The Goldman Sachs Group Inc.
The Goldman Sachs Group Inc.
Total Assets: $312.21 billion (2001)
Stock Exchanges: New York
Ticker Symbol: GS
NAIC: 523110 Investment Banking and Securities Dealing
The Goldman Sachs Group Inc.—the company changed its name from Goldman, Sachs & Co. after it went public in 1999—has been a respected player in world finance for more than 100 years. The company operates as a leading global investment banking and securities firm with two main divisions. The first division is Global Capital Markets, which includes investment banking, financial advisory services, trading, and principal investments. The second division is Asset Management and Securities Services, a business unit responsible for investment advisory services. Goldman Sachs’s clients include corporations, financial institutions, governments, and wealthy individuals. The company operates over 40 offices across the globe.
Early History: Late 1880s
The company was founded by Marcus Goldman, a Bavarian school teacher who immigrated to the United States in 1848. After supporting himself for some years as a salesman in New Jersey, Goldman moved to Philadelphia, where he operated a small clothing store. After the Civil War he moved to New York City, where he began trading in promissory notes in 1869. In the morning, Goldman would purchase customers’ promissory notes from jewelers on Maiden Lane, in lower Manhattan, and from leather merchants in an area of the city called “the swamp.” Then, in the afternoon, Goldman visited commercial banks, where he sold the notes at a small profit.
Goldman’s son-in-law, Samuel Sachs, joined the business in 1882. The firm expanded into a general partnership in 1885 as Goldman, Sachs & Co. when Goldman’s son Henry and son-in-law Ludwig Dreyfus joined the group.
Henry Goldman led the firm in new directions by soliciting business from a broader range of interests located in Providence, Hartford, Boston, and Philadelphia. In 1887, Goldman, Sachs began a relationship with the British merchant bank Kleinwort Sons, which provided an entry into international commercial finance, foreign-exchange services, and currency arbitrage.
On the strength of this growing exposure, Goldman, Sachs won business from several midwestern companies, including Sears Roebuck, Cluett Peabody, and Rice-Stix Dry Goods. With the establishment of Goldman, Sachs offices in St. Louis and Chicago, Henry Goldman became responsible for the firm’s domestic expansion.
Railroads—indispensable to the opening of the American West—were the preferred investment of financiers in the eastern United States at this time. But Goldman, Sachs, committed to a diversified portfolio, saw great potential in a number of other developing industries. At first difficult to market, these investments became profitable ventures only after Goldman, Sachs persuaded companies to adopt stricter accounting and auditing procedures.
In 1896, soon after Samuel Sachs’s brother Harry joined the company, Goldman, Sachs joined the New York Stock Exchange. With Harry Sachs in the company, and with the New York operations firmly under control, Samuel Sachs took special responsibility for Goldman, Sachs’s overseas expansion. Through Kleinwort, he gained important new contacts within the British and European banking establishments.
The Company Co-Manages Its First IPO in 1906
In 1906, one of the firm’s clients, United Cigar Manufacturers, announced its intention to expand. Goldman, Sachs, which had previously provided the company with short-term financing to maintain inventories, advised United Cigar that its capital requirements could best be met by selling shares to the public. Although Goldman, Sachs had never before managed a share offering, it succeeded in marketing $4.5 million worth of United Cigar stock; within one year United Cigar qualified for trading on the New York Stock Exchange.
On the strength of this success, Goldman, Sachs next co-managed Sears Roebuck’s initial public offering (IPO) that same year. Henry Goldman was subsequently invited to join the boards of directors of both United Cigar and Sears. The practice of maintaining a Goldman partner on the boards of major clients became a tradition that continues today.
During the 1910s, a time of feverish industrial activity, Goldman, Sachs instituted a number of innovative financial practices that today are common, including share buyback and retirement options. The firm managed public offerings for a number of small companies which, in part due to Goldman, Sachs’s activities, later grew into large corporations. Some of the firm’s clients at this time included May Department Stores, F.W. Woolworth, Continental Can, B.F. Goodrich, and Merck.
Henry Goldman retired in 1917, and shortly afterward Samuel and Harry Sachs became limited partners. The company was still a family business, and a third generation consisting of Arthur, Henry E., and Howard J. Sachs were promoted to directorships.
