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On Wednesday morning, October 15, 1986, John L. Weinberg, the venerable senior partner of Goldman Sachs, had a long list of phone calls to make. Before the morning was over he needed to telephone thirty-six men and one woman. His conversations would be brief; good news travels fast.

He started early, hours before the official list would be published. Thomas W. Berry would be first and Garland E. Wood last; alphabetical order was the rule. This was the phone call each vice-president on his list had waited years to receive. Each would reach for the receiver hoping Weinberg was about to extend an invitation to the most exclusive club on Wall Street--the partnership of Goldman Sachs. Weinberg's simple statement, "I would like to invite you to join the partnership," was for most the reward for a decade of grinding hard work. No one had ever refused the honor. Thirty years earlier, Weinberg's own father, the legendary Sidney Weinberg, had issued him the same invitation.

John Weinberg, with help from the eight other partners who comprised the management committee, had vetted hundreds of vice-presidents in the biannual selection process. They had deliberated for two agonizing months while speculation among the troops grew. For the hundred or so in "the zone," the inside term for those actually in contention, everything was at stake--prestige, recognition, riches. As Weinberg traveled through the alphabet, some of the dozens passed over would shut themselves in their offices, while a few would storm out of the firm's headquarters. Envy and frustration would cause one or two people to resign, but the vast majority would take the disappointment in stride, hoping for another shot at a partnership two years hence.

Those telephoned that autumn morning were being offered not only vast wealth but virtual lifetime employment as well. John Weinberg himself had spent his entire career at the firm, beginning in 1950; Robert E. Rubin and Stephen Friedman, two of the more senior members of the management committee, had been with the firm for twenty years. Their tenure was not unusual. Moreover, few partners had ever been asked to leave; graceful and bittersweet departures almost always capped lengthy and prosperous careers. Barring any missteps, the young men and woman answering Weinberg's phone call could expect to retire with a nest egg worth tens of millions of dollars.

Yet those selected knew that after years of grueling sixty-, seventy-, or even eighty-hour weeks spent on trading floors, in client's offices, or on airplanes, the real work was only now about to begin. The partners of Goldman Sachs in 1986 owned a $38 billion business, and running it was, and still is, an all-consuming job. Partnership meetings are held on weekends; vacations and sleep are routinely interrupted with conference calls whose participants span the globe. Partners felt free to call each other whenever they needed to know something about another's business. "When you made partner suddenly you had to return eighty other phone calls," says one retired partner. "Partners were much less respectful of your privacy than employees would be."

The partnership class of 1986 represented change. At thirty-seven, it was twice as large as any previous class. The all-white, all-male partnership had invited into its ranks the first African American and the first woman in its history. The pressure on Wall Street firms to become more diverse was considerable, and Goldman Sachs was one of the last to bow. Almost all partners had spent their entire careers with the firm, yet this class included two former managing directors from rival Salomon Brothers and a famous professor from MIT.

For the first time, existing partners had been unfamiliar with some of the candidates. The firm had grown and specialized. Its four divisions--equities (stock trading), investment banking, fixed income (bond trading), and J. Aron (currency and commodities trading)--had been separated into dozens of specialized departments, many members of which had very little contact with employees from outside their own department. Partners had been forced to trust the recommendations of their colleagues. Impersonality had crept into the process.

Perhaps the most atypical feature of the class of 1986 was the number of partners elevated from the ranks of salesmen and traders. Goldman Sachs's traditional strengths lay in the field of investment banking, in raising capital for large corporations or arranging mergers and acquisitions. Despite some areas of excellence, particularly in stock trading, Goldman Sachs did not have the trading prowess of a firm like Salomon Brothers. In 1986 top management determined that this would change.

Weinberg's anointed officially joined the partnership on Monday, December 1, 1986, the first day of the firm's new fiscal year. Only five days later, the management committee that so recently had bestowed this honor proposed to take it away. At the annual partnership meeting held in New York, Steve Friedman and Bob Rubin, who would be appointed co-vice chairmen the following year, announced that the firm was considering selling itself to the investing public.

