Money and Power

by William D. Cohan

  Paulson was a natural at certain aspects of being Goldman’s CEO. He was a guy who liked being in charge. With his bald pate, imposing build, and military demeanor—he seemed so authoritative—he was the type of man who could get other people to take the hill on his orders. He was very decisive when a decision needed to be made, even if he lacked the requisite expertise or knowledge to make it. In those instances, he was clever enough to gather around him the people with the knowledge, hear their thoughts, and then move forward. He loved being the CEO of Goldman Sachs, in part because it meant he could get to see pretty much anyone on earth he wanted to see. When he was Goldman’s CEO, the premier of China consulted with him about setting up executive training programs throughout China and about establishing a business school at the premier’s alma mater, which the top seven Chinese leaders attended. He talked to the Chinese leaders about privatizations and about how to deal with the ratings agencies. Angela Merkel, the chancellor of Germany, would visit with Paulson and talk for hours about world events and economics. Before her first meeting with President Bush in January 2006, she consulted with Paulson. When she got out of the meeting, she called Paulson and debriefed him from her car. He also occasionally worked on big deals as he had for years as a banker. For instance, he got personally involved in Procter & Gamble’s January 2005 $57 billion acquisition of Gillette, which Goldman advised. At one point, when the deal seemed like it might fall apart, Paulson helped bring the two sides back to the negotiating table. Indeed, by his own admission, he was having such fun being Goldman’s CEO—and he was so good at it, he said—that he decided he would not follow through on the promise he had made to Thornton and Thain to relinquish the position after two years. (In Paulson’s telling, the board would not let him leave even if he’d wanted to.) He would not have relinquished it easily under any circumstances, but after September 11 and after Goldman got ensnared in one Internet bubble scandal after another, he also came to the conclusion that neither Thornton nor Thain was up to the task of being the next CEO of Goldman Sachs.

  In Paulson’s version of events—a rare and not wholly convincing attempt at spin—he blames himself for putting both Thornton and Thain in roles at the top of the firm in which they could not succeed, especially when he—and the Goldman board—decided he needed to remain as Goldman’s CEO beyond the originally conceived time period. What started as a reward for their loyalty in supporting Paulson in his single-minded desire to overthrow Corzine ended in Paulson having to engineer their exits from the firm. “I’m the guy who was working with clients in Chicago, running the investment banking and private equity,” Paulson said. “I had a fondness for smart people, and they were both very smart. Thain was just good at thinking through risk, at protecting the firm and making sure we had excess liquidity and also worked extremely hard. Let me just tell you something. In terms of the commitments to committees—the capital committee and the risk committee—John Thain ferreted out more things that didn’t smell right and didn’t look right. In terms of protecting the integrity of the firm, he was great there. I just thought these were two really young, outstanding guys. They had experience all over the world. John Thornton was instrumental in building our international M&A business. John Thain started out in banking and in the trading division and knew the trading side of the business well, and then really understood the infrastructure of the firm. And the business being as dangerous as it was, having someone with his expertise there as a co-president of the firm, and then having a brilliant, global investment banker matched with him, it looked like good fit.”

  But, once again, a presumed succession plan had failed. This was not Paulson’s favorite subject and one he discussed only with great reluctance. “I really liked both guys,” he said. “They are very talented. They were close to me. They were helpful and it was an impossible situation for them in many ways because their titles were co-presidents and co–chief operating officer. And neither one of them was an operating officer and neither of them wanted to be an operating officer. Neither one of them had ever run a business. They thought that I’d be leaving in a year or two, so they thought of themselves as heirs apparent. We signed every memo ‘Hank, John and John.’ ”

  But increasingly over time, the other executives at Goldman grew resentful and referred to them as the “owner’s sons.” Resentment continued to build not only after the Internet IPO scandals but also after Goldman’s dot-com initiatives—such as investments in Wit Capital and a number of electronic trading platforms, including Primex Trading, a joint venture among several Wall Street firms and Bernie Madoff’s securities firm—soured and as it became clear that the Spear, Leeds acquisition was basically a bust. “In doing things like that they were hopeful when we were executing,” said one Paulson loyalist about Thornton and Thain, “but when we were dealing with a mess they weren’t around.”

  As it became clear that Paulson was sticking around, he encouraged both men to use one of Goldman’s supply of “management coaches,” who could help them think through how to adapt to the new situation, and to begin to take on more and more operating responsibilities, to help relieve some of the burden on Paulson. According to the Paulson loyalist, Thornton’s coach and his “well-meaning friends” had a simple message for Paulson: “You know something? He can’t survive in this spot. If you don’t want him to be CEO then he’ll have to leave. But otherwise he’s just in an untenable position.”

  But Thornton had few fans at Goldman outside those who knew him well in London or in the M&A department. For some people, he was a “patron saint,” Paulson said. Others, though, saw Thornton as “arrogant,” according to a number of Goldman partners, and a glaring symbol of the Goldman meritocracy gone haywire—someone who was rewarded with a position far beyond what his considerable accomplishments merited. “The organization overall didn’t like John because it didn’t know him,” explained one partner.

