But Corzine was insistent. He kept calling Paulson and urging him to take the idea seriously and to figure out, possibly with Maughan, how it might be made to work. Paulson would have none of it and could not understand why Corzine was having such trouble understanding how little sense the combination made. Then Corzine would sic J. Christopher Flowers, the head of the Financial Institutions Group, or FIG as it was known, on Paulson to try to make the case again. Of course, Paulson’s relationship with Corzine would have been much simpler and easier if he had said, “You’re right, Jon, let’s go buy Salomon Brothers.” But Paulson couldn’t do that, even though his life would have been better had he simply acceded to the CEO’s wishes. He just did not think the deal made any sense for Goldman Sachs. Corzine had to tell Maughan the discussions were off. Then Corzine insisted Paulson go talk to Sandy Warner, at JPMorgan, who had an idea that Goldman and JPMorgan should be merged with Warner as the leader of the combined firm, or as the co-COO with Paulson. That discussion went away faster than did the one about merging with Salomon Brothers. JPMorgan had lost some of its “pizzazz,” Paulson said, and the idea of working for that management was a nonstarter. “Those guys thought they should run the organization, and none of us wanted to pursue that,” he said.
But the combination that made the least sense to Paulson—although it seemed to make great sense to Corzine—was the one between Goldman and Sandy Weill’s Travelers. Nevertheless, Corzine begged Paulson to go meet with Weill and hear his reasoning. “I remember Sandy Weill saying to me his first choice was to buy Goldman Sachs because he needed international presence and his second choice was to buy JPMorgan,” Paulson recalled. “I said, ‘Sandy, what if neither one of those are available? Why don’t you buy Salomon? They’re available.’ Just to test him. And he told me all the reasons why he wouldn’t buy Salomon.” (In recounting the story, Paulson laughed uproariously because in September 1997, Travelers bought Salomon Brothers for $9 billion.)
In many ways, Weill reminded Paulson of Corzine. “If it’s available, buy it” seemed to be their basic business philosophies. But Weill had a far deeper bench when it came to integrating acquisitions than did Corzine at Goldman Sachs, which had bought exactly one company—J. Aron—and wrecked it long before figuring out a way to make it pay off. Paulson could not make sense of the Travelers deal, either. “At least I couldn’t figure it out,” he said. “I wouldn’t have known how to make the combination successful, particularly when there was, in my judgment, no strategic rationale. Size is the enemy of excellence in investment banking, especially when you are trying to put together two different cultures.” Besides, he had had a tough enough time cutting people at Goldman in the wake of the 1994 losses; the thought of having to rationalize two overlapping businesses was not an assignment he relished in the slightest.
For his part, Corzine said the discussions with Salomon Brothers, JPMorgan, and Travelers were not in 1995, but were actually in 1996 and after. (A later Wall Street Journal article did peg the Salomon discussion to 1995.) He said he agreed to have the meetings—a dinner with Sandy Warner here, or a “delegation” sent to meet with Sandy Weill there—because the bankers in his FIG, chiefly Flowers, thought the meetings were good ideas. Corzine believed the discussions were just casual encounters between CEOs of financial services companies and not particularly serious, nor were they intended to be. Throughout these discussions, he said he remained convinced that Goldman’s valuation would be higher if it conducted its own IPO rather than if it merged with an existing public company.
Corzine also mentioned a dinner held between Goldman and AIG—six people on each side of the table—to explore a possible combination, with Corzine and Maurice R. “Hank” Greenberg, the strong-willed leader of AIG, leading the way. (For his part, even though some people think he arranged for the meeting, Paulson said he had no recollection of any discussion with AIG; Greenberg said AIG wanted to invest in Goldman, especially if Sumitomo and the Bishop Estate were investors—he was a close friend of John Weinberg—but could not recall a discussion about a combination of AIG and Goldman.) “It was very, very exploratory,” Corzine said. “It wasn’t like we were committing to anything. But the question was, was there something to be done between these two firms? There were some people advocating a combination between investment banking and insurance.” Corzine said that while Greenberg was a “good leader and a good person,” he was also “an intimidating guy” and so he was always skeptical of the potential deal. “Wasn’t exactly like I’m gonna sign up to be number two here,” he said. More important, few at Goldman liked the idea of a deal with AIG. “A lot of us on the trading side,” he said, “looked at that and said, ‘You’ve gotta be kidding.’ First of all, we’re going to get swallowed up in a bureaucracy, and second of all we don’t understand Financial Products at all”—a reference to AIG Financial Products, the London-based group that decided to sell billions of dollars of insurance against the potential default of various financial securities. (Later on, of course, Goldman’s involvement with AIG would have major consequences in the financial crisis of 2008.)
