Money and Power (65 page)

Aside from why Friedman had seemingly botched his departure, the other lingering question that remained among many of the Goldman partners was how Corzine could have emerged as the firm’s leader when he was leading the very division—fixed-income—that had lost hundreds of millions of dollars in 1994. “He’s the only one who understood how to get out of it,” explained a fixed-income trader. “You have to have someone who knew how to get out of it.”

Paulson tried to explain how this could have happened. “Fixed-income trading had grown to be a big part of the firm and its profits,” he said, “so effectively there wasn’t a choice. There had to be someone from the fixed-income side overseeing that business because that’s where the problems were.” Added another partner, about Corzine, “He is charming. He’s got a
really
nice style. He comes in an attractive package, so although he has got a huge ego and huge ambition—which far exceeds his ability in both those things—he comes across in a laid-back, low-key, disarming style. And yet, I have asked myself—all of us have asked ourselves—how could this have happened?” The “only way to explain it,” he continued, was that even though fixed-income “while he”—Corzine—“was running it” had “almost taken the firm down,” Goldman’s fixed-income business had grown so big and complex—and so profitable, at
least in 1993—that there almost had to be someone with a deep understanding of the subject at the top of Goldman. The only other viable choice to do that, aside from Corzine, was Winkelman. But “despite great respect, I think, every one of us had, to a man, for Mark Winkelman, none of us wanted him to run the firm or to work for him,” this partner continued, “because Mark didn’t see shades of gray, he saw things as black and white.”

By contrast, some people at Goldman used to refer to Corzine as “Fuzzy,” not only because of his beard but also because he was “a fuzzy thinker,” one partner said. “He wasn’t crisp and wasn’t black and white. He fuzzed things when he communicated.”

With Winkelman not a viable option, Goldman was hostage to Corzine. “There was this big beast,” one partner said, “that was a huge profit driver, and a huge risk, and you had to keep the traders there, you had to figure out how to solve some of the problems. So there’s no way Steve could have left and said, ‘Here’s the idea: let’s have Mark and Jon leave—because I doubt whether Jon would have stayed without being head of the firm—so let’s take those two guys out and let’s have some investment bankers run the firm or let’s pick someone who is not even on the management committee to be co-head of the firm.’ There effectively wasn’t a choice.” Despite this impeccable logic, the fact remained that Goldman had selected as its new leader the very person who had just presided over a complete meltdown in Goldman’s fixed-income business and who, as a result, never fully had the trust and faith of the firm’s investment bankers. “
That
is one good question,” one Goldman trading partner said. “At a normal place, it would be discordant. You couldn’t imagine it. And I guess at this place, somehow you could, because maybe the place really did sort of get into this long-term thinking that Rubin always used to talk about.”

——

B
UT THE FIRM
did not dwell for long on its misfortunes. For starters, there were fifty-eight new partners to indoctrinate into the Goldman Way. “
There’s no difference between us and every other investment bank out there—except your hard work, your management, and the people you hire,” Mark Winkelman told
Gary Cohn before Winkelman left Goldman. “Think about it. We work in the same buildings. We have the same computers. We fly on the same planes. We sleep in the same hotels. We even have the same clients.” Cohn told
Fortune,
ten years later, he “thinks about this ten times a day.” This idea of Goldman’s exceptionalism was one of the firm’s oft-repeated mantras.

Despite the 1994 losses and the management chaos, Goldman continued
to emphasize the opportunities ahead and the rarefied air its partners breathed. “
We were ready to drink the Kool-Aid,” one member of the 1994 partner class told the
Financial Times
. On November 4, 1994, the Kool-Aid was flowing at the new partner orientation at Doral
Arrowwood, the Rye Brook, New York, conference center favored by Goldman.

Mark Schwartz, a graduate of Harvard College, Harvard Business School, and the John F. Kennedy School of Government at Harvard, was a Goldman “culture carrier”—as they were known at 85 Broad Street—one of the few partners sufficiently steeped in Goldman folklore and mythology that he was selected to speak to the incoming partners. “We’re going through a very rough period right now and we’re all going to be tested,” he told the new partners. “But remember this—we have three things that make us the best firm on Wall Street, three things that our competitors want: our people, our clients and our reputation. These three things are our most valuable assets. How we manage these assets will determine how successful we are in the future. And how we manage our people through this period now will be our greatest challenge in the last twenty years.”