  To help pick up the operating slack, in March 2002, Paulson named Robert Steel, Lloyd Blankfein, and Robert Kaplan as vice chairmen of the firm, a move many saw as setting up a new group of potential leaders in competition to one day succeed Paulson, since he had pretty much decided that neither Thain nor Thornton would work. The topic of succession planning had been an acute one at the board level, and the appointment of the new vice chairmen was one result of those discussions. Kaplan, one of the former co-heads of investment banking, would oversee both investment banking and asset management. Steel and Blankfein would oversee the firm’s huge—and hugely important—FICC businesses. (Meanwhile, Bob Hurst, previously the firm’s sole vice chairman, was on his way out of Goldman by the beginning of 2002, as he was spending at least half of his time leading the 9/11 United Services Group, an umbrella charity for victims of the September 11 attack.)

  Blankfein’s career trajectory angled further upward during the course of 2002 as the performance of the FICC group—his baby—put up impressive numbers, making close to $1 billion in a difficult financial market. (Investment banking’s pretax profits, meanwhile, plunged to $376 million in 2002, from $1.7 billion in 2000.) Paulson rewarded Blankfein at the end of 2002 by paying him $16.1 million (nearly 50 percent more than both Thornton and Thain)—making him the highest-paid individual at the firm—and then nominating him for a one-year term on the Goldman board of directors. No doubt, the combined effect of Blankfein’s promotion, compensation, and nomination did not sit well with the highly ambitious Thornton and Thain.

  Thornton was the first victim of Paulson’s revised thinking. By March 2003—at least eighteen months after he had probably made the decision that Thornton would not get the top job—Paulson decided Thornton had to leave Goldman, and quickly. He had hoped Thornton would step up and help the firm deal with the Internet scandals, but instead he seemed to disappear, spending more and more time at the Carlyle or in Washington, where he had become chairman of the Brookings Institution. He had hoped Thornton would take on more day-to-day operating responsibility for one or more business lines�
�such as investment banking—and relieve Paulson of having those daily interactions, but he did not. On March 24, Goldman announced Thornton was retiring from Goldman as of July 1, and would also leave the Goldman board of directors. Although he received no severance, he would not be leaving empty-handed. He was paid $11.2 million in 2002. His Goldman shares were then worth around $230 million. He was named a senior adviser to the firm and agreed to be available to “work closely” with Paulson and Thain “on certain strategic matters” involving Goldman and its clients. He was also going to spend more time at Brookings, and—thanks to Paulson and his connections—was named a full professor at Tsinghua University, in Beijing, described alternatively as the “MIT of China” and “China’s foremost institution of higher learning.” (Among Tsinghua’s graduates are Zhu Rongji, China’s former prime minister; Hu Jintao, China’s president; and Wu Bangguo, the chairman of National People’s Congress.) For reasons not entirely clear as to why this honor was bestowed upon him—he spoke no Chinese—Thornton was the first non-Chinese to be named a full professor at the university and was named the first director of the university’s newly established (thanks to Paulson) Program for Global Leadership. Goldman also announced that Thornton would serve as a special adviser on China to Richard Levin, Yale’s president.

  All things considered, Thornton’s forced retirement came with a number of nifty consolation prizes. Paulson even managed some happy talk on the firing. “John will be greatly missed,” Paulson said at the time. “He exemplifies the best of our firm: a tireless devotion to client service, to excellence, and to the development of our people. From the beginning of his career, John recognized the importance of the international business and has been a driving force behind our development into a global firm. We are grateful for his dedication and service over the past 22 years, and we are pleased that he will continue to be available to us as an advisor.”

  The truth of what happened to Thornton—like many things at Goldman Sachs—was not quite the official version. One popular scenario had Thornton getting tired of waiting for Paulson to abdicate the Goldman throne, telling him he wanted the top job and asking Paulson to leave immediately. Offended by the raw power play, in this version of events, Paulson supposedly told Thornton that he was fired and sent him—immediately—to find the elevators and to leave the building. Another had it that Paulson just got fed up, once and for all, with Thornton’s elusiveness and failure to dig into the leadership role he had been given. Paulson denied that anything remotely like either scenario happened, especially since Thornton was a brilliant tactician and would never have initiated a coup without having already lined up the support needed to succeed. But there is no denying that something occurred to damage irrevocably their relationship between February 27, 2003—the date Goldman filed its proxy statement where the firm recommended Thornton be elected to a new three-year term as a director—and March 24, when his unexpected departure was announced. In an interview that day, Thornton told the Wall Street Journal that he left because “it was clear to me that Hank is staying around for a while. When I was younger, I said I wanted to get out of the business at 40, but now I am nearly 50 and ready for a change. It is time to do something different and touch people’s lives in a different way.”

  A number of people close to Paulson confided that Paulson fired Thornton deliberately. “Thornton left because Hank pushed him out,” explained one former senior Goldman partner. “The reason he pushed him out was Thornton was a very political guy. He had enormous talent, by the way. But something weird happened after nine-eleven where nobody could find him for weeks and months. Thornton always acted like he was a secret agent. Nobody ever knew where he was. And Hank finally concluded that he was a sinister force. So Hank created this opportunity in China and he pushed him out.”

