Money and Power

by William D. Cohan

  Thornton hated to lose and once reportedly announced at a new-business pitch, “If we do not get this mandate I will personally slit the throats of all my team and drink their blood.” Goldman got the assignment. Once he had a mandate, he was equally determined that his client would win, at nearly any cost. When Storehouse PLC was looking to fend off the raider Asher Edelman, Thornton hired the private investigator Terry Lenzner—brother of former Goldman arbitrageur Bob Lenzner and a famed former civil rights lawyer. Lenzner “uncovered enough dirt to persuade some of” Edelman’s financial backers to drop the deal. Another time, on a different deal, Lenzner’s team was caught going through garbage bags in an effort to thwart a hostile takeover of Racal, the defense electronics firm, causing “obvious embarrassment” to Goldman. Thornton’s greatest M&A triumph seems to have been his ruthless 1991 defense of ICI, the chemicals company, from the clutches of Lord Hanson and his Hanson Trust PLC. “He undertook a vicious, no-holds-barred demolition job in the Press and in the City on the predator, exposing Hanson Trust to allegations of rampant tax avoidance and excessive executive indulgence,” according to The Independent. “Hanson’s City reputation never recovered from the assault.”

  In 1996—after Thornton had threatened to leave Goldman for Lazard a year earlier—Paulson and Corzine named him chairman of Goldman Sachs Asia, to re-create in Asia the success he had in Europe. In 1998, thanks in large part to Thornton, Goldman was selected to lead the $18 billion IPO of Japan’s DOCOMO, the cellular phone giant.

  Not surprisingly, along with business prowess, Thornton had a knack for making enemies. Lord James Hanson accused Thornton of using “dirty tricks” to discredit him. Lord Timothy Bell, a former adviser to Margaret Thatcher and then an adviser to Goldman, said of Thornton, “He is someone you want to have on your side, not someone else’s.” In one profile of him, one anonymous banker urged the writer to “let him have it with both barrels” and then concluded, “he is a terrible man.” Added a former colleague, “He has a huge number of enemies … he knocks people about.”

  Invariably, the profiles of Thornton—once they get done describing his ruthlessness in a business setting—get around to talking about his picture-perfect personal life. “John Thornton has one big flaw—he is just too perfect,” began one profile of him in the Sunday Times, in May 1999. (His friend, Rupert Murdoch, owned the London paper.) “If you called central casting and asked for a Wall Street banker, they would send Thornton.… Bankers are often dull, pompous or both. Thornton is neither and he and his wife Margaret”—a Tennessee Williams scholar—“are seen as great catches on the London social scene. He is 45, rich (the float values him at £121 million), successful and happily married. No wonder some people hate him.” (And no wonder, at one point, Paulson told Thornton to crank down the publicity machine. Thornton declined repeated requests to be interviewed for this book.)

  But these profiles ignored the claim that he likes to throw around his wealth and his power. His affinity for high-priced real estate is legendary. In 2008, he paid $81.5 million—the asking price—for businessman Sidney Kimmel’s 32,000-square-foot oceanfront mansion on South Ocean Boulevard, in Palm Beach, Florida. Real-estate taxes alone on the house were $517,775 in 2007. In 2001, he paid $18 million for the 118-acre Dunwalke estate in Bedminster, New Jersey. Both the Palm Beach and Bedminster homes were record prices in their locales at the time Thornton bought them. He also owned a home in the tony Belgravia section of London. He and his wife bought and restored a $1.3 million antebellum mansion in Charleston, South Carolina, where she was born. At Hotchkiss, where Thornton is chairman of the school’s board of trustees (and where three of his four children went—or are going—to school), he has bought up a number of homes around the lake on which the school sits, much to the consternation of his neighbors, who are worried about what he might do. He also used his influence at the school to replace a tennis coach with a coach being used by his son—who was excluded from the tennis team by the original coach and then was included when the new coach was installed. “He is a real dick,” one “rival” banker told the New York Observer in a 2001 profile of Thornton. “How do you think he got where he is now?”

  Along with Thain, Thornton was one of the leaders of the opposition effort inside Goldman to the IPO in 1998, whether he was standing on principle—as it was often portrayed—or because Corzine was leading the firm was not entirely clear. When Corzine succeeded in getting the IPO approved by the Goldman partnership in June 1998, many observers thought Thornton’s days at the firm were numbered. “Mr. Thornton always denied that he was opposed to the float,” The Independent observed, “but if there was a focal point for opposition, he was it.” After the partners approved the IPO, Thornton “seemed sidelined,” the paper wrote. “If his opposition had been a bid for Mr. Corzine’s job, he appeared to have misjudged it.”