In an abrupt break with one hundred seventeen years of history, the management committee was proposing that Goldman Sachs become a public corporation. No longer would the partners own their firm; no longer would they run it unencumbered by outside influences. Stockholders would own much of the firm's capital, and a board of directors, presumably with outside members, would rule on issues of policy. Partners would find themselves as employees, albeit extremely wealthy ones, of a large corporate entity. The management committee believed that in order to expand into new businesses, additional capital of a more permanent nature would be required. The pressure to sell the firm had only increased as each of Goldman Sachs's major competitors had undertaken a public sale or merger with a larger entity. Now the management committee unanimously recommended that the partnership vote for an initial public offering. Not one of the thirty-seven new partners, who had far less to gain than longtime partners from the windfall that would be created by such a sale, thought this sounded like a good idea.

The partnership had never before openly entertained the notion of a public offering, although behind closed doors the management committee had discussed and dismissed the idea many times. In the late 1960s, Sidney Weinberg had considered it briefly and sent his top lieutenant Gus Levy to canvass the partners. It would be the first time the idea was shot down. In 1971, the management committee had decided to incorporate, going as far as printing up new business cards before changing their minds and leaving the private partnership in place.

On the morning of December 6, the partners convened in the large meeting room on the second floor of 85 Broad Street, the firm's three-year-old headquarters in lower Manhattan. For days rumors had circulated but the official agenda had not been disclosed. The management committee members had been lobbying their partners, trying to line up support before the meeting. Many of the new partners were nervous; it was their first partnership meeting, and they had little idea of what to expect. Much was at stake; the future of Goldman Sachs would be decided in the next thirty-six hours.

The members of the management committee were seated around a table on a stage at the front of the room, while the ninety-five remaining partners sat facing them. Weinberg had positioned himself some distance away from his fellow members; this action sent out what many remember as a very strong signal. During the formal presentation he said almost nothing.

Most members of the management committee spoke, but when Rubin and Friedman, who were already widely regarded as heirs apparent, stood to present their vision of the future, everyone listened more closely. Goldman Sachs would be a great global firm, they told the audience, a worldwide wholesaler of investment banking services. The firm would be transformed into a trading powerhouse, one that would challenge top-ranked Salomon Brothers, which was operating with considerably more capital. Risky, capital-intensive activities like trading (some of it for the firm's own account rather than as an agent for clients), much of which was under Rubin's management, and principal investments (long-term strategic investments made by the partnership in operating companies), Friedman's latest brainchild, could not be operated easily with the firm's existing partnership capital. Earnings would be more volatile in these new businesses, and to remain competitive a fortified capital base would need to be built.

Then the issue of unlimited liability was addressed. "What would happen if we hit a bump in the road?" those on the management committee asked. In a private partnership none of the assets of partners are shielded from liability, and the individual partners are exposed down to the pennies in their children's piggy banks. Large trading losses or lawsuits could pose a threat to the firm's capital and ultimately its existence. The actions of a rogue trader could spell personal bankruptcy (one year later a lone trader would singlehandedly lose Merrill Lynch $300 million). Although 1986 had been a very successful year, the firm had suffered a few large bond trading losses, and some partners had grown concerned. Sexual harassment and racial discrimination suits, with ever larger settlements or awards for damages, were becoming increasingly common on Wall Street. Fifteen years earlier, when Penn Central railroad, a Goldman Sachs client, had filed for Chapter 11 bankruptcy protection, the firm had been plagued by lawsuits, the dollar amount of which threatened to exceed the partnership capital. It had been a frightening experience.

Goldman Sachs's capital was inherently unstable. In any given year a substantial group of senior partners with large capital stakes might retire, taking their money with them, and the drain on the firm's resources could be debilitating. If it happened in a year when the firm performed poorly, as it would in 1994, for example, the results could be extremely damaging. By inviting outside investors, in the shape of stockholders, to join the firm, its capital base could be strengthened and its risk dispersed. Friedman and Rubin strongly supported the proposal. Their boss John Weinberg did not.

