Money and Power Page 15
Early on in the deposition, Sachs offered an illuminating description of just how Goldman viewed an investment banker’s job circa 1948. “I think that the investment banker should be a man who, by reasons of his experience and his training and his knowledge, should be in a position to give sound advice to companies, issuers, on the intricacies of finance,” he said. “And he should be in a position, by reason of all these qualifications, to give sound investment advice to institutional or individual investors.” The “professional” aspects of the business had led investment bankers to serve on the boards of directors of their clients and to seek out “men who are trained in such institutions” as Harvard Business School. At industrial companies, he continued, “the problems are very real: The problems of merchandising, the problems of markets. There are constantly very real problems that are coming up, and in my opinion one can only have a better knowledge and judgment as to a company’s problems if you are in constant contact with them over a period of time as a director. I think it is preferable from the company’s point of view and from the investing public’s point of view.”
Sachs explained that Goldman was very much a new-business machine. “I don’t want to be facetious,” he testified, “but I will say this—we have members of our organization who devote themselves almost exclusively to ferreting out opportunities of doing new business, and I would also say that of course a major part of the activity of our partners, or many of our partners, is to originate or ferret out and get new business, and we all do it at one time or another.” While this seems like an obvious point—salesmen must always be selling, to paraphrase David Mamet in Glengarry Glen Ross—at this time on Wall Street a much preferred new-business strategy at many other firms could best be summarized as “waiting for the phone to ring” or for the business “to float in over the transom.” This was not Goldman’s strategy, and the firm used a series of offices outside of New York—in Chicago, in Boston, in St. Louis, and in Philadelphia, as well as having representatives in Detroit, Albany, and Buffalo—to keep in regular touch with businessmen in much of the country.
Needless to say, and despite the government’s allegations in the antitrust case, there was pretty stiff competition among the various investment banking firms for business. And Goldman lost its share, despite using its growing set of connections. Indeed, in an effort to show Judge Medina that Goldman could not have colluded with the other defendants to restrain trade, during Sachs’s cross-examination, Arthur Dean, his attorney at Sullivan & Cromwell, peppered him with questions about one failed underwriting after another. Remember that $75 million issue of Michigan Bell Telephone bonds from October 1948? “After the public offering price, they went down very substantially,” Sachs said. “A very unfortunate incident occurred there.” Goldman decided to market and sell the bonds right after AT&T had announced a $150 million bond deal at roughly the same time. Suddenly, there was too much supply and not enough demand. Many investors “sold out at a depressed price and lost quite a bit of money,” he said. There was a disastrous preferred stock offering for Pure Oil in August 1937, and another “very unsuccessful” $48 million bond issue for Bethlehem Steel, and a failed September 1948 preferred stock issue for Reynolds Tobacco Company.
Generally, though, through ongoing trial and error—and through friendships honed and burnished over many years—Goldman Sachs proved itself to be masterful at exploiting its corporate relationships and turning them into substantial profits over many years for the firm’s partners. Take, for instance, the firm’s long association with Merck, the big German drug company. Goldman’s relationship with Merck began after World War I, around 1919, when the Alien Property Custodian’s office had seized the German Merck family’s shares in the company and was “developing plans to dispose of those shares to American interests.” With the legal advice of Alfred Jaretzki, the senior partner of Sullivan & Cromwell, George Merck, the founder of the company, worked out a plan to divest his shares through a public stock offering, which also allowed the American branch of the Merck family to get more control of it. Jaretzki brought the deal to his firm’s best client, Goldman Sachs. In 1920, Goldman underwrote a successful preferred stock offering to bring the firm public. At the time, Waddill Catchings went on the board of directors of Merck (he would be replaced by Sachs in 1930). Merck remained a loyal and, as it grew, very lucrative client for Goldman.
