Goldman's Partnership Is Bankrupt

What can that headline possibly mean? Bankrupt? How could that be, at a time when the firm just announced record results? 

What I'm referring to is the bankruptcy of the partnership culture at Goldman Sachs. Yesterday, the Financial Times reported that Goldman partners sold nearly $700 million of stock in the eight-month period following Lehman's bankruptcy -- even as Goldman was raising outside capital, increasing the public float by over 100 million shares, or more than 25%.

Although the firm is no longer a partnership, Goldman prides itself on retaining a strong ownership culture. The title "Partner Managing Director" remains -- PMDs are selected every two years in a tradition that is a holdover from the partnership regime.

The group cost of individual action
Selling part of one's stock holdings in a crisis is a rational act at the individual level, but it undermines the fabric of the firm by sending a negative message to one's colleagues and the firm's "limited partners" -- i.e., public shareholders.

Cashing out one's partnership interest in a period of firm adversity would have been impossible -- unthinkable, even -- under the watch of past senior partners Sidney Weinberg, Gus Levy, or John L. Weinberg. Here's how the Goldman partnership behaved in the face of previous Wall Street crisis that threatened its viability, according to Charles Ellis' history, The Partnership:

The failure of the Goldman Sachs Trading Corporation
When the Goldman Sachs Trading Corporation (GSTC) collapsed massively during the Great Depression, it ultimately cost Goldman $12 million -- the firm never sold a single share of its original interest in GSTC. This represented a significant part of the firm's partnership capital; in order to alleviate the impact on junior partners, the Sachs family covered partners' losses.

That behavior seems oddly quaint in an era when one former Goldman partner paid out $837,000 of shareholder wealth to a celebrity designer to redecorate his new executive office at Merrill Lynch.

This loss of a partnership culture isn't without spillover costs. Some observers have blamed the disappearance of the partnership on Wall Street (see table below) for the excesses that led to the credit crisis -- it was certainly a contributing factor, in my opinion.

Goodbye, partner

Goldman remains a superb firm, with a culture that emphasizes teamwork, salesmanship, client service and winning. However, Goldman's partnership culture is dead, finished off by an IPO that is barely 10 years old. The firm could take a lesson from one of its recent, large investors, Warren Buffett, who continues to treat Berkshire Hathaway's (NYSE:BRK-A) (NYSE:BRK-B) public shareholders as full partners … but I'm not going to bet on that happening.

The lesson for investors
The bankruptcy of Goldman's partnership culture simply nails home a lesson straight from another former partner (and remarkably successful investor), Leon Cooperman:

We are not an investor in [investment banks]. I determined many years ago that if you want to make money on Wall Street, you work there; you don't invest there. They just pay themselves too well. I would rather look elsewhere for investment opportunities.

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