Money and Power (81 page)

But there were—are—important
cultural
differences behind Goldman’s extraordinary ongoing success that set the firm apart from its peers.
The Economist
’s April 2006 cover story about Goldman tried to capture some of these unique aspects of the firm’s culture. “The secret of Goldman’s success is the stuff of constant speculation, above all among the investment bank’s competitors, none of which has come close to matching its sustained record of superior performance,” the magazine observed. “Back before Goldman went public in 1999, the firm was looked upon with a certain awe—a secretive, private partnership, the last truly large such entity in American finance, that consistently minted money without having to disclose anything. In 2006, despite public filings that are so large they can be more easily measured in weight than in pages, Goldman Sachs remains just what it was in 1999, only more so: it is a hugely profitable enterprise—return on equity during the first quarter of this year approached 40%, notwithstanding a compensation scheme for employees that would make the old partners jealous—and it remains something of an enigma. Over time, that enigmatic quality has only increased, defying predictions that the greater transparency supposed to accompany going public would reveal to the world Goldman’s secret formula. In part, this is deliberate. Its primary source of profit has shifted from banking to trading, and the firm is intentionally quite vague about how, and precisely where, those trades are made or, equally relevant, from whom the profits are coming. One line in its accounts, ‘fixed income, currency and commodities’ (referred to as FICC) accounts for a huge chunk of revenues and this is because … well, no one outside Goldman knows exactly why.”

The magazine touched on Goldman’s Svengali-like ability to massage
its public image. “Whether Goldman was, in fact, really different in its approach to vice, or virtue, than any other Wall Street firm is the cause of some debate, but beginning in the 1960s the bank graduated from the second-tier to pre-eminence at least in part because it was perceived by its clients as the one to trust,” the article continued. “Symbolically, for years it advised on few hostile takeover bids. This role has, theoretically at least, become increasingly tenuous as Goldman has moved from being mostly an agent (as an underwriter) to a principal, as a trader and direct investor. Inevitably, in setting a price either for a security or a company that it might buy or sell, Goldman is no longer looking after only its client’s interest. Indeed it has become harder to distinguish between who is a Goldman client and who is a Goldman competitor.” After citing a few examples of where Goldman’s conflicts have gotten it into a public-relations fix, the magazine concluded, “Mostly, though, Goldman’s formidable reputation works in its favour.”

There was also mention made of the stealthy and secretive process by which Goldman weeded out older partners, clearing room at the top for the next generation. The magazine suggested this delicate surgery was Paulson’s purview. “Often enough, someone important is quietly asked to leave,”
The Economist
reported. (According to Goldman lore, Paulson had such a hair trigger that he fired one partner, even though his colleagues decided to rethink the initial decision. But it was too late.) “This is one of Mr. Paulson’s most critical roles. He apparently does it well enough that word rarely leaks out in the firm. Sometimes even the person being dismissed is unaware they are being forced out—there is a brief discussion about a more interesting future. Typically, senior Goldman employees are on several charitable boards and, invariably, there is a lot of personal wealth to be invested, given away, or, after a lifetime in an office, spent on something grand. Goldman, says Mr. Paulson, is a hard place to be hired, a hard place to be promoted and a hard place to stay. And if you want an explanation of how Goldman endures, that, perhaps, is the best explanation of all.”

——

B
Y THE TIME
the
Economist
article appeared, Paulson was deep into highly secretive negotiations with the president of the United States,
George W. Bush, and with Josh Bolten, Bush’s chief of staff and a former colleague of Paulson’s, about becoming the seventy-fourth treasury secretary of the United States. Paulson told virtually no one at Goldman Sachs that Bolten had approached him about taking the Treasury job to succeed John Snow. He shared the news with John Rogers, Paulson’s chief of staff at Goldman and a longtime power behind the throne at the
firm, but he did not share the news even with
Ken Wilson, Paulson’s partner and close friend at Goldman who would soon enough join Paulson at Treasury as an unpaid adviser. “
The idea of being Treasury secretary in the abstract appealed,” Paulson told
Vanity Fair
reporter
Todd Purdum, “but my initial inclination was that it wasn’t right for me to take that step.” Purdum reported that Paulson clicked through the issues in his mind that he cared most about—“reforming Social Security and
Medicare, overhauling the tax code, rethinking trade and investment policy”—and concluded that given the president’s lame-duck status and abysmal political standing, his chances of accomplishing his agenda were minimal. (“He would be right about that,” Purdum wrote.) Paulson recommended someone else for the job.