World War I depressed financial activity until 1919. In its aftermath, however, came a strong economic expansion. Built primarily on large war-related capital investments, the expansion led many of the firm’s clients—H.J. Heinz, Pillsbury, and General Foods among them—to return to Goldman, Sachs for additional financing.
Opportunities in the Post-Depression Era
The company’s expansion continued well into the 1920s. Goldman, Sachs, eager to take advantage of the promising economic climate at that time, formed an investment subsidiary called the Goldman Sachs Trading Corporation. The new company expanded rapidly. But in the fall of 1929, Goldman Sachs Trading, like many other companies, fell victim to a crisis of confidence that forced the stock market into a devastating crash. By 1933, the investment subsidiary was worth only a fraction of its initial $10 million capitalization.
The company’s recovery from the Depression was slow, but by the mid-1930s, the commercial-paper and securities businesses again were highly profitable. During this period, Sidney J. Weinberg, an “outsider” in the family business, assumed a leading position within the firm. Starting out in 1907 as a porter’s assistant making $2 per week, Weinberg rose quickly at Goldman, Sachs. In 1927, at the age of 35, Weinberg became only the second outsider to be made a partner. Weinberg was known for his diligence and for his attention to detail.
In the aftermath of the 1929 stock market crash, Congress passed the Securities Act of 1933. This act created the Securities and Exchange Commission, which required that every investment be accompanied by a detailed prospectus. These often contained confusing small-print passages. As a conservative and practical securities dealer, Goldman, Sachs worked to reduce investor confusion by providing concise information in common language.
Goldman, Sachs also began a securities-arbitrage business in the 1930s under the direction of Edgar Baruch and, later, Gustave Levy. Meanwhile, the firm continued to expand by taking over other commercial-paper firms in New York, Boston, Chicago, and St. Louis. The firm subsequently engaged in a broad variety of investment activities, including new domestic and international share offerings, private securities sales, corporate mergers and acquisitions, real estate financing and sales, municipal finance, investment research, block trading, equity and fixed-rate investment portfolios, and options trading.
During World War II, Sidney Weinberg was placed on leave to serve on the government’s War Production Board. With virtually all U.S. industry under special government supervision, many of Goldman, Sachs’s activities were supplanted by government agencies; investment capital was raised through instruments such as war bonds, which were sold to individuals.
Goldman, Sachs did not fully regain its prewar momentum until several years after the war ended, which was a time when American industry and the economy in general experienced unprecedented growth. Intimately involved in this economic expansion, Goldman, Sachs recruited hundreds of new employees from leading business schools and launched many new activities in finance and investment.
Sidney Weinberg was called into government service again during the Korean War, serving with the Office of Defense Mobilization. His absence, in part, precipitated the creation of a management committee intended to decentralize the decisionmaking process. Gus Levy, who later became president of the New York Stock Exchange, was its first chairman.
At Goldman Sachs our culture is very much in evidence, helping us attract and retain the best employees and clients. Goldman Sachs’s commitment to its clients, teamwork, integrity, professional excellence, and entrepreneurial spirit has its beginnings in 1869 with Marcus Goldman. At the core of our business remains our commitment to our clients, which is embodied in our fourteen business principles. Our business principles are a consistent measure for evaluating recruits and employees. To maintain our competitive edge and meet the high expectations of our clients, our culture continues to evolve. Goldman Sachs has made a commitment to creating an environment that values diversity and promotes inclusion. The Goldman Sachs culture is what sets our company apart from other firms and helps to make us a magnet for talent.
Postwar Investment Strategies
Goldman, Sachs’s most important management of a new share issue occurred in November 1956, when shares of the Ford Motor Company were sold to the public for the first time. As co-manager, Goldman, Sachs helped market 10.2 million shares, worth $700 million. The firm set another record in October 1967, when it handled the floor trade of a single block of Alcan Aluminum stock consisting of 1.15 million shares, worth $26.5 million, at the time the largest block trade ever made.
Sidney Weinberg died in November 1969 and was succeeded as senior partner by Gus Levy. Goldman, Sachs began to attain its current position as a highly influential financial institution during the 1960s, and that position was solidified during the 1970s, as commodities such as oil grew to dominate the economy. Large new investments in domestic petroleum projects placed the company at a critical juncture. To some degree it was able to determine the complexion of the industry by channeling investment funds. Goldman, Sachs’s expertise in this area resulted in its management of several large energy-industry share offerings.
