NEWSMAKER Q&A March 12, 1999

BW Exclusive: A Chat about Goldman Sachs with Author Lisa Endlich
The former trader talks about her book on Goldman and the firm's future as a public company

Lisa Endlich, a former Goldman Sachs trader, is the author of a new book published by Knopf entitled Goldman Sachs: The Culture of Success (read an excerpt). Business Week Associate Editor Leah Nathans Spiro reviewed the book in the Mar. 15, 1999, issue of Business Week. Spiro, who covers Wall Street for Business Week, caught up with the London-based Endlich recently in New York. Here are excerpts, covering Endlich's views on the upcoming Goldman Sachs initial public offering, on Goldman senior partner Jon Corzine's recent ouster, and why Goldman as a public company will be very different from the private partnership it is today:

Q: I wrote a rather harsh review of your book (3/15/99 "How Greed Changed Goldman"). Is there anything you would like to say in response?
I thought that you had a couple of good points. One thing that struck me was that you pointed out that my timing was bad. Yes and no. People have enormous interest in the firm right now. So we got more attention. Now people are reading about the possibility of the largest initial public offering ever. Yet the book doesn't have the closure that it might have had. I didn't think they would do the IPO quite this fast. I thought they would string together a few more good quarters first. I thought you were fair.

I found some of the characters more interesting than you did. Goldman Sachs doesn't have the comic characters that Salomon Brothers did. But I found someone like Sidney Weinberg riveting...[like] Horatio Alger. He almost merited his own biography. Gus Levy is another fascinating character. He basically invented block trading and risk arbitrage. Everybody was scared to death of him and loved him. Bob Rubin is a wonderful character. Sorry I couldn't speak to him. He hired me from the Mondale campaign to the firm. I worked for him at the Mondale campaign. The man is so cool under pressure and so analytic. He really has had the weight of the world on him.

Q: Tell me about yourself, including how long you worked at Goldman Sachs and when.
I worked there from 1985 to 1989. I have an MBA from the Sloan School. I did management consulting briefly. I went to the Mondale campaign and then to Goldman Sachs. On election day [when Mondale lost to Ronald Reagan], Bob Rubin asked me, what was I going to do with my life? I said I don't know. He said come to Goldman Sachs. I still had to go through 25 interviews before I was hired.

Q: Were you surprised that Corzine was forced out?
Yes. Nobody has been forced out since 1930. That's when Waddill Catchings ran the firm. He began Goldman Sachs Trading Corp., which was a mutual fund formed in December, 1928. In 1929, it lost 92% of its value. Investors got 8 cents on the dollar back. Before that, Henry Goldman in 1918 was pushed out. He held pro-German views right before World War I.

Q: Why was Corzine forced out?
I don't know. I don't think it helps things. You want stability at the top when you do an IPO. The teams who had run the firm have spent their careers together. Whitehead and Weinberg and Friedman and Rubin. As three of those four men said to me, they had found a way to work together long before the problems of the firm were on their shoulders. That was not true with Hank Paulson and Jon Corzine. They hadn't worked in the same office, or the same business. And yet under their tenure they were faced with some of the biggest issues the firm had been faced with -- revitalizing and taking the firm public. If you haven't worked out the issues between you, obviously troubles occur. Rubin had to work together with Friedman for 20 years before they became co-senior partners. Every time one of them wanted to arbitrage a stock or do a merger, they would sit down together. Before 1986, you could jump over the fence.

Q: Doesn't this forced exit run counter to Goldman's description of itself as an institution based on teamwork?
Yes. Because the model for teamwork was at the top. Whitehead and Weinberg, Friedman and Rubin, they were the models. If they could act as a team, anyone could. There is no question it sets a bad example.

Q: You say when Corzine was installed, "Goldman Sachs needed a trader in a top job." Because the firm faced such volatile markets. Given that volatile markets can occur at any time, does Goldman Sachs still need a trader in the top job?
Either in the top job or the vice-chairman's job. One of the two top positions needs to be held by a trader. It's too significant a portion of the firm's profits and too difficult of a business for a banker to run. Steve Friedman touched on this best. He said he was never going to be an expert on trading, that he would never really understand the intricacies like Rubin or Corzine. That's my personal opinion. One of the senior partners said to me, the banking business is run more on its own. It's more well-established. The trading businesses are newer, more volatile, and less in keeping with the firm's culture. That needs to be watched more closely.

