Transcription
Goldman Sachs is what you think of when you hear the words banking, Wall Street, and market crash. The investment banking group is over 150 years old but has kept its name since setting up way back in 1869. It's a money-making machine that has invested in the likes of Spotify and Dropbox and was the lead bookrunner of Twitter's IPO. It's even committed almost $2 billion to philanthropic initiatives.
But the name Goldman Sachs is also synonymous with corruption, market manipulation, offshore tax havens, and insider trading, to name a few of its controversies. In US court today, uh, for violating, uh, US money laundering laws and the Foreign Corrupt Practices. The department filed criminal charges in New York against the Goldman Sachs group and its Malaysian subsidiary, charging each with conspiracy to violate the anti-bribery provisions of the Foreign Corrupt Practices Act.
Yet, for all these good deeds and sins, the giant of commerce wasn't started by a hedge fund manager or stockbroker, but a humble immigrant with a flair for business and hunger for the American dream. So, how did a German immigrant build what would become an international powerhouse of finance? How unethical is the company? Will it be around forever, or will it finally get its comeuppance? Well, it's time to learn how history works as we unravel the history of Goldman Sachs.
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Post-Civil War America saw a boom in engineering and growth. New technology like the telegram and railroads were connecting people and states, and the change in civil rights laws saw a change in the way Americans live their lives. The Suez Canal was built and the Brooklyn Bridge finished construction. Truly, prosperity was on the horizon. It was the time of the Gilded Age, and Marcus Goldman knew it. The 48-year-old German Jewish immigrant had come to America as a refugee from his home country to escape hard times and in search of better opportunities for his family. He arrived in 1848 without knowing anyone and having only a basic skill in speaking English. He initially settled in Philadelphia and began peddling wares as a traveling salesman, but pushing that cart up and down the street wasn't giving his family the life they needed nor the respect he wanted. His desire was to be a businessman.
So, in 1869, he uprooted his wife and five children and moved them to New York City. He was following the exodus of German Jews because Manhattan was seeing a rise in immigration due to the post-war boom. There were more opportunities, especially on Wall Street. However, Goldman had no real background in finance. Nonetheless, he got his foot in the door by renting a small office on Pine Street with a sign out front that read, "M. Goldman, Banker and Broker." This may have been a brash move for some, but Marcus had displayed a talent for numbers all his life. So, if he was good at peddling items door-to-door, then he could pedal numbers bank to bank, right? His start was in buying promissory notes, which are basically fancy IOU's from merchants in need of ready cash, and selling them to bankers uptown for profit. At the time, bank loans were hard to get, yet small companies needed help to turn their accounts receivables into cash. Marcus jumped on this demand by supplying a service. The operation was small, all-time, but the specialism in an appealing area of the industry gave Goldman little competition and enough recognition to slowly but surely scale his company. His small loans of liquidity to tanners and jewelers snowballed into a tight-knit, profitable family business for the next 10 years.
Then, a new family entered the fold: the Sachs. Marcus befriended Joseph Sachs many years before during synagogue classes in their native Williamsburg. In time, Sachs would move to the US too, and some of his five children would marry some of Marcus's five children. Rosa Goldman became Mrs. Julia Sachs, and Samuel Sachs would marry Louisa Goldman. An interesting side note: they each had a child called Julius, whereas Marcus had Henry and Joseph had Harry. Think of them like the 19th-century version of The Brady Bunch. Back to the topic: Marcus's business had been growing so much that he wanted someone to help run it with him, which was how he came to pick his son-in-law, Samuel, who was regarded as a moral and honest man. And thus, on September 20th, 1882, Goldman Sachs was born. But by 1896, the firm would have $1.6 million in capital shared among five partners. The third partner to join shortly after Marcus teamed up with his son-in-law was Harry Goldman. Later, he would run the company with Samuel when Marcus retired. Their tenure together shaped the company dramatically in the next 30 years to come, including the start of the controversies.
The conflict between the brothers-in-law benefited the company. Henry's adventures brought them to new opportunities, but Samuel's conservative approach avoided catastrophe. This was perfect timing because their niche market was becoming saturated with competition. They needed new ventures to stay ahead of the curve. One such venture was to take companies public. In short, when a private company wants to go public, it means that they need an IPO, which is most often handled by an investment bank. This is known as underwriting, which was Goldman Sachs' next big step forward. Initially, they wanted to underwrite railroads, but they were wedded off by stiff competition like J.P. Morgan. So, instead, they focused on smaller commercial companies like cigar sellers and even Macy's. But the first company they helped public was Sears, whose valuation at the time was a modest $40 million in 1906. Of course, it helped that Henry was friends with Julius Rosenwald, the owner of the department chain. IPO-ing a company at this time was a huge risk. So, to level the chance of failure, Goldman Sachs partnered up with Lehman Brothers to underwrite $30 million in common stock and a further $1 million of preferred stock. If fortune favors the brave, then Goldman Sachs was fearless because the IPO was a big success. Both firms had a big payday and also saw their reputation attract more clients from bigger firms.