Goldman’s relationship with the May Department Stores Company was also a long and fruitful one. Sachs joined the board of the company in 1919. As a result of that assignment, he made regular trips—two or three times a year—to St. Louis in search of business opportunities at May and at other important St. Louis companies. Along with the executives at May, Sachs had also become friendly with the executives at Kaufmann Stores—a similar upscale department store chain based in Pittsburgh—and run by Edgar Kaufmann. “It was always in the back of my head that the Kaufmann Store was a store very similar in type … to the May Stores, and that it was geographically situated so that it was a natural thing to bring the two together,” Sachs testified. For some ten years, Sachs had talked to Kaufmann about his idea of merging the two companies together. Before speaking with Kaufmann, Sachs had received the go-ahead from May, and so he knew May was interested in such a deal if he was able to interest Kaufmann. But Kaufmann had a son—Edgar Jr.—whom he wanted to have run the business and keep it independent, and so for the longest time Sachs’s idea went nowhere. “Well, they cannot pay me anywhere near what I am willing to take, I am sure,” Kaufmann Sr. told Sachs.
Some time later, Sachs heard that Edgar Jr. had been named an assistant curator at the Museum of Modern Art, in New York, and figured that the young man’s interests had changed. When Sachs arrived at the office that morning he told his colleagues, “Here is the chance to do this deal that I have been dreaming about because he won’t have that ambition anymore.” Sachs’s timing was perfect. There was general agreement that both sides would be interested in a deal if the parameters could be worked out.
A long negotiation ensued. “Figures were exchanged finally,” Sachs recalled, “were weighed in the balance, and, in conjunction with us and with protracted discussions, an equation was finally worked out to which the two men … agreed in so far as they could.” The deal was then brought to the respective boards of directors of the two companies. Of course, since Sachs was on the board of the May Company and Goldman was to receive a fee for its advice in crafting and negotiating the deal, Sachs recused himself from the board vote. He stayed for only the first part of the board meeting “in which I gave certain expression to my reasons for thinking this was a constructive thing.” Once both boards approved the deal, “[t]hen came our share of the work,” he said, “in seeing that all the mechanics were carried out correctly.” Goldman continued to advise May on other acquisitions as well as other financings but, Sachs testified, in the long history of the relationship between the two firms, it wasn’t until Goldman received its fee for the Kaufmann merger that the account had been a profitable one.
Turns out, this kind of thing was not atypical, a fact the government lawyers found hard to fathom. Sachs explained that often he and his partners would give advice in passing to company executives—free of charge—in anticipation of winning an M&A (mergers and acquisitions) assignment or underwriting in the future. These kinds of off-the-cuff conversations happened frequently, especially when the Goldman partner in question served on many boards at the same time, as did Sidney Weinberg and Henry Bowers. The compensation for serving on a board at that time was around fifty dollars a year. The government lawyers responded to these observations by wondering how Goldman could remain in business without getting paid for its advice. “From time to time, financing does take place with these companies,” he explained, “and we make every effort to retain the relationship that we have by giving them good advice, by being sound advisers. And then when it comes time for an issuance of securities, why, we hope to be favored with it, of course.”
Sachs made much of the idea that unless and until there was a “chink in the armor” of a firm’s relationship with its client there often was not much sense in trying to steal clients away. This didn’t mean there was any kind of tacit understanding between bankers about such things, he allowed, but rather that there was simply a well-honed sense that existing relationships between bankers and companies develop over many years and often involve close personal relationships so that it just often is not worth the precious time it would take to pry loose a potential client if there was not otherwise a reason to try to do so.
There were, of course, a number of examples where other firms tried to dislodge Goldman Sachs from its perch at a given company, only to have the Goldman partners—quite understandably—go to the greatest lengths to prevent that from happening. In one instance, in 1930, Sachs used all his muscle to prevent Dillon, Read & Co. from making inroads into Goldman’s—albeit at that time, apparently still unprofitable—relationship with May Department Stores. Dillon, Read had financed Commercial Investment Trust—now known as CIT, the large consumer lender—and was close to Henry Ittelson, the CIT CEO. (This was the same CIT that Henry Goldman had invested in after he retired from the firm.) Ittelson had started in business at May, and the May family was a big investor in CIT, which was also based in St. Louis at the time.
