UK
Thain wants to mimic it at Merrill, but there are reasons to believe that Goldman’s method of making decisions isn’t really all that.
John Thain, Merrill Lynch’s newly appointed chief executive, is a graduate of the Goldman Sachs collegial management school, which harks back to the firm’s days as a private partnership.
Thain’s new home doesn’t follow this ethos though, and according to the Financial Times he thinks Merrill’s bankers aren’t chummy enough: “They don’t have the same teamwork [as Goldman] at the senior level.”
Given that Goldman appears to have sidestepped the sub-prime crisis, emulating its management culture might seem a good thing. But is decision making in the style of a hippy commune really the best thing for a business?
Goldman certainly has a few problems with its methods. The firm is renowned for its laborious recruitment process – sometimes candidates have to go through as many as 10 interviews, simply to ensure everyone has their say. And as any exhausted analyst can testify, assembling a pitch book is no fun when every banker and his dog has a say in the final product.
So should Merrill (and everyone else) be copying Goldman and going down the road of cosy collegiality? Or is it actually ok for one person to make a decision and suffer the consequences?
Goldman place a heavy emphasis on risk management and canvasses opinion across from the different levels, from management to control. If Merrill had paid a little more attention to the little people, perhaps they wouldn’t be in such a mess now.
I think it’s a matter of business models.
Goldman followed an evolution path that is now showing to be the good one. They started to be advisor, they moved to be principal investor, and they are now an asset management firm (rising and advising PE funds). They succeded in all theese roles. Merrill started as a broker (today the world biggest one), and is currently trying to be a principal investor, but failing due to CDO problem… I would conclude that Merrill is about 10-15 years less evoluted than Goldman… at the same time I see Goldman no more evoluted than some new entries like Macquarie or Babcock&Brown, that are showing to be more focused asset management firms, able to raise money from pension funds as well as Goldman, and even more.
The industry has changed in a way that you must take more risk to be competitive (O’Neil said that), so, finally, the decision on which is the best investment bank will not depends anymore from some elements used in the past, like brand awarness or league tables, but it will depend on which bank will generate higher returns for investors (pension funds) investing in their PE funds.. and Merrill is very good only in publishing research reports
Goldman’s asst management franchise has been in a terrible mess recently due to their quant approach ; they have limited success in equity derivatives and a few other flow-driven areas, so it seems that while they are very good in principal investment, the culture cannot create a success in all fields… The bottom line of principal invest remains impressive of course.
Also don’t forget that Goldman is the best proprietary trading house around, whose traders seem to be able to safely navigate any kind of markets. Goldman avoided the subprime mess largely owing to its prop desk shorting the market.
Goldman got in to the CDO business to underwrite deals and earn huge commissions, not to own the paper. From as far back as 2000 when I worked there and the CDO business was starting to take off, senior management was dead set against holding the paper. Indeed, if they got stuck with CDO equity than it was often marked at zero regardless of quality. They smartly hedged themselves in case disaster struck and lucky for them this time the hedges way outperformed the inventory of CDOs. So they definitely look smarter than the rest…