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According to the Collins English Dictionary 10th Edition fraud can be defined as: "deceit, trickery, sharp practice, or breach of confidence, perpetrated for profit or to gain some unfair or dishonest advantage".[1] In the broadest sense, a fraud is an intentional deception made for personal gain or to damage another individual; the related adjective is fraudulent. The specific legal definition varies by legal jurisdiction. Fraud is a crime, and also a civil law violation. Defrauding people or entities of money or valuables is a common purpose of fraud, but there have also been fraudulent "discoveries", e.g. in science, to gain prestige rather than immediate monetary gain
*As defined in Wikipedia

Tuesday, February 23, 2010

A Historical View of Culture Change at Goldman Sachs

A reader here at GS666 and a blogger who publishes a blog called, "Prophet Without Profit" recently submitted a two part article he wrote on Goldman Sachs.  I found it quite interesting and informative and will publish part II here.  You will find a link to Part I in the first sentence of his post.

This writer wishes to remain anonymous and I will honor his request.  He does not identify himself on his blog either but does offer a bio which you can view here.  Here is his opening paragraph about himself.
For more than 30 years, I worked as an attorney. In addition to a clerkship and law firm experience, I worked for some of America’s biggest corporations. I have a background in both law and economics. Unfortunately, when one works for a big corporation, one often has to self-censor some of one’s more provocative thoughts.  But…it’s a living.
Now Part II:  A Reputation As Good As Goldman Part II
In A Reputation as Good as Goldman Part I, we examined Goldman’s role in exacerbating the housing market collapse, AIG’s demise, and the Greek government debt crisis.  These major stories were the subject of separate front page articles in the New York Times. Mentors had always warned me no to be too clever by half, a lesson Goldman perhaps missed.   Are the Goldman stories symptomatic of behavior for the last ten years on Wall Street?  Was this always the way Wall Street firms and Goldman behaved?

Sydney Weinberg

In 1930, Sydney Weinberg became the head of Goldman Sachs. He ran the firm for the next 39 years.  By 2010 standards, he was an unlikely person for the job. He had left school at 15 (1907) and started at the struggling brokerage firm as a janitor’s assistant.  He then served in the Navy during World War I, returned to the firm and ultimately became co-head of the securities trading group. He is credited with saving Goldman Sachs from bankruptcy during the Depression. See Annals of Business: The Uses of Adversity by Malcolm Gladwell

In 1956, Weinberg managed his greatest corporate coup. Goldman Sachs was selected to handle for the Ford Motor Company the enormously difficult, largest ever until that time, initial public offering.  The effort took two years. The most fascinating part of the transaction was Weinberg’s fee:

When Henry Ford had asked Weinberg at the outset what his fee would be, Weinberg had declined to get specific; he offered to work for a dollar a year until everything was over and then let the family decide what his efforts were really worth.  Far more than the actual fee, Weinberg always said he appreciated an affectionate, handwritten letter he received from Ford which says, along with other flattering things, “Without you, it could not have been accomplished.” Weinberg had the letter framed and hung in his office, where he would proudly direct visitors’ attention to it, saying: “That’s the big payoff as far as I am concerned…” The fee finally paid was estimated at the time to be as high as a million dollars. The actual fee was nowhere near that amount: For two years’ work and a dazzling success, the indispensable man was paid only $250,000. Deeply disappointed, Sidney Weinberg never mentioned the amount.  See The Partnership: The Making of Goldman Sachs by Charles D. Ellis
Weinberg understood the value of a continuing relationship with Ford Motor Company and was soon appointed to their board.  Moreover, for nearly a half century, Goldman became the chief investment bank for Ford which vaulted the firm into the top tier of Wall Street firms.  To Sydney Weinberg reputation was everything.

Tradition and the Making of a Culture

John Weinberg followed his father Sidney as head of the firm.  The younger Weinberg preserved his father’s ethic and corporate culture.

