Goldman Sachs

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Goldman Sachs: After the Fall (Fortune, 1998)

October 23, 2011: 9:30 AM ET

Editor's note: Every week, Fortune.com publishes a favorite story from our magazine archives. This week, we turn to an article from the November 9, 1998 issue that examines Goldman Sachs' failed attempt to go public (the bank eventually went public in 1999). The article highlights concerns related to Goldman's emphasis on its trading operations, which makes the bank particularly vulnerable to market swings. Based on Goldman's earnings announcement this past week -- the firm reported a $428 million loss for the third quarter partly due to trading losses -- it looks like it continues to face some of the same challenges. 

The failed public stock offering of Wall Street's last great partnership affords a rare look inside the amazingly profitable -- and secretive -- world of Goldman Sachs.

By Bethany McLean and Andrew SerwerGoldman Sachs - Henry Paulson and Jon Corzine

FORTUNE -- On the afternoon of Monday, Oct. 19, most of Goldman Sachs' 189 partners are to gather at the firm's New York headquarters for a hallowed ritual -- the biennial awarding of that ultimate badge of Wall Street achievement: a Goldman Sachs partnership. What will make this year's meeting perhaps the oddest in the firm's 129-year history is this: The meeting was never supposed to happen. As of two months ago, no one was ever to make partner at Goldman Sachs again -- because, as you'll remember, Goldman was supposed to go public right about now, meaning that the 50 to 60 men and women who are about to become members of this exclusive club would instead merely have become highly paid employees of another new corporation.

But of course Goldman's (GS) IPO, okayed by the partners in June, was scuttled, officially "withdrawn," in late September. Instead of a hallmark of the roaring '90s, which some had predicted it would be, the IPO became a high-profile victim of the financial firestorm that has swept across the globe. Goldman put off the deal because once the stock market crashed (shares of the big Wall Street houses crashed even harder), the numbers didn't work anymore. The deal would have valued Goldman at $28 billion (a number cited in a letter to the firm from Goldman limited partner and former co-CEO John C. Whitehead, which Fortune obtained) if, as once envisioned, Goldman sold stock at around four times book value. Post-September, Goldman stock might have brought a slight premium to book, valuing the firm at a mingy $7 billion, which would have left it far short of the swag the IPO was supposed to spread throughout the firm to its partners, limited partners (mostly retired partners with capital still in the firm), and other employees.

According to the firm's co-CEOs, Jon Corzine (rhymes with "sign") and Henry "Hank" Paulson, putting the IPO off "was a pragmatic decision." Says the bearded Corzine, with his trademark Cheshire Cat grin: "At the appropriate time we will revisit the matter. Now we have to move forward." But contrary to the blase nature of that statement, it is clear, based on interviews with Goldman partners, employees, customers, and Wall Street sources, that debating -- and then icing -- the IPO was a wrenching experience that has bruised the firm. It has spotlighted, and in some cases revealed, weaknesses both in Goldman's capital structure and in its mix of businesses. It created tensions between the firm's general and limited partners. And it heightened rumors already circulating on Wall Street about the rivalry between Goldman's investment bankers and traders in general, and Corzine and Paulson in particular.

See also: Goldman results: A gift to Volcker Rule proponents

One of Goldman's official reasons for going public was to "match our capital structure to our mission." That may sound like boilerplate, and it is, in part. Whitehead, for one, wrote, "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." Still, capital is a valid issue. Goldman, in fact, has a smaller equity base than either Morgan Stanley (MS) or Merrill Lynch ($6.6 billion at midyear vs. $13.8 billion and $11.7 billion, respectively). Yet both current co-CEO Paulson and ex-CEO Whitehead say that having less capital merely forces the firm to make better decisions. Competitors don't think Goldman suffers from a lack of capital. Says Donaldson Lufkin & Jenrette CEO Joe Roby: "I wish I could find a business where Goldman is capital constrained." More

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