FORTUNE — Becoming a household name has not been a good thing for Goldman Sachs (GS). Not long ago, few people outside Wall Street and the top tier of corporate America paid much attention to Goldman, other than to note how many former Goldmanites seemed to be concentrated in the upper echelons of the federal government and other seats of power. Then came the worldwide financial meltdown, and almost overnight, Goldman came to be invoked as a symbol of everything that had gone wrong.
Enter Steven Mandis, who worked at Goldman from 1992 to 2004 and is now an adjunct professor at Columbia Business School and a doctoral candidate in the sociology department. With public interest aroused in his former employer, Mandis has astutely adapted parts of his Ph.D. thesis into a book called What Happened to Goldman Sachs (Harvard Business Review Press, 381 pages). That’s a very Goldman move: The place teaches you how to seize opportunities when they present themselves. It’s the same kind of thinking that led Greg Smith to publicly resign from his position as a Goldman executive director on March 14, 2012, via an incendiary op-ed column in the New York Times (NYT). It made him a celebrity and netted him a substantial book contract.
Unlike Smith, however, Mandis is writing out of sorrow rather than anger, and trying to explain rather than exploit his former employer. He clearly has a lot of respect and affection for Goldman despite having been gone almost a decade, and seems to have a blind spot about how the general public perceives the firm. In his introduction, for example, Mandis muses, “It strains credulity to think that the firm’s culture could have changed so dramatically between 2006, when the firm was so generally admired, and 2009, when it became so widely vilified.”
But of course, that change in the public perception of Goldman has nothing to do with changes in Goldman’s culture. The change came as the public began to see Goldman as a too-big-to-fail firm, helped by government bailouts, that quickly began posting record profits and paying bonuses that were huge even by Wall Street standards while millions of Main Street Americans were still suffering.
Mandis’s book is a sober analysis of the changes that took place at Goldman as the firm transformed itself from a smallish partnership whose profits came primarily from serving clients into a worldwide colossus with public stock whose major profits come from trading. When you serve clients, the long term matters. In proprietary trading, long-term planning is, “What should we order for lunch?”
What happened to Goldman is rather simple: Incentives changed. From its founding in 1869 through 1986, the firm was a general partnership. This meant that every partner was responsible for all of Goldman’s debts. As a result, the firm was very, very careful about the risks it took. When any partner can be personally wiped out if the firm fails, he (there were few shes) wants to make sure that it doesn’t fail.
In 1986, Goldman became a limited liability company — a significant change. Partners’ capital in the firm was still at risk, but anything they owned outside of the partnership was safe.
A far bigger change came in 1999, when Goldman became a corporation with publicly traded stock. This structure let partners cash out by selling shares, as opposed to the partnership days, when Goldmanites couldn’t make significant capital withdrawals until they left the firm, and had to take their payout over a period of years.
“Being a small private partnership allowed Goldman the flexibility to make its own decisions about what was best in its own interpretation of long term, ” Smith writes. “Having various outside shareholders all with their own time horizons and objectives, combined with Goldman’s legal duty to put outside shareholders’ (not clients’) priorities first, makes the interpretation and execution of long term much more complicated and difficult.”
Mandis says he initially assumed that going public was what changed Goldman. However, he ultimately became convinced that “organizational drift” arising from the firm’s rapid growth starting in the 1980s played a major role in transforming Goldman from an organization that upheld what he calls an “ethical standard” of behavior to merely a “legal standard.”
I’m not sure that “ethical standard” actually existed at Goldman, which prided itself on being “long-term greedy” — but still greedy. And I’m not sure whether the sociological stuff matters to non-sociologists.
My quibbles notwithstanding, this is an informative and interesting book. People who don’t know what life in a big Wall Street firm is like will find the book enlightening. Mandis talks about how he and his colleagues were obsessed with work and sacrificed everything to get the job done. The Goldman environment he describes is insanely competitive. Even though Fortune recently named Goldman as one of the best places to work, if you want to become a big hitter at Goldman — why else go there? — you had best plan to subordinate your life to your job.
One of my favorite parts of the book is its eight appendices, which total roughly a third the length of the narrative portion. The appendices are extremely useful. They include an outline of Goldman’s history, and an 11-page list of “Selected Goldman Employees and Lobbyists with Government Positions (Before or After Goldman).” Then there’s the financial voyeur’s delight: the 10 pages of Appendix D that list the 221 Goldman employees who held stock when the company held its initial public offering on May 3, 1999. At the close of trading that day, the value of the shares owned by the lucky 221 ranged from $205,172,466 each for Hank Paulson and Goldman’s two other biggest fish to a mere $37,304,085 for each of 57 small fry from Abby Joseph Cohen to Yoel Zaoui. The total: a bit over $18.5 billion, for an average of $83,723,195 each. And that was almost 15 years ago.
Those numbers tell us what Goldman is about: making money. When Goldman was a private firm, its partners’ incomes and wealth were closely guarded secrets. Now that information is readily available. When the numbers were private, Goldman could credibly proclaim itself to be a noble enterprise that put clients first. But with its numbers public and its business changed, people can see Goldman for what it is and probably always was: a high-performing, high-powered greed machine.