Five years later, in 1935, Sachs had to defend Goldman again from a rear-guard action by a competitor seeking to make inroads with Brown Shoe Company, another St. Louis–based client where Sachs was on the board. This time the incursion came from Stifel, Nicolaus & Co. Brown Shoe was considering doing a financing and had approached other underwriters about their interest in potentially leading such a deal for the company. “I think it was about this time that I jumped on a train and went out there,” Sachs said, “and used every effort to persuade the Brown Shoe Company to do business with us rather than with someone else. I might amplify that statement by saying that in the depth of the depression they were one of the concerns that were very restive in their relationship with us, and I at that time, and subsequently, and I think successfully, made every effort to keep their business.” In the end, Goldman and Lehman did the $4 million bond deal alone, without Stifel, Nicolaus.
In May 1951, Sachs took the stand after the government entered large swaths of his deposition into the court record.
Sachs considered himself “in a rather conceited way” a good witness on behalf of Goldman. He enjoyed watching Judge Medina up close and considered him “very intelligent,” in effect someone he thought Wall Street could do business with and therefore was worth betting on to do the right thing and find in its favor. “My own position, Sidney Weinberg’s position, our firm’s position was absolutely adamant from the word go,” he said. “I never for a moment was willing to listen to any question of a consent decree.… I took the position that the relationship between a banking house and its clients was of a quasi-professional nature. As I say, I would never listen to the question of any compromise.” He said that he and Weinberg used to tell the firm’s associates as well as bankers at other firms, “We will never submit to this.” Goldman, though, was prepared to continue fighting the government if Medina ruled against the industry. Not only would Goldman pursue an appeal, Sachs allowed, but he also said Goldman had asked its clients to testify on its behalf—and the clients had agreed to do it.
The antitrust trial against Wall Street lasted some three years, more than 309 courtroom days. The trial transcript ran to nearly 24,000 pages and contained nearly 6 million words. Some 108,000 pages were printed related to the case. To defend themselves, the seventeen firms spent millions on legal fees, estimated by the New York Times to be $6 million. (The government reportedly spent around $3 million.) First Boston alone spent $1 million on its lawyers; according to Walter Sachs, Goldman spent $700,000 for Sullivan & Cromwell—at a time when the firm’s total capital was around $6 million, a tidy percentage indeed. Goldman never considered settling with the government or discussing the possibility of signing a consent decree. Goldman, Sachs said, was “absolutely firm because we thought [settling] would be a mistake. We felt confident that having a highly intelligent judge, the question would be presented properly and clearly and he would understand, and that the result would be the result that, as we saw it, should have been.”
Goldman Sachs made a smart bet. Indeed, Medina ended up announcing his decision at a procedural hearing because he feared that his written opinion—at that moment nearly 80 percent complete—would leak out. So at the hearing, he took out a yellow legal pad and his fountain pen and sketched out his decision. He surprised the forty or so people in the courtroom that day. “I have come to the settled conviction and accordingly find that no such combination, conspiracy and agreement as is alleged in the complaint, nor any part thereof, was ever made, entered into, conceived, constructed, continued or participated in by these defendants, or any of them,” he wrote on his legal pad in throwing out the case. “Since there was no combination, the monopoly charges fall of their own weight.”
Needless to say, Wall Street breathed a collective sigh of relief that Medina had ruled in its favor. Despite the years of headlines and the huge number of documents produced, some of them unflattering, there would be no changes—zero—to the way investment bankers performed the business of financing the exploding postwar growth of American industry. As for Goldman, Medina found the firm pursued “a competitive policy which was in every sense of the term aggressive” and then found, explicitly, that it “was at no time a party to any scheme or plan involving deferring to any other investment banking house, or holding off because of ‘satisfactory relations’ between an issuer and any of the defendant firm or any other firm named or not named as an alleged co-conspirator.… On the contrary, there are indications that Goldman Sachs even transcended the bounds of reasonable competitive effort in its endeavor to get every piece of business it could possibly secure, within the limits of its personnel and its resources.”
