Money and Power

by William D. Cohan

  On September 13, Goldman announced that Friedman would retire in November and that Corzine, forty-seven, would succeed him as senior partner and chairman of the Management Committee—the CEO, in Corzine’s mind—and Paulson, forty-eight, would “assume the No. 2 job,” according to the Times, as vice chairman and chief operating officer. Friedman would join Weinberg as “senior chairman” of Goldman and move to the firm’s office at the Seagram Building on Park Avenue. The news raised inevitable questions as to why Friedman had decided to leave. Was it his health, had he been toppled in a coup, or did he not have the right stuff to manage Goldman through the very difficult year? “When the job is done with maximum intensity, it can be more than a little tiring,” Friedman wrote in a memo to the firm. But in an interview with the Times, he focused on other things. “How come I’m doing this?” he asked rhetorically. “Take a look at this view”—and then he pulled out a large photograph of the snow-covered mountains surrounding his home in Jackson Hole, Wyoming. “Now take a look at that view”—pointing out his office window at 85 Broad Street to a jumble of office towers and a sliver of a water view. “Which is better?” As for the rumors about his health, he denied them. “My health is great and that’s how I want to keep it,” he said. “Only on Wall Street do people think it bizarre that I don’t want to spend half of my day on the telephone and the other half on an airplane.” He said he ran up to six miles every day.

  Coincidentally, Paulson also had his own health problems in 1994, although nobody inside Goldman Sachs was aware of them. Some people at his church on Central Park West who had heard Paulson discuss these health scares there recalled him describing them as being cancer, but he denied having said that was the disease, although he cannot be sure what it was. “As a Christian Scientist, I don’t go to doctors and get diagnoses,” he said. “I don’t believe I was dealing with cancer. I sure didn’t feel well for a period of time in early 1994, and in the summer of 1994, I remember working from home and doing a lot of praying for a couple months where I felt no energy at all. I didn’t feel well until the problem was met. I have relied on prayer for health care all my life.” He believes he has had many physical healings.

  As for the idea that a cabal of unhappy partners had led an insurrection in part because of his “aloof” behavior, Friedman replied, “I’m not going to tell you that all hundred and fifty partners are happy. I’ve been described as aloof before. But we have had the most collegial Management Committee in my experience here. And it bothers me when someone outside of the firm says there’s a mess here because there isn’t.” Corzine, too, denied the firm was having problems. “I wouldn’t be jumping into a mess, willingly or unwillingly,” he told the Times. Guy Moszkowski, then an analyst at Sanford C. Bernstein who covered the financial industry, observed that, in 1994, much of Wall Street was “going through the same thing. A top person leaving a firm is not going to leave because of the current environment.” The Times noted that Corzine was “seen as more open and personable” than Friedman and that he was “popular with clients” and might be “better able to rally the sometimes contentious egos in an organization at which hundreds in the firm are millionaires.” Paulson would likely be “simpatico” with Corzine, the paper reported, since he was an investment banker and could complement Corzine’s trading skills. “They spoke warmly of working as a team,” the paper said. Their fitness was also noted: Corzine was into long-distance running (as well as chess) and Paulson jogged at least three miles a day. Left unmentioned was the fact that Corzine had high blood pressure (and that once someone scared “the bejeezus out of him” by telling him about a correlation between deep lines in his earlobes—which he has—and heart attacks). No mention was made, of course, of Paulson’s cancer scare. Friedman, Corzine, and Paulson also all wore similar Timex Ironman digital watches; Paulson’s was a gift from Friedman. Corzine also sought to assuage Winkelman’s hard feelings. “My relationship with Mark has been one of the great experiences of my life,” he told Institutional Investor. “We sat in the same office; we shared high points and low points. I think he’s one of the brightest, ablest people I’ve ever been around. Goldman Sachs is a hell of a lot better off with Mark helping build our future.”

  ——

  IN CHOOSING CORZINE and Paulson to lead the firm, Goldman’s politburo could not have found two more different people. Corzine was born and raised on a family farm in Willey Station, Illinois—population forty. Corzine’s family lived in the shadow of the Great Depression. Using borrowed money, his grandfather had been a very successful farmer in the 1920s, owning 2,500 acres and a bank. He was a state assemblyman and a leader in the state Republican Party.