  Thornton’s fortunes changed, of course, when he teamed up with Thain, Paulson, and Hurst a few months later to oust Corzine in the wake of the withdrawn IPO. Suddenly, Thornton was on board for the IPO, now that Paulson was the CEO. As co–chief operating officer in the new Paulson regime, Thornton moved back to New York—somewhat reluctantly—and holed up in the Carlyle, a hotel, on Madison Avenue. The plan was for Thain and Thornton to sit tight, wait for Paulson to retire, and then be crowned as the new leaders of the firm. Paulson told them he only wanted to stay around for two years. “John Thornton and I had the expectation that he was going to stay for two years and then he would leave and we would be elevated,” Thain explained. For some reason, Thornton rarely went into the office at 85 Broad Street, preferring to stay at the Carlyle when he was not on an airplane.

  A number of factors quickly made the situation untenable for Thornton and Thain. First, where the power at the private firm had resided in the one-man, one-vote Management Committee (or briefly, the Executive Committee) with the senior partner as leader but not the ultimate authority, now, as a public company, the power at the public Goldman resided with the chairman and CEO—Paulson—and with the company’s board of directors, which was basically in Paulson’s pocket. In addition to Paulson, Thornton, Thain, Hurst, and John Weinberg (as a courtesy), the first Goldman board had Paulson’s friend John Bryan, CEO of Sara Lee; Thornton’s friend Sir John Browne, the CEO of BP Amoco PLC; James Johnson, the former CEO of Fannie Mae and a Rubin friend; and Ruth Simmons, the president of Smith College. Second, as co–chief operating officers, Thain and Thornton had people reporting to them but no direct management responsibility themselves for particular business lines, such as investment banking, FICC, or asset management. Such a job would have been fine if they were elevated to be co-CEOs in 2001, as was the original plan. They then could have been simply CEOs-in-waiting and learned the ropes. But the logic of their appointment began to dissolve in the wake of the third factor affecting them, which was that Paulson decided he liked the job of being Goldman’s CEO and did not want to relinquish it. He liked making decisions and wasn’t that keen on consulting with the two men. “The two of them sat there,” one partner said, “and Paulson wasn’t about to sit there and collaboratively say, ‘Let’s take a vote and make the decisions.’ ” Paulson had yet another troubling situation brewing, and he knew it.

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  BUT FIRST THERE was money to be made. In 1999, its first year as a public company, Goldman rang the cash register. Thanks to the growing Internet bubble, revenue skyrocketed to $13.3 billion, from $8.5 billion the year before. Pretax income, which now included the cost of compensation—in years past, pretax income did not include partners’ distributions—also soared to around $4.2 billion (excluding a onetime $2.2 billion gift to employees), from $2.9 billion in 1998.

  Paulson was euphoric. “Our performance far exceeded the financial goals we set for ourselves in the lead-up to our initial public offering,” he wrote to his new shareholders. “We told potential investors that we saw numerous opportunities to grow the firm’s businesses, but emphasized that we work in a
n industry that does not produce predictable earnings on a quarter-to-quarter basis. Recognizing this reality, we set financial targets of an annual return on equity of more than 20 percent and 12 to 15 percent earnings growth over the cycle. In 1999, on a pro forma basis, we had a 31 percent return on equity, and our net earnings rose by more than 100 percent.” As for the future, he wrote, “As we begin the new century, we know that our success will depend on how well we respond to change and manage the firm’s rapid growth. That requires a willingness to abandon old practices and discover new and innovative ways of conducting business. Everything is subject to change—everything but the values we live by and stand for: teamwork, putting clients’ interests first, integrity, entrepreneurship and excellence. These values sustained the firm and set us apart during the 20th century. They must never change, but much else will. We can afford nothing less if we are to become a nimble, highly focused, technology-centered, 21st century business and remain the world’s premier investment bank and securities firm.” Paulson was paid $25 million for the year, and his nearly 4 million shares of stock were worth $571 million; Thain and Thornton were each paid $21.5 million, and their stock was worth $552 million and $447 million, respectively.

