All the Devils Are Here [96]
In truth, however, Goldman badly needed to go public. Merrill Lynch, Lehman, and Morgan Stanley were already public companies, as were most other big Wall Street firms. Big, publicly held banks like Citibank and J.P. Morgan were Goldman competitors. Transformational deals were taking place that were reshaping Wall Street, and those deals used stock as currency. Wall Street firms that went public suddenly had what Charles Ellis, the Goldman historian, calls “substantial permanent capital.” They could take more risk. They could grow more rapidly. They were no longer reliant on the partners’ capital. Firms that didn’t go public would, in all likelihood, be left behind.
When Corzine became senior partner in 1994, he made it his mission to persuade his partners about the necessity of an IPO. In this he succeeded. The deal was originally supposed to happen in the fall of 1998, but had to be postponed, embarrassingly, when Goldman got caught up in the Russian crisis and the collapse of Long-Term Capital Management. Even when the IPO finally took place the following spring, it was not without internal turmoil. Shortly before it finally went off, Corzine was ousted in a palace coup, replaced by Paulson. (Although the change in leadership was announced prior to the offering, Corzine stayed on until the IPO was completed.) And John Whitehead, he of the famous fourteen business principles, wrote an anguished letter to all the Goldman partners: “I don’t find anyone who denies that the decision of many of the partners, particularly the younger men, was based more on the dazzling amounts to be deposited in their capital accounts than on what they felt would be good for the future of Goldman Sachs.”
The IPO was a critical turning point for Goldman Sachs. Over time, its culture did change, as the company—you couldn’t really call it a firm anymore—became focused on such measures as return on capital, stock performance, and growth. A firm where senior partners used to say “Trees don’t grow to the sky” began instead to talk about aggressive goals for return on equity. The trading side of the firm—for which “substantial permanent capital” was its lifeblood—eventually overwhelmed the investment banking side, in terms of profits, stature, and ethos.
And starting in the early 2000s, Goldman, having adjusted to life as a public company and having transformed itself into a money machine, went on a run the likes of which has rarely been seen in the annals of corporate America. Its 2003 revenues were $16 billion. They rose to $21 billion in 2004, $25 billion in 2005, and nearly $38 billion in 2006—more than double what it had been just three years before. Its market cap that year topped $88 billion. Somehow, Goldman always seemed to be in the sweet spot of every market. Somehow, Goldman always seemed to react to big market shifts faster than anyone else. Somehow, Goldman never seemed to make a wrong move.
But nobody could quite say how. As Goldman began generating most of its revenue from trading, it became impossible for outsiders to see how Goldman was making its money. Trading can mean a lot of things. It can mean acting as a market maker or trading for one’s own account—or both. It can mean treating clients fairly or “ripping their faces off,” as traders sometimes put it. It can mean trading plain vanilla bonds or peddling complex derivatives deals.