Editor's note: This was originally published on Nov. 19, 2008. It has been updated with a recent video interview by TheStreet.com's Gregg Greenberg.
Individual investors have learned some painful lessons in self-reliance in recent weeks and have many reasons to ask: "What's going on?"
In particular, they may well ask, "What are the major Wall Street firms really like and what do they really do -- and why?"
is a candid, inside look at
, how it became the power that it is, and why it acts the way it does.
Leadership and the achievement of leadership in business have long been the focus of my interest: Why and how do certain organizations rise to leadership and stay there?
Video: Charles Ellis says Goldman Sachs' first ever quarterly loss as a public company has nothing to do with the end of the firm's vaunted partnership or high profile departures. To watch the video, click the player below:
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During three decades with Greenwich Associates, consulting on competitor business strategies with all the leading investment banking and securities firms in America, Europe, and Asia, I knew that Goldman Sachs was more driven and more determined to achieve market leadership than any other firm. While other firms' talented people worked hard and wanted to improve, Goldman Sachs people worked harder and for much longer hours and were much more clearly determined to be the best. I wanted to understand why.
When other firms started early -- by 8:30 -- Goldman Sachs has been going full tilt since 7:00
would work later into the night
work over the weekend plotting competitive strategies.
While other firms had impressive "presentation" offices, Goldman Sachs' offices were somewhere between modest and shabby. They flew coach and ate lunch at their desks. While other firms craved affirmation and compliments, Goldman Sachs only wanted to know where they were weak, making mistakes, or missing opportunities -- so they could correct errors and improve competitive position. I wanted to understand why.
In dozens of private meetings every year over those three decades, working with a series of senior executives, I saw an astonishing consistency in every market, in every product line (investment banking, bond dealing, stock brokerage, foreign exchange, commodities, and derivatives) -- a calm, steady, relentless determination to find ways to become the best -- and stay there. I wanted to understand -- and was sure others would want to understand -- why?
Why were Goldman Sachs people so persistently different in their competitive determination, so modest about past achievements, and so unrelenting and focused on doing better? What brought them so close together -- almost tribal -- and what kept them committed for over 75 years in the long, hard climb from disaster to global leadership?
I knew the firm had been a near failure after the disaster of Goldman Sachs Trading Corporation and had struggled to survive the Depression and World War II. I'd heard of feisty, short, seventh-grade dropout Sidney Weinberg whose compelling personality made him "Mr. Wall Street" and the firm's domineering charismatic leader. But I also knew that such dominating leaders were usually followed by decline or, perhaps, a period of consolidation. They seldom leave behind them firms determined to advance and build and gain even greater strength. But that's what happened at Goldman Sachs. Understanding
would be important -- and the best way to develop an accurate, rigorous understanding was clear: Learn the real story from those who had lived it -- and produce a major book.
Meeting and working as a consultant with Gus Levy, I quickly learned how driven
driving a leader he clearly was. First in every morning and often having
client dinners every night, Gus did everything at double speed -- and everyone at his firm seemed to love it and joined right in. Levy really wanted to do
the business and expected everyone at his firm to strive every minute of every day to make sure that happened.
Richard Menschel, head of equity sales, was typical of the unit leaders. A curious reality of institutional stock brokerage is that almost all institutional investors allocate their commissions in much the same way. Broker #1 gets 12-14% of the total, broker #2 gets 8-11%, and broker #3 gets 6-8%, and other brokers get less and less. While every firm was shown this remarkably consistent reality, only Goldman Sachs' Menschel seemed to fully understand the strategic significance. While other brokers wanted to do business with as many institutions as possible, Menschel insisted his brokers drive to be #1 -- and to be #1 with every client -- or lose accounts so they could and would focus on being #1 with the reminder.
To be sure his focused strategy was fulfilled, Menschel insisted on and personally controlled an unusually rigorous recruiting program and the toughest training and retraining program on Wall Street. That's not all: He visited more accounts more frequently then any other sales head and always asked, "How can we do better for you?" He kept exceptionally close tabs on every salesman; showed each one how to do better; and linked compensation -- financial and nonfinancial -- directly to commitment and long-term results. His salespeople were better trained, better disciplined, better paid, and had far less turnover so they developed stronger and stronger client relationships and almost inevitably became for institution after institution, broker #1 -- with the most profitable and most enduring relationships.
Impressive as this was to me, I soon learned it was typical of Goldman Sachs. Working with John Whitehead in investment banking, I was surprised to learn how determined he was to advance past
-- then the leading firms that had longstanding relationships with all the major corporations. But year-by-year, Goldman Sachs advanced with a series of "product" innovations like Tender Defense to protect clients from raiders -- and to win new clients who wanted protection from a firm that would always be on their side.