  In 2000, there was more of the same, only more of it. Net revenues grew again, to $16.6 billion, and pretax income was $5 billion, up 20 percent. Part of Paulson’s success as a banker and as a CEO was his ability to lead by example. Nobody worked harder, of course, but nobody was better at “asking for the order,” getting close to CEOs, or encouraging the sharing of vital information about clients or markets or trades around the firm. The impact of Paulson’s high level of engagement on the rest of Goldman cannot be underestimated. In an era before e-mail, Paulson was a relentless user of voice mail and would spend hours a day leaving messages, forwarding messages, and copying others on messages. This also sent a powerful—message—to the organization. Paulson constantly bombarded his partners: “Here’s what I just heard. Boom.” He was a “great networker of information,” explained one partner. “A great communicator, ironically. Not in a Ronald Reagan sense, but in an ‘I hear it, I get it out’ sense. That’s how he made his career in banking, too, was as a user of information, calling CEOs and saying, ‘What are you doing? This is what I heard.’ ” Everyone at Goldman would have hundreds of voice mails to deal with every night that would require hours of attention. Spouses would be left speechless. One partner said his wife would look at him every night and think, “Nuts. Nuts. Nuts.”

  During 2000, Goldman made—by far—its largest acquisition, spending $6.65 billion in cash and stock to acquire Spear, Leeds & Kellogg, a leading specialist firm, the acquisition of which made Goldman the largest market maker on both the New York Stock Exchange and American Stock Exchange, and the second-largest clearing firm on the NASDAQ. “We have no doubt that as the [New York Stock] Exchange changes, as there is more done electronically, I’m sure like a lot of functions the specialist function will evolve,” Paulson said. “But we have no doubt we’re going to need those skills. We think the winning combination for the future is going to be strong people skills and strong technology.” The market liked the deal, and after it was announced, Goldman’s stock closed up $8 per share, to around $132, near its fifty-two-week high. Analysts liked the deal, too. “It basically allows them to internally cross more of their NASDAQ volume,” Guy Moszkowski, at Merrill Lynch, said. “It takes the number of stocks that they can make markets in on the NASDAQ up over 6,000 from 300 or so stocks they do now.” But, in time, as the specialist system on Wall Street slowly dissolved in favor of electronic trading, the Spear, Leeds deal would prove to be a poor one—not that it would particularly matter, given how much money Goldman was making in its core businesses.

  Although profits were higher at Goldman in 2000, the troika at the top of the firm was paid less—$19 million for Paulson and $16 million each for Thain and Thornton—and by the time Paulson wrote his annual letter for 2000, in early 2001, the market had begun to crack. The bursting of the Internet bubble on March 10, 2000, when the NASDAQ peaked intraday at 5,132, had a grave impact on Wall Street. Tens of thousands of investment bankers lost their jobs, and the compensation for those who remained was much diminished. “The markets of the last months of 2000 and the first part of 2001 produced a much less favorable business environment than earlier in 2000, and reminds us that our greatest challenge remains in managing growth,” Paulson wrote. “We will be disciplined in our approach, but we will continue to build for the future.”

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  UNLIKE MANY OF its Wall Street peers—Merrill Lynch, Morgan Stanley, and Lehman Brothers—Goldman suffered no fatalities on September 11. Its headquarters, at 85 Broad Street, while near the New York Stock Exchange and about a quarter mile from Ground Zero, was unscathed except for being covered in white dust. But the calamity that day opened a few fissures among the top executives of the firm. On the day of the attack, Paulson was in China, Thornton was in Washington, and Thain was in New York. It turned out that Paulson got back to New York before Thornton did, which did not sit well with the CEO. Why Thornton remained in Washington, instead of rushing back to 85 Broad Street, has never been made clear. But Thornton’s immobility left his partners dumbfounded. Some say he didn’t show up at Goldman for months after September 11. “It was pretty clear from a leadership standpoint that that was a moment in time—the CEO is in China—let’s go,” explained one Goldman partner. “Thain’s here, command central. He’s in Washington—just drive here, whatever. Even if you’ve already been told you’re out, a natural leader would have come back to New York. When people saw that, I think that was sort of … let’s just say he didn’t last that long after that.… People reacted different to nine-eleven. Maybe he just didn’t get it. But if you have ambition to run a firm, what are you doing? In a crisis like that? Come on.” Many partners lost complete confidence in Thornton at that moment. “There are a lot of people that think Thornton was an empty suit,” said one. “A lot of people. I thought Thornton was strategically very smart. And he always wanted to have an angle in front of a client: ‘What’s the edge? What are we saying? Let’s not just go in there and say nothing.’ But then as a leader, and a manager, he wouldn’t be in the top twenty-five. Which is sort of sad, because he had it. He could have done it. He was right there.” Soon thereafter, Paulson confided to some partners, “I’m going to push Thornton out.”