As irritating as these merger overtures were to Paulson, it wasn’t only the megamerger conversations that got him miffed about Corzine. There were also the failed efforts to acquire two money managers: Miller, Anderson & Sherrerd, with $29 billion under management, which Morgan Stanley ultimately bought; and RCM Management, with $22 billion under management, which sold to Dresdner Bank. Corzine also wanted to open new offices around the world. “Jon wanted to do business in every country, everywhere, and wanted to be big,” one partner said. “He was like the guy going through a cafeteria and he wanted to take everything and put it on his tray. That concerned people.” In 1995, Goldman opened offices in Shanghai and in Mexico City and created joint ventures in India and Indonesia. Paulson thought Corzine was moving too quickly to open offices and seemed never to have met a location he didn’t like. Lloyd Blankfein used to joke that “he was going to go away someday and wake up and find out we were opening up an office in Guatemala.”
For Paulson, the irony of working with Corzine was that while he was a much beloved figure around the firm, he was not an easy person with whom to work. Others noted that while Paulson often seemed not to be listening—his kinetic energy often had him bouncing around in the middle of a conversation—he was considered a very good listener, while Corzine looked like he was listening carefully to people but was often not paying attention. (His beard and cardigan sweaters made him look avuncular.) “He loved the firm,” one former partner said about Corzine. “He was committed to the firm. He worked incredibly hard. That was the biggest part of his life. But he had a real hard time compromising, and that was a strange thing. To work jointly with someone, to work well with them, you have to be able to say, ‘Okay, on matters of ethics or principle or conscience, I hold my ground,’ but if there is something that the other guy feels very strongly about and it’s not irrational or stupid on the face then you go that way.’ The key is to figure out what are the really big issues, and to Jon every issue was a big issue. He just saw it that way.”
Corzine also seemed to make loyalty to him the litmus test for everything. “When you’d say, ‘Here are the three reasons why this doesn’t make sense,’ he would never say, ‘Well, I disagree with you for this reason’ and debate you,” said one member of the senior management of the firm. “He just would say, ‘Gee, I really think this makes sense,’ and ‘Gosh, I’d like you to support me on this. I just know this would be good.’ He’d put his arm around people and a lot of them would agree with Jon. But there were plenty of people at Goldman Sachs that didn’t want to do that.… It’s always been, at Goldman Sachs, more about a bigger group of partners than just the leaders at the time.”
In August 1997, the Wall Street Journal got hold of the fact that Goldman had considered buying Salomon Brothers two years earlier, and the idea was born that the firm was seriously considering a merger as a way to go public rather tha
n doing an IPO. It was as if the firm’s thinking from two years earlier had found its way into the paper on a time-released basis. The Salomon talks—between Corzine, Maughan, and Robert Denham, Salomon’s chairman—“were merely exploratory,” the paper reported, and didn’t amount to much, especially after Goldman reportedly insisted on running the combined firm but showed “that taking itself public may not be the only route open to Goldman should it decide that it wants to become a public company.” The paper also reported that AIG had considered taking a 25 percent stake in Goldman after the 1994 debacle. At the time of the Journal’s article, mergers were rampant on Wall Street, as was speculation about what deals were next. In May, Morgan Stanley merged with Dean Witter, in a surprising bid to diversify its institutional franchise into the retail market. Then there were a series of three smaller Glass-Steagall-busting deals between commercial banks and investment banks that had people scratching their heads: Bankers Trust Company bought Alex. Brown Inc.; BankAmerica Corp. bought Robertson Stephens & Co.; and NationsBank Corp. bought Montgomery Securities. (Glass-Steagall’s repeal—long de facto—became de jure in November 1999, thanks in large part to Bob Rubin.)