Whitehead paid more attention to Greenwich Associates research and consulting then anyone at the other leading firms, focused on specific ways to improve, used our research as a guide to effective action -- not just a report card -- and was directly engaged while other firms' leaders assigned subordinates to do the work. I got the message: Goldman Sachs was more determined to succeed and more willing to do what it takes. They wanted it more.
Same thing in bonds. Same thing in Europe. Same thing in Japan. No other firm was so competitive or thought as strategically. Or worked harder. Or enjoyed competing and striving so much. I was determined to understand. Why was Goldman Sachs so different? Why was it so clear to that firm's leaders that their organization was going to prevail over all competitors? And with all this progress and success, why was there so little of the arrogance and "look at
!" heroics so common at other firms they were passing by?
The more deeply I probed, the more sure I became that the Goldman Sachs story was really the classic "come from behind" all-American story at its very best. This only added to my interest in understanding the phenomenon of Goldman Sachs.
Of course, I knew that investment banking, despite the surface dignity and gracious charm, is a tough business -- and gets rough "under the basket" as firms compete for transactions and market share where the lucrative payoffs to the winner are huge. Much as I admire Goldman Sachs as the best of its kind, the firm always played to win and its leaders at all levels have always been aggressive, unrelenting competitors. Nobody who knows would prefer to compete with Goldman Sachs.
It's important for investors who want to understand Wall Street to understand Goldman Sachs. Everyone in finance, everyone in business leadership or government, and everyone interested in power around the world will want to understand this phenomenon. So too will everyone who wants to understand organized ambition, self-discipline, and determination that sustains commitment over long, long periods and is so "universal" that it works in many different nations and cultures. But the firm is notoriously private, so how could I get access to all the key people and write an accurate book?
At just the right time, I had lunch in Manhattan with two old friends, my college classmate, and a man with whom friendship flourished 30 years ago after we learned we were raised in adjoining New England towns.
After hearing their current war stories, they turned to me to ask, "So what's new with you?" I replied, "Your question is a week late, guys."
I then explained that a week before, I'd have said I was excited about and working on a book about Goldman Sachs, but had reluctantly decided it would be impossible to get the candid, insightful interviews needed because chaperones had started sitting in on interviews and the wide-ranging candor of my early interviews had evaporated. If I couldn't get accurate information and insight, the inside study that really explained how and why Goldman Sachs had risen so strongly to global leadership, the book I'd wanted to write -- and knew many people would want to read -- would not be possible. So I was giving it up.
"Call me -- after four this afternoon," said my near neighbor, Gershon Kekst, widely recognized as corporate America's leading PR adviser. I was surprised to learn that Goldman Sachs was one of his clients and was delighted to have his help. I called shortly after 4:00 and was told to go see the firm's chief of staff, which led to an agreement that my interviews would not be chaperoned and that the firm would help on factual accuracy. However, the firm was really uncomfortable with the whole idea and only cooperating because it recognized that a book was inevitable.
Over the years of research, 100 Goldman Sachs partners and all the firm's senior partners still living joined in lengthy, candid interviews. And over 100 seniors from competitor firms or clients of Goldman Sachs interviewed too. I also had unusual access to important documents and had already had three decades of experience as a strategy consultant to all the world's major securities firms. Research took most of 10 years.
With all these advantages in the research phase, it was important to decide on the best way to organize the book for readers. I made several choices. Rigorous chronological order would have to give way to topic clarity so each subject could be covered in one chapter rather than sprinkled over several chapters covering different time periods. Leadership has been crucial to Goldman Sachs, so eras of key leaders could be a strong way to organize many chapters.Colorful people and dramatic events have been important to the firm's history and the experience of the people of Goldman Sachs so readers should have all the best stories in some detail -- and not over-summarized. If that meant a fairly long book, so be it.
is a longish book, but early readers tell me they much prefer to have the whole story.
One more problem: Goldman Sachs is and has been a powerfully successful firm -- more successful than any other -- so its story is the story of success. How could readers be sure
is fair and accurately balanced and objective? Interestingly, while the people of Goldman Sachs feel my telling of their story is too tough, some reviewers say they found it too favorable. Of course, that may be the best evidence that I got it really right. Who knows?
What I do know is that
is as accurate as possible, is a great adventure story, and provides readers with the best ever understanding of how and why Goldman Sachs of 1930 -- a humiliated failure -- became today's Goldman Sachs, the most profitable and respected financial firm in the world.
Charles D. Ellis is a Senior Advisor at Greenwich Associates and Managing Partner of Partners of '63, a pro bono enterprise, established by members of Harvard Business School's Class of 1963. Ellis is also on the Yale School of Management's board of advisors.