Once upon a time, Goldman Sachs shunned publicity.  During the period from 1930 to 1969, Sydney Weinberg ran Goldman Sachs where he developed a staunch corporate cultural aversion to publicity.  During the 1970s, a tandem of John Weinberg and John Whitehead assumed the reigns of leadership at Goldman Sachs.  Whitehead left the company in 1984 to enter public life.  John Weinberg carried on in the same vein as his father Sydney – shunning publicity – to the point where he hired a man to keep his name and his firm’s out of the press.  He kept him off the full-time payroll (though he sat full-time at a desk in head office) so that if, improbably, a comment did slip out, it could be honestly dismissed as not coming from a Goldman Sachs employee.  John Weinberg served as sole senior partner and chairman until 1990.  His mantra was to put the client’s interests first and he wouldn’t allow Goldman to be involved in (sic) hostile takeovers. See All Roads Lead to Goldman Sachs.

As a young law student, Ben Stein interviewed with John Weinberg.  He was impressed with Weinberg as a “smart guy,” but also surmised that he inherited the position from his father, Sydney Weinberg:

But what I did not know about John Weinberg was that even though he was rich and well connected, as a young man he joined the Marines to fight the Japanese in the Pacific, then fought again in Korea. That was America’s ruling class then. The scions of the rich went off to fight. See Looking for the Will Beyond the Battlefield
Clearly, John Weinberg believed that honor and service to one’s country mattered.  But in the current Goldman and Wall Street culture, going off to serve one’s country is for the common folk: why do that and miss out on so many deals and great bonuses?

What Changed?
The end of the Weinbergs’ era can be traced to several factors.  First, Goldman Sachs, Morgan Stanley and other large investment firms were partnerships.  This means the partners were investing their personal fortunes.  Moreover, retained capital was extremely important to the future success of the business.  Thus, there was a limit on executive compensation based on capital and personal preservation.  Second, as firms went public, it was easier to convince a less involved board of directors (rather than partners) to pay large bonuses to executives. Third, those same executives became increasingly greedy, and probed and trampled ethical boundaries. Short-term thinking reigned on Wall Street.  Fourth, compliant government officials endorsed and enabled these behaviors instead of regulating them.

Finally, we need to look at the important intersection of law and ethics.  Just because something is legal does not mean one should do it.  A legal thing is not always an ethical thing.  Would the Weinbergs’ have permitted Goldman to take positions against their own clients?   Would they have forced AIG into insolvency? Would they have designed scams to fool the EU? I doubt it.

It will be a long time before Goldman restores its reputation.  And President Obama is not catalyzing any restoration of ethics or reputation by calling the current Goldman CEO a savvy businessman.   By its actions, I doubt if Goldman Sachs cares.
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Yes, GS has come along way since the days of Sydney Weinberg.  In fact, many of our large corporations have succumbed  to greed and left morality in their gold lined trash cans.  I doubt that we will ever see a return to business even the way it was in the latter part of the Twentieth Century.  Back in those days even the banking industry served the public and their customers.  Remember when you knew your banker and your banker knew you? 

Of course, technology and the internet have changed and removed a lot of the personal aspect but it has not changed morality.  Only greed and the ever growing greed amongst large corporations has changed and often eliminated the moral boundaries they operate within.

Our government as well - through several administrations, Democrat and Republican - has aided and abetted the moral change of behavior in our big corporate world by encouraging, deregulating and not regulating regulations already in existence.

This is certainly evidenced by the lack of any criminal investigations on any of our financial institutions. During the S&L crisis many top executives were investigated, charged, tried and convicted - some of whom are probably still doing time.

The magnitude of our current crisis is 10 times, a hundred times maybe even a 1000 times as severe, yet no legal action has been taken against any of these "banksters" - only rewards.

But what do you expect when this cartel - whose most prominent member is Goldman Sachs - has people infiltrated in many high levels of our government.  In astronaut speak, "Houston, we have a problem".

Thank you again to the reader/blogger for submitting his writings.  I look forward to more from him/her.

I welcome also the writings of others including some of our readers who leave comments worthy of publishing as Feature Posts.  Email your pieces to for review.

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