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Why Goldman Sachs Went From Investing For The Rich To Targeting Everyone

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23:52   |   May 02, 2019

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Why Goldman Sachs Went From Investing For The Rich To Targeting Everyone
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  • A big debut expected tomorrow for the Goldman Sachs initial public offering.
  • I believe we share the conviction that this is in the best interest of all Americans.
  • We still like all businesses have to change and evolve.
  • Goldman Sachs.
  • One of the top investment banks in the world, with a history of
  • making money, envied on Wall Street.
  • It's the biggest of the old investment banks with almost a trillion
  • dollars in total assets.
  • The allure of working at Goldman Sachs is that potentially you could
  • be one of the people running the world.
  • Much admired.
  • Much hated.
  • And you know, the best risk managers on Wall Street. Everybody wanted
  • to be like Goldman Sachs or copy it in some ways. Although
  • it hasn't been able to climb back to its 2009 peak.
  • It's a bank that emerged from the financial crisis relatively
  • unscathed.
  • Financially, but its reputation took a beating.
  • And you want people to trust you?
  • From the cream of the crop, to the vampire squid.
  • Now the company is targeting the regular consumer.
  • Goldman Sachs is going from caviar to cheeseburgers.
  • For a 150 years, GOLDMAN served the most important people in the
  • world. Heads of state.
  • Heads of corporations.
  • Millionaires, billionaires.
  • And now, they're also serving you that consumer.
  • So how did the bank get to where it is today.
  • Goldman Sachs was founded in 1869 by Marcus Goldman, an immigrant from Bavaria.
  • He started as a peddler in Philadelphia and then invested in a sewing
  • machine to become a tailor.
  • After about 20 years, Goldman moved to New York City and opened up
  • shop as a banker.
  • He would buy notes payable from jewelers and tanners downtown and
  • sell them for a small profit uptown.
  • In 1882, he brought his son-in-law, Sam Sachs, into the business and
  • the firm was eventually re-named Goldman Sachs and Company.
  • Once upon a time, firms all sort of
  • looked a lot alike.
  • They're all small private partnerships with people whose names were
  • on the door.
  • There was really Mr.
  • Goldman. There was really Mr.
  • Sachs. There were three Lehman brothers, there were three Lazard
  • brothers.
  • Goldman's son, Henry, joined the firm in 1885.
  • He went on to re-shape the financial world decades later.
  • After Goldman Sachs became a member company of The New York Stock
  • Exchange in 1896, Henry Goldman began to take over the business.
  • A lot of the Jewish firms like Goldman Sachs were not allowed to do
  • certain kinds of businesses they weren't allowed to get in the
  • underwriting of railroads or banks which were the huge growth engines
  • at the beginning of the 20th century.
  • They were allowed to underwrite retail businesses.
  • That's where Henry Goldman pounced.
  • Retail firms wanted capital to expand but they lacked the assets that
  • industrial companies like railroads had.
  • He developed a revolutionary idea: use a company's potential
  • earnings. Its ability to generate income in the future, to value the
  • company. This became key to the company's first IPO in 1906: United
  • cigar. And it would become a model for the future, including the IPO
  • of Sears Roebuck later that year.
  • He was responsible for the initial underwriting of more than 50 of
  • our country's most successful publicly owned corporations.
  • And it was the next year in 1907 that Sidney Weinberg, the future
  • leader of the company joined Goldman as an assistant to the janitor.
  • He would later be named Mr.
  • Wall Street.
  • Through the next half century Goldman Sachs continued to play a
  • prominent role in banking.
  • It helped companies like B.F.
  • Goodrich and F.W.
  • Woolworth expand by going public.
  • For Goldman Sachs, it was all about the relationships.
  • Sidney Weinberg spent years after World War Two courting Henry Ford
  • II and helping him restructure the company he took over from his
  • grandfather.
  • Their big breakthrough came in the 1950s when Goldman was allowed to
  • underwrite the IPO of Ford Motor Company.
  • Given that Henry Ford was considered anti-Semitic was sort of a sea
  • change on Wall Street.
  • And I think after that sort of Goldman began really to thrive.