  But during that financial crisis, his grandfather’s family lost everything, an experience that understandably had a lasting effect on Corzine’s father. “My father never had a credit card, was afraid of any kind of financial risk because he saw what happened to his father,” Corzine said. His father, then sixteen years old, went to work in a coal mine. After serving in World War II and fighting in the Battle of the Bulge, his father rented about 120 acres of farmland from his aunt—he was a “tenant farmer,” Corzine said. His father sold insurance at night to supplement the family’s modest income. His mother taught elementary school for thirty years.

  Corzine went to the Taylorville public schools. His focus in high school was sports—basketball and football—and trying to get the occasional date. “It was a very happy time of life to be honest,” he said. He was a six-foot two-inch guard on the high-school team, where basketball was a form of religion. He was the captain. He was also the starting quarterback of the high-school football team for three years. Playing sports in high school taught him the clichéd lessons about how to get through life. “You’ve got to work for everything you do,” he said. “And when you get beat, you’ve got to get up. You’ve got to work together, particularly if you’re not the smartest or you’re not the biggest or you’re not a Michael Jordan. It was a great life lesson.”

  He had his first job when he was thirteen, selling hot dogs during the summer at the county fair. A few years later, in addition to athletics and schoolwork, he ran a dance hall at the fairgrounds. Then for a couple of summers he worked on a construction site, helping to build a nuclear power plant.

  After graduating from high school in 1965, Corzine went to the University of Illinois at Urbana-Champaign, forty-five miles away. “I used to say the biggest change that ever happened in my life wasn’t coming from Chicago to New York, or Columbus to New York, but was going from Taylorville to the University of Illinois, which had about fifty thousand kids,” Corzine said. In addition to being inexpensive—a couple of hundred dollars per semester—his high-school sweetheart, Joanne Dougherty, was also going to Illinois. At Illinois, he majored in economics.

  After he and Joanne married and graduated from college in 1969, they packed up their belongings into a U-Haul and drove to California, where Corzine had been accepted into the PhD program in economics at UCLA. He attended four weeks of classes and then got the inevitable: a letter from the Taylorville draft board ordering him into the armed forces. “If you came from a place like Christian County, which is where I was from, you might as well just drive on down to the induction center,” he said. He decided to enlist in the marines and served his basic training in San Diego. His drill sergeant nicknamed him “the Professor.” “I was the only college graduate in my platoon …,” he said. “I remember getting the shit kicked out of me regularly.”

  From boot camp, Corzine spent some time at Camp Pendleton, in California, learning how to shoot a mortar, but he was never called on to serve in Vietnam. By this time, Joanne was pregnant, and the Corzines moved back to Taylorville, where Joanne got a job teaching school. Corzine tried to find work, without luck, and eventually he moved to Chicago. He sent around his résumé to all the banks and finally got hired, in 1970, to work in the back office at Continental Illinois National Bank and Trust advising smaller community banks
in Illinois, Wisconsin, and Michigan about their investment portfolios. He traveled three days a week. At night, he studied for his MBA at the University of Chicago, part of which was paid for by the bank. Corzine remembered taking a night course with Fischer Black, then a professor at the University of Chicago. “I swear I don’t know what the course was about to this day,” he said. “It was all equations, all the time, and he gave me a C plus. He was very kind. That was the moral equivalent of flunking.” (Black later won the Nobel Prize in economics and became a Goldman Sachs partner, thanks in part to Corzine.)

  After three years traipsing around the Midwest for Continental Illinois while simultaneously studying at the University of Chicago and raising a baby daughter, he decided to quit the bank to be a full-time MBA student. To pay for the final year at Chicago, he borrowed from his credit card—just what his father would never do. “That’s true of all this baby boom generation,” he said. “They learned to borrow early and big.”

  By the time Corzine graduated from the University of Chicago, in 1973, he wanted to work on Wall Street. Both Merrill and Salomon rejected him. Fortunately, his former boss at Continental Illinois had moved to Bank One in Columbus, Ohio, and hired Corzine to help him manage the bank’s bond portfolio, deciding what municipal and Treasury securities to buy and sell.

