Goldman Sachs Saga: a story from an insider

Book Reviewed: What Happened to Goldman Sachs: An Insider's Story of Organizational Drift and Its Unintended Consequences, by Steven G. Mandis

This is a fascinating story of the rise and fall of one of the most influential financial corporation of our times from an insider who witnessed it all. Goldman grew from a modest privately owned investment banking firm (focused on United States), with less them $100 million profit to a publicly traded company with $10 billion profit and equity of $100 billion. In 2006, Goldman spent $16.5 billion in compensation with an average of $622, 000 per employee; it was at the height of its earning power and prestige. But gradually the Goldman values, the business principles and the firm's culture eroded. Two years later it was widely accused in the press of unethical and criminal behavior; the press alleged that it squeezed the body of humanity to extract anything that looked like money.

The author proposes that the organizational drift that occurred after the company became a publicly traded corporation is the root cause of its downfall. The changes in business practices and policies led to Goldman's organizational drift. The daily grind of competition and the rapid growth stuck in the minds of Goldman's executives to ignore the most fundamental principle of the company. Invest stockholders money at the same level of care and caution, as if you are investing your own money. Part of the problem was the inherent difficulties of the financial system. Public trading brought new kind of ownership and financial interdependence among the partners. The elimination of capital and growth constraints made the firm to take into account the outsiders perceptions, like the analysts' estimates of earning per share (EPS) and stock values. The firm was bent on providing higher returns to its stockholders. Increased competition and complexities of banks with too many deals going around the clock made the system too complex. The barrier between legal and illegal deals became so thin that conflicts became unmanageable.

This book focuses on the Goldman's case, but the story has much broader implications, because many problems the firm faced is very similar to any other firm playing the game. But the executives did not pay attention to the signs that shows that it is losing touch with original principles and its values. These signs include; leading market share, appeal to stockholders, brand name, and attractiveness as an employer. The firm did not wake up and made things right, but it merely responded to business pressures and its financial environment.

Goldman did not do too badly at the end, because at the height of the mortgage crisis, it still managed to come back with vengeance. In 2008, the firm had a return on its equity of 4.9% versus -5.0% for its peers, and 22.5% versus -1.8% in 2009. Lehman Brothers, Bear Stearns, Merrill Lynch, Washington Mutual and Bernie Madoff were not lucky enough to beat the crisis.

There are several books about the success and failures of Goldman Sachs and this one is interesting in that the author was an insider, and knew the executives and their business philosophy personally.