It's now 1914, and Goldman Sachs has become an investment bank on Wall Street. They were officially in the big leagues, and with all that cash to reinvest, the Roaring Twenties was perfect timing, yet again. Except for Henry. Even though he facilitated that deal which brought the family business into Wall Street, his open support for Germany in the run-up to World War I wasn't kosher. No doubt those family dinners were much more fraught than usual, especially since rival J.P. Morgan had been funding the Allied cause. In his defense, Henry's family and culture were German, so it's understandable why his patriotic reflexes tilted towards his ancestry, even though other members of the Sachs family wanted to support their new home of America. In the end, Henry resigned, and the company sailed off into the sunset without him. What a sunset it was! Markets were soaring, optimism was high, champagne was flowing. So, Goldman Sachs seized the moment by investing a million dollars into a trading company and selling the shares to the public at 10 times the price. They returned $93 million with their original investment now worth 10 times the amount. But why stop there? If they can make an investment return like this out of thin air, why not make another, or another? After all, people were willing to buy them, just like the early days of Marcus Goldman when he was pushing his cart up the street. The old adage of supply and demand applies now as it did then. Let's hope a market crash doesn't come along to ruin the party.
October 29th, 1929, the start of the Great Depression, practically evaporates all of Goldman Sachs's money. There were accusations of share price manipulation and insider trading. So, was this hubris for market meddling or paranoia during an economic downturn? Perhaps it was character assassination from jealous rivals who were more battered by the market crash. In the next year, more investment firms went bust, and with it, investors, investment banks, and anyone else trapped in the house of cards. Yet, Goldman Sachs survived. How? Answer: Sidney Weinberg. The third of 11 children from a poor family in Brooklyn, Sidney had been forced to leave high school early to help support his impoverished household. He started working at Goldman Sachs as the janitor's assistant, but 15 years later, his grit got him to the top. It was his weight and charm that persuaded General Electric to go public. His clients liked him so much that they stayed with him even when Goldman Sachs went belly up and had its reputation dragged through the mud. Over the next years, Goldman Sachs gradually pulled itself back together.
Then came the 1950s when Sidney led them on what would be their boldest move yet: convincing Ford Motors to go public. There was little doubt that the IPO would make an investment banker filthy, stinking rich, but it wouldn't be easy. Ford distrusted Wall Street; it was gambling in a rigged game against ordinary folks. That's why J.P. Morgan Jr. had failed to take Ford public at one point. But what would be a bigger challenge was Henry Ford was an outspoken, one could say, devout anti-Semite. He continued to be one even after the end of World War II. You'd be right in thinking that a Jewish-owned family company of bankers had no chance whatsoever of getting Ford to change his mind about Wall Street, which is why they didn't. Nine years after Henry Ford died, they approached his grandson, Henry Ford II, to make the deal. It was the deal of the century, and the Jewish company doing business with a company whose founder had been a racist became a sea of change on Wall Street. Now, the only thing more important than money was winning, even if you had to cheat.
Gus Levy was born in 1910 in New Orleans to a middle-class household. He made a name for himself as a trader in New York and became a well-regarded started partner at Goldman Sachs at the age of 30. His specialty was block trading. The idea is this: when an investor sells a large amount of shares, it can cause the market to react unpredictably. So, by privately negotiating a sale at a discount, a trader can then ride the fluctuations of the economy to resell off remaining shares out of profit. Simple, right? It's now the 1960s, and Sidney Weinberg is retiring, and Gus Levy becomes heir to the Goldman Sachs empire. For the next decade, he makes block trading a major source of revenue for the company, but trading more and more at a larger scale made them vulnerable. One mistake could cost them everything.
Then came 1968, and with it, the formation of Penn Central, becomes the largest railroad company in the country with a staggering $1.2 billion in debt, but it needs more to operate. Goldman Sachs is hired to issue $100 million in commercial paper. Not only does the company finally get to underwrite a railroad company, but investors line up when they hear Goldman Sachs is backing the safe investment. Unfortunately for them, Penn Central fails to generate enough revenue to maintain its railroad tracks and equipment. The company goes bankrupt. Those who invested in the commercial paper are almost taken out completely, so they sue Goldman Sachs for misrepresentation. Goldman Sachs was the one who evaluated the risk, and it was them who pushed for the deal, so their hubris cost them 20 cents on the dollar. Yet, they came out on top. How? Goldman Sachs said that the payments were covered by insurance.