  An institutional bond salesman at Goldman, in Chicago, used to call on Corzine at Bank One to sell the bank government bonds. They spoke on the phone most days and eventually the Goldman salesman decided to ask Corzine if he wanted to interview for a job at Goldman. The firm had just started building up its fixed-income group after years of neglect, and a Chicago MBA seemed to be a valuable credential, along with his experience at Bank One. Corzine suffered the usual endurance test of twenty interviews, culminating in meeting George Ross, who was head of Goldman’s Philadelphia office but was then running fixed-income. Corzine had never met anyone at Goldman in New York before he showed up there in 1975 for his first day of work. “First time I ever came to New York was the first day I walked in the front door at Goldman Sachs,” he said. “Never been to New York before. I walked in with a sport coat. I looked like a country hick.”

  He was hired as a trainee on the government bond desk. He had been making about $15,000 per year at Bank One. Goldman offered him $50,000. But Corzine had big debts to pay off—he had a home mortgage by then plus the school loans—and he and his wife had had a second child. He took the job at Goldman, but for nine months his wife and the two children stayed behind in Columbus, where Joanne was teaching school. His job was to deliver trading confirms, get coffee, and answer the phones before the second ring. “Oftentimes, it was a hooker or a bookie,” one member of that desk said. But Corzine was basically clueless about how to trade or about what made a good trader. Eventually, though, he started to fill in for traders on vacation and began to trade U.S. Treasury bonds and bills.

  Corzine got one break after his boss, Don Sheehan, left for the night at five o’clock and asked him to check up on the Treasury bonds he had been buying during the day. Corzine realized that Sheehan had bought up bunches of Treasury bonds that had attached warrants—the right but not the obligation to buy more bonds at a set price. Sheehan had loaded up on them without being properly hedged. “I was sort of ‘holy sheep shit,’ ” Corzine said. “We have this great miscalculation. We were supposed to sell bonds at the same time we were buying warrants, and our team forgot to sell the bonds.” Corzine stayed with the clerks until four o’clock in the morning to figure out the magnitude of the problem. “We found out we were long—ten times over our limits—and it turned out to be a great trade,” he said. “But we had to call the Federal Reserve because we were over our regulatory limits.” This was how Corzine met Gus Levy, who called him on the phone and let loose. “He was madder than hell,” Corzine said. “That’s all I remember.… We worked our way out of that trade and made more money than the desk had made in the previous couple of years. It was $10 million or something. It was a meaningful amount that should have never occurred, so nobody got any credit for making the money because it could have been a big mistake.” But Corzine learned a lot from Sheehan. “He knew how to maneuver in a market better than anyone I have ever seen,” he said. He also liked that the government bond desk seemed to be filled with Irish Catholics. “An Irish crowd in a Jewish firm,” he said.

  A bigger break came after about eighteen months, when a group of government bond traders at Goldman, led by Sheehan, walked out and joined E. F. Hutton. It took Goldman months to hire new traders to replace those who had left suddenly. During that time, Corzine was pressed into service. “I got to trade everything for about three months before the firm could go reload …,” he said. “I made more money … than the desk had made in the previous couple of years. Pure luck, I’m sure, but it caught people’s attention.” Corzine quickly came under the wing of partners Eric Schoenberg and Victor Chang. When Frank Smeal was hired from JPMorgan to rebuild Goldman’s fixed-income business, Smeal took a shine to Corzine as well. “If you were successful at Goldman Sachs people paid attention to you,” he said. “If you worked harder than most folks they paid attention to you.” One year he got paid a bonus of $150,000, more money than he could imagine. He called his father and told him the news. “You ought to come home,” he told his son. After taking over the running of the government bond desk in 1979, Corzine became a partner the next year. He had made the run in four and a half years, a major accomplishment under any circumstances. He was thirty-three.

