Money and Power

by William D. Cohan

  Given Blankfein’s ascendancy and Paulson’s lingering, Thain said the opportunity was too good for him to resist. “There were a lot of public policy reasons to do it,” he said in an interview. “The exchange was in a lot of trouble. The combination of the opportunity to be the CEO, the opportunity to really make a difference to help a part of the U.S. financial system that needed a lot of help, and the fact that Hank wasn’t leaving led me to decide to run the New York Stock Exchange.”

  Thain told Paulson he was leaving Goldman two days before the public announcement. Paulson was “stunned,” Thain said in a later deposition, and “didn’t say anything for several hours.” Some accounts of that conversation had Paulson raising his voice in anger at Thain’s decision and its timing. But Paulson said he did not raise his voice, although he said he was not pleased to hear the news from Thain. He said he told Thain he thought taking the job was a mistake and tried to talk him out of it (although some people think Paulson orchestrated Thain’s appointment much as he had orchestrated Thornton’s nine months earlier). “I told him I thought the NYSE was a very difficult business to manage,” Paulson said. “I thought the way the world was going he was putting himself into an impossible situation. I was wrong. He said I showed no signs of leaving, no signs of anointing him as my successor. He wanted to go and learn something else and when he left I think it was a bigger issue than just not getting my job.”

  On the same day that Thain announced publicly he was leaving Goldman, the firm announced that Blankfein would become the firm’s sole president and chief operating officer. Goldman also announced that Steel would be leaving to teach at the Kennedy School of Government, at Harvard. “These were not easy decisions for me personally,” Paulson said. “But I just felt an enormous responsibility as CEO of a public company. And I wanted to be in the position where I wouldn’t have to do the job forever.” He harked back to the lunch conversation he had with Steve Friedman as he was thinking about what to do with Thornton and Thain. Friedman had rejoined the Goldman board of directors in 2005 after his two-year stint as one of Bush’s top economic advisers. At the lunch, Friedman asked him if he controlled Goldman Sachs on his own and his entire net worth was tied up in it, whom would he have run the place in his stead? “Without skipping a beat I said, ‘Lloyd,’ ” Paulson recalled.

  As long as Paulson retired at some point, Blankfein’s path to the top job was clear. “But if Mr. Blankfein hopes to succeed Mr. Paulson, he may have to be more patient than Mr. Thain was,” the Times reported. “As long as Mr. Paulson is chairman and chief executive—and he could hold those jobs for five years or more—no drastic changes are expected at Goldman Sachs. Mr. Paulson has overseen the firm’s strong recovery this year and, by all accounts, has the full support of its directors.” Indeed, the paper quoted Jim Johnson, the head of Goldman’s Compensation Committee, saying he hoped Paulson would be staying around for a long time. “The board has the view that Hank Paulson is doing a fabulous job,” Johnson said. “We think he is one of the most outstanding C.E.O.s in the world.”

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  IN CASE ANYONE was worried that Hank Paulson, investment banker extraordinaire, would cut back on the risks that a newly—and successfully—publicly traded Goldman Sachs would be taking, they need not have bothered. Paulson embraced risk taking with alacrity, in nearly every part of Goldman’s business. “We managed the transition from a partnership to a public firm seamlessly without losing a beat,” he said. “We didn’t lose people. We went from being the medium-sized firm to being a large firm and we kept the best attributes of the culture. We went from being a firm where we were behind Morgan Stanley and right there with Merrill Lynch to being a firm that was clearly the global leader.” By the time Blankfein was named Paulson’s heir apparent, Goldman’s transformation to a risk-taking juggernaut was obvious, both anecdotally and in its financial performance. “When people think about Goldman Sachs, they think about a first-class investment banking franchise,” Henry McVey, an analyst at Morgan Stanley, told the Times at the time of Thain’s departure. “Blankfein’s appointment reminds investors and clients that some of the company’s heritage is in capital markets and trading.” He said replacing Thain with Blankfein was a “subtle shift” rather than a change of great import because “the trading and risk-taking are already substantial.” For 2003, Goldman earned net income of $3 billion, up from $2.11 billion in 2002. Like Thain, Paulson and Blankfein were each paid $20 million in 2003.