Q: Why did you want to write a book about Goldman Sachs?
Because I realized there was no book written about Goldman Sachs. Yet it was a great story. If you say investment bank, it's the firm that comes to mind. It plays a preeminent, mythological role. There are many books about Salomon Brothers, a fantastic book about Lehman Brothers. Goldman Sachs hadn't been touched upon.

Q: How long did it take you to write?
It took about 2 1/2 years. I had to rewrite the last chapter twice. Altogether, three years. I did a lot of interviews. I think about 180.

Q: Why do think there is this incredible fascination with Goldman Sachs?
The firm is obsessed with its own secrecy. I think that makes other people interested. If you were as secretive as they were, people would be interested in you. And it's the money. Its the money and the secrecy. And they are the last of a breed. They're a throwback in a way. I suspect once they become a public company, people's interest will wane.

Q: Goldman is poised to go public. Is it a buy?
I'm not a stock analyst. On a qualitative basis, yes. If you wanted to buy an investment bank, it's a buy. It will be very difficult to buy. Employees and institutions will get an enormous amount of their stock.

[But] the firm is going to change a lot when it goes public. It will stay at the top of the heap. It will look more like Morgan Stanley and Merrill Lynch. They [at Goldman] are going about their business expansion very cleverly. They are being very careful not to take on overhead. Their retail strategy will be an Internet strategy.

Q: What could go wrong with the IPO?
The stock market.

Q: What will Goldman's biggest weakness be as a public company?
I think there will be an adjustment process to the demands of public shareholders. They are so used to running the show themselves without regard to external forces. They are not used to being beholden to anyone. The biggest worry as a public company, although they are pursuing a strategy that will yield recurring income, is that they still get more of their income from speculative trading than their competitors. The volatility of their earnings thus far -- and I know they are trying to change -- is their biggest weakness as a public company.

Q: How much will the 221 Goldman managing directors make in the IPO?
I don't know.

Q: Will Goldman be able to retain its unique culture as a public company?
I don't think so. No. There will be aspects of it that they will retain. I think a partnership is a team. Part of the Goldman Sachs culture is Gus Levy's dictum to be long-term greedy. It doesn't work as well in a public company. Through a process of self-selection, they have hired some of the most motivated people in the industry. A young woman told me yesterday that she had an offer from Goldman Sachs. She said she didn't want to take it because she didn't want to work that hard. I think the carrot of partnership was such a lure. It provided an enormous incentivizing force. Many partners believe that.

Q: Stephen Friedman was Goldman's head after Bob Rubin left. The day he left, you say in your book, the firm plunged into turmoil, and many other partners left the firm. Yet you are reluctant to draw any conclusions. Wasn't it clearly a huge mistake for Friedman to leave just then?
Yes. In leaving, Steve set an example to other traders that it was acceptable to leave in difficult times. And he himself admitted in the book that had he known the times would be as difficult as they were, he wouldn't have left.

Q: Bob Rubin may be one of our finest Treasury Secretaries. I just noticed that John Thain is a big fund-raiser for Senator John McCain (R-Ariz.). Which Goldman partners have politicial aspirations?
I can only speak to their political involvement. Corzine has been quite involved in Presidential commissions.

Q: Please tell us the three most positive traits that John Thornton and John Thain bring to the job of future leaders of the firm?
Knowing how to build a business from nothing. Thornton built the M&A business in Europe from literally nothing. Both have huge overseas experience. Till then, the top partners didn't have significant overseas experience. That's where a lot of growth will come.

Q: Is it a problem that Thornton and Thain opposed Goldman going public?
Yes. I don't think either one thinks it is the ideal strategy. But they'll get 100% behind it, and it will work. Because once you have come out and said a private partnership is a suboptimal capital structure, you have to go public.

Q: What about Corzine?
I don't think Corzine was greedy. He wanted to take the firm public at less than 1.5 times book in 1996, even though that was a very low price. He set an example. You do what's right for the firm, not what's profitable. That was in 1996 when that's all the firm would sell for. Yet Corzine pushed to sell the firm at that price.

Q: So he was willing to not get every last dollar off the table in order to do what was right for the firm?
It was probably the lowest multiple the firm had hit in the decade. It didn't matter to him. He pushed to do it. He set an anti-greed example.

EDITED BY DOUGLAS HARBRECHT _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _


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