For many in that room, John Weinberg was Goldman Sachs. He had been with the firm for almost forty years, and for eight of those had shared the top position with his friend John Whitehead. But Whitehead had left Goldman Sachs and was serving as deputy secretary of state in the Reagan administration, and, at sixty-one, Weinberg was on his own. A portly gentleman with close-cropped white hair, thick jowls, and a kind face, over the years he had inspired unswerving loyalty and total devotion. Weinberg's leadership, now in its tenth year, was unquestioned and absolute. He had kept politics out of Goldman Sachs. Under Weinberg the firm retained the feeling of a family business, and the dueling egos and unrestrained greed that had plagued and even destroyed some of his competitors was not tolerated. Only two years earlier, Lehman Brothers, a first-class name in investment banking and a onetime partner of Goldman Sachs, was crippled by a power struggle at the top and had been forced to sell itself to the conglomerate Shearson American Express.

By 1986 the relationship between Goldman Sachs and the Weinbergs--John and his father, brother, son, and nephew--extended back seventy-nine years. The emotional bond was strong. Weinberg believed passionately in the value of the partnership, in its role as the contributing factor in the firm's success. While the management committee presented a united front, many who heard the presentation doubted Weinberg's commitment to the proposal. Goldman Sachs had just closed the books on one of its most profitable years. Through the early 1980s the firm's return on equity had risen as high as an astounding 80 percent, and many partners realized that this level of profitability was unprecedented and unsustainable. The stock market was buoyant and new issues were selling well. If the firm were to go public, it would have to seize the moment. In 1986 the press was full of uncannily accurate prognostications of the gloom and doom to follow. Any knowledgeable observer could see that Wall Street was at the giddy heights of its perennial cycle and it would not be long before the inevitable downturn began. Acceding to the management committee's unanimous wishes, Weinberg agreed to set the ownership issue before the partnership.

The presentation made to the partners that Saturday morning has been described as, at best, uninspiring and weak. Others have called it haphazard and half-baked, emphasizing that its quality was far below that of presentations the firm routinely gave to its clients. Most agree that it was an amateurish effort; what was presented was little more than a concept. Partners were given written reports that outlined the proposed structure: Overnight they would be transformed into managing directors and paid a multiple of the value of their investment in the company. Veteran partners, already very wealthy, could triple their net worth overnight.

One partner who was present remembers that the numbers, in the parlance of the business, did not "foot"; those in the audience who checked back and forth between the many exhibits in the presentation package found that the numbers did not add up and they jumped all over the inconsistencies. In various scenarios, the analyses showed how the partners' capital would grow over time if the firm remained a partnership. But many of the assumptions were questioned and investment banking partners challenged the valuations underlying the proposal. Projections of the firm's earnings as a public corporation were ridiculed. In a business where almost all of the assets go down the elevators and out the front door each night, who could guess what would be left after the firm transformed itself? Calculators came out as partners estimated what their take from the initial buyout might be, but more fundamental questions remained unanswered: What would the company be worth? To whom would shares be sold? On what kind of schedule would the partners be paid? The audience was not impressed.

By afternoon, an impassioned debate had erupted. A partnership is a much more personal organizational structure than a corporation, but even Weinberg was surprised at the level of emotion unleashed. Most of these men knew each other well. The partnership was a small, intimate organization--a fraternity in the very best sense of the word--in which no one was above criticism and the more senior partners regularly challenged their leaders. What was taking place this day was open and honest conversation. Partners screamed and cried, Weinberg remembers; it was a cathartic exercise.

The newest partners could not have been expected to embrace the proposal, since for them it was a financial step backward. The dividing lines between generations of partners had always existed, but now they would be drawn in the sand. Most of the members of the class of 1986 were still in their thirties, and being a partner of Goldman Sachs was a job they had aspired to since business school. The money was not bad, of course, but for some the psychic rewards were even more important. There was a sense of affiliation, of belonging to a select group with a hallowed history and a common purpose. The newest partners had worked for, and expected, a lifelong career with the firm, and they had no interest in giving up their shot at the future.

