The Golden Passport

by Duff McDonald

  “My classmates weren’t just smart,” he recalled. “They were also some of the most ambitious and hard-working people I’d ever met. Most of them had, like me, come out of the military, and they were eager to make up for lost time by barreling out of Harvard Business School with straight A’s.”8 He also credited the case method as a powerful pedagogical tool. “[It] required a kind of adaptive thinking that required much more creativity than the rote learning of college,” he said. “Each business problem had to be considered afresh and on its own unique terms.”9

  Whitehead was the only person whom Goldman Sachs hired in 1947. “The exalted Harvard Business School degree probably made some difference,” he later wrote, “since it was a rarity at the firm in those days. [Goldman chairman] Sidney [Weinberg] was friends with the dean of the Business School, and held it in some awe.”10 Whitehead, who became a partner in 1956, felt no compunction whatsoever about focusing the firm’s recruiting on the cream of the business school crop, in particular his alma mater. By the time he had ascended to the chairman’s post in 1975 (along with cochair John L. Weinberg, Sidney’s son), the firm was recruiting out of HBS in earnest. At the end of the 1980s, in fact, there was only one company that employed more HBS grads than Goldman, and it was McKinsey & Company.11

  Goldman’s connections with HBS go all the way back to the beginning, when Walter and Paul Sachs, the sons of cofounder Samuel Sachs, both supported the School in its first decades, including a $100,000 donation in 1927. And even if Weinberg hadn’t hired from HBS at the rate that Whitehead did, he nonetheless cultivated close ties to the School, and received an honorary doctorate from Harvard in 1966 in appreciation of his having raised several million dollars for the School.12 John Whitehead and John Weinberg—“the two Johns”—also established a scholarship fund at HBS to honor Sidney Weinberg and in 1983 recommended that every partner, whether or not they had attended HBS, donate money to the School’s annual fund drive.13

  After retiring in 1984, Whitehead embarked on a career in public service, the first in what would become a long line of Goldman executives to do so. (Among the others: Hank Paulson [’70].) He worked as Ronald Reagan’s deputy secretary of state. He was chairman of the Federal Reserve Bank of New York from 1995 to 2000, during which time he orchestrated the bailout of Long-Term Capital Management. And he later chaired the Lower Manhattan Development Corporation in the aftermath of the 2001 terrorist attacks, and headed the foundation that raised $130 million for a memorial to rescue workers and victims.14

  In 1985, Whitehead donated more than $200,000 to the School, with Goldman donating an equal amount, to establish the John C. Whitehead/Goldman Sachs & Company Faculty-Business Executives Exchange Program, which facilitated the exchange of junior HBS faculty with executives in industry for up to a year.15 In 1995, he also donated $10 million to HBS to establish the School’s Social Enterprise Initiative, with a goal of increasing managerial capacity and to encourage more students to explore careers in the nonprofit sector.

  When Whitehead died in February 2015 at the age of ninety-two, the cochair of SEI, Professor V. Kasturi Rangan, correctly credited Whitehead for his contributions but then tried to give HBS a lot more than it deserves: “When I was introduced the other day at a social enterprise conference in India, the speaker commented that Harvard Business School had created the whole discipline of social enterprise. In my view, that credit really belongs to John Whitehead for being the spark that allowed the HBS engine to fire.”16 Alas, HBS did not create the discipline of social enterprise; after considering it in its earliest days, it decided against doing so. That honor belongs to the Yale School of Management, which was founded in 1971 with the express intention of offering a degree in both private and public management. Its founding dean, mind you, was William Donaldson (’58).

  John Thain (’79) is one of those HBS graduates who joined Goldman during Whitehead’s leadership. With an undergraduate degree from MIT, Thain quickly distinguished himself not just with the polish typical of HBS graduates but with his quant skills as well. Rising through the ranks, he was named the firm’s chief financial officer in 1994. In 1999, he was named president of the investment bank, and was considered a potential successor to Hank Paulson. (Thain had helped install Paulson in a partnership putsch that resulted in the ousting of Jon Corzine in early 1999. One official from the New York Fed later referred to him as “a stone-cold killer.”17) He left before Paulson did, however, taking the top job at the New York Stock Exchange in 2004, and in a tenure that lasted just two years managed to take the exchange public. In December 2007, he left to become the CEO of Merrill Lynch.

