Christian debt consolidation program

A peek inside the nation's most powerful investment bank

Goldman Sachs Co-chairman Jon Corzine took the podium at the Doral Arrowwood Resort in Rye, N.Y., with the air of a country preacher mounting his pulpit. It was a gloomy day in January 1995, and Goldman Sachs, Wall Street's last major private partnership, was coming off the first money-losing year in its 129-year history. In October of 1994, Corzine's predecessor had unexpectedly resigned, and 38 of the firm's 160 partners had "gone limited" the in-house term for retirement, taking substantial chunks of capital with them.

A devout Methodist born in a central Illinois hamlet called Taylorville, Corzine has a broad-shoulder farm boy's build and a thick, brown beard that defy the stereotype of a silk-stocking investment banker. Despite his unassuming appearance, he speaks and acts with the brash self-confidence of a Wall Street-style master of the universe. He flashed a slide on the projection screen that had originally read, "We can make $8 billion pretax in five years." But Corzine had marked a line through the numeral 8, replacing it with a 10. The corrected line read: "We can make $10 billion pretax in five years."

Today, Goldman Sachs is regaining its claim to being America's most powerful and most profitable full-service investment bank, thanks both to a protracted bull market and to 51-year-old Corzine's leadership. Corzine's most recent coup came June 15, when he announced Goldman's decision to go public. An initial public offering (IPO) will provide huge personal windfalls to the partners and give Goldman the additional heft it needs to compete in the nation's rapidly consolidating financial sector.

Yet, as interviews with Corzine and other insiders confirm, the story lost amid the media hoopla surrounding the IPO announcement is how close the firm had come to unraveling four years earlier. The tale of Goldman's comeback following its 1994 crisis offers a revealing glimpse into how Goldman hopes to operate as a publicly held corporation.

With over 11,500 employees and 38 offices in 20 countries, Goldman Sachs's influence extends from its shiny glass head quarters at 85 Broad Street in lower Manhattan to the White House, the Far East, Europe, and Latin America. Former Co-chairman Robert Rubin has been called the most powerful Treasury secretary since Alexander Hamilton. The firm's recently signed senior adviser on Japan is former Vice President Walter Mondale. Other firm members have held or currently hold key posts at the Federal Reserve Bank, the World Trade Organization, the Defense Department, and the State Department. Goldman partners have advised governments from Mexico and Canada to Kuwait and China.

But Goldman's main mission is making money, and lately it has been doing so like never before. In 1997 the firm ranked first in IPO underwriting, second in merger and acquisition advisory, third in stock underwriting, and third in investment-grade debt underwriting, according to Securities Data Co. The trade publication International Financial Review named it the 1997 financial-derivatives house of the year. Through the first half of 1998, Goldman boasts over $9 billion in pretax profits, and it is on track to hit Corzine's five-year, $10 billion target by the end of September--16 months ahead of schedule.

Above the fray. To put that achievement in perspective, go back to a similar period of prosperity in 1993. The Dow Jones average was climbing to a then unprecedented height of nearly 3800; virtually every major Wall Street firm was riding the wave. Founded in 1869 by Bavarian immigrant Marcus Goldman, who once peddled promissory notes out of his top hat, Goldman Sachs still prided itself on an intensely loyal private-partnership culture that the firm believed put it on an intellectual and ethical pedestal. Goldman disparaged the star system in favor of teamwork; it refused to represent corporate raiders in hostile takeovers; and it published the founder's 14 guiding business principles (Principle No. 1: "Our clients' interests always come first") in every annual report and in-house phone directory.

But Goldman also was beginning to emulate some of the aggressive--and high-risk--tactics of its less-lofty-minded rivals. The firm was rapidly expanding its core business of investment banking, which is primarily an advisory service for blue-chip corporate clients ranging from Sears, Roebuck to Microsoft and AT&T. At the same time, it was branching into all sorts of merchant-banking functions, investing in real estate and the stock of more than 90 corporations--sometimes in competition with its own clients. In 1993, British authorities fined Goldman $256,000 for misdeeds involving the late media tycoon Robert Maxwell; the fine was a mere slap on the wrist, given the huge profits Goldman was making from bets on the financial markets through its proprietary trading accounts. "Things got out of control at that point," recalls a former Goldmanite. "We were making so much money in 1993, we thought the market would keep going up and the party would never end. Everybody seemed to be focused on managing revenues, but nobody paid much attention to managing costs. You could get just about any project approved. People were spending like crazy."

In 1994, the party temporarily went lights out for Wall Street bulls as the markets took a nose dive. Goldman reported $508 million in pretax profits for the fiscal year, but, after payouts to retired partners and to nonpartner equity holders like Sumitomo Bank and the Bishop Estate of Hawaii, it had a still-undisclosed net loss caused largely by ill-considered trades in foreign currencies and bonds.

A Marine Corps veteran who earned his business degree in night school, Corzine joined Goldman's bond department in 1975, helping to pioneer the use of futures and options to hedge trading risks. In 1986, he won fame and eternal gratitude within the firm for extricating Goldman from a short position in the U.S. Treasury bill market that threatened to consume more of the partners' capital. Now he faced the even more daunting task of filling a leadership vacuum at the top.

Throughout most of Corzine's tenure, Goldman Sachs had flourished under the stewardships of co-chief executives, including Rubin and Stephen Friedman, who took office as co-chairmen in 1990. After Rubin resigned to join the Clinton administration in 1992, Friedman ran the firm as sole chairman with the help of a six-member management committee called "the college of cardinals." Although Friedman later claimed he had planned his fall 1994 departure months in advance, his timing was terrible. "It was kind of a startling thing for Goldman Sachs," recalls a former partner who stayed to weather the storm. "We had never had a bad year relative to the competition. Then we got hit with a double whammy, with the chairman walking out and the partners having their first experience at losing capital."

Corzine's first objective was to restore morale by retreating to Arrowwood for a combination brainstorming session and pep rally. He reminded his fellow partners that the retirements of Friedman and 38 of their colleagues were not so unusual: The average retirement age at Goldman was 50 years old, and the firm could expect at least 25 partners to "go limited" in any given year. With that in mind, he turned to the whiteboard and wrote out what then seemed like the wildly optimistic goal of making $10 billion pretax in the ensuing five years.

But Corzine realized that getting Goldman back on top required more than encouraging words. Determined to avoid the mistakes of 1993 and 1994, he initiated a long-overdue cost-cutting program that reduced the firm's annual expenditures by 25 percent and laid off 12 percent of the nonpartner work force. He also instituted a formalized procedure for managing proprietary trading risks. In addition, Corzine invited his fellow partners to get more actively involved in charting the future direction of the firm by forming an 18-member partnership committee and an 18-member operations committee to supplement the college of cardinals. "One of the problems was that we had taken our success for granted," he now admits. "We had to be more vigilant."