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SACHS WAS CONVINCED that the trial had vindicated the investment banking profession, that its future was exceedingly bright, and that it would continue to attract the best and the brightest from the nation’s top business schools. “I think there’s a realization … that the investment banking community, the profession, performs a perfectly enormous service for American industry,” he said.
More to the point, he contended, in an argument familiar to modern ears, “the industry today earns every dollar that it gets,” an idea he put forth “without fear of contradiction.” “You have to maintain an organization year in and year out of highly trained experts,” he said. “[Y]ou have to pay selling commissions to your sales force.” He said much was made in the press about the seemingly high fees—“of four or five hundred thousand dollars”—an investment banker received for underwriting a deal, but that ignores that the banker has “paid selling commissions. They’ve paid printing expenses. They’ve paid for telegraph and telephone. They’ve paid for these highly trained men who’ve come out of the Harvard Business School, or I trust, out of the Columbia Business School, or the Wharton School—men who are career men, men who are highly paid.”
Sachs noted that after the Depression, graduates of Harvard Business School “turned away from Wall Street” and sought jobs instead in corporate America. “Now, of course, in the more recent active years, they’re coming back. We’ve gotten many of our most able men from the Harvard Business School. We get every year men from the top third. Many of them have stayed to become partners.” Others stayed at Goldman for a number of years and then went into other corporations, where they often showed loyalty to G
oldman, resulting in new business for the firm. “Needless to say, there’s friendship there for Goldman, Sachs and Company, because they got this training with us.”
He assumed Goldman would continue to attract the best and the brightest—men. “It’s a wonderful field for young men, it seems to me,” he said, “just as chemistry is a wonderful field and a lot of other things are wonderful fields. He told these young men, using a homely phrase that my uncle Henry Goldman [used]: ‘Money is always fashionable.’ That was one phrase, and the other was, ‘You must do what is fashionable.’ By that he meant that you must gear your financing to what is the order of the day.”
And that business would boom, with the next ten years being “enormously active years in investment banking.” Sachs said in April 1956, “[A]nd it’s easy to see why. You only have to read the daily press to see the enormous amounts of money that industry requires for the building of plants and for development.” But the boom would not be uninterrupted. “We’re sure to have that,” he continued. “I don’t believe—and I may be wrong—that we’re going to have a 1929, 1930 debacle or depression. But business surges up and business surges back somewhat. I don’t think there’s any doubt about that. [T]he greatest factor is the continued growth in population, and the growth in population means that more consumer goods are wanted, and if more consumer goods are wanted, you’ve got to build factories to produce those consumer goods. It’s just as simple as that, it seems to me.” He said the “reason for 1929 was easy to see—[t]here was cheap money, and it was profitable from a tax point of view for people to create debt. Now, you go along that road up to a certain point, but that takes care of itself in a certain way, because if your debt, in relation to your assets, gets too high, you have to take another route.” At that end of World War II, Goldman had more equity capital—$6.5 million—than all but seven other investment banks. Merrill Lynch had the most capital—$11.4 million—followed by Wertheim & Co., with $10.6 million, and Loeb, Rhoades, with $10.3 million. Lehman Brothers had $9.9 million; Bear Stearns had $6.9 million, just above Goldman. After Goldman on the list was Lazard Frères & Co., with $6.447 million. Morgan Stanley, twenty-sixth on the list, had $2.9 million of its partners’ capital in the firm. Sachs had a view about how Goldman would capture more of the pie. Sachs’s aim, essentially, was to find companies where competitors did not already have a toehold and then provide the best-quality service possible, ensuring the firm would have the best chance of winning business and then repeat business. “Industrialists naturally go back to banking houses that have done a good job …,” he said. “If you have a lawyer or a doctor that has served you well, you’re not going to go around and have one man compete against another. You’re pretty apt to go back to the same lawyer. You’re pretty apt to go back to the same doctor. And in the same way, you’re pretty apt to go back to the same banker.” At the same time that Goldman “tried to keep our own fences well mended,” he said, it tried to exploit weaknesses at other firms. “We are constantly on the look-out for weaknesses.”