  • They were the first firm to house both a trading operation under a
  • guy named Gus Levy with an investment banking operation under the
  • infamous Sidney Weinberg.
  • They had a return on equity of something like 70-75 percent which is
  • just gargantuan numbers.
  • Welcome. Disney Land is Your Land.
  • In 1957, Goldman Sachs led the IPO of Disney, just a few years after
  • the company opened its theme park Disneyland in California.
  • When I started out there, Goldman Sachs was probably in the fifth or sixth place in terms of being the leading firm.
  • It wasn't until I'd say the late-70s and early-80s when Goldman Sachs, because of its client activity and
  • investment banking, the deals it did and so on, began to get the reputation for being the gold standard of the investment banking business.
  • I think a commitment to excellence and a very low tolerance for
  • sloppiness and a lot of attention to detail
  • and that started this whole talk about culture and
  • the Goldman culture was different from others.
  • To some degree it was although that difference faded away when the
  • trading era got going.
  • When Gus Levy who ran the trading business took over the firm as
  • senior partner in 1969, Goldman Sachs started taking on more risk.
  • When you're a private partnership,
  • they're making bets with their own money and that absolutely helps
  • them sort of mitigate extreme risk taking and make sure that firm is
  • prudent overall because if the firm goes under, it's the actual
  • partners whose names are on the door or whose capital is in the firm,
  • their money is going to be lost.
  • But as investment banks started going public in the 1970s, things
  • started to change.
  • All of a sudden you have to go from a partnership culture to a bonus
  • culture on Wall Street beginning from 1970 and now we're coming up at
  • 50 years of this kind of shenanigans.
  • Fifty years of people getting rewarded for essentially taking big
  • risks with other people's money.
  • The traders were street smart, sales oriented, pat you up
  • the back and let's go to the Knicks game types, often using ideas for
  • trading that came to them from a bunch of PhD's we locked in a cage somewhere.
  • But it was a different set-up from the
  • investment banking troupes who thoughts of themselves as more the
  • intellectuals.
  • In 1981, Goldman Sachs acquired a commodities trading firm, J.
  • Aaron and company.
  • It marked a strategic shift in the business for the bank and future
  • leaders like Lloyd Blankfein and Gary Cohn rose through the trading
  • ranks. A lot of the leadership of the firm moved from the
  • investment banking sector to the to the trading sector.
  • The 1980s saw the rise of private equity on Wall Street, power brokers
  • dominated culture and Goldman watched some of its biggest competitors
  • rake in big dollars by going public.
  • Bear Stearns in 1985.
  • Morgan Stanley in 86 and then Lehman Brothers in 1994.
  • Goldman made some massive deals like the purchase of Rockefeller
  • Center in 1995 but the company stayed a partnership.
  • I joined in the summer of 95.
  • And I say I was very fortunate because I think I was something like
  • this only the fifth person ever that joined as a partner when it was
  • a partnership so I felt a little bit scared because you know I was
  • coming into this remarkable partnership and then I had no idea what
  • it would be like.
  • I'll never forget the second day I was getting an email from Jon
  • Corzine who was of course the CEO asking me what I thought of the
  • lira. And I was shocked.
  • And I gave him an answer and he answers me back within half an hour.
  • I thought wow, this is a great cool place.
  • Actually within three months of me being there they had the first
  • what became pretty well known big deep debate amongst
  • all the partners about whether they should or shouldn't go public and
  • the decision was no.
  • For a long time it was felt that you know Goldman was special would
  • be better off private.
  • You know over time frankly people who were there at Goldman I mean
  • they would never say it quite this way but they they got greedy.
  • They realized if they can go public at four times book value they all
  • stood to make a ton of money and get really really rich.
  • I mean there was really no reason at all for Goldman not to go
  • public.
  • Because it got so big anyhow the idea that it behaved with exactly the
  • same philosophy as the original spirit of the partnership seems to me
  • to be not as true as the value of the partnership suggested.
  • So I'm like well you know why not just become a public company.
  • A big debut expected tomorrow for the Goldman Sachs initial public
  • offering, The IPO is 10 times...
  • It was one of the biggest IPO's in history at the time and the company
  • raised three point seven billion dollars.
