Pump and Sears,Roebuck & Co.

In an eerie forerunner of today's disasters, Waddill Catchings,Henry Goldman's successor, would very nearly destroy the firm in the1920s by placing much of the partners' capital behind Goldman Sachs Trading Corp. This "investment trust" was an excessively leveraged and complex structure that collapsed when one of the subsidiary organizations was suddenly unable to pay a dividend. As Mr. Ellis writes: "Goldman Sachs Trading . . . became one of the largest,swiftest, and most complete investment disasters of the twentieth century."

Out of the rubble emerged Sidney Weinberg, a street-smart kid from Brooklyn, who rebuilt Goldman's reputation and kept the company a float through the largely unprofitable years from 1929 to the end of World War II. Taking advantage of Weinberg's dozens of powerful corporate directorships, Goldman became an underwriting powerhouse.

From 1930 to 1969, Weinberg ruled the roost; his aversion to publicity became part of Goldman orthodoxy. He also had a healthy disdain for arrogance. As related by John Whitehead -- who worked at Goldman for more than three decades and eventually became co-chairman in the 1970s -- Weinberg bought up Phi Beta Kappa keys from pawnshops all over Brooklyn. "If he had a stuffed shirt going on and on for too long about something," Weinberg "would pull the wire full of PBK keys out of his drawer and say admiringly, 'Gee, you're so awfully smart,you should have one of these.' "

Weinberg was followed by Gus Levy, a "shirtsleeves, no-frills guy"who pushed Goldman into the block trading of large groups of stocks or bonds. His strong work ethic and his belief in teamwork became a signature of Goldman's much-vaunted culture. During Levy's leadership,Goldman was nearly driven out of business a second time, when the Penn Central railroad went bankrupt in 1970. Because it was Penn Central's commercial-paper dealer, Goldman was sued not only for losing investors' money but also for not informing clients that its privileged information had caused the firm itself to dump Penn Central's paper.Goldman was censured by the Securities and Exchange Commission and lost tens of millions of dollars in the aftermath.

The firm had righted itself by the mid-1970s and for the next decade flourished under Mr. Whitehead and his co-chairman, John Weinberg(Sidney's son). Lloyd Blankfein, Goldman's current chief executive,rose at the firm because of his sponsorship of principal"risk-embracing" investing -- in other words, putting the firm itself in the position of directly buying and selling securities. The last chapter of "The Partnership" is titled "Lloyd Blankfein: Risk Manager."Whether Mr. Blankfein has appropriately responded to the unprecedented challenges in today's markets -- or indeed whether he precipitated some of the problems through his enthusiasm for principal trading -- is an open question.

It might be just as well that "The Partnership" ends before Goldman's recent convulsions -- Mr. Ellis is not the ideal candidate to dig up the story of what went wrong. In his afterword, he says that his consultancy, Greenwich Associates, has worked with Goldman for more than three decades. His many friendships brought him unparalleled access to the notoriously publicity-shy firm, but his closeness also results in a book that at times sounds like an authorized corporate history. Statements such as "philanthropy and public service are more important to Goldman Sachs people . . . than to any other comparable group" will have rivals grinding their teeth. He also tends to tread carefully when discussing the firm's past problems -- an irksome quality, yes, but a tolerable one, given the attractions of an inside view of what was once a Wall Street titan and -- who knows? -- may be again.

Ms. Peek is a financial writer in New York.


Kyle Falconer / Mark Ronson Valerie by Zutons