  That’s when things started to go the wrong way. Among his management gaffes: hiring former Goldman colleagues Tom Montag and Peter Kraus in the spring of 2008, with pay packages of $39 million and $29 million, at the very moment that Merrill was preparing widespread pay cuts.18 Still, with the mortgage crisis unfolding, he looked like a miracle worker, arranging a surprise sale of the august institution to Bank of America for $50 billion in September 2008 on the very same weekend that Lehman Brothers collapsed. Four months later, however, he was fired from Bank of America after a surprise $15 billion loss at Merrill in the fourth quarter of 2008.

  Not only that: Just before he was pushed out, he paid $4 billion in bonuses to Merrill executives, one of the most high-profile examples of Wall Street displaying zero sense of responsibility for the unprecedented scale of damage it had caused. There was that, and the matter of his $1.2 million office renovation in the midst of it all, including an $18,468 George IV chair, a $68,000 antique credenza, a $35,000 “commode on legs,” and $1,100 for a wastebasket. “He appeared to be a man in a bubble, not good at listening to advice, and worse still at detecting changes of tone when it came to the public’s tolerance for corporate excess,”19 said the Financial Times in the aftermath.

  Thain bounced back when he was hired by midmarket lender CIT Group as chief executive in 2010, a position he held until he retired in March 2016. He was credited with turning around the struggling lender, which included buying OneWest, a regional bank made up largely of the assets of the failed mortgage lender IndyMac. But on his way out the door, CIT somehow found reason to change its definition of retirement in a way that allowed him to keep unvested stock that he otherwise would have lost.

  Previously, CIT employees could keep unvested shares if they had retired at 55 with 11 years of service, or at 65 with 5 years of service. Thain’s tenure did not meet those requirements, as he retired at 60 with just 6 years on the job. But the company decided to switch to a “rule of 66,” in which all unvested stock becomes vested if one’s age and tenure total 66—precisely Thain’s own bogey. Thain said that the shift was an effort to “rationalize” the retirement definition.20 That it was a rationalization there is no doubt, but it was one of an entirely different sort. Thain was already paid well for his efforts—$8.8 million in 2014 and $8.2 million the year before. “It’s perhaps in character . . . that his final bow at CIT should include the fine-print equivalent of a decorative cabinet,”21 wrote Reuters Breakingviews columnist Richard Beales.

  There’s another John who went to HBS with extensive Goldman ties, although he never worked there. John Paulson (’80) attended HBS on a Sidney J. Weinberg/Goldman Sachs scholarship. After working for the Boston Consulting Group, Bear Stearns, and a few lesser-known companies, he founded his own hedge fund, Paulson & Company, in 1994 with $2 million of his own money. By 2003 he was managing $300 million. But it was his bets against bonds backed by subprime mortgages that made him famous (and a billionaire) in the wake of the housing market crash.

  When he was still at BCG, Paulson realized he’d gone into the wrong career. Consulting wasn’t for him; Wall Street was the thing. In a remarkable display of how the HBS network works, he once saw LBO pioneer Jerome Kohlberg at a tennis tournament, walked up to the older man, and told him how much he had enjoyed a lecture Kohlberg had given at HBS. Kohlberg asked him to drop by his
office, and although his firm, KKR, didn’t have any openings, he introduced Paulson to another buyout legend, Leon Levy. Levy hired him.22 Another: Jim Koch, a fellow HBS grad who had worked at BCG with Paulson, asked his classmate if he wanted to invest in his fledgling craft brewery. Paulson gave him $25,000. The brewery? Boston Beer, maker of Sam Adams. Paulson made several million dollars on the investment.23

  Goldman comes back into his story when it later emerged that the bank had worked with Paulson to design a so-called synthetic collateralized debt obligation that would allow him to bet against subprime mortgages in 2007. Along with a key employee, Paolo Pellegrini (’85), Paulson even helped select the contents of the portfolios that went into the CDO, which was named ABACUS 2007-AC1. The only problem was that someone needed to be on the other side of the trade. But it wasn’t really a problem, as Goldman found those buyers in its own roster of clients. When the subprime market collapsed, Goldman’s clients lost more than $1 billion, Paulson made roughly that amount, and Goldman was paid $15 million by Paulson for its efforts. All told, Paulson’s firm made $15 billion in 2007, and his legendary bets were immortalized in journalist Gregory Zuckerman’s 2009 book, The Greatest Trade Ever.