  But one Goldman banker said that the rise of Blankfein also led to the explicit—no longer just implicit—suggestion that clients could be exploited for Goldman’s benefit. “There was this huge change that came with Lloyd where he wanted to ‘monetize client relationships,’ ” this banker said. “I think it was a euphemism for sort of harnessing the relationship banking side of the house to generate investment opportunities for both the various internal funds and the other businesses Goldman was in. So you got into a situation where there was—rather than it just being sort of a happenstance or just sort of a something like it fell out of a client situation—it became a method, became programmatic where we would push a client to pursue IPOs, or you were supposed to push secondary offerings. Or if you got an advisory assignment, you were then supposed to say, ‘Oh, by the way, we can put money into a PIPE”—a private investment in a public company—“or to see if one of the Goldman private-equity funds can get involved. Does he want to sell himself or be taken private by our private-investing group? It changed the emphasis a bit at the margin. It created more ‘relationship tension’ for bankers to manage.” Conflicts? “No, ‘relationship tension’ was the preferred descriptive,” he said.

  As never before, Goldman Sachs was a beehive of global activity, across virtually every imaginable product line in finance, with the sole exception of taking deposits directly from consumers (although like many Wall Street firms, Goldman did have a small commercial bank in Utah). Goldman was now many different things to many different people. As a result, the firm’s exposure to conflicts of interest had never been greater, although its confidence that it could manage the increasing number and complexity of its conflicts had not diminished one whit. “Business conflicts continue to be a particularly important area of focus for us,” Paulson and Blankfein wrote in the firm’s early 2005 annual letter to shareholders. “How we identify, disclose and manage real and apparent conflicts will be critical to the long-term success of our business. We operate with the knowledge that what many may have considered acceptable industry practice yesterday will be the target of intense scrutiny tomorrow. We must conduct ourselves accordingly and ensure that we have thoroughly and thoughtfully analyzed all of our business priorities. At the same time, it is naïve to think we can operate without conflicts. They are embedded in our role as a valued intermediary—between providers and users of capital and those who want to shed risk versus those who are willing to assume it.”

  To try to manage the conflicts, Paulson made numerous efforts to try to indoctrinate the firm’s leaders in the ways of good behavior. He instituted a firmwide program called “Compliance and Reputational Judgment” training to “reinforce our compliance culture,” Paulson wrote. In 2005, he began the “Chairman’s Forum,” where Paulson met with more than twenty small groups of managing directors to discuss “at length business practices, reputational judgment and compliance leadership.” He explained, “We will emphasize to all our [managing directors] that our highest priority is to enhance our reputation for integrity in every aspect of our business.”

  Paulson also wanted to institutionalize the best aspects of the firm’s culture—if he could—and so he created, in 2000, a leadership institute, named “Pine Street” (after the location of the firm’s first headquarters) and modeled after GE’s highly respected John F. Welch Leadership Center at Crotonville, New York. Paulson even recruited an executive who started Crotonville, Steven Kerr, to run Pine Street and to serve as Goldman’s chief learning officer. “Pine Street is
dedicated to strengthening the culture of the firm, enhancing the success of Goldman Sachs and its clients, and developing world-class leadership and management talent,” according to Goldman’s website. “Distinguished businesspeople, noted academicians and the firm’s own leaders serve as faculty. Pine Street combines formal classroom experiences with extensive mentoring and coaching to establish a common language and skill set of leadership throughout the firm.” Observed one Goldman banker, simply, about the Goldman culture: “It was the firm, firm, firm, firm, firm, the firm, it’s the firm.”

