Greed is good;

Even merchant bankers have never seen money-making like it. This week the 190 partners at Goldman Sachs decide whether to do a deal that could earn each of them up to $100m
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BIG BUCKS are not big enough to describe the profits made recently by Goldman Sachs & Co, the Wall Street investment bank. It made a record $1bn in just three months last winter; and last year's $3bn profit was bigger than any of the other big hitters on Wall Street. By their profits they are judged, so Goldman Sachs is currently considered the best in the business.

Goldman Sachs is good at keeping its secrets, but the one it can't keep completely is how much it pays its top dogs. During the first weeks of the Labour government, a speculative story suggested that Gordon Brown proposed a punitive tax on the prodigious bonuses that are common now in the City of London. "Chancellor to tax six-figure bonuses", said the headline. "Just as long as he doesn't touch seven- figure bonuses ..." chortled a wit in Goldman Sachs's office in the old Daily Telegraph building in Fleet Street.

Revise that to read eight figures, or even nine. Goldman Sachs is the last great banking partnership, and the 190 partners who own it are to decide whether to sell shares in all or part of their banking business. If they sell the whole firm, which they valued last week at no less than $35bn (pounds 21bn), they can expect to own shares worth an average $100m each. It will be the climax of the biggest bonanza in the history of American capitalism.

The fateful meeting begins this Friday at an executive resort on the banks of the Hudson River in New Jersey, known as the Palisades Conference Centre. Each of the 206 bedrooms is equipped with its own PC (the place is owned by IBM) and the two dining rooms are open 24 hours a day - presumably to accommodate both sides of an argument.

Preliminary discussions among the senior partners have been private, but the argument for going public is familiar: Goldman Sachs has capital of $6.3bn and, successful as it is, it needs to raise much more if it is to compete with the other big Wall Street investment banks, such as Merrill Lynch, which are already public companies and can count their capital in tens of billions. Moreover, there is no better time to take the bank to market. Prices are so high and the demand for new shares so great that the senior partners will get more moolah than they ever dreamed of.

Opposition comes from the junior partners, who would prefer to accumulate larger shares for themselves before they sell out (their share grows with their bonus every year). They are in a minority. But a simple majority is not enough; a consensus has to be arrived at.

The partners will drive the 12 miles north of the George Washington Bridge to the centre this Friday, and they will stay on through Saturday before returning to their lavish homes in prosperous, arboreal small towns in Connecticut, or their second homes in the Hamptons on Long Island. Their wives are used to the wait; Goldman Sachs is legendary for the hours its employees put in.

Forty-four of the 190 partners will have flown in from Europe; 38 of them work in Fleet Street, including the economist Gavyn Davies, who was a candidate for the governorship of the Bank of England, and Peter Sutherland, who transformed himself astonishingly from being a faceless attorney-general in a passable government in the Irish Republic to chairman of Goldman Sachs International.

The London partners will be influential in deciding whether there is a strong enough consensus in favour of a sale. A basic rule of market trading is that punters should not try to get in at the bottom of the market or get out at the top. Goldman Sachs might be about to succeed in getting out at the top.

The top defies experience. In mid-1982 the Dow Jones average of share prices on Wall Street stood at less than 1000, and bears believed it was heading for 500. Last Friday it closed at 9038, and that was down from a record 9200 in May. The index is the sharpest symbol of a phenomenal period in the history of American capitalism.

More people have become seriously rich in the past decade than ever before. As time goes by, an ever-smaller proportion of the investors has any experience of a bear market in which prices fall. Waves of new investment force the market onwards and upwards, defying all logic. A shrewd Wall Street analyst tells me: "It's like mass hypnosis."

And these investors, many of whom chose the stock market as their means of saving for a pension, like investing in the banks that profit from their trading. They pile into the shares of similar banks, such as Morgan Stanley and Merrill Lynch. If the partners do leave the Palisades Executive Conference Centre having established a consensus in favour of an Initial Public Offering (IPO), they can be confident of plenty of buyers for their shares. The past three years have been a wonderfully fruitful period for investment banks.

Critics of international finance, especially on the left, say this is a dangerous illusion - that the trouble with investment banks specialising in market trading is that they are, in a very real sense, the ultimate service industry. They don't make anything; it's all paper. Goldman Sachs would reply that what they make is money. The firm operates according to 14 commandments - they call them business principles - and the ninth states: "Profits are a key to our success ... profitability is crucial to our future." They mean it; they always have done.

Like many investment banks on Wall Street and in the City of London, the firm was founded by a German immigrant. Marcus Goldman, who had arrived in New York from Bavaria, started in 1869 buying and selling what is known as commercial paper. The business was basically like Shylock's at the Rialto Bridge in Venice, except that he insisted on interest in cash. Goldman would lend a merchant $900 in return for a note with a promise to pay $1,000 at a future date. Goldman would then trade the promissory note like a bond or security, buying and selling when there was money to be made.

As at other merchant banks, business was done at large desks at which two partners sat facing each other (thus a partners' desk) in a room that was small enough to enable everyone to know everyone else's business. This intimate style of merchant banking, which encouraged teamwork, lasted over 100 years before the business began to proliferate. Profits were shared unequally, according to seniority, and when a partner retired he took his share of the firm's capital with him.

The system allowed generations of bankers to live in considerable comfort, although there were intermittent disasters to remind them that merchant banking is basically a risk business. For example, in the autumn of 1929 Goldman Sachs launched an investment fund with shares valued at $100. By 1932 they were worth $1.15. One of the advantages of the partnership principle is that young men learn about finance through the experience of old men.

