Goldman Alumni Cannot Simply Do Everything

Goldman Sachs is the only US independent firm left. The rest, Bear Stearns, Merrill lynch and Lehman Brothers - were not so lucky. Or is it luck? For years, you were golden if you hired from Goldman Sachs.

Associated Press: Alumni of the Wall Street firm have advised presidents from both parties, taken high-profile Cabinet posts, run big businesses and been involved in multimillion-dollar philanthropies.

But recent missteps have challenged the notion that Goldman only breeds winners, The Associated Press says.

Henry Paulson, who was criticized for mishandling the first incarnation of the bank bailout, is a Goldman alum. So is John Thain, who rushed billions of dollars in bonuses to Merrill Lynch employees before the investment bank had to be sold. (Henry Paulson did not handle his Treasury role well at all. The TARP program was changed and modified as he was uncertain on how to tackle the crisis. His biggest mistake was allowing Lehman Brothers to fail. Somehow if it was Goldman Sachs in trouble, I'd doubt very much he would have taken that route. As smart as he was at Goldman Sachs, it did not give him the skills and ability to tackle broader macro, monetary and economic policy issues.)

Also a Goldman vet: Robert Rubin, the Clinton treasury secretary who resigned from his senior advisory role at Citigroup last month after being criticized for missing the warning signs of the financial crisis. (As rich as Rubin was, he was mainly a trader, and a very successful trader. He shouldn't have been an economic advisor and probably contributed zilch to Citigroup.)

Those names have lent a rare tarnish to a firm sometimes called the New York Yankees of Wall Street.

”When you become a partner at Goldman, you are supposed to be the master of the universe,” Ed Yardeni, who runs his own investment consulting firm and is a well-known Wall Street economist — and himself was turned down years ago for a Goldman job, told The Associated Press.

”That meant you could run the greatest investment bank on earth, but it turns out that skill set doesn’t always translate to the White House, Treasury or other Wall Street firms.”

Goldman draws its talent from the top students from the best universities and business schools. Those given a chance to embark on Goldman’s recruiting gantlet encounter job interviews in which they are asked not just complex questions about finance but simply why they deserve to be at Goldman.

And just like the Yankees, Goldman employees are well-paid. Its 30,000 employees last year made more than $355,000 on average, including salaries, bonuses and benefits. The average at rival Morgan Stanley was about $250,000.

Those given the coveted title of partner managing director — who are considered partners — can pull in seven figures. But flashing wealth runs against the Goldman culture, and employees, dubbed ”billionaire Boy Scouts,” are expected to give to charity or perform public service.

”Does the firm create exceptional talent, or does exceptional talent create a truly great firm? I think the vast majority of ex-Goldman employees want to believe it’s a little bit of both,” Janet Hanson, a 14-year Goldman veteran who went on to found a money management firm and the global women’s networking group 85 Broads, told the news service.

Teamwork, integrity, accountability and collegiality are other prominent parts of the Goldman ethos, said Charles Ellis, author of ”The Partnership: The Making of Goldman Sachs.” That breeds loyalty not seen at other Wall Street firms.

For instance, the firm uses an evaluation system in which each employee is graded by everyone he or she works with. So low-level workers get to weigh in on their bosses.

Goldman survived the financial meltdown last fall, but not without help. It took $10 billion from the government’s Troubled Asset Relief Program, or TARP. It also received a $5 billion investment from Warren E. Buffett’s Berkshire Hathaway that came with a strong endorsement from Mr. Buffett.

That helped to stabilize Goldman but couldn’t stop the bleeding. From September through November, it lost $2.3 billion — the first quarterly loss since Goldman went public in 1999. Goldman’s chief executive Lloyd C. Blankfein is forgoing a bonus for 2008.

Still, Goldman made it out alive. That’s more than can be said for three of its former fellow investment banks – Lehman Brothers, Bear Stearns and Merrill Lynch — none of which survived the meltdown as an independent firm.

And now that fingers are pointing at top bank executives, Goldman veterans aren’t immune.

When Lehman imploded in September, it was Mr. Thain, a former Goldman president and chief operating officer, who engineered a deal to sell Merrill Lynch to Bank of America. At the time, he looked like one of the smartest guys around.