The partners' capital at the time was a little more than a billion dollars and all members of the class of 1986 received a .32 percent stake. If the firm had been sold in 1986 each new partner would have walked away with between $3 and $3.5 million, and while that is not a bad payday it is important to consider the alternative. In its proposal the management committee had predicted that the firm's return on equity would decline to and stabilize at 40 percent, a level of return yielded by few other investments anywhere. The management committee was suggesting the transition to a public company because of the long-term growth opportunities they envisioned. But it was precisely this growth potential that would cause the very newest partners, with little invested in the company, to want to maintain the partnership. And at the end of perhaps a decade, when members of the class of 1986 had increased the size of their partnership stakes, the firm could still be sold. Of course the risks were great--a stock market crash was in fact less than a year away--but the potential for building substantial wealth was obvious to all.

A powerful contingent of banking partners, whose businesses did not require additional capital, remained unconvinced of the firm-wide need for greater resources. The merger department, which generated huge profits from the fees earned in successfully bringing companies together, was breaking profit records every year and hardly needed help. Many banking partners had not signed off on the vision of the future--expanded trading and increased principal risk--that Friedman and Rubin had presented. "I'm not sure how much they [the investment bankers] were listening either," one partner recalls. "They thought it was a terrible idea going in, and nothing was said there that would convince somebody [otherwise] who thought it was a terrible idea. If you went in with an open mind you might decide one way or the other. But if you went in totally against it, and with good reason--a firm belief in your mind that the partnership culture was in fact the essence of the firm and that this would not just be a different way of capitalizing the firm but would completely change the firm--then you would be looking for alternatives" [to going public]. Some, like former senior partner John Whitehead, believed that limits on capital were not necessarily a bad thing. Two years before he had remarked that "Everybody here knows we have restraints on capital. Capital should be a restraint. It helps you make selections. You have to make choices. We can't do leveraged buyouts and arbitrage--or we can do a little of each." Six months earlier the firm had taken an equity injection from Sumitomo Bank in Japan, and many bankers felt that additional sources of private capital could be located if necessary. This would be the best of all possible worlds, they reasoned--the partners' capital enhanced, their control undiminished.

A number of very senior partners, despite their own economic interests, took issue with their management committee colleagues. A few stood up and spoke emotionally and at length about the value they placed on the partnership--what it had meant to them personally. The partnership had a family feeling, which was something many were loath to part with. A partnership at Goldman Sachs was a sacred trust, they argued. The partners were custodians of a great lineage extending back to 1869. Didn't this legacy belong to the next generation? What gave the current partners the right to sell?

The arguments from the audience appeared very one-sided. Those opposed stood up to make their points, while those in favor sat quietly, relying on the management committee to uphold their side of the case. Some who spoke raised the notion of privacy: Goldman Sachs did not report its earnings, and the partners liked it that way; few wanted to proclaim to the outside world just how much money they made. The firm had operated for many years under a veil of secrecy. Business decisions were not analyzed in the press, personality conflicts were not discussed in the trade magazines, and lifestyle features in glossy magazines complete with pictures of second homes and second wives were not part of the Goldman Sachs ethos.

But with the rewards of partnership come considerable risks. All partners, regardless of their stake, left the bulk of each year's earnings with the firm, to be withdrawn only after retirement. In any given year, if the firm were to lose money, some of those gains could be wiped out. Partners took home an 8 percent draw each year against the amount they had in their capital accounts (the amount of the firm's profits they had accrued but left invested with the firm) and a salary. (In 1997 it was about $300,000.) One partner in the early 1980s asked for a $60,000 loan to do some improvements on his house at a time when Weinberg and Whitehead were each receiving a salary of $85,000. The partner was told to take it out of his salary. "Now how the hell could I do that? My salary isn't that large," the partner responded. He was cash constrained perhaps, but partners are far from poor. The class of 1986 needed only to look at the more senior partners to see what financial possibilities existed in the partnership format. When a list of the one hundred highest-paid professionals on Wall Street was published in 1986, Goldman Sachs partners filled twelve places.