  • It made the partners unbelievably rich.
  • Top partners at the firm probably made something like 300 million
  • dollars, even less senior partners made something like a 100 million
  • dollars. So it was a huge payday across the firm.
  • It was a bonanza.
  • It was a smashing success.
  • Thinking about it nearly 20 years later, I wish GS would've retained
  • some of the more genuine strength of what being a partnership forced
  • them to be.
  • Because at the end of the day it was our own capital that was at
  • risk.
  • Of course while all this was going on, Goldman's increased influence
  • extended beyond Wall Street and into politics.
  • After senior partners raked in all that money, many of them asked:
  • what's next.
  • A lot of them were still young.
  • They now claim you know wanted to give something back.
  • In truth, what did they wanted to do is they made all this money on
  • Wall Street, now they wanted to have power.
  • And if you want to have power you have to go to Washington.
  • So that led to people like John Whitehead, senior partner at Goldman,
  • going to work for Ronald Reagan.
  • Bob Rubin becoming first the national economic adviser for Bill
  • Clinton. Steve Friedman who is also Rubin's co-senior partner at
  • Goldman also became a national economic adviser.
  • Rubin of course became Treasury secretary.
  • Steve Mnuchin, current treasury secretary is a Goldman guy.
  • Former Goldman partner Gary Cohn of course and it just became part of
  • the culture, part of the DNA.
  • These men have had significant influence on banking policy over the
  • last 25 years.
  • Rubin was part of Bill Clinton's team that de-regulated the banking
  • sector in the 1990s.
  • Gary Cohn was one of the architects of Donald Trump's corporate tax
  • cuts. And of course Henry Paulson was the treasury secretary during
  • the financial crisis of 2008, proposing the 700 billion dollar bank
  • bailout. But we'll get to that later.
  • And some people say well you know Goldman Sachs is Government Sachs
  • rotating door.
  • No they just have a lot of smart people and smart people tend to wind
  • up in positions of power.
  • So what does that mean that cachet.
  • It means they are one to two degrees of separation from the most
  • important people in the world.
  • Heads of state.
  • Head of corporations.
  • Governments Sachs in my in my book is a moniker that's well earned.
  • When people push back and say Government Sachs isn't really a thing
  • I'd say is there any other Wall Street firm who sent more people into
  • government than Goldman Sachs?
  • And the answer is No.
  • Business boomed after the IPO, the company was making about two to
  • three billion dollars a year from 1999 through 2003.
  • By 2007 that profit number crossed ten billion dollars.
  • It's a tale of two decades since Goldman Sachs went public.
  • In the first decade, they crushed it on almost any measure.
  • Earnings growth. Book
  • value growth.
  • Returns. Stock price outperformance fantastic.
  • But to a degree they were a victim of their own success.
  • The company divided its revenue into three main categories: investment
  • banking providing services to companies and governments when they do
  • things like issue bonds merge or of course IPO.
  • Asset Management advising clients on investing their money.
  • And we're talking about very very wealthy clients, like people with
  • 10 million dollars in the bank.
  • And finally, trading and investments: the bets the company is making
  • in the market.
  • In 2007, it was that sector, those market bets that made more than 13
  • billion dollars for the company, 75 percent of the company's pre-tax
  • profits.
  • Goldman was the darling of Wall Street.
  • As somebody who wrote a book about Goldman I understand how they make
  • money from investment banking.
  • I understand how they make money from Asset Management, but in many
  • ways it's still a big mystery how they make as much money as they
  • did.
  • Welcome to Today, on a Friday morning I'm Matt Lauer and I'm
  • Meredith Vieira
  • And if you thought the markets couldn't get any worse you may be in
  • for a rude awakening.
  • This was the wildest single day in the history of Wall Street.
  • We are faced
  • with the prospect of a global meltdown.
  • Goldman Sachs figured out before other firms that trouble was coming.
  • They began to figure out in December of 2006 and they made a big
  • proprietary bet against the mortgage market.
  • Now that's my words.
  • They say they were hedging their risks.
  • By the time the summer of 2007 came around and the Bear Stearns hedge
  • fund had collapsed, Goldman made an absolute killing.