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  IN THE MONTHS before and after the September 11 attacks, Paulson was faced with a number of embarrassing situations, some of his own making, some not. For instance, there was the unfortunate story of Kevin Ingram, the onetime head of adjustable-rate mortgage, or ARMs, trading at Goldman. He was one of five children, raised by a single mother “on the gritty streets” of North Philadelphia, according to one story about him. But he rose above these difficult circumstances and graduated from MIT with a degree in chemical engineering. From MIT, he was off to graduate school at Stanford, also in engineering, when he heard that Wall Street was increasingly interested in such skills. He switched immediately to the MBA program at Stanford. Ingram was a highflier at Goldman and was friendly with both Rubin and Corzine. Not only was Ingram a proven moneymaker at the firm year after year, but he was also black, which put his career potential on an even higher trajectory, especially since Goldman had few, if any, black partners at the time. Rubin, especially, took a shine to Ingram. “Kevin is very smart and had a very scientific approach to trading,” a Wall Street colleague told the Times, in October 2001. “His engineering background meant he could understand complex mortgage-backed securities and structured transactions in a market-efficient way. And he had loads of support on Wall Street. He had the varsity of the varsity behind him.” He also lived well: he had a yellow Ferrari, a silver Porsche, a Bentley, a Lexus, a Range Rover, and a forty-four-foot yacht.

  In 1996, Ingram got passed over for partner at Goldman, losing out to Steve Mnuchin, the son of the longtime Goldman pa
rtner Robert Mnuchin. “He was livid,” remembered a former colleague. “He was much smarter than Steven, had accomplished a lot more, but his dad wasn’t Robert Mnuchin. And he left.” In short order, Deutsche Bank hired Ingram to lead its global asset-backed trading desk. (Sadly, years later, Ingram would engage in a tawdry money-laundering scheme and would go to prison.)

  As blame began to be apportioned in the fallout from the collapse of the Internet bubble, Goldman came in for more than its fair share of criticism. For instance, in early October 2002, the House Financial Services Committee, under the leadership of Representative Michael Oxley, a Republican from Ohio, issued a report accusing Goldman of distributing chunks of shares in so-called hot IPOs—including Goldman’s own IPO—to twenty-one CEOs of big companies with which Goldman did significant amounts of investment banking and trading business. After receiving the shares of the much-sought-after IPOs, the CEOs often sold them quickly into the market—in a process known as “spinning”—at prices substantially higher than what they paid for the shares, often netting huge profits. Some observers quickly took to likening what Goldman did in facilitating spinning for favored clients to bribery. According to Representative Oxley, Margaret “Meg” Whitman, then the billionaire CEO of eBay and a Goldman director, and Jerry Yang, one of founders of Yahoo!, each received shares in more than one hundred hot IPOs managed by Goldman and then flipped the shares for a fast profit. EBay had paid Goldman $8 million in investment banking fees since 1996.

  According to Representative Oxley’s report, Goldman’s generosity seemed to be reciprocated in spades. For instance, Goldman served up shares in more than twenty-five IPOs to Edward Lenk, the former CEO of eToys, which paid Goldman $5 million in fees. Martin Peretz, former director of TheStreet.com Inc., received more than twenty-five IPOs, and his company paid Goldman $2 million in fees. Goldman allocated shares in more than fifty IPOs to iVillage co-founder Nancy Evans; iVillage paid Goldman $2 million in fees. Then there were the IPOs Goldman allocated to executives of companies that ended up at the center of the meltdown, including Enron, WorldCom, Global Crossing, and Tyco. Three of these four were Goldman clients—Tyco, which had paid Goldman $57 million in fees since 1996; Global Crossing, which had paid Goldman $45 million in fees; and WorldCom, which had paid Goldman $19 million in fees. Representative Oxley also found that Goldman’s own IPO, which rose in price dramatically on the first day of trading, was a way for Goldman to reward favored clients and investors. For instance, Michael Eisner, CEO of Walt Disney Co., received thirty thousand Goldman shares at the IPO price. Disney had paid Goldman $51 million in investment banking fees since 1996. William Clay (“Bill”) Ford Jr., a director of Ford Motor Company and Thornton’s friend from Hotchkiss, received four hundred thousand shares of Goldman’s IPO; Ford had paid Goldman $87 million in banking fees since 1996. “There is no equity in the equity markets,” Representative Oxley proclaimed in releasing his report.