But Mr. Thain became a poster child for Wall Street greed when news surfaced that he had rushed out billions of dollars in bonuses to Merrill employees just before the Bank of America deal closed.

Then came embarrassing reports that he had spent more than $1 million to redecorate his office at Merrill. Mr. Thain later repaid the money.

”It’s not likely that he sat there and came up with ways to squeeze more for himself or the employees of Merrill Lynch. But he should have known better,” Sydney Finkelstein, a management professor at the Tuck School of Business at Dartmouth and author of the new book ”Think Again: Why Good Leaders Make Bad Decisions,” told The Associated Press. (Why did John Thain end his career by making some of his biggest mistakes towards the end. I could understand why he would ask for his $10m bonus as it was probably pre-agreed. The office refurbishment was silly, but more galling was the audacity to pay out the huge bonuses to Merrill staffers prior to being absorbed by Bank of America.)

Mr. Rubin spent most of his early career at Goldman. He joined the firm in 1966, as an associate in trading and arbitrage, became partner in 1971 and was co-senior partner — C.E.O., in Goldman-speak — from 1990 to 1992.

In 1993, Mr. Rubin left to work in the Clinton White House, and became treasury secretary in 1995. He followed a path into the public sector paved by many past Goldman leaders.

Among them was Sydney Weinberg, the firm’s senior partner from 1930 to 1969, who advised five U.S. presidents. John Whitehead worked in the State Department in the Reagan administration and as chairman of the Federal Reserve Board of New York after he left Goldman, where he was senior partner from 1976 to 1984. And former Goldman head Jon Corzine is governor of New Jersey.

”Goldman Sachs has a long history of people who have chosen to go into public service and we are proud of our alumni who have taken this path,” Goldman spokesman Ed Canaday told The Associated Press.

When Mr. Rubin joined Citigroup in 1999 as a senior adviser, it was considered a coup for the bank.

While he never had an operational role at Citi, the company still took on massive risks that resulted in losses of $18.7 billion in 2008. In early January, Mr. Rubin resigned and said he wouldn’t stand for re-election to the board.

”My great regret is that I and so many of us who have been involved in this industry for so long did not recognize the serious possibility of the extreme circumstances that the financial system faces today,” Mr. Rubin said in a letter to Citi’s chief executive announcing his departure.

Mr. Paulson, too, was drawn to a role in government after leaving Goldman’s helm in 2006, after more than 30 years at the firm. He became treasury secretary in the Bush administration.

His arrival in the public sector came during a booming economy, but what soon emerged was a devastating recession matched with a financial crisis of historic proportion.

Mr. Paulson never seemed to get his hands around it, even with the help of some former Goldman executives he brought to the Treasury Department. Among them was Neel Kashkari, who was appointed to oversee TARP and formerly worked as an executive in Goldman’s San Francisco office.

None of this seriously threatens Goldman’s status on Wall Street, of course. It’s still the place to be — perhaps now more than ever, given the carnage in investment banking.

”The people they recruit have never lost anything,” Mr. Ellis told the news service. ”They have always won. That is the kind of person Goldman wants to hire.”

(Goldman's alumni used to be regarded as very smart people and was welcomed to into important public service positions. Recent history would suggests that that line of thinking could be flawed. A successful investment banker or trader still needs to "prove himself first" before being elevated to critical positions. There are specific skills and the need to have a solid understanding of the broader issues of economic policy, monetary policy and macro-cause-and-effect issues. Its the same situation in politics in many countries, for my life, I cannot appreciate how someone can be Ministry of Tourism one day and step into Ministry of Environment the next day. Yes, they can be surrounded by experienced advisors for each ministry, but positions of importance such as Ministry of Finance, Ministry of Law, Ministry of Housing, Ministry of Foreign Affairs, EPU unit, Foreign Investment unit, etc... must be helmed by people with some relevant experience - and not be divvy up like a barbecued animal after a festival.

People like Louis Gerstner - whom I think is the best manager of businesses over the last 30 years, proving his ability at American Express, RJR Nabisco and then IBM - only come around once in a blue moon.)

p/s photos: Eva Huang Sheng Yi