Sachs of dollars

Partners at the US investment bank may decide this weekend to take it public - a move that would make some $75m richer

A SUPER-swish hotel in the country-club zone of New York's Westchester County, the Doral Arrowwood, is trying to drum up its weekend business with a "Time for Two" package, featuring a "relaxing and romantic stay in sumptuous surroundings". This weekend it has at least 174 guests booked who know how to enjoy luxury. Relax, however, they will not.

This is a group almost entirely of men who together are worth more than the gross national product of many developing countries. They are the partners of Goldman Sachs, the most venerable of the world's premier investment banks. This is their annual get-together. Ordinarily, it should be a time for a celebration of the firm's latest triumphs and a few rounds on the Little Blue Monster, the hotel's famously challenging nine-hole golf course.

This year, circumstances are different and not just because the Monster is under a foot of slush. The partners have a decision to ponder so difficult it may reduce the toughest of them to jelly. Has the time arrived for Goldman, the last remaining great partnership on Wall Street, to sell itself to the public? The last time the firm confronted the issue was in 1986, and then the discussion became so fraught, sources said: "Guys cried."

It is a hard call for multiple reasons. Objective business considerations suggest that going public may be Goldman's only option if it is to remain a world banking power.

A more compelling consideration has to with dollars and cents. Avalanches of them, in fact. For the longest-standing of the partners, who for years have been taking quite modest wage packets relative to the rest of Wall Street in return for ploughing the bulk of their earnings back into its capital base, a trip to market would mean windfalls more spectacular even than a jackpot on the lottery. By most estimates, a partnership at Goldman is worth $25m (pounds 16.5m) on retirement. If the bank is sold, that figure could balloon overnight to as much as $75m and - this may be the decider for some - it would be instantly realisable.

The largesse would not confined to the US. Thirty-eight of these 174 plutocrats are based in Europe, of whom 32 work in Goldman's London offices in the former Daily Telegraph building in Fleet Street. Peter Sutherland, the former director-general of Gatt, would be a big beneficiary as chairman and managing director of Goldman Sachs International. Gavyn Davies, Goldman's high-profile chief international economist and a former adviser to the Labour Party, would be another.

If Goldman's partners are salivating a little today, it will not be over the pheasant on the dinner menu. But not everyone will be so enthralled. Partners only recently instated will have accumulated much smaller stakes, perhaps only of $1m, and will favour waiting for them to grow larger before the bank is sold. They want the jackpot, too.

And then there is the cultural cost. Founded by Marcus Goldman in 1869, Goldman Sachs is a special place precisely because of its partnership structure. Throw it away and a part of what the bank stands for, the foundation of its unique franchise, would be lost for ever.

Press-shy and notoriously conservative, Goldman Sachs is the archetype of old-fashioned investment banking. In the 1980s, when Wall Street was wallowing in merger mania, Goldman declined to represent any clients mounting hostile takeovers. Not for Goldman, the "Big Swinging Dicks" of Michael Porter's famed Liar's Poker, the book that portrayed the swaggering bond traders of Salomon Brothers. And even if its traders may qualify for the Masters of the Universe epithet coined by Tom Wolfe, it has never been done to boast about it. Locker-room talk about sexual conquests, so prevalent on other trading rooms floors, remains frowned upon at "white-shoe" Goldman Sachs.

It is an ethos that many attribute precisely to the partnership system. The theory, at least, is that it ensures a collegiate atmosphere among the troops and a powerful incentive for extraordinary labours. Becoming a partner - usually after about 10 years at the firm if you are lucky and deemed to be of the right, buttoned-down stuff - is the holy grail towards which everyone aspires.

"Once you are partner, it is like Christmas day every day for three weeks," says one analyst from a rival firm. Every day for 52 weeks might more like it, with annual earnings likely to top $5m in good years. Winning the partnership status also brings with it instant respect within the firm and a share of power in its decision-making.

Privately, though, some in the firm voice misgivings. The partnerships are few in number, and the competition to squeeze through the bottle neck to win them is savage. "It is an incredibly intense place to work," conceded one disaffected former employee who jumped ship last year before qualifying as a partner. "You could say it is more important to be intense - and to demonstrate that you are intense - than to achieve anything or even work hard." If you decide to take lunch at Goldman in a day that is likely to last from 7am to 10pm, you had better leave your jacket on the back of your chair.

Contenders for partnerships are labelled "pithy's" - partners in training. And by most accounts they are forced to suffer. Usually they are taken under the wing of an existing partner who becomes their mentor - or, in the firm's parlance, their "rabbi". The rabbis then proposes candidates to the other partners who will eventually take a closed-door vote once every two years on new inductees.