  According to one of the Goldman executives who worked at Pine Street, Paulson was very concerned that when the firm went public something special about Goldman would be lost. “You have a company that is going public,” remembered this person, “and their whole culture is about apprenticeship and leaders teaching leaders. Then, suddenly it’s going to change. How could the company then, after going public, justify that decision and say, ‘We’re still all about an apprenticeship. We’re still all about leaders teaching leaders. We’re all about a culture. How can we make sure that culture remains a competitive advantage at Goldman Sachs? How do we make sure we don’t lose our secret sauce?’ ” John Rogers, Goldman’s consigliere, explained how important culture was—and is—to Goldman Sachs’s continued survival, echoing one of the firm’s common refrains. “Our bankers travel on the same planes as our competitors,” he said. “We stay in the same hotels. In a lot of cases we have the same clients as our competition. So when it comes down to it, it is a combination of execution and culture that makes the difference between us and other firms. Behavior is shaped by it. People who think culture is just a bunch of bacteria in yogurt set a tone that strips values from a company. That’s why our culture is necessary—it’s the glue that binds us together. We hold on to the values, symbols and rituals that have guided us for years, and anything new that we add to the culture always supports what already exists.”

  Pine Street was an idea born of paranoia, Blankfein said, since Goldman Sachs was “an interesting blend of confidence and commitment to excellence, and an inbred insecurity that drives people to keep working and producing long after they need to. We cringe at the prospect of not being liked by a client. People who go on to other commercial pursuits frequently self-identify as a former Goldman Sachs employee, long after they have left the firm. Alumni take a lot of pride in having worked here.”

  The future leaders of the firm were selected to attend, making the experience “aspirational,” the former employee explained. The rewards for those selected became clear, too, as they seemed to be promoted more rapidly than their peers. “Pine Street was presented to me from the start as a way to make senior people here feel special, to connect them to one another—as some group of them will continue to rise and lead parts of the firm, as well as lead practical projects within their business,” explained one Goldman banker. “When I realized it had the full sponsorship of the executive office, that gave credibility to the program for me.”

  The genius of Pine Street was that about half of the programs were geared to Goldman’s clients, not just its future leaders. The firm’s coverage bankers would offer their clients the opportunity to attend a very special seminar or lecture or discussion and then be able to spend “quality time” together, away from the typical boring banker flip-book pitch. “We would create these small, intimate, world-class programs where, as a relationship manager—as a banker, all you want to do is spend time with your client and learn what’s going on in their organization—these programs were the ultimate way for that sort of information to be exchanged,” according to one Goldman banker. “They’re coming because during the breaks or during the actual sessions, when you break out with your client and discuss with them the changes they’re facing and their challenges that they’re facing in the organization, you probably learn more during that day than you do taking your client to dinner or to a Rangers game.” In November 2006, Harvard Business School professor Boris Groysberg published a thirty-eight-page laudatory “A” case about Pine Street, how it got started, and what, ideally, it would accomplish. As a follow-up to that case, Groysberg also drafted a “B” case about how effective Pine Street turned out to be in practice. He checked quotes with various people but then never published the B case. Goldman decided the A case should be the only document published about Pine Street.

  Just in case the managing directors did not get the message about the importance of maintaining the culture, the firm also had a “reputational risk” department in the basement of 85 Broad Street, staffed by an Orwellian mix of former CIA operatives and private investigators. Its purpose was “to protect the reputation of Goldman Sachs,” explained one Goldman executive. What this meant was once a potential new hire survived the firm’s arduous interview process but before an official offer of employment was made, the candidate had to be investigated thoroughly by the reputational risk department. “They turn your life inside out,” one Goldman banker recalled. “I mean they check everything. They call your high school.”

