What Happened to Goldman Sachs: An Insider's Story of Organizational Drift and Its Unintended Consequences Read Online Free

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     risk-taking (not just financial but also reputational) were loosened. Those
     in areas such as proprietary trading had the opportunity to make more money
     than banking partners if they made the firm significant amounts of money.
     The incentive was to ask for and to invest as much capital as possible,
     because the more money you were given, the more you could potentially make
     with your trades. Traders could argue that if they worked at a hedge fund
     they would receive 10 to 20 percent of the profits they generated and if
     they didn’t get paid correspondingly by Goldman, they could
     leave. And with so many more hedge funds cropping up, if the trades
     didn’t work out and you got fired, you could be almost sure
     you’d get a job at another bank or a hedge fund. The attitude of
     many was that the Goldman pedigree would get you another job somewhere for sure. 8
    One might ask how the change in the attitude toward risk was
     evaluated by the board of directors. After 2002, when the
     Sarbanes–Oxley Act became law, Goldman’s board was
     composed largely of independent directors, most of them prominent in
     business and academia. However, according to interviews, none of them had
     ever focused on trading for a living. None would probably have been
     classified as an expert in risk management by most trading experts. The
     directors owned very little Goldman stock (less than 0.1 percent of the
     total company), and what they owned generally was not significant to their
     net worth. An interviewee speculated that the fact that Goldman’s
     traders were making enormous sums of money for the firm and themselves also
     made it unlikely the board would question that success.
    In fact, it could have created the opposite effect. One partner I
     interviewed said that the directors were not likely to question people who
     made tens of millions of dollars and whose returns on equity and profits
     exceeded those of their peers. Another partner speculated that as trading
     became more important after the IPO and risk management was more critical,
     the board relied on Lloyd Blankfein and his number two, Gary Cohn, from
     trading, instead of Hank Paulson, and that may have contributed to
     Paulson’s decision to leave to become secretary of the
     Treasury.
    When I was in proprietary trading, one of the partners received a
     voicemail from Paulson, CEO at the time, on which I was copied. It related
     to risk. The partner forwarded the message to Blankfein, answering the
     question and asking Blankfein to deal with it. I asked the partner why he
     had not responded directly to Paulson. He seemed more than a little annoyed
     at my curiosity, saying essentially that Paulson knew a lot about clients
     but little about trading risk, and he did not have the time to explain it to
     Paulson. Whether or not Paulson understood trading risk, the fact that a
     partner did not want to deal with the CEO was surprising to me. This was in
     stark contrast to when I was an analyst in the early 1990s, when the senior
     partner was held with the deepest respect. I remember being told that when
     one goes to see the senior partner of the firm, one must wear a suit jacket
     to show respect. In hindsight, I think I intuitively felt that Hank would
     probably not be around for much longer if traders didn’t have the
     time for him, and I privately questioned if a banker would ever again be
     head of Goldman. But I don’t remember giving it that much
     thought. I just went back to my daily routine.
    Misaligned Incentives
    Goldman’s incentive structure, like those of other
     banks, also evolved in response to the changing nature of the
     firm’s business mix. Rob Kaplan, former vice chairman of Goldman,
     said that banks’ visions changed as they placed emphasis on
     trading (see chapter 5 ). It
     became more about making money than about “the value-added vision.” 9
    More Cultural Stress: Envy, Self-Interest, and Greed
    One of the basic