Schwartz’s Arrowwood presentation focused on three precepts: how to manage “your” people, how to manage “your” business, and “how to behave.” “None of this is profound,” he said. “All of it is common sense. If we do these things we’ll be fine; otherwise we’ll be in trouble.” The key to managing, he said, was to “find the right people” by interviewing and recruiting. “Don’t delegate away this responsibility,” he said. “Hiring the right people is the most important contribution you can make. Hire people better than yourself. Don’t self-select. We’ve made this mistake for years. There’s richness in diversity yet we’ve been risk averse in hiring. We go to the same schools and select the same people year after year.”

Schwartz then turned to the subject of communication. Goldman, he said, had “moved from a senior partner whose favorite word was ‘eleemosynary’ to one whose favorite word is ‘shithead.’ ” Schwartz told the new partners that sometimes it was just as important to be spending time with colleagues in the firm as it was to be spending time with clients soliciting business.

He then conveyed to them another one of Goldman’s secrets: the ability to know when to copy the innovations of others and when to be an innovation leader. “Sometimes it’s great to be a genuine innovator but often it’s desirable to simply copy or market other people’s ideas,” he said. “We’ve been pretty successful at picking up a pioneer’s market share without having to pay a pioneer’s research and development costs. We
were late in mortgages, swaps, junk bonds and emerging markets in the last ten years, but we watched others make mistakes and we recovered very quickly.” He noted that Goldman remained behind other firms in asset management and was still debating how deeply to be involved in Asian markets. “But on balance, I still think it’s usually wise to wait on markets and products and aggressively copy or tweak others’ successes.”

On the flip side, Schwartz explained, was unprofitable innovation. He said in 1994, Goldman created a new tax-deductible preferred stock security—called
MIPS. The firm marketed and sold it extensively, building a 90 percent market share in the product. “The only problem is that we’ve lost money doing all this business,” he said. “We’ve been very creative, we’ve marketed the idea very successfully, and solved some important capital structure problems for many important clients. But we haven’t made much money, given this very substantial effort.”

Schwartz finished his lecture by daring to tell his audience “how to behave.” He knew this would be risky. “I probably have no right and no authority to tell you how to act but this comes from the heart and I wish Jon and Hank would say it to the rest of our partners,” he said. “First, be inspirational. Be a leader. Set high standards for yourself and your group. And keep raising the bar. Push people as far as possible, to be the best in this business.” He urged the new partners to “be outspoken, independent, irreverent. Challenge the way we think and act. But be prepared for lots of resistance. People like the status quo and prefer incremental change.” He noted that shaking up the status quo at Goldman was especially important in 1994. “The biggest benefit from this very difficult year is that we are being forced to change our management structure, our organization, and we’re reexamining each client relationship and every line of business. Re-engineering
is
the buzzword and I hope we have the courage to radically restructure the way we approach certain businesses. To be visionary, but also pragmatic.”

He also recommended they take chances and in true corporate fashion equated firing people with bravery. “Be creative and take risk,” he said. “Take risk in your own careers, take risk in shrinking and growing businesses, take risk in moving people around, take risk in making decisions. At difficult times like this, you have to demonstrate the ability to make hard, tough decisions—streamlining businesses, curtailing growth, laying off people. Making tough decisions will actually make us more credible in our business units. Lean organizations need strong values and ironically if you make tough decisions and communicate them, your groups will appreciate you for your candor, fairness, facing reality and
being decisive. You’ll earn loyalty and respect from your group and you’ll boost the productivity of your business.”

Finally, after reminding the new partners that “
we
own this business,” he exhorted them to act like partners. One could almost hear the voice of Vince Lombardi. “We are partners—emotionally, psychologically and financially. There can be no borders between us, no secrets. Treat one another differently from this day forward. Do not be quiet, anonymous or part of a silent majority of partners. Be active, involved, outspoken. Exert leadership. When you’re down, pick yourselves up. Most people don’t. That’s the reason many people fail. Many people get knocked down and lack energy and willpower to get back up.… If you think you already exhibit most of these qualities, that’s wonderful. This firm needs an infusion of active, motivated, inspired people like you. We need it now more than ever. We’re vulnerable right now—but we’re also capable of greatness and excellence. Don’t let another day go by without believing that. As
Robin Williams said in
Dead Poets Society
—
Carpe Diem,
Seize the Day. Be very proud to be a Goldman Sachs partner, get very intense and seize the day.”

