THE GOLDMAN CULTURE

After twelve years at Goldman Sachs, 33-year-old Greg Smith decided he’d seen enough. He resigned because, as he put it, “The firm has veered so far from the place I joined right out of college that I can no longer in good conscience say that I identify with what it stands for.”

Let’s do what lawyers do best: distinguish him away and move on.

The Times op-ed describes Smith as former executive director and head of the firm’s U.S. equity derivatives business in Europe, the Middle East and Africa. After Smith’s public condemnation, CEO Lloyd Blankfein and President Gary Cohn sent employees a memo saying that he was one of 12,000 vice presidents out of 33,000 employees. He reportedly earned $500,000 last year, which would put him far down the Goldman food chain.

Analogizing to a big law firm, Smith would probably be the equivalent of a non-equity partner. That doesn’t make his observations irrelevant or wrong, but context matters.

As for what Goldman stands for, what did Smith think the firm was when he joined in 2000? An eleemosynary institution? It seems unlikely that the radical transformation he depicts occurred only after Blankfein and Cohn took over in 2006. After all, they rose to the top for reasons relating to the firm’s culture and values.

Case closed. Move on.

Any big law analogies?

Not so fast. If Goldman has accelerated in a particular direction, it’s not alone. In that respect, some parallels between trends at Goldman and the prevailing big law model are interesting:

– Management

At the top of Goldman, traders displaced traditional investment bankers. That bespeaks a shift from long-term thinkers to short-term profit-maximizers. Once in power, Blankfein (a former commodities trader) surrounded himself with “like-minded executives — ‘Lloyd loyalists,’” according to the Times in 2010.

Transactional attorneys have similarly risen to lead many big law firms. Along the way, they have absorbed the business school mentality of corporate clients.  Dissent is not always a cherished value.

– Resulting culture changes

Goldman’s determination to represent all sides of a deal recently became the subject of Delaware Chancellor Leo Strine’s highly critical opinion of the firm. Likewise, large law firms have perfected techniques to maximize their representational flexibility. Those techniques have been essential to the remarkable growth that many firms have experienced.

– Metrics

Goldman’s leverage ratio is stunning: 442 partners out of more than 33,000 employees. As a group, large law firms have pulled up ladders, widened the top-to-bottom range within equity partnerships, and doubled attorney-to-equity partner leverage ratios since 1985.

– Partner Wealth

Goldman’s partners are famously rich. Many big law equity partners now enjoy seven- and even eight-figure incomes previously reserved for media celebrities, professional athletes, corporate CEOs, and — yes — their investment banker clients.

Yet the most important question is mission. Smith’s op-ed suggests that Goldman had become focused on squeezing money out of clients. Last year, The Wall Street Journal wrote about “Big Law’s $1,000-Plus an Hour Club” — senior partners who command four-figure hourly rates from clients. It quoted Weil, Gotshal & Manges’s bankruptcy leader Harvey Miller: ”The underlying principle is if you can get it, get it.”

A year earlier, Miller was resisting discount requests from the court-appointed monitors in the Lehman and GM bankruptcies:

“If you had cancer and you were going into an operation, while you were lying on the table, would you look at the surgeon and say, ‘I’d like a 10 percent discount’? This is not a public, charitable event.”

(Miller’s concluding line was ironic. At the time, his firm had already billed $16 million for the GM bankruptcy, which “public” taxpayer money was facilitating. Through January 31, 2012, Lehman ran up a $383 million tab at Weil Gotshal. Meanwhile, Weil recently reported average profits per partner of more than $2.4 million — an all-time high.)

Attitudes such as Miller’s are pervasive. It’s easy to single him out because he’s been publicly blunt about them. Greg Smith’s indictment was his way of revealing truth as he saw it. Sometimes statements from those at the top of large law firms allow the truth to reveal itself for all to see. Often, it’s not pretty.

6 thoughts on “THE GOLDMAN CULTURE

  1. Thank you for putting Greg Smith’s comments in context. Understanding his standing at Goldman is valuable.

    I also appreciate your analogies to BigLaw. Years ago I was representing the agent bank in an LBO arranged by Merrill Lynch. Merrill was putting equity in the deal and also a bridge loan in anticipation of the placement of junk bond. It was represented in both capacities by the same Wall Street BigLaw firm.When I inquired about the conflict of interest, I was laughingly told, “[BigLaw] considers it a conflict when another firm is involved!”

