Two Articles of Note

I saw two articles in the Wall Street Journal that I wanted to pass along. The first is from Susanne Craig who looks at how partners are selected at Goldman Sachs. This is Wall Street’s equivalent of being a “made man” in the mafia. Once you’re a PMD (partner managing directors), no one can mess with you. You’re even allowed to have three people killed. It’s one of the perks. Ok, I made that up, but still, it’s a sweet gig.

For years since Goldman’s founding in 1869, anyone who joined the firm and showed promise had a good shot of becoming partner. Until a couple of decades ago, the firm was much smaller and kept the number of partners to a minimum; in 1982 there were just 70.
The stakes for this year’s class are high. In recent quarters, Goldman has been posting impressive quarterly profits — $1.59 billion in the third quarter — and its stock is up 40% so far this year, eclipsing the 17% gain for the Dow Jones Wilshire U.S. Financial Services Index. As some other large securities firms have pushed to become global financial supermarkets, Goldman, the world’s No. 1 merger-advisory firm, has moved deeper into trading and investment banking. It has put more of its own money on the line both to trade and to invest in other companies, a move that has increased risk but beefed up profits.
Goldman’s partners have always viewed their firm as a cut above the rest of Wall Street. Mr. Blankfein, a hard-driving former gold salesman who took the top job at Goldman in June, likes to refer to an intangible secret sauce that makes Goldman smarter and savvier than its competitors. Although Goldman is known for the fat pay partners receive, Mr. Blankfein bristles at the suggestion that money-making is all that drives his partners and the firm’s selection process.
Successful partner candidates are expected to be “culture carriers,” he says. The firm encourages public service by partners, he says, and many partners have pursued that path, including former Chief Executive Officer Henry Paulson Jr., who is now Treasury Secretary. “Sure, Goldman partners make a lot,” Mr. Blankfein says. “But I can pay people a lot of money without going through this process.”

The other article looks at Wachovia’s future with Golden West. As you may know, I’m rather skeptical of this merger, and I’m not a big fan of most large mergers. In December when I decide on next year’s Buy List, Wachovia will probably be gone.
First, WB paid too much. I think the Sandlers wanted a way out, and they got the right deal from Wachoiva. The Golden West business model is extremely simple, yet I’m not sure how well it will be integrated into Wachovia. I still haven’t recovered from the Fifth Third/Old Kent deal, and that was six years ago.

Frustrated Wachovia officials insist the payoff from the Golden West purchase looks as promising as ever. “We go in with a little bit of a chip on our shoulder because we’ve got something to prove,” says Bob McGee, leader of the Wachovia integration team at Golden West, the second-largest U.S. savings and loan behind Washington Mutual. Wachovia also points out that this is by far the biggest deal of Mr. Thompson’s tenure, and the bigger the deal, the more investors tend to fret.
Supporters of the deal, including some institutional investors, argue Wachovia is being unfairly tarnished by comparisons with previous acquisitions that turned out to be disastrous, like the bank’s 1998 purchase of the Money Store, a lender to consumers with blemished credit histories, for $2.1 billion. The unit was shut down two years later. In contrast, Mr. Thompson has deftly handled the integrations of three major bank takeovers, most recently SouthTrust Corp., a Birmingham, Ala., bank acquired in 2004 for $13.7 billion, while improving customer service, supporters say.
“We’ve got a lot of faith in Ken Thompson and his team that they know what they’re doing. That’s why we’re sticking with the stock,” says William Hackney III, managing partner of Atlanta Capital Management, an Atlanta firm with $8.9 billion in assets under management, including about 1.2 million Wachovia shares valued at $67 million.
Softening in real estate is starting to show up in Golden West’s numbers. Through the end of August, loan originations declined 7.3% from a year earlier. While Golden West has a conservative record for underwriting loans, nonperforming assets and restructured debts rose to 0.41% of total assets from 0.28% in August 2005.

Posted by on October 13th, 2006 at 1:06 pm


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