  Mark Winkelman came to Goldman in 1978 after a four-year stint as a senior investment officer at the World Bank. At first, Corzine and Winkelman did not get along. “He and I went head to head for a long time because we both saw the same opportunities,” Corzine said. But after Goldman bought J. Aron, in 1981, Rubin figured out how solve two problems at once when he separated the two men and sent Winkelman to run J. Aron, while Corzine remained on the bond desk. “Then we both began to understand that a lot of the stuff Aron was doing there and a lot of stuff we were doing in fixed-income was really the same thing,” Corzine said. Around 1986, Goldman decided to merge J. Aron and Goldman’s fixed-income businesses to create a super group called “FICC,” short for “Fixed-Income, Currencies and Commodities.” Winkelman and Corzine were working together again. (Some Goldman partners said Corzine needed—and benefited from—Winkelman’s intelligence and oversight.) This time, the two men made the partnership work. “We translated that into a very effective partnership on many things …,” Corzine said. “He is a really, really smart guy—as opposed to me—he could do the math as well as anybody, anywhere, anytime, and he was disciplined.” (Other partners said the relationship between Corzine and Winkelman was strained, at best, right from the start.)

  Part of the reason that Weinberg, Rubin, and Friedman thought Corzine could use a little more oversight had to do with an incident that occurred during 1986 and involved a large and risky trade that the firm had concocted and that was not going well. It turned out that Goldman had bought, in quantity, Treasury securities with a coupon of 8.75 percent and shorted Treasury securities with a coupon of 9.25 percent. The trade went in the opposite direction of what the Goldman traders hoped, and soon the firm faced hundreds of millions of dollars in potential losses. Corzine, who had been managing the department, had to jump back into front-line action. “I went back on the desk for seven months,” he explained. “Every desk—the corporate desk, the muni desk, the J. Aron people—all had this same trade on.” Goldman had expected the Japanese and the few hedge funds that owned the securities to roll them over, but that did not happen. “A huge, huge short squeeze developed over about six months,” Corzine said. “I think it was the biggest loss that I had ever been responsible for on a mark-to-market basis.” Although a member of the Management Committee, he had to report to the committee every other day about what was transpiring with the trade. Finally, after about five months of worry, the bet began to reverse and the bonds beha
ved as the traders had expected.

  Corzine had turned a $150 million potential loss into a $10 million gain. “That’s the last time I was a day-to-day trader,” he said. One of the traders came away impressed by Corzine’s guts. “He went around, he took everyone’s position, and he just traded it himself,” he said. “Good or not, it was very leaderly, and it worked out well enough. He was leaderly, strong. He was there late at night, because Japan was a major player in this, so he traded Japanese hours.” Quite understandably, though, the firm’s investment bankers didn’t appreciate how risky the trade turned out to be and questioned how Corzine could have allowed such a potential loss to metastasize. The 1986 near miss was the obvious precursor to what would happen again, in spades, in 1994, but Corzine believed his ability to navigate the 1986 crisis successfully put him on a trajectory that eight years later would lead to his becoming the firm’s senior partner.

  ——

  ASIDE FROM THE fact that they both grew up on farms in Illinois and both were non-Jews in a predominantly Jewish firm, Hank Paulson’s upbringing and career had little in common with Jon Corzine’s. Paulson’s grandfather on his father’s side, Henry Paulson, owned a fine-watch wholesaler. Eventually the company became the largest watch wholesaler and watch repair operation in the Midwest and “supported a prosperous lifestyle,” including a home in Evanston, Illinois, and “a modest” winter home in Palm Beach, Florida.

  Paulson’s father, also named Henry Paulson, loved farming, and after graduating from Principia College, a small Christian Science school—a “Christian Science family” is how Paulson described it—in southern Illinois, convinced his father to buy some farmland in Stuart, Florida, north of Palm Beach, where the Paulsons moved after World War II and started a ranch to raise Brahman bulls. Henry Paulson—the third, known as Hank—was born in Palm Beach on March 24, 1946. That same year, Paulson’s grandfather’s business started to fail, and his father was forced to sell the Florida ranch and move back to Chicago to take over the watch business, which eventually went bankrupt. The family lived in a small apartment in a garage in Winnetka, Illinois, before moving to a seventy-five-acre farm in Barrington, Illinois, about forty miles west of downtown Chicago.