Memo to Goldman: don't do it

Wall Street's finest firm risks everything that made it great if it goes public, says Michael Lewis
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IF WE know anything about Wall Street firms, we know that they are more likely to succeed if they are partnerships. For the past several decades Goldman Sachs has proved that well enough.

Goldman alone resisted as other firms submitted either to foolish arguments about the need for capital, or (more likely) to the quick buck. As a result, Goldman has prospered. Where it was once merely one of a gaggle of prestigious investment banks, it is now far and away the finest firm on Wall Street. The only reason for this is that it has remained a partnership.

The current culture of most Wall Street firms, in which employees are hired guns rather than shareholders, fuels a very big problem - that the short-term interests of the employee and the long-term interests of the firm are not one and the same. Many times a financier has to choose between them. Screw the customer or your colleague and your bonus will be bigger, even if the firm loses a great deal of business.

But why should an employee care about the long-term interests of the company? The firm is merely a vehicle for his own narrow ambition: when it has been milked he can move on.

The publicly owned Wall Street firm tends to become no more than the sum of its parts, each of whom demands to be paid at least as much as he has brought in. The institution is unstable and impoverished.

The partnership creates a different set of employee incentives. A partnership enables an employee to see his own narrow self-interest as in the company's long-term interests. If he behaves in the long-term interests of the firm, he may one day be given a piece of that precious company. What is more, the partners themselves become useful role models. Their willingness to delay their own gratification (by not selling the partnership to the public) is a moral example.

This weekend, Goldman Sachs may announce the end of its partnership and a plan to sell shares in itself to the public.

The speculation about the value of those shares has caused many financial mouths to water and heads to spin. A few months ago, it was estimated that the company could be worth $20bn (pounds 12bn); by May that number had risen to $25bn; most recently it was as much as $35bn.

Whatever the number, it represents a fantastic multiple of the book value - currently $6.3bn - Goldman has always used to value the shares of retiring partners.

Put another way, recently retired partners will feel screwed while partners who just joined will feel blessed. On 9 December last year after a career at Goldman Sachs, Jack Salzman left his partnership to start his own hedge fund. On 19 March, Kendrick Wilson left Lazard Freres to become a partner at Goldman. A man who devoted his career to Goldman arguably has added more value to the partnership than one who has just joined. Yet Mr Salzman would have been paid for his Goldman shares roughly one-fifth of what Mr Wilson may reap for his shares the moment the firm goes public.

This raises a couple of questions. The first is one of simple justice. The stock market will place a very high premium on Goldman Sachs. That value is chiefly the result of the work of men long gone from the firm who, through their willingness to sacrifice their short-term interests for the long-term glory of the partnership, created the firm's distinctive culture and brand. Why should that premium belong exclusively to the 190 partners who just happen to be willing to sell out? Why should they, of all people, reap value created by Goldman Sachs employ- ees over the past 129 years? Shouldn't the premium be spread evenly around all those who built the partnership?

The other question is: why do it at all? The word from Goldman is that the partners believe a public company is a better vehicle for building an empire, that the firm would prefer to acquire other firms with inflated Goldman shares rather than cash. This is more than a little reminiscent of the argument put forth by John Gutfreund in the early 1980s: that Salomon Brothers must go public to obtain the capital necessary to grow. Well, we all know what happened to Salomon Brothers. Just as we all know what will happen to Goldman Sachs.

q Michael Lewis is the author of `Liar's Poker', the best-selling account of Wall Street in the 1980s.

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