John L. Weinberg and John Whitehead were promoted to senior partners upon the death of Gus Levy in 1976. Some years later, Whitehead left the firm to become Assistant Secretary of State in the Reagan administration, and Weinberg became chief partner and chairman of the management committee.
Goldman, Sachs diversified late in 1981 by absorbing the commodities-trading firm of J. Aron & Company, which dealt mainly in precious metals, coffee, and foreign exchange. The company’s acquisition of Aron would give it a strong footing in South American markets, an area of later growth for the firm. In May 1982, under the leadership of co-partner John Weinberg—son of Sidney Weinberg—the firm took over the London-based merchant bank First Dallas, Ltd., which it later renamed Goldman, Sachs, Ltd.
Beginning in 1984, a new craze erupted on Wall Street in which investment companies engineered leveraged buyouts (LBOs) of entire firms. These buyouts were financed with junk bond debt, which was paid off with operating profits from the purchased firm or from the piecemeal break-up and sale of the firm’s assets. At the time, the practice could be highly profitable for firms willing to assume the associated risks.
Goldman, Sachs, however, preferred to stress its transaction work rather than to undertake higher risk LBOs. But the market crash of October 1987 reduced the profitability of transaction work. In addition, Goldman, Sachs began to lose clients to more aggressive investment firms, forcing it to begin efforts at downsizing and reducing overhead. Several hundred employees would be laid off through the end of the decade.
In early 1989, in an effort to retain its partnership status in the face of growing corporate competition, Goldman, Sachs elected to seek capital to expand its merchant-banking activities. With seven insurance companies, it formed a ten-year consortium that infused the firm with $225 million in new capital. Structured like a preferred stock, the expanded partnership was similar to that undertaken in 1986 with Japan’s Sumitomo Bank when the bank purchased a 12.5 percent share of the brokerage house for upwards of $500 million. While entitled to 12.5 percent of Goldman, Sachs’s profits, Sumitomo, like the newer partners, would be prevented by federal law from having voting rights within the firm. Goldman, Sachs would continue to accept such equity investments into the next decade.
The company also created a holding company, Goldman Sachs Group, which, technically, was not subject to the capital requirements of the New York Stock Exchange. The firm also began to spin off several subsidiaries. Engaging in bridge loans, mortgage insurance, and LBOs—as well as the creation of the Water Street Corporate Recovery Funds, a $500 million fund dedicated to investing in financially troubled companies—the firm’s subsidiaries bolstered the company’s profits but also caused lower bond ratings from Moody’s and Standard & Poor’s. Other changes in the company included the 1990 introduction of the GS Capital Growth Fund, a mutual fund targeted for the moderate-income investor through a minimum investment of $1,200. The introduction of this fund signaled the company’s efforts to stretch its market beyond the rich client base to which it had previously catered.
- Marcus Goldman moves to New York City and begins trading promissory notes.
- Goldman’s son-in-law, Samuel Sachs, joins the business.
- The firm expands into a general partnership, Goldman Sachs & Company.
- The company lists on the New York Stock Exchange.
- Goldman Sachs co-manages its initial public offering (IPO).
- The Goldman Sachs Trading subsidiary falters after the stock market crashes.
- The firm co-manages the IPO of Ford Motor Company.
- The company handles the floor trade of a block of Alean Aluminum stock—the largest block trade ever made at the time.
- Goldman Sachs absorbs the commodities-trading firm of J. Aron & Company.
- London-based First Dallas Ltd. is acquired.
- A federal appeals court rules that Goldman Sachs can no longer advise corporate clients in bankruptcy organization.
- The company goes public and adopts the name The Goldman Sachs Group Inc.; Henry Paulson, Jr., becomes sole chairman and CEO.
- Subsidiary Goldman, Sachs & Co. becomes one of the largest market makers in the industry.
