NEW YORK (CNNfn) - When Goldman Sachs went public this week, it ended a 130-year partnership that had become a Wall Street legend.
"Last year I know it was the most profitable privately owned company in America. And this includes Levi Strauss, the United Parcel Service. This includes household names. Goldman Sachs was more profitable than any of them," said Lisa Endlich, a former currency trader and vice president at Goldman.
That kind of success has made Goldman Sachs (GS) a Wall Street legend. In her book, Goldman Sachs: The Culture of Success, Endlich offers a rare look into a very private partnership.
"Being a partner at Goldman Sachs," Endlich said, "is the highest accolade on Wall Street. It is something people aspire to. It has allowed Goldman Sachs to recruit and maintain the very best people in the industry. Because there is nothing else like it."
Last great partnership
It was unique because Goldman was Wall Street's last great partnership. And because the partners owned the firm, they haven't had to report to shareholders, the press or the rest of the world, allowing Goldman to develop a culture of privacy -- even secrecy -- that many say was key to the firm's success. The first clue to that discretion is the number 85 -- the only marking on Goldman's headquarters just off Wall Street.
"It's a stone tower with really nothing flashy about it," Endlich pointed out. "No fancy art, no expensive, you know, Chinese rugs. I mean it really is very discreet -- and very pedestrian."
By eschewing the trappings of success, the message, she said, is, "We make money, the firm makes money. But don't you go spending and show some flashy lifestyle and attract a lot of attention because of it."
It's a philosophy started in 1869, when Marcus Goldman, a German immigrant, opened a short-term lending firm on New York's Pine Street. Two decades later he invited his son-in-law, Samuel Sachs, to join the company and Goldman Sachs was born.
The family firm got its first big break in 1906 when it took a cousin's mail order business public: Sears Roebuck (S). Until then, investors wanted stock only in companies such as steel and railroads, which had physical assets that could be sold if the company failed. Goldman devised a new way of valuing companies based on cash flow.
This was a "huge" shift in thinking of the stock market, Endlich said: "It changed Goldman Sachs' ability to underwrite and everyone else on Wall Street's ability to underwrite companies that did not have major physical assets."
With that innovation, Goldman Sachs became a top Wall Street firm until the crash of '29, when its highly leveraged investment trust collapsed, dropping more than 99 percent from its peak, losing $300 million. In today's terms, that loss would equal nearly $3 billion.
"It had no customers for the next five years. It made no money for 15 years," Endlich said. "It's almost unthinkable in today's terms that an investment bank could exist for 15 years without making any money. But they did."
30 years to rebuild
Sidney Weinberg, who was named senior partner in 1930, spent the next 30 years restoring Goldman's reputation, cultivating personal ties to America's top CEOs.
That strategy paid off as Weinberg persuaded Ford Motor Co. (F) to go public in 1956 in what still stands as the biggest initial public offering of all time, selling $650 million worth of stock -- nearly $4 billion in today's terms.
Goldman transformed the stock market again when a trader named Gus Levy invented block trading, allowing not just hundreds, but millions of shares to change hands instantly. Levy took over the firm in 1969, extending his aggressive style even to recruiting.
"Early in the morning before school started he would have high school seniors come in to the trading floor and play cards with him," Endlich recounted, "poker, bridge -- any sort of game where there's a strategy involved, the way that was remembering the cards, where he could watch people's minds and see how they thought and see how analytical they were. And those who were good players got hired as traders."
In the 1970s, Goldman made its next big gamble: going global. The move into international markets was hardly risk free. The costs of setting up shop overseas were formidable. And financial centers like London weren't eager to start sharing business with U.S. banks. But the decision to go global would prove pivotal to Goldman Sachs, transforming it from a great American bank to a worldwide powerhouse.
"Goldman Sachs is the No. 1 banker in London," Endlich said, "No. 1 banker in Europe in many businesses, and really has gone into China quite heavily."
The person who led Goldman's next innovation: Robert Rubin, now a familiar face as Treasury secretary in the Clinton administration, who made millions in risk arbitrage -- betting the firm's own assets.
"Bob spearheaded some of the more risky trading businesses, the proprietary trading businesses in which the firm did so well in the 1980s and the 1990s," Endlich said. "Those brought a lot more risk to Goldman Sachs and with it, an enormous jump in profitability."
Great growth, damaging setbacks
Goldman enjoyed phenomenal growth during the '80s, tripling in size, often earning a remarkable 80 percent return on equity.
But there were damaging setbacks. In 1987, partner Robert Freeman was arrested and later pleaded guilty to insider trading. In 1991, the firm was linked to illegal trading by the late British media tycoon Robert Maxwell.
"Goldman Sachs' name got dragged through the mud in this," Endlich said. "Goldman Sachs was written about in almost every major news publication in a negative light because of their involvement with Robert Maxwell."
Perhaps the biggest setback came in 1994: Goldman lost hundreds of millions of dollars on bad trades. A third of the partners quit, taking a third of the firm's capital with them.
"I believe that turmoil of 1994 scarred the firm in such a way that it believed it needed a steady source of capital, permanent capital, that something like 1994 should never happen again," Endlich said, "and that the way to keep something like that from ever happening again, one of the ways, was to take permanent capital from public shareholders."
But the decision to go public has been a difficult one, hotly debated by partners who feel the partnership structure -- and culture -- was key to the firm's 130-year success.
"There's no doubt in my mind," Endlich said, "that the firm's culture and its partnership are what have set it apart from the rest of the industry to this point, and without the firm's partnership it will become much more like every other firm in the industry."