  • Four billion dollars in profit.
  • Goldman has always prided itself on being the best risk managers on
  • Wall Street.
  • And I think the financial crisis proves that.
  • The week after longtime competitor Lehman Brothers went bankrupt,
  • Goldman got a five billion dollar investment from none other than
  • Warren Buffett.
  • I have no idea what the stock market's going to do next month or six
  • months from now.
  • I do know that the American economy over a period of time will do
  • very well and people will want a piece of it will do well.
  • When you had other financial firms literally failing.
  • I mean remember you had Lehman Brothers and you had Bear Stearns.
  • You have a bunch of others that failed.
  • Goldman Sachs was strong and they were so strong that coming out of
  • the financial crisis, they dominated the trading activity.
  • And so you're like Goldman Sachs is on top of the world.
  • You know to their credit Goldman Sachs really really killed it in 2009
  • making more than 30 billion dollars in trading, an amount of money
  • that you know Wall Street might never see again.
  • They really put the hurt on their competitors.
  • And I think created a lot of resentment in the marketplace and in
  • public opinion as a result of that.
  • Of course it didn't help that former CEO Henry Paulson who was
  • Treasury secretary at this point was the person proposing 700 billion
  • dollars in taxpayer money to bail out the industry.
  • This Troubled Asset Relief Program has to be properly designed for
  • immediate implementation and be sufficiently large to have maximum
  • impact and restore market confidence.
  • It also didn't help that CEO Lloyd Blankfein defended the company in
  • an interview with The Times of London saying he believed the firm was
  • doing God's work.
  • It's because that so many of the cultural realities of what you all do
  • is jarring to most Americans.
  • This notion of selling a product that you're betting
  • against is hard for people to understand.
  • The crux of the critique came down to this.
  • Goldman Sachs was structuring mortgage backed securities in its
  • investment banking unit and selling them to clients.
  • But at the same time, the trading side of the firm was betting
  • against those deals.
  • Look what your sales team was saying about Timberwolf.
  • Boy that Timberwolf was one.
  • There was a spotlight that shined on Goldman Sachs and Main Street
  • didn't know who Goldman Sachs was and Goldman Sachs did not handle
  • that as well as they should have.
  • They didn't explain to the public. When
  • Goldman Sachs management testified to Congress it came across a
  • little stilted and defensive.
  • Do you think you have an obligation to tell the person that you're
  • selling that security to in that deal that you are keeping this short
  • position in that deal?
  • That's my question.
  • That we're not going to cover in the market?
  • Well no. That
  • you intend to keep that short position.
  • Not forever.
  • It's your intention to keep that short position.
  • No I don't think we would have to tell him.
  • I don't even know that we would know ourselves.
  • It was great political theater.
  • People needed a scapegoat and Goldman provided an easy target for a
  • scapegoat.
  • Goldman Sachs ended up paying more than seven billion dollars in
  • settlements surrounding its handling of mortgage backed securities in
  • the run up to the financial crisis.
  • That's according to KBW Bank litigation tracker.
  • However, in true Goldman fashion the company figured out how it could
  • make money even on what most thought were government fines.
  • Here's how they did it: as part of the settlement with the Department
  • of Justice, Goldman agreed to provide one point eight billion dollars
  • in consumer relief.
  • But Goldman Sachs doesn't have a mortgage business, so they couldn't
  • simply let delinquent borrowers stay in their homes.
  • Instead, the company bought pools of distressed mortgages from Fannie
  • Mae and restructured them.
  • They got to count that towards their fine but they can still
  • potentially make money off the assets.
  • It's hard to think of anything more Goldmanesque which is for them
  • turning a penalty into a moneymaking opportunity which feeds just
  • into this longstanding narrative about Goldman Sachs which is that
  • these guys are the smartest guys in the room.
  • Now the flip side of that is that their reputation is that they are
  • sharks.
  • When we asked Goldman Sachs about the strategy they directed CNBC to
  • the Independent Monitor's report on the settlement.
  • As of February 2019, the monitor validated almost one point three
  • billion dollars in relief.
  • Seventy one percent of the way to fulfilling the settlement.