Fundamentally, Weinberg did not believe that anyone was entitled to cash in on the firm's legacy. With $1 billion of capital and the intangible value of a first-class banking franchise (the firm's good name, its established businesses, and its client relationships), Goldman Sachs might have sold for $3 billion. The firm's value at any given moment is the sum total of the contributions hundreds of people have made for more than a century. Yet the entire economic value of this legacy, worth as much as $2 to $3 billion, would accrue to those who owned the firm at the time of an initial public offering. In 1997 Weinberg recalled the 1986 meeting: "I always felt there was a terrific risk, and still do, that when you start going that way you are going to have one group of partners who are going to take what has been worked on for 127 years and get that two-for-one or three-for-one. Any of us who are partners at the time when you do that don't deserve it. We let people in at book value, they should go out at book value."

Although Bob Rubin strongly supported the proposal, on some level he too may have had doubts about transforming Goldman Sachs into a large public company. Two years earlier, commenting on Lehman Brothers's merger with Shearson American Express, he had said, "Wall Street has been a highly entrepreneurial arena. Lots of venture dollars are organized here. Leveraged buyouts come out of Wall Street. The merger wave, without regard to the question of whether it is a good thing for society, comes out of Wall Street. Can that entrepreneurial spirit remain alive in units as large as American Express? If not, can Wall Street remain a highly entrepreneurial world? And if it doesn't, does it make a difference? Will this source of energy diminish?" Friedman had concerns as well and did not relish the notion of running a public company, but he supported the proposal wholeheartedly, certain that the firm needed downside protection and an increased capital base with which to compete.

For every person seated in that room going public was a multimillion-dollar question, yet some had more at stake than others. The partners with more seniority, whose stakes were worth between 1 and 3 percent of the firm's capital, would find their bank accounts enriched by many tens of millions of dollars; at least ten partners had stakes that would be worth at least $50 million in a public sale. Weinberg, it was widely estimated at the time, stood to make more than $100 million if the deal went through. A contingent of older partners was very interested in selling the firm. If the firm went public the amount they would take out upon retirement would be two or three times larger than what they would receive if the firm's structure remained unchanged. With Wall Street approaching its peak, for some aging partners with high percentages this would be a once-in-a-lifetime opportunity to cash out. They were determined not to let it pass.

The night before Saturday morning's presentation the worldwide investment banking division held its annual dinner, a celebration of the year's achievements and for the division one of the biggest events of the year. Since rumors had been circulating about the nature of the following morning's meeting, the new banking partners found themselves besieged by those just under the partnership level. There was little support from the troops for going public, and the newest partners came under heavy pressure to vote against the proposal. All the vice-presidents in the room wanted their shot in the coming years, and they let their recently elevated colleagues know it.

Saturday's meeting lasted all day and was adjourned without a decision. Partners were told to disperse, meet among themselves, and carefully consider the weighty issue before them. At the partners' annual dinner dance held at Sotheby's auction house Saturday evening, there was one issue on everyone's mind. Each partner was engaged in a balancing act, an internal struggle to weigh the different factors that would affect his vote. Personally most partners wished the firm to remain a partnership; yet a judgment needed to be made as to whether the firm required a larger and more stable capital base in the near future. And then there was raw self-interest, a very personal calculation of the optimal way to enhance one's wealth. The group was to meet again on Sunday, and a decision would be made.

Without its partnership Goldman Sachs would take the first step toward becoming indistinguishable from every other firm on Wall Street. Instantly the firm would lose its ability to focus on the long term, as quarterly reporting requirements and the demands of outside stockholders would have to be reckoned with. Goldman Sachs's success in attracting and holding onto some of the most talented people in the industry might also be diminished. Without the incentive of partnership to offer young MBAs, the firm might no longer be able to pick from the absolute cream of the crop. The partnership gave Goldman Sachs a very real edge in recruiting, and the motivation it provided was unmatched at public companies. People stayed at the firm, despite being bombarded by lucrative offers from competitors, often with stock options attached, hoping one day to receive an offer of a partnership. Most partners feared that as a public corporation Goldman Sachs would find it difficult to maintain its special culture. Concern ran high that the emphasis on teamwork, low staff turnover, and an unswerving focus on clients might all come under attack if the firm was forced to meet short-term economic targets. Finally, the family feeling and collegial atmosphere might be threatened by the more formal management structure required of a public corporation.

