The Partnership: The Making of Goldman Sachs (a review)

Around the time The Partnership: The Making of Goldman Sachs arrived in bookstores, events forced a profound change on the firm. With financial markets undergoing their worst crisis since the Great Depression, the business model of a full-service, freestanding investment bank suddenly became obsolete. As a funding source, the capital markets proved too fragile a foundation without the backup of a deposit base. The leading U.S. investment banks failed, merged with commercial banks, or, like Goldman Sachs, were converted into commercial banks.

The firm’s transformation in 2008 was hardly the first time Goldman Sachs reinvented itself since its 1869 founding as a sole proprietorship dealing in a precursor of commercial paper. Over the decades, while evolving from a national powerhouse into a global one, the firm expanded into underwriting, equity block trading, research, risk arbitrage, and asset management. Each transformation entailed enormous risks and was thus heatedly debated by the partners, whose personal net worth was on the line. Ultimately, the partnership form of ownership, which was central to the firm’s rise, gave way to operation as a publicly traded corporation, a change accomplished only after additional rounds of fierce internal struggle.

Understanding the extraordinary capacity of Goldman Sachs to adapt and then move on to ever-greater profits is the book’s chief benefit to investment professionals. Readers will observe repeated practical demonstrations of the value of such principles as teamwork, competitive drive, bottom-line focus, excellence in recruitment, and high regard for intellectual prowess. Innovation is a recurring theme, with Goldman Sachs claiming credit for such fundamental ideas as separating the client contact and product design functions of corporate finance. Probably no better textbook than The Partnership exists on the subject of developing and maintaining a successful financial organization. Moreover, no one is better equipped than Charles Ellis to tell the remarkable story of Goldman Sachs. As the founder of the consultancy Greenwich Associates, Ellis made a career of scrutinizing financial firms and analyzing the sources of their effectiveness. Eager to drive his own firm to excellence, Ellis identified the traits common to the leaders of a number of service businesses, including the Capital Group Companies (money management), McKinsey & Company (consulting), Cravath, Swaine & Moore (law), and the Mayo Clinic (medicine).

The culmination of Ellis’s many years of investigation, including in-depth interviews with past and present leaders of Goldman Sachs, is a book so expansive that one of its most important revelations has attracted little notice. Nearly 500 pages into the text, persevering readers will find a well-documented refutation of James Stewart’s account, in his Pulitzer Prize–winning Den of Thieves (1992), of the insider-trading case brought against Goldman Sachs partner Robert Freeman. Stewart appears to have relied heavily on confessed felon Martin Siegel’s version of events and on information from prosecutor Rudolph Giuliani’s office, which itself relied on Siegel as a main source. Summarizing the significance of several pivotal stock transactions, Ellis concludes, “A careful review of the trading records clarifies the major problem: Siegel’s story was a string of lies.” For good measure, Ellis depicts Giuliani telling an interviewer on national television that he was confident that the case against Freeman did not rely on a sole witness. A few years later, however, the U.S. Attorney’s Office confirmed that Siegel was indeed the only witness. To my knowledge, neither Stewart nor Giuliani has responded to Ellis’s refutation.

In Ellis’s retelling of the insider-trading scandals, Freeman is more wronged than wrongdoer. Ellis does not spare the firm, however, when detailing its rare failures, lapses, and excesses. He relates the sorry tale of the Goldman Sachs Trading Corporation, “one of the largest, swiftest, and most complete investment disasters of the twentieth century.” Ellis vividly describes the damage inflicted on the firm’s reputation—and capital—by inadequate disclosure in the sale of Penn Central commercial paper, even as the railroad was plunging into bankruptcy. Ellis goes so far as to report that Sidney Weinberg (1891–1969), Goldman Sachs’s revered lead partner, persuaded a philandering corporate raider to forgo a run at Baldwin United by confronting him with compromising photographs procured by a sketchy-sounding character.

Nor does The Partnership shrink from discussing boardroom intrigues. An essential aspect of the firm’s history is the involvement of many of its executives in public affairs, which gave rise to the not-so-complimentary nickname “Government Sachs.” Among other tidbits, Ellis reports that former Goldman Sachs co-head John Whitehead advised a successor, Henry Paulson, not to accept the post of U.S. Treasury Secretary under President George W. Bush. “This is a failed administration,” he warned. “You’ll have a hard time getting anything accomplished.”

Although Ellis is candid about the details of the firm’s story, he exercises appropriate restraint in the manner of its telling. As he explains in an afterword, the conversations reported in the book are “best-effort re-creations,” with numerous redactions of slang and expletives. Some of the resulting dialogue reads more like declamations of classic theater than spontaneous speech, to humorous effect. Intentionally amusing passages are sprinkled in as well, making The Partnership a good, if not necessarily easy, read. The adjective that best describes the book, however, is “monumental.” Tackling his subject with incredible energy and skill, Charles Ellis has produced a book that stands in relation to others of its kind as Goldman Sachs stands in relation to the competitors that pay tribute to its preeminence.

—M.S.F.