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Goldman Sachs was founded in 1869 by Marcus Goldman. Early achievements included introduction of the use of commercial paper, thus helping entrepreneurs with a new source of funding; being invited to join the New York Stock Exchange as a member in 1896. Goldman was a major player in establishing the U.S. initial public offering market. It managed the largest deals of the early 20th century, most notably the Sears, Roebuck and Company IPO in 1906.

During the 1970s, the firm opened its first international office, in London. Goldman created a private wealth division in 1971 and a fixed income division in 1972.

Another milestone was pioneering the “white knight” strategy. In 1974, Goldman defended Electric Storage Battery against a hostile takeover bid from International Nickel, led by Goldman’s rival Morgan Stanley.
—via news.xinhuanet.com, 19 April 2010

In the 1980s, Goldman expanded into other markets with the acquisition of J. Aron & Company, a commodities trading firm. Over the next twenty years, Goldman developed expertise and a market presence in metals and energy commodities, including oil speculation, as a principal and an agent.

The 1999 Goldman IPO

One of the largest events in Goldman’s history was its own IPO in 1999after which

  • 48% ownership was retained by the partnership pool
  • 22% was held by non-partner employees
  • 18% remained with retired Goldman partners and two longtime investors, Sumitomo Bank Ltd. and Kamehameha Activities Association, a Hawaii school system

Merely 12% was sold to the public.

Also in 1999,

  • Henry Paulson became Chairman and Chief Executive Officer
  • Goldman acquired Hull Trading Company, a leading market-making firm

Goldman prospered

Mergers and acquisitions activity of note, from September 2000 – 2007 included:

  • acquisition of Spear, Leeds & Kellogg, one of the largest specialist firms on the NYSE
  • merger with JBWere, the Australian investment bank
  • introduction of full-service broker-dealer services in Brazil
  • taking an ownership interest in Burger King

Sizable profits made during the 2007 subprime mortgage crisis led the New York Times to proclaim Goldman Sachs “without peer” in the world of finance.

…until it didn’t

The firm’s viability was soon called into question as the financial crisis intensified in 2008. Venerable investment bank Merrill Lynch Pierce Fenner & Smith was rushed through a fire sale, to be integrated with the Bank of America. Shortly after, Goldman Sachs received Federal Reserve approval to transition from an investment bank to a bank holding company.

On Sept. 22 2008, the last two major investment banks in the United States, Morgan Stanley and Goldman Sachs, both confirmed that they would become traditional bank holding companies, bringing an end to the era of investment banking on Wall Street.  The Federal Reserve’s approval of their bid to become banks ended the ascendancy of the securities firms, 75 years after Congress separated them from deposit-taking lenders. 
—via news.xinhuanet.com, 19 April 2010

I found that paragraph profoundly moving.  I’m not crying for Goldman Sachs, although I do feel sad about Merrill Lynch. I feel sorrow reading of the demise of institutions that had seemed to be bulwarks of stability and integrity.

I would never have expected such an emotional, respectful description of their diminished stature by Xinhua, the Communist People’s Republic of China’s official English language news service. [Update 2018: I wrote this post in 2010. Over the past eight years, I learned a lot about the media and political economy, and the influence campaigns of state actors, be they American, Chinese, Russian, etc.]

Hindsight review

Goldman’s acquisition of Spear, Leeds & Kellogg should never have been approved by the SEC, regardless of whether or not it was a legally allowed transaction. The same can be said for Goldman’s acquisition of Hull Trading, Salomon Brother’s acquisition of PhiBro and numerous other instances of vertical integration in financial markets, especially during the 1980s and 1990s.

Spear Leeds was a prime broker. It was an intermediary, facilitating activity and improving liquidity in U.S. and global financial securities markets. Spear Leeds lent stock, for a fee. Borrowing stock is necessary prior to initiating short sales. It is preferable that stock lending and proprietary or other speculative trading activities be run by separate entities, else risk principal agent problems.

There is more, but others have described it better, and in far greater detail already.