Goldman Sachs at 150: Part 2 – Hubris (1929)

Cultural Philosophy and Risk Aversion:

• Lloyd Blankfein's 2007 stance of "constitutional pessimism" reflects a historical Goldman Sachs culture rooted in the 1930s Depression, where survival depends on anticipating that "every bubble bursts."
• The firm maintains a preparedness for cyclical downturns regardless of current profitability or market euphoria.

1914-1918 Schism and Resource Loss:

• A deep ideological split occurred at the outbreak of World War I between Henry Goldman (pro-German) and partners Samuel and Harry Sachs (pro-Allied).
• Henry Goldman resigned shortly before 1918, taking 15 major clients and a "considerable" portion of the partnership's capital.
• The two families never spoke again following the departure.

Leadership Transition and Strategic Shift:

• Following Henry Goldman's exit, the remaining seven partners (Sam and Harry Sachs, plus sons Arthur, Walter, and Howard) became the first to recruit a non-family external leader.
• This decision appointed Waddell Catchings, a charismatic outsider with industrial experience, who had entered the firm at the top rather than rising through the ranks.

Waddell Catchings' Controversial Leadership (1920s):

• Catchings prioritized short-term profits and "enormous leverage" over the firm's long-term institutional stability, operating as a "lone wolf."
• He aggressively pursued mergers, creating corporate icons like General Foods and National Dairy, but adopted an increasingly imperious and intractable demeanor.
• Catchings published The Road to Plenty (1928), advocating for aggressive strategies involving margin buying and highly leveraged assets.

The Goldman Sachs Trading Corporation (1928-1929):

• Founded in 1928 as an off-balance sheet investment trust to capitalize on the bull market, representing a new institutional form for trading capital gains.
• Stock in the corporation doubled to $222 per share within months of creation; Catchings rejected warnings from partner Walter Sachs, dismissing them for lacking "imagination."
• The entity leveraged assets at a ratio of 129 to 1 by October 1929.

The Crash and Near-Collapse:

• Following the October 1929 crash, the Trading Corporation's stock plummeted from a peak of $326 to $1.75 per share.
• The collapse nearly ended Goldman Sachs' 60-year run; the Trading Corporation was "obliterated" and Catchings was ousted.
• Survival depended on the legal separation of the Trading Corporation from the main firm; had it been an integral part, the firm likely would not have survived the Great Depression.
• The event instilled a cultural lesson regarding the dangers of overweening ambition, lack of caution, and solitary decision-making.

Post-Crash Legal and Reputational Fallout:

• A consortium of 42,000 stockholders sued Goldman Sachs for $100 million as the firm navigated the "stuck market" of the Depression.
• Many Wall Street insiders believed the family-run business would not survive the reputational damage and financial liabilities.