On Sunday morning some members of the class of 1986 met to discuss the issues among themselves. Although out of strict economic self-interest they were all opposed to the management committee's proposal, they felt a weighty responsibility to do what was right for the firm. After some discussion, the presentation by the management committee was deemed to be unconvincing, and there was talk of the group voting against the proposal as a block. Their numbers and the forcefulness of their opposition could assure the motion's failure. But when the group began preparing a formal presentation outlining its disagreement with the plan, Steve Friedman joined them. Many remember that he was angry, and he made it clear that there would be no block voting; this was a matter for consideration by the entire partnership, not for any interest group to decide. Each partner was to represent his own views and those alone. One member of the group stood up to defend the gathering, telling Friedman that he would have been proud of them, as the discussion had focused on the interests of the firm as a whole. Some of the new partners described this dressing-down as frightening--after all, members of the management committee like Friedman determined partnership stakes, promotions, responsibilities, and virtually every aspect of their partnership careers, now only six days old.

When the partners filed back into the second-floor meeting room, most still believed that there would be a vote. The management committee, and Friedman and Rubin in particular, had expressed their strong support for the idea of going public but had never forcefully pushed the idea. This contrasted sharply with the way other partnerships had gone about selling their firms to larger corporations or the investing public. When Salomon Brothers had sold itself to commodities trading giant Philip Brothers Corporation five years earlier, Salomon's executive committee had presented the idea to the partnership as a fait accompli. There were speeches by those in power and a question period for the partnership that lasted one hour. Those on the executive committee had the power to vote the merger into place on their own, and consulting the general partnership was a formality. Unlike Goldman Sachs's two days of soul searching, the Salomon Brothers meeting, which began in the evening, was so short that it left plenty of time for a celebratory dinner that same night. At no point did those Goldman Sachs partners listening to the management committee's presentation feel that the issue was being railroaded. Rubin and Friedman wisely stepped back and listened.

They got an earful. Two of Sidney Weinberg's sons were in the room that day. John, the younger of the two, was seated silently on the stage, while his brother, Sidney Weinberg Jr., known to everyone as Jimmy, was in the audience. In 1967, Jimmy had come to his father's firm in mid-career, after years with Owens Corning, to head up Investment Banking Services (IBS), the new business development arm of the investment banking division. IBS was set up to carry on the work of Sidney Weinberg, and it was fitting that his eldest son was at the helm. Now Jimmy felt he needed to have his say. When he stood up to speak, his authority far outstripped his position. Jimmy told the group the proposal made no sense. Goldman Sachs had a heritage, and he was on the side of preserving it. He reminded the partners of their stewardship, of their responsibility to the next generation. He would feel uncomfortable reading about the partners in the newspapers, of having the details of their financial situation made available for public consumption. People stared in amazement: On the face of it the issue seemed to have pitted brother against brother. But after Jimmy spoke, it was all over. No vote was ever taken.

Geoffrey Boisi, the head of investment banking who would soon be seated on the management committee, summed up the events of the day. "We were not psychologically ready to be a public company," he says, "with all that it entailed. I found it ironical, being an adviser to corporate clients on equity offerings, our own blindness to what the impact was going to be on our own culture." Staying private cost some of the more senior partners tens of millions of dollars, and they accepted the decision with a note of regret. Others were relieved. No amount of money would compensate for the loss of the private firm to which they felt such dedication.

Many believe the proposal was doomed from the start, precisely because of John Weinberg's lack of enthusiasm for it. Despite the fact that Friedman and Rubin were managing much of the firm's day-to-day operation by the end of 1986, Weinberg's moral hold on Goldman Sachs was undiminished and his leadership absolute. Culture at Goldman Sachs was passed from one generation to the next and John along with his father Sidney had been the firm's two greatest culture carriers. Partners trusted Weinberg's motives completely; as Boisi said, "You always knew he would ultimately do the right thing." The proposal was too radical to embrace without Weinberg's unqualified commitment to it. In the assessment of one partner, Weinberg was either very brave or very smart--brave enough to take a risk that the firm would go public or smart enough to know it would fail to do so.