The article speculated on the reasons why a merger with an existing public company would appeal to Goldman’s younger partners—particularly the fact that no so-called IPO discount of between 10 percent and 15 percent would be required to attract investors—but the whole idea that a company with as formidable a brand as Goldman Sachs would go public through a “back-door IPO” seemed far-fetched.
Indeed, quite the opposite seemed true: the firm performed so well in 1996 and 1997 that a Goldman IPO looked increasingly inevitable at some point during 1998, when the partners would reconvene for their biannual meeting. Whatever else could be said about Corzine and his management style, there was no denying that he got the Goldman workforce out of its funk and focused intently on profits. In 1996, on revenue of $6.1 billion, the firm earned $2.6 billion in pretax profits, an unheard-of margin of 43 percent. In 1997, on $7.4 billion in revenue, Goldman earned $3 billion in pretax profit, a 41 percent margin. With regard to ROE, the performance measure Corzine had instituted in 1996, the firm’s performance was off the charts: 51 percent in 1996 and 53 percent in 1997. In the wake of the 1994 disaster, Corzine and Paulson had turned Goldman Sachs into a profit machine.
But Paulson was not happy. He had been paid millions of dollars in compensation for years. He owned 4.1 million Goldman shares worth hundreds of millions of dollars and was on the brink of realizing much of that wealth, assuming Goldman moved forward with an IPO in 1998 as expected. Instead, he was burned out. He had been traveling through Asia for much of the year, while at the same time overseeing the firm’s banking, private-equity, and asset management businesses. He could not get along with Corzine. “The differences between Corzine and me became huge,” he said. “I was tired of bumping my head against a wall.” He believed Corzine surrounded himself with his cronies, who told him what he wanted to hear, and was irritated by an increasing number of Corzine’s decisions that he thought were wrong. For instance, one particularly galling situation occurred when Paulson fired a partner in Chicago who got caught having an affair with a twenty-one-year-old secretary. Corzine reversed the decision and reinstated the partner in New York. Or he would hear from his friends that Corzine was going around behind Paulson’s back and trying to undercut him with other partners.
Before the Christmas break, Paulson went to see Corzine and told him he was thinking of leaving. “I said to him I didn’t think it was healthy for both of us to be here,” he said, “and that I was willing to leave. We just needed to negotiate who was going to be paired with him to run the firm because I wasn’t comfortable having him run the firm unchecked.” He wanted to negotiate with Corzine a bigger management role for both John Thain and John Thornton, who were quickly emerging as the leaders of the next generation at the firm. Corzine ignored him. “He didn’t really respond,” Paulson said. Corzine’s nonresponse was increasingly typical of him, some of his partners had noticed, with growing frustration, when he seemed to be giving them “the limp leg.” The “Fuzzy” nickname was heard with greater frequency within the halls of power at the firm. Paulson used the Christmas vacation to think about how to respond to Corzine’s indifference. He and his family went to the Yucatán Peninsula for a little kayaking, birding, and fishing. Wendy counseled him not to be rash and to think through his decision. “You’re miserable now,” she told him. “I want you to be happy. But just make sure you’re going to be happier if you leave.”
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PAULSON DECIDED TO keep fighting and went back into battle in 1998. Within weeks, though, Corzine made a major political misstep—or at least that’s how it was perceived—and handed Paulson the opening he had long been seeking that would give him the upper hand at the firm.
Chris Flowers, the highly respected FIG banker, was one of Corzine’s closest allies at the firm. Flowers was classic Goldman. Born in California, he had moved to Weston, Massachusetts, a suburb of Boston, at age six, when his father retired from the navy and took a job as an administrator at Harvard Business School. In high school, Flowers was a math whiz and a chess champion.