  The Securities and Exchange Commission later brought securities fraud charges against Goldman for misleading its clients about Paulson’s involvement, and the bank paid $550 million to settle the charges in 2010, the largest-ever fine paid by a Wall Street firm. (It has since been eclipsed.) “Half a billion dollars is the largest penalty ever assessed against a financial services firm in the history of the SEC,” Robert Khuzami, director of the SEC’s Division of Enforcement, said at the time. “This settlement is a stark lesson to Wall Street firms that no product is too complex, and no investor too sophisticated, to avoid a heavy price if a firm violates the fundamental principles of honest treatment and fair dealing.”24 In 2016, Goldman agreed to pay an additional $5.1 billion to settle accusations of wrongdoing before the financial crisis.25

  (Not everyone who made a fortune from the subprime crisis had HBS attached to their name. Another, Andrew Lahde, who graduated from the Anderson School of Business at the University of California, Los Angeles, made waves when he announced his retirement with a scathing letter. “I was in this game for the money,” he wrote. “The low-hanging fruit, i.e., idiots whose parents paid for prep school, Yale, and then the Harvard MBA, was there for the taking. These people who were (often) truly not worthy of the education they received (or supposedly received) rose to the top of companies such as AIG, Bear Sterns, and Lehman Brothers and all levels of our government. All of this behavior supporting the Aristocracy only ended up making it easier for me to find people stupid enough to take the other side of my trades. God bless America.”26)

  In 2015, Paulson donated $400 million to Harvard, prompting HBS dean Nitin Nohria to call him “the epitome of a visionary leader.”27 John Paulson is certainly one of the savviest investors of his generation. Whether that makes him “the epitome of a visionary leader” seems debatable, especially considering the means by which his fortune has been made. But, as one journalist noted ruefully upon hearing the news, it’s what the Romans used to say: Pecunia non olet—“money doesn’t stink.”28

  William A. Ackman (’92), the activist hedge fund manager and head of Pershing Square Capital Management, represents the promise and the peril of HBS all at once. For would-be MBAs seeking wealth and success, he has a surplus of both, and is among the best hedge fund managers of his time. At the same time, the School’s narrow view of what constitutes success—that is, money—infects their view of everything, including their opinion of themselves. Many of the School’s graduates also drag morality into it, as if their success were somehow a result of their innate goodness rather than of their particular skills, situation, and luck. Bill Ackman is that, too.

  There’s no question that Ackman has been successful. He and a Harvard classmate scraped together $3 million not long after Ackman had graduated from HBS to start Gotham Partners. The two had some wins, including a $1 billion return from a bet against bond insurer MBIA, but a number of bad calls led to the winding down of the fund in 2002. The “risks” one takes in hedge fund land only extend so far. When too many bets go against you, you move on—an experience not too distant from pretending one is a CEO in a case study.

  Not long after that, Ackman founded Pershing Square with a $50 million investment from Leucadia National Corporation. He also refashioned himself into an activist investor. Fights against the managements of Target and JCPenney followed. When betting against the nutritional supplement maker Herbalife, Ackman referred to it as a “moral obligation” and has otherwise insisted that his investments are guided by a strict moral code.29 And, incidentally, defended through schoolyard taunts. When Berkshire Hathaway vice chairman Charlie Munger questioned the morality of one of Ackman’s holdings, Valeant Pharmaceuticals, in late 2015 after it had been accused of jacking up the prices of drugs to unaffordable levels, Ackman fired back that the soda made by Coca-Cola, a longtime Berkshire holding, was bad for children.