The 1970s saw more of Goldman Sachs's securities go rotten. Settling million-dollar lawsuits became the norm, but now the company has gone from boutique investment bank to elite institution. These times in court did little to sink the company. Sure, it was wounded, but it was still standing. Even the death of Levy from a stroke during a business trip did little to tank the company because even though no succession plan was left behind, it's clear who the next leader would be: John Whitehead. The ex-Navy commander implements his military training into the company culture so that the firm can get back to first principles. One of his drills was to test subordinates to see how long they would wait for a meeting with him. Naturally, some left after a few hours, but in the end, the remaining ones came to learn that if they need to reach a big client, they must be conditioned to wait in their lobby for as long as it takes. Under Whitehead, the client came first. A sense of duty and diligence had re-entered the culture of Goldman Sachs for the first time since Marcus dragged his car up and down the streets of Philadelphia, and it paid off. By 1983, the company was raking in $400 million, that was a staggering 60% increase from the previous year. At the height of his success, he retired to work for Ronald Reagan.
Now, the torch was passed to Robert Rubin, who stays CEO for 2 years before passing the buck to Stephen Friedman, another 2-year CEO. Why was their tenure so short? Hadn't they just inherited the keys to the biggest money-making machine on Wall Street? I've been here in '85, I've lived through, uh, I think six, seven CEO transitions. Well, it was because someone was after them: Rudy Giuliani. It's 1987, and a senior partner in the company has just been busted for insider trading. His perp walk is splashed all over the papers, so now Goldman Sachs's reputation is in the gutter once again. But they've bounced back before, and their customers know it. So, as long as Goldman Sachs keeps making money, then all those corporations on their books have nothing to worry about, right? In fact, Rubin managed to get out of the banking world to enter politics before it was too late, this time working for Bill Clinton. So, by 1993, Goldman Sachs profits were up to $2.7 billion, mainly due to trading by putting their clients' interests first and having a few back-door deals, it seems. But that only lasts a decade. You see, even with their $98 billion of assets, senior partners are retiring, so the company needed to find a new stable way to hold on to capital so that they won't be knocked down if too many partners took too much out too soon. You know what they did, right? Of course, you do, you've been paying attention: they went public.
There was just one problem: Russia. It's 1998, and the biggest country in the world does what no economist thought would ever happen: they stopped servicing their debt. A sovereign country defaulting on its debt didn't fit into any economic model. Other investment banks started hemorrhaging money, so Goldman Sachs dumps their bonds onto the market to accelerate the downfall. Thankfully, the Federal Reserve steps in and bails the billionaires out. It's up to you to decide whether it was worth avoiding another financial crisis because all that Goldman Sachs cared about was surviving. And with Goldman Sachs back on firm ground at the end of 1999, and at the height of the dot-com bubble, Goldman Sachs goes public. This means everyone is finally able to see the paperwork, providing just how much profit the company has been making and how much was paid out to partners. Spoiler alert: it's a lot.
Now, Goldman Sachs just needed an even newer way to make money, and what market was booming at the turn of the millennium? Mortgage-backed securities, AKA the reason Hollywood made the movie The Big Short. Unless you've been living under a rock, you know the housing bubble triggered the 2007-2008 financial crisis, which was the most serious economic catastrophe since the Great Depression. This crisis bankrupted Lehman Brothers, the very same firm that helped Goldman Sachs all those years ago. It's worth noting that just before the bubble burst, the then-boss of Goldman Sachs, Henry Paulson, did what every boss did before him: leave the company at their peak to enter politics. Hank Paulson was made the Secretary of the Treasury by George W. Bush Jr. That may explain how Goldman Sachs got another, another round of bailout money, but it didn't explain how they paid out record employee bonuses in 2009. Then again, those profits likely came from the company betting against the housing market while it was selling weak securities to people it knew couldn't pay them back. But is that more tinfoil hat conspiracy?
Since then, the Wolf of Wall Street culture has been exposed. The company has gone through the courts with gender discrimination cases and sexual harassment lawsuits of plenty. Former employees have become whistleblowers claiming the ethos of putting the clients first is long gone. One whistleblower said that clients were referred to as "Muppets" behind closed doors, and seniors joked about ripping them off. Insider trading continues to dog the company, as does the revolving door with politics. And what about the conspiracy to allow $1 billion of bribes to obtain business from the Malaysian sovereign wealth fund? It's up to you to decide whether Goldman Sachs is the largest money laundering facility in the world or whether the scale of the operation is always going to attract bad apples. But one thing's for sure: the company that started with a small-time lens helping ordinary folk start their own business has now become an elitist behemoth that chews up ordinary folks and spits them out, all in the name of profit.
So, was Henry unfairly thrown under the bus by the company who did business with the Fords? So, how did Rudy Giuliani spoil the fun for Goldman Sachs, and was he truly a hero? Well, go watch our video on Rudy Giuliani to learn more about how the mayor of New York lived long enough to see himself become the villain. And be sure to subscribe to keep on learning how history works.