He then enrolled at Harvard, where he majored in applied mathematics. He said, “I found people at Harvard who made me look like a moron at math.” Flowers knew he wanted to go into business. He got a summer job at Goldman Sachs after his sophomore year, and after graduating from Harvard a semester early, Flowers joined Goldman full-time in March 1979, working as an analyst for Steve Friedman in M&A. “The first thing I learned at Goldman was how to work hard,” he explained. That first year he worked “three hundred and sixty-five days straight,” and Goldman paid him $16,000. He says he also learned how to “sell,” the mundane but crucial aspect of investment banking that requires bankers to persuade clients to hire you and your firm rather than someone else and his firm. Flowers bloomed at Goldman. He was invited into Goldman’s nascent Financial Institutions Group as the M&A guy and quickly shone. By 1988, he’d been named a partner at the tender age of thirty-one, the youngest at the time to attain that distinction.
Corzine seemed utterly captivated by Flowers. They had worked together for ten years on different assignments, and Flowers impressed Corzine with his understanding of both strategy and capital markets. “He was our franchise with financial institutions and he was extraordinary,” Corzine said. “I don’t think anybody would dispute that he was number one or two in the world at giving advice to financial institutions.” Flowers went out of his way to introduce Corzine to the other leaders in the financial industry. “Some of the original introductions were actually from Chris,” Corzine said.
One of those introductions was to Frank Cahouet, the CEO of Mellon Bank. Mellon and Cahouet had been a longtime client of Goldman and Flowers. For instance, in April 1997, Mellon hired Goldman to sell its corporate trust business. Then, in October 1997, Mellon hired Goldman to represent the bank in an unfriendly $18 billion bid to acquire CoreStates Financial, another Pennsylvania bank (Goldman’s principles about not representing hostile bidders having once again fallen by the wayside apparently). When CoreStates rejected Mellon’s offer, Mellon dropped its bid. Early in 1998, Flowers arranged for a meeting between Corzine and Cahouet. To Corzine, the potential combination of Goldman and Mellon made tremendous sense. Mellon had no investment banking business (so no overlap) and a huge asset management business (one of the key areas in which Goldman was looking to grow) plus a commercial banking business that would allow Goldman access to a steady form of cheap financing from customer deposits. Mellon also had a nascent prime brokerage business, which provided brokerage services to hedge funds and other large institutional investors, another area that Goldman was also looking to build. In many ways, a combination with Mellon made tremendous sense for Goldman—at least on paper. “It was one meeting,” Corzine said. “I was more enthusiastic about that, though, than any of the others. If we ha
d been able to get through the ‘King of the Hill’ stuff, maybe it could have gotten done. But that wasn’t happening with Frank and so it really wasn’t going anywhere. I think it got deeply exaggerated by some of the folks who wanted to use it as another excuse to say I didn’t know what I was doing.” Corzine told Paulson about the meeting, told him it was “very preliminary” but that it “made a lot of sense” and that he thought he and Cahouet would be co-CEOs and Paulson would have the “much bigger role” of being head of the combined firms’ commercial and investment banking businesses.
From Paulson’s perspective, Corzine’s “one meeting” with Cahouet was actually something more. Paulson worried that perhaps Corzine had already started negotiations to put the two firms together. Then, “after he was pretty far along he said something to me,” Paulson said, “and then he said he wanted Chris Flowers to talk with me about it.” Flowers, whom Paulson described as “incredibly commercial, really bright, and quite straightforward,” had an amazing message for Paulson. “Chris had explained to me that my stock would be worth $850 million after we got done [with the merger],” he recalled. “I remember they thought that would really do the trick.” After his meeting with Flowers about the deal, Paulson said he spoke with Corzine and raised some objections—particularly that he thought Corzine might be getting ahead of himself—and that if he was going to have another meeting with Cahouet, Paulson wanted to be there.
But Corzine told him he was just getting to know Cahouet and wanted to do the next meeting by himself. He told Paulson he wasn’t going to get into any details, he was just going to listen and take notes. Paulson wasn’t happy about Corzine’s decision, but Corzine was the CEO. What could he do? After Corzine had the second meeting with Cahouet, Paulson asked him how it went and what had transpired. “Well,” Corzine told him, “I just listened. I didn’t get any details.” Then Paulson called Flowers—“a heat-seeking missile looking for the money,” he said—and asked him to come by and see him that day, which happened to be a Sunday. Flowers told Paulson that Corzine had made a merger proposal to Cahouet, including specifics on the economics of the deal, the exchange ratio, and who would be leading which business units. “I got angry,” Paulson said.
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