  Ackman’s view of his role in the stock market is pure HBS. “He sees himself as one of the good guys,” Katrina Brooker wrote for Bloomberg, before allowing him to say so himself: “We are the white knight always on behalf of the owners of the business.” Another way to think of it: Bill Ackman is the avenging angel of Michael Jensen’s agency theory. But he’s also an angel with a good sense of public relations, or at least the half of it that involves getting people’s attention. He’s not so good at the part that suggests humility when the cameras or microphones are pointed your way, the part that Warren Buffett has perfected with the result that his “Aw, shucks” cornhusker personage invariably overrides the fact that he is as ruthless as any other financier. Bill Ackman once claimed Warren Buffett as a mentor, despite never having met him. “You can still learn a lot from people without ever meeting them,”30 he said at the time. A lot, but not everything.

  “I think he is just prepared to live with the scrutiny and the calumny heaped upon his head,”31 said one of Ackman’s HBS professors, William A. Sahlman, in October 2014, missing the point entirely. Ackman invites the calumny. Indeed, he seems to relish it. One can hardly look upon someone who compares a publicly traded company (Herbalife) to Enron, the mafia, and the Nazis—all in one sitting—as some sort of passive player in the whole stage drama that is investing. (Carl Icahn, equally loose-lipped but far more entertaining than Ackman, called the younger man “a liar” and a “crybaby” on television.32)

  “Mr. Ackman is no charlatan,” writes Andrew Ross Sorkin of the New York Times. “He genuinely believes what he says. But he also seems to be able to compartmentalize his views and rationalize his investment philosophy in contradictory ways. His declaration that he will never own Coca-Cola because its products are unhealthy is tough to square with his ownership of a position in Burger King.”33

  Not for Ackman, it isn’t. Ackman compares his ownership of Burger King with ownership in a supermarket. While the fast-food giant sells Coca-Cola, he says, its customers aren’t obliged to buy it. Voilà! No contradiction. “I wouldn’t be against owning a supermarket and they sell Coke,” he told Sorkin. So if you make poison, you’re bad. But if you sell poison that someone else made, you’re in the clear. That’s quite the moral code, so much so that you’d probably need Enigma to crack it. Its logic is offensive and arrogant, all at once. But that’s not too surprising. As Robert Caro told us, arrogance is one of the coefficients of money.

  It’s also about as clear-cut an example of the failings of the case method as one could ask for. Whatever your view on the morality of selling soda, only a high school debate team—or an HBS section—would be impressed by Ackman’s distinction between making it and selling it. If he really believes it, he’s even more of a caricature than most people think. But he probably doesn’t, the remark simply a demonstration of his HBS-bred ability to turn on a rhetorical dime. Says one alum: “You just n
eed to look at Bill Ackman to see why women have traditionally been less forthcoming in HBS classrooms. Because there are far fewer of them that are willing to do that bullshit dance to score points.”

  All that said, the man seems to have figured something out. A failed bid to buy drugmaker Allergan in 2014 nevertheless led to $2 billion in gains when Allergan escaped his clutches through a merger with rival Actavis. By the end of 2014, Pershing Square was reportedly sitting on top of $18 billion. “A lot of people viewed 2013 as the end of Pershing Square,” he told Bloomberg at the time. “That was kind of the perception in the media: JC Penney, Herbalife, Icahn going on TV saying I’m an idiot.”

  Indeed they were. But they were not, as Ackman somehow came to conclude, “actively . . . trying to harm” him. In this, Bill Ackman is like every other overgrown adolescent who put his big-boy pants on after graduation and proceeded to develop a persecution complex when it turned out that running one’s mouth off about other people’s abilities can provoke the same in response. By March 2016, with a huge—and failing—investment in Valeant threatening to bring the “idiot” label back into play, the ironies of HBS’s influence on that particular saga were plain to see: The plunging stock price of a company that was nothing more than a roll-up of other people’s hard work, that rose to prominence on aggressive sales tactics (and even more aggressive accounting), was threatening the reputation of a man whose entire career has been built on harassing other people to show profits now rather than later. Ackman may not be an idiot, but he’s certainly a cliché.