  Explained one Goldman trader, “After I went through the processes of being offered the job by businesspeople, then you have to run through the legal and background checks, where they basically ream, steam, and dry clean you. They look into every aspect of your life. It was just a license to ask anybody anything. They tell you if you lie about any of this, we rescind our job offer. I was always sort of convinced that they did that to build a dossier on you, so if you ever gave them a problem, they could use it against you.” He remembered once when a former head of Goldman Sachs Asset Management, who had been fired, wanted to trade with Goldman at his new firm and the Goldman legal department told him he had to first submit the idea to reputational risk to have them clear the firm’s association with its former partner. “This guy there explained to me—it was this big guy who looked like an ex-cop—that their job was to look into everybody and everything and to watch out for the interest of the partners,” the former Goldman executive recalled. “I was told a story that there had been a partner who had a problem with an extramarital affair and the reputational risk department handled it. The stuff I took away from it was, that this is basically an internal police force that would also take care of any issues outside the firm that were threatening the firm. Almost like a mob kind of feeling. There was an aura about it that was pretty scary.”

  Even though the trader had been gone from Goldman for more than a decade, the firm’s power and its tentacles still frightened him. “Not that they would come to my house and beat me up or something or kill my children,” he said. “But certainly they would drag you through court or do something to screw up your life. If you did anything to hurt that firm in any way, all bets were off, because God knows I saw what they did to their customers. That was bad enough—they’d steal from them, rape them, anything they could do.”

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  A NUMBER OF Goldman’s clients had noticed the way the firm was treating them and they were not happy about it. This was not necessarily a new or recent development but rather one with a lineage that went far back into the firm’s history. For instance, the Chicago investor Samuel Zell—who had a serious run-in with Goldman in the late 1980s about the sale of Rockefeller Center, which he lost in a heated battle to Goldman and the developer Jerry Speyer—remembered that Rubin and Friedman came to see him in his Chicago office in the hope of getting Zell to do more business with Goldman Sachs. “I am happy to do business with you,” Zell told the men, “just tell me whether you are my agent or my competitor. I am happy with either one, just not both.” Although Rubin and Friedman assured Zell that Goldman had “Chinese walls” to prevent any confusion, the truth was that Goldman was constantly blurring the lines and more and more clients were getting angry. Despite their anger, many clients seemed reluctant to do anything that would end up alienating the firm, since it was generally acknowledged that Goldman had the best deal flow and had access to the best investment opportunities. Pissing
off Goldman Sachs—it turned out—would be bad for business.

  Despite Blankfein’s concern that Goldman did not want its clients upset with the firm, sometimes the firm left its clients little choice. For instance, in February 1999, somewhat out of the blue, Société Générale, the big French bank, announced a preliminary agreement to acquire Banque Paribas, another important French bank with a big investment banking business. The deal was large—more than $17 billion—and took people by surprise because it had basically been negotiated between the two leaders of the banks, Daniel Bouton, at SocGen, and André Lévy-Lang, at Paribas. Once the two banks had figured out what the chairmen had done, there was a push made after the fact to hire legal and M&A advisers to make sure everything was buttoned up properly. Naturally, every Wall Street firm wanted to be part of the deal, including Goldman, which at the time had been working on three separate projects for SocGen: a review of its investment banking business with a look at potential acquisition targets, a review of its investment management business, and a global review for the bank’s top management of strategic initiatives, complete “with all the inside information you could imagine,” said a knowledgeable SocGen insider. “They were in our pants in a big way.”

  Goldman was as surprised as anyone by the news of the SocGen/Paribas merger and, understandably, wanted to be hired as an M&A adviser. Goldman’s message to the bank was simple: “If you won’t hire us then somebody else will.” (This was not an unusual veiled threat on Wall Street.) In the end, SocGen hired Morgan Stanley for M&A advice and Sullivan & Cromwell for legal advice. Goldman, miffed, rounded up a new client—Banque Nationale de Paris, or BNP as it was known—and began working hard to disrupt the SocGen/Paribas deal. The battle raged for the next year, with BNP at one point launching hostile takeover bids against both Paribas and SocGen. (So much for the policy against launching a hostile bid, although in fairness this was two hostile bids.) In May 2000, BNP emerged the victor with an agreement to acquire Paribas, while SocGen was able to remain independent.