International Expansion in the 1990s
Goldman, Sachs began the 1990s with a boom, reporting a record pre-tax profit of $1.1 billion in 1991 and paying out end-of-1992 bonuses of 25 percent annual salaries to employees. By 1993, the company had become one of the most profitable in the world, with pre-tax earnings of $2.7 billion. Some of this gain could be attributed to its successful offering of Japanese securities to U.S. investors as other than foreign exchange instru ments, as well as the investment banking firm’s expansion of its markets overseas. The firm experienced rapid growth by participating in several overseas investment projects, acting, for example, as a global coordinator in Finland’s Neste Oy oil company in 1992. However, some markets, such as China, remained volatile due to differing political and cultural climates. And in a venture in the former U.S.S.R., the company worked with a government official who unfortunately lost his political influence during the changes in the Russian government at that time. The company closed its Russian office in 1995, although interest in rekindling its involvement in that country’s fluctuating financial markets would resume in mid-1997.
While Goldman, Sachs’s charted record profits between 1991 and 1993, there were setbacks for the company later in the decade. In 1993, a federal appeals court ruled that an investment banking firm could no longer advise a company with whom it had a business relationship in bankruptcy proceedings. This decision, issued as a result of Goldman, Sachs’s representation of client Eagle-Picher Industries in Chapter 11 proceedings, signaled the end to a lucrative area for large investment banking—the advising of corporate clients in bankruptcy reorganization—that netted Goldman and similar firms over $100 million a year.
The crash in the market price of Treasury and other bonds in 1994, as well as the drop of the U.S. dollar in foreign markets, found Goldman, Sachs laying off more employees by mid-decade. More serious, however, was a mass wave of “retirements” by almost 50 of the firm’s veteran partners, including firm chairman Stephen Friedman. Due to Goldman, Sachs’s rapid expansion in the early 1990s, partner relationships had become strained. As discontented partners left the company, they were expected to take their much-needed equity with them, forcing the firm to find $250 million worth of new capital. By mid-1994, the company had named 58 new general partners, a record for the company; announcements of a new wave of layoffs quickly followed.
Fortunately, the bull market that had been in place on Wall Street since August 1982, as well as a stronger bond market, helped to stabilize the firm, growing its profits to replace the capital lost due to departing partners. Cost cuts and an internal restructuring further buoyed the firm.
Firm Pursues a More Aggressive Strategy
By 1996, the company was back on track, posting a pre-tax profit of $565 million for the first quarter. By mid-March, Goldman, Sachs had led an investor group in the successful but much-contested purchase of New York City’s Rockefeller Center—dubbed the “greatest urban complex of the 20th century” for $306 million. In further efforts to expand its roster of small-scale investors, the firm also began to aggressively acquire other firms, including Liberty Investment Management, the United Kingdom-based pension fund manager CIN Management from British Coal, and Stockton Holdings’ Commodities Corp., located in New Jersey. The acquisition of such fee-based asset management firms helped to stabilize the company’s unpredictable trading business both in the United States and on international markets, allowing Goldman, Sachs to retain its leadership role in the securities and banking industry.
The year 1996 was also notable for several internal changes. A new class of “junior partners” was created in September—dubbed “partnership extension” by the company—in the hopes that such promotions would stem the tide of partner defections and retirements that characterized the beginning of the decade. The firm also voted to adopt a limited liability structure, effective in November. The conversion, while significant in that it changed the company’s 127-year structure as a partnership, was expected to have little impact on the way the company conducted its business. This prediction was borne out by the company’s year-end pre-tax profits of $2.7 billion—the second highest in company history.
Going Public in 1999
Then, in 1998, the company began toying with the idea of going public. After ditching its initial plans in September 1998—due to faltering global markets—Goldman, Sachs launched one of the largest financial services IPOs in U.S. history. In early May 1999, the company listed on the New York Stock Exchange, raising $3.6 billion. The firm sold off approximately 69 million shares, just under 12.5 percent of the company. It then officially adopted the name The Goldman Sachs Group Inc. and named Henry Paulson, Jr., as sole chairman and CEO.
Goldman Sachs entered the new century on solid ground. After the IPO, Paulson immediately set plans in motion to secure the company’s position as a major independent player in its industry. Goldman Sachs nearly tripled its employee count before making a series of job cuts in 2001. It also spent over $7 billion in acquisitions. Its most significant purchase was that of Spear, Leeds & Kellogg L.P., a leading market making firm. In 2002, this firm’s NASDAQ trading and market making businesses were integrated into subsidiary Goldman, Sachs & Co., making it one of the largest market makers in the industry.
