85 Broad Street
As the last major partnership on Wall Street, Goldman, Sachs had become one of the major players in the investment banking and securities industry, not only within the United States but internationally.
Goldman, Sachs & Co. has been a respected player in world finance for more than 100 years. While proving itself something of a cautious follower in an age of daring leveraged buyouts and corporate raids, Goldman, Sachs has moved aggressively into the asset management arena, where it has become the third largest investment firm. What Goldman lacks in bravado and innovation, it makes up for in prudence and surety.
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 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 & Company 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 Eastern financiers 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 audit 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.
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 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 which 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&mdashø return to Goldman, Sachs for additional financing.
The expansion continued well into the 1920s and created great demand for investment services. Goldman, Sachs, eager to take advantage of this new and promising market, 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, often containing 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. During that time, however, 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 decision-making process. Gus Levy, who later became president of the New York Stock Exchange, was its first chairman.
Postwar Investment Strategies Prove Pioneering
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, but 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, however, 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 10-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&mdash 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 signalled the company's efforts to stretch its market beyond the rich client base it had previously catered to.
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 companies 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 instruments, as well as the investment banking firm's expansion of its markets overseas. The firm experienced rapid growth in several overseas investment projects, including as a global coordinator in Finland's Neste Oy oil company in 1992, although 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. 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.
Despite Goldman, Sachs's record profits between 1991 and 1993, the company would find the decade contained its setbacks as well. 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, signalled 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 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 U.K.-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 U.S. and on international markets, allowing Goldman, Sachs to retain its leadership role in the securities and banking industry.
Nineteen ninety-six was also a year 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.
Principal Subsidiaries: Goldman Sachs International Limited (U.K.); Goldman Sachs (Japan) Corp.; Goldman Sachs (Asia) Limited (Hong Kong); Goldman Sachs (Singapore) Pte. Ltd.; Goldman Sachs (Australia) Limited; Goldman Sachs Canada; Goldman Sachs Finanz A.G. (Switzerland); Goldman Sachs Money Markets Inc.; Liberty Investment Management; CIN Management (U.K.); Stockton Holding Ltd. Commodities Group.