Money and Power (77 page)

The documents and e-mails the SEC and Spitzer provided in the settlement documents make clear that a number of Goldman’s research analysts felt pressured by bankers to write favorably about their clients in order to help the bankers generate revenue from them. One analyst, asked what his three most important goals were for 2000, wrote: “1. Get more investment banking revenue. 2. Get more investment banking revenue. 3. Get more investment banking revenue.” In another analyst’s year-end review, some of his colleagues criticized his close ties to the bankers. “He has been in the incredibly awkward position of having the investment bankers have a stronghold over his written work—STOR [
StorageNetworks], LDCL [
Loudcloud] to name a few embarrassments,” observed one colleague. Another one added, “One gets the sense that he’s been held captive to the agenda of others within the Firm and that, were he allowed to exercise an independent investment thesis, he would have had a decidedly different take of this group’s prospects.”

Not surprisingly in this environment, bankers would bring research analysts along on IPO new business presentations, with the promise that the analyst would cover the company—favorably—after the IPO, which of course Goldman should lead. In an April 2000 e-mail, a Goldman investment banker wrote to the Goldman research analyst covering Loudcloud: “For next Wednesday’s meeting, we have a challenge before us. We have been guided today by Loudcloud that we must show total focus and commitment from a RESEARCH perspective. [Loudcloud representative] strongly suggested that you guys come prepared to SELL.… HERE IS THE SUGGESTION: CAN YOU GUYS PREPARE A BRIEF (3–4 PG) RESEARCH REPORT ON LOUDCLOUD FOR THE MEETING. This is effectively our pitch.… This way we can
say we are so excited about the story that we have already begun writing the report.” (The emphasis was in the original e-mail.) In response, the analyst wrote: “I want to make this thing the best. WE WILL WIN THIS MANDATE.”

As the
Internet bubble was reaching its zenith, Goldman displayed an increasing inability to deal effectively with its conflicts of interest, erring time and time again in favor of potential investment banking revenue at the expense of institutional and retail investors who might well have preferred to know the truth. In January 2001, the management of WebEx, the videoconferencing company that Goldman had taken public six months earlier, tried to use its muscle—effectively, it turned out—to influence a research report that the Goldman analysts covering the firm were working on. “As discussed,” he wrote, “I want NO mention of any funding issues in this written report. I told you if people called and asked you why your plan shows a need for modest funding, you can verbally tell them that management believes they have adequate funding and it is probably because management has a less conservative plan than you do.”

The Goldman analyst responded, “The webx [
sic
] funding issues is a key area of investor concern, as such will remove any mention from the top section of the note, but will address it in a manner this [
sic
] is consistent with your recommendation for verbal responses to client inquiries in a later section. To exclude it completely detracts from the intention of the note, which is to address key investor concerns upfront and then give them a reason to buy the stock.” He attached a copy of the revised report to his e-mail. The WebEx executive replied: “Thank you. This is much better. The other note said the company has a funding problem, but we think it isn’t very big. This says that the company believes it has enough funds, but there could be a problem; and if there is it will be minor. Thanks again for the change.” Goldman issued the revised report on January 22, 2001.

——

T
OWARD THE END
of January 2003, Paulson was speaking to investors about the firm at a Salomon Smith Barney conference and did himself no favors. Goldman had been reducing staff during this period, so nerves were understandably raw around the firm. During the question-and-answer period, a question arose along the lines of, “
Hank, you’ve been cutting, and you’ve been cutting, and you’ve been cutting staff in this terrible environment. At a certain point, you have to start cutting muscle. Have you hit that point yet?” In his answer, Paulson implied that between 80 and 85 percent of Goldman Sachs’s employees were irrelevant
to the company’s success—a message that flew in the face of the company’s professed antisuperstar ethos. “I don’t want to sound heartless,” he said, “but in almost every one of our businesses, there are 15–20 percent of the people who really add 80 percent of the value. I think we can cut a fair amount and not get into muscle and still be very well-positioned for the upturn.” Understandably, Paulson’s comments did not go over well at the firm. “
News of that comment spread through the firm like wildfire,” remembered David Schwartz. “It was afternoon London time, but before I went home, I knew about it. I think in New York, there were buttons that were made up the next morning: ‘Are you one of the 80 percent or the 20 percent?’ It was instantaneous flow of information around the whole fucking firm. I gather that Paulson’s phone did not stop ringing that afternoon.”

Paulson quickly realized he had to put out the fire he started. In a voice mail message to the firm’s twenty thousand employees, Paulson acknowledged that his remarks were “insensitive” and “glib.” He apologized. “The eighty-twenty rule is totally at odds with the way I think about the people here,” he said, adding he would also apologize in person at a series of upcoming town hall meetings. According to one report, “He reaffirmed the importance of teamwork over individual glory and acknowledged that he was embarrassed by his choice of words.” Schwartz recalled that “it wasn’t more than forty-eight hours and Paulson apologized to the entire firm for his comments. He said they were ‘ill-considered’ and they did not reflect what he really believes. He apologized to everyone and asked for forgiveness. It was abject apology. There was no ducking or diving.” Schwartz thought the incident, while appalling, revealed Goldman at its best. “The ability to process the information almost instantaneously through the whole organization and to come up with the right solution to the problem equally instantaneously in a way that, I think, very few other CEOs would have done was very impressive,” he said. “Other CEOs would say, ‘It’s really true. People should just get over it.’ Not Hank. Hank is a stand-up guy.”

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.