  • Goldman Sachs wouldn't comment on whether it's making a profit on the
  • strategy. And the financial crisis is not the only scandal to hamper
  • Goldman in the last decade.
  • In 2012 and 2013 the Bank arranged three bond deals in Malaysia to
  • fund a state investment fund called 1MDB.
  • It raised six point five billion dollars to attract foreign
  • investment but according to U.S.
  • authorities it was just a front.
  • They accused a Malaysian financier of stealing billions from the fund
  • and paying hundreds of millions of dollars in bribes.
  • Today's case is the largest single action ever brought by the
  • department's Kleptocracy Asset Recovery Initiative.
  • When you talk to people on Wall Street about making 600 million
  • dollars in three bond deals everybody scoffs at this.
  • This is an insane amount of money to make on bond deals that are
  • supposedly fairly plain vanilla.
  • At the very highest levels of the company, maybe if they didn't know
  • what 1MBD was perhaps something suspicious about that, well maybe
  • they should have dug a little harder and maybe they should have found
  • out.
  • The investigation into the firm's culpability is ongoing as of April
  • 2019. Goldman Sachs told CNBC "senior management was unaware of the
  • criminal activity by Mr.
  • Leissner and his associate who took extraordinary efforts to hide
  • their part in the illegal scheme.
  • Despite the legal issues Goldman's advisory business still crushes
  • its competitors on Wall Street but its trading business has lagged.
  • So Goldman Sachs has gone from great to good.
  • Look at the first decade versus the second decade.
  • They were number one in trading and then they went to number three in
  • trading.
  • The lead has narrowed somewhat and the stock price the valuation is
  • the lowest that it's been since they've been a public company in a
  • non crisis period.
  • All of this has prompted one of the most interesting pivots in Wall
  • Street history.
  • But if you think about the brand and the way the regulatory
  • environment has changed who we are, it makes sense for us to have
  • direct relationships with consumers.
  • In 2016, the company launched a new product called Marcus.
  • Remember him.
  • It's a digital bank that provides personal loans and high yield
  • savings accounts.
  • What is it that Goldman is offering in their bank account that I
  • can't get elsewhere?
  • It's that slightly higher savings rate.
  • The pitch is
  • we are you know we are a new bank we're a new approach.
  • We're not gonna nickel and dime you on fees.
  • We're going to be very transparent.
  • We're going to be very clear to you about how we make money.
  • And this is sort of a new way of doing fintech these days.
  • To be clear, this is still a tiny part of Goldman's overall business
  • but the trend of investment banks starting to look more like
  • commercial banks is real.
  • In a post financial crisis world, diversification is important.
  • Goldman said it had 46 billion dollars in online retail deposits
  • across the U.S.
  • and the U.K..
  • That's pocket change compared to competitors like Bank of America or
  • JP Morgan with more than a trillion dollars in deposits each.
  • But it's seen as a growth opportunity.
  • See, none of this is going to fundamentally change Goldman Sachs who
  • we are, how we're making money in the short term, but we think we can
  • build very successful platforms that over time will make a meaningful
  • contribution.
  • Goldman Sachs is going from Wall Street to Main Street and look at how
  • they're doing this they're doing this with more technology more like Silicon Valley.
  • Today, we're introducing a brand new service and we call it Apple card.
  • There was an opportunity that I think Apple saw and we saw to redesign
  • certain aspects of the credit card.
  • They're doing this with a younger workforce.
  • Three fourths are millennials or younger.
  • They're doing this with a more relaxed dress code and they're doing
  • this with a CEO who is a part time DJ.
  • Look, the jury is out on the effectiveness of this new path.
  • A lot of us are watching.
  • If history is any guide Goldman Sachs will find a way to make money.

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Goldman Sachs, the Wall Street investment bank, has a storied history. Founded by Marcus Goldman 150 years ago, his son Henry revolutionized the industry with company valuations and IPOs. It was the gold standard in investment banking for decades and partners got rich when the company went public. But the firm's reputation took a beating during the financial crisis, eventually leading to one of the most interesting pivots in Wall Street history.

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How Goldman Sachs Became Wall Street's Most Powerful Investment Bank