What Happened to Goldman Sachs. Steven G. Mandis
a transaction. You could offer excuses: “The other bank offered to loan them money,” “They were willing to do it much cheaper,” and so on. It was never that you got outhustled or that the other firm had better people, ideas, coordination, relationships, or expertise, something that would negatively reflect on you or the firm (or both). In proprietary trading, there were no excuses for bad days of losses. We were expected to make money whether the markets went up or down. There was another thing I learned quickly. One could be right as a trader, but have the timing wrong in the short term and be fired with losses that then quickly turned around into the projected profits. In addition, relative to banking, in judging performance the emphasis seemed to tilt toward how much money one made the firm versus more subjective and less immediately profitable contributions. The fear of this transparency and the potential for failure kept many bankers from moving to trading.
I later discovered that Goldman’s proprietary trading areas actually maintained a longer-term perspective than did most trading desks and hedge funds, where a daily, weekly, or (at most) monthly focus was generally the norm. Our bosses reviewed information about our investments daily, but they tended to have a bias toward evaluating performance on a quarterly and even yearly basis (but much shorter than evaluating a client relationship in banking, which could take years). We were held accountable and were compared on risk-based performance against hedge fund peers, as well as other Goldman desks. If we found good opportunities, we got access to capital and invested it. Theoretically, when we didn’t see attractive opportunities, we were to sell our positions and return the money to Goldman, with the understanding that we had access to it when we felt there were attractive opportunities.
However, I learned there was a perverse incentive to keep as much money as possible and invest it to make the firm as much money as possible—and yourself as much money as possible—even if the risk and reward might not be as favorable as other groups’ opportunities. There was a feeling that we were “paid to take risks,” and the larger the risks you took, or were able to take, the more important you were to the organization. We did have a critical advantage over most banks—we knew that many of our bosses and those at the very top of the firm understood, and were not afraid of, risk. Many had managed risk and knew how to evaluate it. They also would sometimes leave us voicemails or discuss in meetings their feelings or perspectives on the current environment and risks.
In my conversations with former competitors, I later learned that Goldman’s approach to managing proprietary traders was substantially different from theirs. For example, if we lost a meaningful amount of money in an investment while I was at SSG, we would sit down with our bosses (and sometimes other traders not in our area) to rationally discuss and debate alternatives, such as exiting all or some of the position, buying more (“doubling down”), hedging the downside, or reversing our position and making an opposite bet. I learned that traders from other firms generally did not sit down with others to discuss alternatives. Rather, most often they were simply told to sell and realize the loss of money-losing investments (“cut your losses”), because their bosses or their bosses’ bosses didn’t understand the risks. Competitors’ traders told me they couldn’t comprehend the idea of our getting together with someone as senior as the president of the firm, and especially traders outside our area, to discuss and debate the attractiveness of an investment. For this reason, traders at other firms did not get as many great learning opportunities or would make poor decisions.
When I left in 2004, the firm was very successful in reaching certain organizational goals. It had the best shareholder returns and continued to recruit the best and brightest people in the industry. It had access to almost any important decision maker in the world. The culture and working environment were such that a motivated, creative person felt as if he or she could accomplish just about anything; all one had to do was convince people of the merits of the idea. But the firm felt different: it was much larger, it was more global, and it was involved in many more businesses. One could certainly start to feel the greater emphasis on trading and principal investing. The bureaucracy had grown, and as SSG grew and diversified we were increasingly encountering turf wars with other areas. I knew fewer people, especially senior partners, many of whom had retired by 2004, so I also felt a weaker social tie to the firm.
At the same time, there was great demand from outside investors (including Goldman Sachs Asset Management) to give money to Goldman proprietary traders to start their own firms and invest. Also the firm’s prime brokerage business and alumni network had a great track record for helping former proprietary traders start their own firms. I felt I had a good track record and reputation, and enough support from Goldman and many of its employees and alums who were friends, to start my own investment business.
With my savings from bonuses, and with my 1999 IPO stock grant and other shares fully vested on the fifth anniversary of the IPO, I left Goldman in 2004 to cofound a global alternative asset management company with an existing hedge fund that already had approximately twenty people and $2 billion in assets under management. Shortly after, several Goldman investment professionals joined me. Less than four years later, I had helped expand the firm to 120 people and $12 billion in assets under management.28 I was the chief investment officer and helped manage and oversee over $5 billion, about half of the firm’s assets, through multiple vehicles focused on the United States and Europe. Also, I helped start several other funds while also serving on all of the firm’s major investment committees. In my position, I saw firsthand the competitive, organizational, technological, and regulatory pressures facing an organization (also a private partnership) as well as the organizational challenges of growth. I maintained a close relationship with Goldman, becoming a trading and prime brokerage client and coinvested with Goldman. My partners and I also hired Goldman to represent us in selling our asset management firm. In early 2008, we announced a transaction valuing the firm at $974 million.29 So I also experienced what it meant to be a trading and banking client of Goldman’s and am able to compare the experience versus other firms.
I have also worked for one of Goldman’s competitors at a very senior level, as an executive at Citigroup from 2010 to 2012 in various roles, including chief of staff to the president and COO, vice chairman and chief of staff to the CEO of the institutional clients group (ICG), and member of the executive, management, and risk management committees of that group.30 When I joined Citi, it was under political and public scrutiny for taking government funds, and the government still owned Citi shares. It was a complex business with many organizational challenges; it was an intense experience, with me starting work at 5:30 a.m. almost every day to be prepared to meet with my boss at 6 a.m. My experience at Citigroup was critical in my development of a new perspective on Goldman and the industry. Citigroup has approximately 265,000 people in more than 100 countries. In addition to being much larger (in total assets and number of employees) than Goldman, Citigroup is much more complex, because it participates in many more businesses (such as consumer and retail banking and treasury services) and locally in many more countries. In addition, unlike Goldman, Citigroup was created through a series of mergers and acquisitions. At Citi, I had the chance to compare the practices and approaches of a Goldman competitor that had a big balance sheet (supported by customer deposits to lend money to clients) and that had grown quickly through acquisitions—two things Goldman did not really do.
Before working at Citigroup and during the financial crisis, I advised McKinsey & Company on strategic, business process, risk, and organizational issues facing financial institutions and related regulatory authorities worldwide. McKinsey is one of the most prestigious and trusted management-consulting firms in the world, with some fifteen thousand people globally. There are many differences between the firms, but as with Goldman (before Goldman became a public corporation), McKinsey is a private partnership that has a revered partnership election process. Goldman and McKinsey compete for the best and brightest graduates every year, and there are elements of the McKinsey culture that are similar in many ways to Goldman’s, especially to the Goldman I knew when I started. When attending McKinsey training programs, I could have closed my eyes and replaced the word McKinsey with Goldman, and it would have been like my 1992 Goldman training program all over again. McKinsey has an intense focus on recruiting, training, socialization of new members, and teamwork. It also has long-standing, revered, written business principles. Lastly, it has an incredible global network.
The people