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Shared values, complementary skills
Shared values
Shared values come first. A super aggressive partner paired with a chicken, or a super ethical one paired with someone who likes to cut corners, can't make it work. When AT&T went public, the offering ran with a full-page ad listing about 40 investment banks, and a childhood friend named Ed Ramsdell carried the clipping around and crossed off each firm as it went out of business. Almost all of them disappeared except Goldman Sachs.
Firms with some cowboys and some chickens turn on each other. In bad times, the chickens complain that the cowboys are getting everyone killed, and in good times, the cowboys complain that the chickens are holding everyone back.
Complementary skills
Complementary skills mean the partner can do things you can't, so the two of you add to each other. Without that, the thought creeps in that the partner is overpaid and not needed. Bruce Karsh approached Howard Marks in 1987 with the idea of a distressed debt fund, and from the start, Marks goes on the road to talk to people while Karsh stays back and manages the money.
They have been partners for 39 years and have never had a fight, probably because neither is a financial maximizer. The bedrock is mutual respect.
What happened to nearly all those investment banks?
Wall Street firms were repeatedly absorbed or failed over the decades. In 2008 alone, Bear Stearns was sold to JPMorgan Chase in March, and Lehman Brothers filed for bankruptcy in September. Merrill Lynch agreed to be bought by Bank of America that same month. Goldman Sachs and Morgan Stanley converted to bank holding companies, a status that gave them access to Federal Reserve lending.
Why did partnership structure keep banks cautious?
Goldman Sachs was a private partnership until its public offering in May 1999. Partners were personally liable for the firm's losses, so their own wealth stood behind every risk the firm took. After the offering, shareholders rather than partners carried that risk. The partnership dated to the firm's founding in 1869.
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