In most places this method of education has gone out of fashion. At the time of the dramatic collapse of Barings Bank in 1995, after Nick Leeson's wild and unauthorised trading, Barings' oldest employee was not yet 60. Goldman Sachs, on the other hand, boasts on its website about the regular presence of a 95-year-old partner in the New York office, and teamwork is still encouraged.

Goldman Sachs developed a reputation as a Jewish house, just as Merrill Lynch was thought of as an Irish bank. It also had a reputation for competence; in the 1970s it was at the top of the second rank of Wall Street investment houses, and when the markets opened up during that decade it was well placed to take advantage of it: "They were at their desks at 6.30am, and you could tell on the telephone that they were top-notch professionals," says Roger Geissler, who was a whizz in the bullion market at the time.

The past 25 years have seen a financial revolution, which began with the open market in foreign currencies in 1973. Traditionally, investment banking had involved the sale of bonds to raise money for big business, and trading was confined to the stock exchange. But astute Wall Street banks soon realised that there was money to be made from foreign exchange, and from buying and selling precious metals like gold and silver on their own account: why make profit for a customer when they could make it for themselves? This new business was called proprietary trading, and it took off in the 1980s.

Computers provided speedy access to information, and satellite links reduced the time it took to complete a deal to seconds. New markets in obscure products like options and the canvas for trading exploded at a time when Goldman Sachs was run by an astute operator named Gustave (Gus) Levy. By the mid-1980s the firm was regarded by rivals as the top operator on Wall Street, partly because it seemed immune to the cataclysmic rivalries between bankers that brought down banks such as Lehman Bros, and divided others such as Salomon Bros.

"There was never a star system," says a former Goldman Sachs trader. "The idea of a partnership was that people cared how the firm was being run. And if you needed to get to the senior partners, you could. It was not so hierarchical." Bonuses at Goldman Sachs were based on percentages of the firm's overall profits, rather than on individual people's performance. That helped keep the team intact. Recruitment was no longer based on race or religion, though a degree from Harvard or Yale helped. Women partners were very scarce. From the outside, however, Goldman appeared monolithic: "It is an overbearing culture," says a Wall Street broker.

As the fashion moved from arbitrage to junk bonds to mergers and acquisitions, to expansion in the City of London and Europe, Goldman Sachs stayed in the thick of things, though it retained its own style. John Weinberg, a joint senior partner, wrote in 1988 to a whippersnapper from Shearson who accused Goldman Sachs of bad faith in a takeover bid: "In my judgment your letter is not worthy of a reply ... Moreover, your tactical manoeuvres can only contribute to the negative impression of our industry that many people have. I trust those tactics will cease."

Goldman Sachs made its own contribution to that negative impression in 1987 when one of its partners was charged with insider trading. True to its style, the firm stayed mum, but the shocking inference was that Goldman Sachs might be no different from Wall Street's other investment banks - just better at covering it up.

Last Monday Jon Corzine, the co-chairman and chief executive, broadcast a message telling staff that the firm's success makes this a good time to consider the merits of going public. "Be patient a little while longer," Corzine counselled, "and certainly don't believe anything you read in the newspapers."

The partners have discussed the issue seven times in the past 25 years. In 1986, Corzine had supported the idea. The last time it was discussed, however, in January 1996, he set the question aside. Deep divisions between the partners meant that there was no prospect of a consensus. The problem was that Goldman Sachs had had an uncharacteristically rocky couple of years.

In London, the firm had to pay $120m into the Mirror Group's pension fund after the death of Robert Maxwell. Proprietary trading led to accusations that Goldman's partners put their own interests above those of the clients - contravening the first commandment in the business code. There were some important defections and retirements which reduced the firm's capital. And to make matters worse, the bond market was rotten.

The decision to go public could be made out of strength or out of weakness, and early in 1996 it would have been weakness. The junior partners, who had won their prize in 1992 or 1994, would have received only a modest return from a share offering. They were not enthusiastic.

A little over two years later, the mood has changed utterly. Goldman Sachs's principal competitors are public companies with access to massive capital. This enables them to trade on a scale which Goldman Sachs is stretched to equal. One former partner, quoted in the Institutional Investor, says: "The firm sees a level of risk never seen before ... Having a risky business on top of a risky capital structure is not something they're comfortable with. That's why they'll go public as soon as the markets allow."

Corzine's new co-chairman - a partner named Hank Paulson - is said to be in favour of the flotation, and the operating and partnership committees have given the go-ahead for a vote next weekend. This is interpreted by students of the bank's politics as indicating a feeling inside Goldman Sachs that the partners will approve. The word "inevitable" is being used, for the first time. "The world has changed," says one of the partners. "We have to look at what we want to be when we grow up."

Last week, an internal valuation set the value of Goldman Sachs at $35bn, as much as 40 per cent higher than outside estimates. This valuation is based on forecasts for earnings that will exceed last year's records, and it would give the firm a market capitalisation $4bn higher than Merrill Lynch, which is the biggest broker in the US. The valuation is the basis for the calculation that the average partners' stake will be worth $100m, although it would be a great surprise if more than a fifth of the partners' equity was sold in the market.

There is opposition, of course, expressed in thunderous tones by a leader writer in the Financial Times: "Those who back a newly incorporated investment bank today will contribute to the less impressive social purpose of adding froth to the Wall Street bubble." But the Financial Times does not have a vote.

Unlike fear and greed, social purpose has never been a strong motive on Wall Street. The partners at Goldman Sachs seem to have vanquished fear. Now they can get on with the greed.

Additional reporting by Hilary Rosenberg, Roger Madoff and Juliana Ratner in New York.

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