One Goldman managing director, who endured his share of these types of meetings, likened working for Goldman to playing for the New York Yankees. “Why do people go to the New York Yankees, right?” he wondered. “You get paid a lot of money. They want to win World Series rings. They want to be viewed in posterity as the greatest in the position of all time and in the Hall of Fame. The best path to fame, recognition, and excellence is through the Yankees. I think it’s an interesting analogy to draw at Goldman because they sort of give you that feel that ‘hey, I’m going to be viewed differently now.’ ” Indeed one year, he remembered, after winning a World Series with the Yankees, Joe Torre, then the Yankees’ manager, showed up to give a speech and said, “What can I tell you, this audience, about teamwork that you don’t already know? I could learn a lot from you.”

——

R
IGHT FROM THE
start, there was bad blood between Corzine and Paulson, and not because one was a trader and the other was a banker—the usual reason given for tensions in full-service Wall Street firms. Rather, the antipathy between the two men was almost a chemical, visceral one. To a certain degree, any hope Paulson had for a true partnership with Corzine was dashed from the outset when Corzine made clear that he wanted to be the firm’s sole senior partner.

Despite this, Corzine and Paulson worked “relatively well together”
at first, Paulson said. The magnitude of the trading losses continued to grow during the last three months of the year. Corzine focused on solving that situation after it was determined that the firm should cut its losses and move on, while Paulson had to oversee the process of cutting costs by 25 percent, which on Wall Street meant cutting people. “When you’re boiling in oil, in the middle of a crisis, the challenges are all so consuming, there is no time for anything else,” Paulson said. “I certainly wasn’t focused on issues or problems with Jon.” Paulson and Corzine focused together on the Herculean task of getting partners to stay while at the same time figuring out what to pay people. “
Partners were looking over their shoulders at each other, wondering who was going to jump ship next,” one vice president remembered. “There was an air of barely controlled panic as you watched people watching each other trying to decide as decision time approached.”

Paulson and Corzine actually complemented each other in their ability to focus on different groups of partners who needed convincing to stay. For instance, Paulson was especially focused on keeping
John Thornton at Goldman. Thornton, an M&A banker based in London, had been responsible for building up the firm’s M&A and banking business in Europe. He was threatening to go to Lazard, where he was hoping to be in line to succeed
Felix Rohatyn as the firm’s chief rainmaker. But after Rohatyn disabused him of the notion that he would be running Lazard anytime soon, Thornton decided to stay at Goldman.

But just as Thornton decided to stay, the firm suffered a big blow when
Kevin Conway, a well-regarded thirty-six-year-old vice president in the M&A group, turned down his offer of a Goldman partnership to take a job, instead, as a partner at
Clayton, Dubilier & Rice, a successful private-equity firm. Making matters worse, Goldman had announced Conway as a partner in October, only to have him reject the offer weeks later. Conway’s rejection of one of the most sought-after prizes on Wall Street was very big news.

Although Paulson and Corzine handled the partner departures as well as could be expected—and seemed to work well enough together doing so—there were small signs of the trouble brewing between them. For instance, Paulson remembered flying around the world that fall—by commercial jet, of course—and going from world capital to world capital visiting with Goldman’s professionals, and with clients and foreign leaders as time permitted. It was grueling. “
I went through Europe to
India and had one night in a hotel in Delhi and then we left Mumbai at like eleven o’clock at night and I was in a coach seat on a plane,” Paulson recalled. “And went from there to
Singapore and had meetings there and
almost fell asleep at the dinner table with clients.” While Paulson was on this whirlwind trip, Corzine had drafted a letter to the firm’s shareholders—mostly the firm’s partners, of course—from Corzine alone, in which he made some gratuitous comments about Paulson. Paulson thought the letter should be from both men. “
The deal with the titles was one thing,” Paulson said. “But we were going to do this together and as partners.” Paulson confronted Corzine about the shareholder letter and Corzine conceded the point. The letter was sent from both men. “I think at the outset we worked as well together as you could have two very different people with different styles work together,” Paulson said.