  What must have seemed like fabulous news to Thain in his quest to replace Paulson—his main rival’s departure—rapidly became more muddled. “At first, he thought he was a shoe-in,” a top Goldman executive said of Thain’s thinking after Thornton’s ouster. “John A. Thain is not a flashy banker or a man with a thousand relationships,” the New York Times reported the next day. “But this understated, austere man who knows the firm’s inner workings might be the right man for the times at Goldman Sachs. With the abrupt departure of John L. Thornton, Mr. Thain becomes the sole president of the firm and the presumptive heir apparent to Henry M. Paulson Jr. As such, he represents the rapid rise of the numbers guy on Wall Street.… Glossed over was the broad gulf in the operating styles of the two ambitious executives. Mr. Thain, who has a degree in electrical engineering from the Massachusetts Institute of Technology, is a clinical, dispassionate man with a military bearing, say those who know him. He has a keen eye for the firm’s bottom line, keeps meetings short and spends less time traveling the world than most bankers at his level.”

  Soon after Thornton’s departure, Paulson began to rain on Thain’s parade. He suggested to Thain that Blankfein, the rising star, be named his co-president, replacing Thornton. Thain would have none of that suggestion. “He thought it was unfair and uncalled for, for me to suggest that Lloyd move up and share a title with him,” Paulson said. Paulson tried to reason with Thain. “I explained that he was doing an outstanding job working with his part of Goldman Sachs,” he said. “But that what Lloyd was doing he was doing well with the FICC organization. I thought that they could work together as co-heads and I thought that they complemented each other very, very well and it was a very big job”—being sole president of Goldman—“and I thought that they could very well both move up and succeed me. And I think the board thought we should have more than one candidate.”

  Either the two of them would succeed him as CEO or they would compete against each other and one would emerge as the obvious choice. “I actually thought when I paired Lloyd with John,” Paulson said, “we’d see how they both would develop and one or the other or both of them would be my successor. John didn’t want any part of that. He wanted to be CEO, and he left to go be one.” Under those circumstances, Paulson likely would not have been too pleased with Thain’s subsequent decisions to go skiing for two weeks at Christmas and then for another two or three weeks in the spring. He might have hoped the two men would compete head-to-head to allow the board to determine who his successor would be, but the fight seemed to go out of Thain after Blankfein’s appointment.

  In any event, Thain kept rebuffing Paulson’s suggestion, telling him he wouldn’t agree to it. “There’s no pretense to Hank,” Thain said. “Hank says what he means. He means what he says. He’s not in any way a guy who veils his feelings or his thoughts. He certainly was good at maneuvering around and he had the power and authority and he used it.”

  The other influencing factor was that the two men did not get along. Like Paulson and Corzine before them, the gemütlich and brilliant Blankfein could not have been more different than the diffident and cerebral Thain. “He seems much more self-deprecating than Hank,” one Goldman executive said about Blankfein, “but it’s not true.” Their growing rivalry could not have been helped by a November 2003 article in the New York Times about the scandal that had erupted two months earlier involving the outrageous compensation package—said to be close to $140 million—that Richard Grasso received as the president of the New York Stock Exchange and that resulted in his firing. The Times article linked the rise of the tech-savvy Blankfein at Goldman with the demise of Grasso, who rose to power at the exchange by defending the status quo of floor brokers and specialist firms. Blankfein’s ability to produce increasing amounts of profit from trading for Goldman—like Gus Levy before him—made him too important to the firm to ignore and “has allowed him to consolidate his power,” the paper reported. First came his appointment as a vice chairman, then came the board seat. In September 2003, Blankfein appointed Gary Cohn, one of his longtime deputies, as head of the firm’s equities division. “Executives say Mr. Blankfein is now the most likely candidate to succeed Mr. Paulson,�
�� the Times said. “But Mr. Paulson, at 57, shows no sign of retiring soon.”

  By then, Thain had secretly started discussing with John Reed, the interim CEO of the New York Stock Exchange and the former Citigroup co-CEO, the idea of succeeding him (and Grasso) as CEO of the NYSE, while Reed would stay on as the NYSE chairman. Reed and Thain seemed cut from the same cloth and knew each other well from the MIT board of trustees. “Both are known as cool and professorial with a deep affinity for exploring how technology and finance intersect,” the Times reported. Thain’s name was reportedly at the top of the search committee’s list of possible permanent replacements for Grasso. On December 18, Thain’s decision to leave Goldman to become CEO of the NYSE was made official. He would start at the NYSE in January 2004. “I grew up in a small town in the Midwest,” he told the Times. “I never heard of Goldman Sachs growing up, and I never viewed myself as the president of Goldman Sachs or the C.E.O. of the New York Stock Exchange.” While he fulfilled one ambition—to become a CEO—it came at a substantial cut in compensation to $4 million a year, from the $20 million he received from Goldman in 2003, although he retained his Goldman stock worth at the time around $300 million. (For some reason, nobody seemed to object to the obvious conflict that Thain retained a large financial stake in Goldman at the same time that he was running the NYSE.)