"Goldman is a polite society, where you have to be superficially friendly and courteous to everyone when really what you are doing is stabbling everyone else in the back," said one client of the bank.

Concern about the viability of the partnership structure was catapulted back to stage-centre in 1994, when the firm, like many on Wall Street, suffered catastrophic reverses. Thanks mostly to a dismal year in bond trading, profits collapsed to $508m from $2.3bn the year before. The shock was considerable. After taking the tiller as senior partner at the end of 1994, Jon Corzine, instituted a massive retrenchment programme to cut the worldwide workforce by 8 per cent. First-class travel was banned. Leases were ended on potted plants at its Manhattan headquarters. The damage was compounded by the retirement of more than 30 partners who had apparently lost their nerve about the firm's future.

"The firm's mentality changed for ever. The whole firm saw clearly a level of risk never seen before," a former partner told the Institutional Investor magazine recently. "They saw a level of retiring mid-and senior- level partners that was uncharacteristic. They saw that you can't run a multinational global business on partnership capital. Having a risky business on top of a risky capital structure is not something they're comfortable with."

"That capital structure, estimated at close to $5bn, falls into three categories. A little more than a quarter is supplied by the portion of the earnings of the general partners that are ploughed annually back into the firm. A second slice comes from limited partners, who have retired as general partners but who have maintained stakes in the firm in return for annual interest. Finally, over the last decade, Goldman has secured additional cash from a outside investors, notably Sumitomo Bank of Japan and the Hawaiian-based Bishop Estate.

The problem is that as a capital base it is both volatile and expensive. While there are conditions on how quickly retiring partners can withdraw their stakes, the exodus in 1994 could entail the draining of as much of 10 per cent of the firm's capital.

If a firm like Goldman means to remain in high-reward - but high-risk - business like fixed-income trading, it needs a capital base that is big and reliable. Meanwhile, high interest payments are owed yearly to Sumitomo and Bishop.

By contrast, Goldman's rivals that are public, like Morgan Stanley which went to the market in 1986, enjoy a permanent and relatively cheap source of funds through the issue of shares.

The supposedly stellar rewards of being a partner, meanwhile, also bear closer examination. While their club is still select, the numbers of partners have been expanding. That means that when profits are distributed, each partner's share of the cake is getting smaller. Further diluting their returns is the increasing con-

tribution to the capital base of the outside investors like Bishop and Sumitomo. An additional injection of funds came from Bishop at the end of 1994. And what of the bad years? Because they are personally liable for the firm's performance, a really disastrous set of results - say Goldman is struck by a rogue trader, for example - could conceivably result in partner's making net losses in a year. Mansions could be put up for sale.

"It is the personal liability issue that will make them go public," predicted the chairman of a competing bank last week. "With globalisation and ever- increasing risk, I just don't think that remaining a partnership is tenable. If they don't do it now, they will in the next two or three years."

To some degree, the pressure to go public has eased since the dark days of 1994. Last year, Goldman bounced back very nicely, returning a profit of $1.37bn before tax. Even its trading divisions, which were responsible for the losses of a year earlier, recovered their stride.

By the same token, however, it may be at such a moment that the firm should make a move. "When you've had a good year, that is a smart year to do something," commented another high-level Wall Street banker.

"This would be a very good time for Goldman to act - while they're in a position of strength."

Perrin Long, a veteran Wall Street watcher at Brown Brothers Harriman is among those who believe Goldman should take the plunge now while the stock market is still riding high. If it does, he suggests, they could secure a sale multiple of as much as 2.5 or even 3 times book value. "My belief is that if they go public now or before the end of June, you and I will be sitting here in a year and a half's time saying: "Jesus, Goldman was smart to go public when they did."

Mr Corzine himself voted to go public in 1986. What is more, his holding in the bank is thought to stand at about $50m. That would give him a prize of as much as $150m.

But if the mood turns towards a sale, debate may not remain genteel for long, as the newest partners voice their opposition. And they are a large contingent. More than half of the current partners were elected in either 1992 or 1994 and most of them in 1994. Their resistance could be dented, however, with a formula to sweeten their rewards with generous stock-option deals.

No final decision is expected from Arrowwood. But the way the wind is blowing there by the end of today will determine how the firm's three decision-making bodies, and eventually its all-powerful six-man executive committee, headed by Mr Corzine, finally fall in the coming few weeks.

The pamphlets advertising the special weekend romance package may even be sending a message to the Goldman partners. Time for Two it declares. If Mr Long is right about the multiple book-value welcome that is awaiting the firm on the market, it may also be time for two and a half, or even three.