    Greed is so humorous.

  2. IMO, the days for these mega firms are numbered. They were constructed to exploit a business environment, e.g., massive, multi-year litigation and massive transactions, that no longer exists on a sufficient scale to support the number of mega firms that formed during the boom.

    Clients don’t care what the Harvey Millers of the profession charge. Over the 3.3 years between Lehman’s bankruptcy (9/15/08) and the 1/31/12 accounting you cite, if Harvey Miller had billed $1000/hr for 2000 hours/yr (unlikely), he would have totaled roughly $6.5 million, or 1.6% of the $383 million total.

    That’s a rounding error.

    The other $377 million was billed by however many other lawyers Mr. Miller deemed necessary, probably at rates between $500/hr and $800/hr. Those are the people whom corporate counsel are increasingly being quoted as saying they’d no longer pay for. They’ll pay Harvey Miller his $1000/hr for a miniscule percentage of the job, and maybe a few of his top lieutenants, too. But when it comes to the 95% of the bill generated by grinding the heavy hours on such a project, they’re recognizing the value of having a lower-priced firm do as much of the grunt work as they feel safe with. What percentage is that? I don’t know, but the trend seems clear.

    So, fast forward a few years to where this has really taken hold, i.e., where clients tier their work to achieve a better balance between high-priced experience and judgment for the critical aspects, and solid lower-priced competence for the (relatively) more mundane tasks. Might today’s $383 million Lehman bill be more like $300 million? Or less?

    If BiggestLaw reaches a place where only its luminaries can command its nominal hourly rate, and otherwise serves as a project manager for a cadre of lower priced law firm subcontractors on a matter or case, can they survive with the highest cost structure imaginable? After all, Citi’s recent report on law firm economics was clear about expenses rising by 9% while revenue increased only 3% — despite two years of the most vigorous cost-cutting ever seen, including moving admin and support operations to low cost areas such as WV.

    How long will it take the Harvey Millers of the world to see the handwriting on the wall, decide to stop financing this staggering overhead, and depart BiggestLaw to set up boutiques consisting of a handful of fellow luminaries and a bunch of project managers? They’d skim the cream and operate in the stratified way the way clients prefer. And each luminary’s departure will make it easier for the next one.

    When I’ve offered this view, the rebuttal is usually a form of “There will always be big cases and big transactions that require the headcount and horsepower of BiggestLaw.” True, but how many will there be, relative to the number of firms who need such big matters to survive?

    Just as the aging and imminent retirement of the Baby Boomers means that, relative to declining demand, the US now has too many construction companies, furniture retailers, and others who rode the crest that has now broken, there are now too many lawyers and firms relative to declining demand.

  3. I wouldn’t be too worried about Weil Gotshal or a handful of other London and NY-based firms, but there are plenty of other large firms that I suspect are finding that the expenses of a global reach are huge, while the amount of work that requires such a firm and is able to pay the rates for it is finite and subject to increasing competition. Many lawyers may have an increasingly difficult time operating in that legal market.

    To piggyback on some other discussions, it is not so much what the PPP or the gross revenues of a firm is, it is what you, as an individual, would make if you were there. A mega firm might be great if you are in the top managment and compensated similar to the CEO of a company, and not so great if you are a practicing lawyer, even if you are practicing at a high level. Between the rising expenses and the squeeze on any partner who is not in management to send more cash up the chain, we may increasingly see partners leave the mega-firms to make more money elsewhere, something like a brain drain. And I think a brain drain is a much bigger problem for a law firm than a widget maker.

    Plus, as the prior poster says, and I forget which GC said it years ago, it is not the $1k an hour expert partners that concerned her, it was the $400 an hour junior associates.

  4. Mike OHoro is right. The hard-to-answer question is not why the top lawyers get as much as $1000/hour. They’re cheap at that price, and I wonder why they don’t double it. The question is why a customer would pay $500/hour for an associate to proofread the contracts or search through documents. Anybody know why?

    • That makes sense. Rather than bill $5000/hour for the partner, which sounds outrageous even if it isn’t, the partner bills $1000/hour for himself and requires 16 hours of $500/hour associate time even tho the client could hire $250/hour lawyers to do that part of the work, and even tho the partner actually pays the associates only $250/hour. Associates are like the overpriced xerox machine.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s