During 2000, Goldman Sachs secured net earnings of $3 billion. The following year proved to be more challenging as both earnings and revenues fell due to weakening market conditions and the economic uncertainty caused by the September 11th terrorist attacks. During 2001, the company stood as the leading advisor in merger activity and was involved in eight out of the ten largest deals completed that year. The firm advised 46 percent of Japan’s merger activity and secured a position as Germany’s leading merger and equity offering advisor. It also was the top underwriter of all IPOs and common stock offerings throughout the year.
The company’s reliance on such activity, however, left it vulnerable to slowdowns. Indeed, in 2002 both IPO and merger activity faltered. In March, overall merger activity was down 42 percent over the previous year and just four IPOs had been launched in the United States from December 2001 to March 2002. As Goldman Sachs prepared for one of its most challenging years, its independent status came into question. The industry had seen a wave of merger and acquisition activity in past years that had created financial powerhouses that included Citibank, whose assets were triple that of Goldman Sachs, and J.P. Morgan Chase & Co., whose assets were twice as large. Rumors surfaced that unless the economy recovered, Goldman Sachs itself may be forced into a merger.
Paulson, however, maintained that Goldman Sachs would thrive on its own. He laid out the company’s strategy in a 2002 Business Week article, claiming, “We want to be the premier global investment bank, securities, and investment management firm. We want to have a disproportionate share of the business of the most important clients in the most important markets.” The article went on to report that in order to accomplish this, the company “must gain a lock on providing financial advice to marquee corporations, government authorities, and superrich individuals in the world’s major economies—the U.S., Germany, Britain, Japan, and China.” With its long-standing history of success and solid reputation behind it, Goldman Sachs may prove to do just that.
Goldman, Sachs & Co.; Goldman Sachs (Asia) Finance Holdings L.L.C.; Goldman Sachs (Asia) Finance (Mauritius); Goldman Sachs (United Kingdom) L.L.C.; Goldman Sachs Group Holdings (United Kingdom); Goldman Sachs Holdings (United Kingdom); Goldman Sachs International (United Kingdom); GS Financial Services L.P.; Goldman Sachs Capital Markets, L.P.; Goldman Sachs (Japan) Ltd.; J. Aron Holdings, L.P.; J. Aron & Company; Goldman Sachs Mortgage Company; Goldman Sachs Credit Partners L.P.; Goldman Sachs Holdings (Netherlands) B.V.; Goldman Sachs Mitsui Marine Derivative Products, L.P.; Goldman Sachs (Cayman) Holding Company; Goldman, Sachs & Co. oHG (Germany); Goldman Sachs Financial Markets, L.P.; GS Hull Holding, Inc.; The Hull Group, L.L.C.; SLK LLC; Spear, Leeds & Kellogg, L.P.; SLK Holdings Inc.; First Options of Chicago, Inc.
Credit Suisse First Boston Corp.; Merrill Lynch & Co. Inc.; Morgan Stanley.
Creswell, Julie, “Goldman Goes Shopping,” Fortune, May 10, 1999, p. 120.
“Goldman Sachs: After the Fall,” Fortune, November 9, 1998, p. 128.
“IPO Again,” Crain’s New York Business, March 15 1999, p. 34.
Lowenstein, Roger, “Goldman Sets Fund for Firms in Distress,” Wall Street Journal, April 16, 1990.
Raghavan, Anita, “Goldman Sachs Moves to Stem Staff Defections,” Wall Street Journal, September 24, 1996.
Serwer, Andy, “Will Goldman Go Pulic—Finally?,” Fortune, June 22, 1998, p. 188.
Spiro, Leah Nathans, “How Public Is This IPO?,” Business Week, May 17, 1999.
Swartz, Steve, “Goldman Sachs Gets $225 Million as an Investment from 7 Insurers,” Wall Street Journal, March 30, 1989.
Tarquino, J. Alex, “In Brief: Goldman Sachs Group Sells 69M Shares,” American Banker, May 4, 1999, p. 28.
“Wall Street’s Lone Ranger,” Business Week, March 4, 2002.
Weinberg, Neil, “Short-Term Greedy?,” Forbes, May 15, 2000, p. 170.
—updates: Pamela Shelton, Christina M. Stansell