But Bolten kept after his former boss. He “offered something almost unheard of for the Bush team,” Purdum continued, “a private meeting with the president even before Paulson decided whether he wanted the job.” Not surprisingly, Paulson agreed to meet with Bush but not before thinking to himself, “Wait a minute—what am I smoking? … You know, how could I possibly presume to take the president’s time” but then not take the job being proffered? “Part of the reason I hadn’t then taken this on was I said [to myself], ‘How many Cabinet secretaries had I seen come to Washington and leave in recent times with a better reputation than they came with?’ ”

Paulson’s rhetorical question, of course, had the obvious answer of “very few,” with the notable recent exception of Robert Rubin, who had indeed proved himself to be a much admired treasury secretary—though many grumble that he helped created the conditions that led to the Great Recession by supporting deregulation of the financial industry from whence he came and then took for himself a $115 million serving of pie from
Citigroup while urging the traders there to ratchet up the risks they were taking. Paulson decided not to meet with Bush, after all. But a month or so later, he changed his mind—“
There are no dress rehearsals in life,” a friend told him—and decided to meet with Bush and accept his offer to take the job. Bush, as part of the bargain to lure the CEO of Goldman Sachs to Washington, ceded an unprecedented amount of power to Paulson to run the economy and Treasury as he saw fit. This was probably the equivalent of giving him the sleeves off his vest, considering how little Bush really knew about business and the functioning of the capital markets—despite being a graduate of
Harvard Business School, a member of Ken Wilson’s class—and how little political clout he had in the final quarter of his difficult presidency.

Bush announced Paulson’s nomination on a beautiful, sunny late
May 2006 day in the Rose Garden. The ceremony lasted eleven minutes.
Paulson would take “this new post at a hopeful time for American businesses and workers,” Bush said. “The American economy is powerful, productive and prosperous, and I look forward to working with Hank Paulson to keep it that way. As Treasury Secretary, Hank will be my principal advisor on the broad range of domestic and international economic issues that affect the well-being of all Americans. Hank shares my philosophy that the economy prospers when we trust the American people to save, spend and invest their money as they see fit.” Bush—with no inkling of how ironic the statement would become—also said Paulson, an active Republican, knew a little something about fiscal restraint and intended to show some. “Hank also understands that the government should spend the taxpayers’ money wisely or not at all,” Bush said. “He will work closely with Congress to help restrain the spending appetite of the federal government and keep us on track to meet our goal of cutting the deficit in half by 2009.”

Paulson told Purdum that after he changed his mind and decided to move to Washington and take the new job, he called Blankfein, then Goldman’s president and chief operating officer and Paulson’s obvious successor, and told him the news. “
I think I surprised and delighted him,” Paulson said, adding that Blankfein, who has a highly evolved sense of humor, “thought it was great for the country—and for
him
.”

At Paulson’s confirmation hearing, on June 27, the most pressing questions the Senate Finance Committee—and in particular its chairman, Iowa senator
Charles Grassley—had for him pertained to getting a copy of a settlement agreement between the
IRS, which is housed in the Treasury, and the
Nature Conservancy, a nonprofit organization to which Paulson had donated tens of millions of dollars. (His family foundation has set aside $100 million for donations to conservation causes.) Senator Grassley was concerned that “too many” people who worked at tax-exempt organizations take advantage of them for their own personal benefit. “As you have seen first-hand with the Nature Conservancy, with the best of intentions, things can run afoul,” Senator Grassley said, a reference to accusations that the Nature Conservancy had violated the IRS rules regarding the donation of conservation easements. He then asked Paulson about his specific concern. “Despite repeated requests by our committee, we still have not received a copy of Nature Conservancy’s closing agreement with the IRS based on the IRS audit of the Nature Conservancy,” Senator Grassley said. “It is important for the public to understand, what was the resolution of matters raised by the press and the Finance Committee in the review of the Nature Conservancy.” Paulson
answered the senator that he was not the CEO of the organization, merely its chairman of the board—the current CEO of the organization,
Mark Tercek, is a former Goldman managing director installed there by Paulson in July 2008—but said that he preferred that the document Senator Grassley was seeking come from the IRS itself, “so it would be kept in confidence,” rather than come from the Nature Conservancy.

That was about as tough as things got for Paulson. Piped in Senator
Trent Lott, “I am excited that you have agreed to take this assignment. It is a very critical one. You know what the issues and the problems are that we face, but your background, your experience in administrations over the years, your experience at Goldman Sachs, your education: you have everything we need in this very important position, so I congratulate you on your nomination and certainly will vote for your confirmation.”

On June 30, just after the Senate unanimously confirmed his appointment as the nation’s seventy-fourth treasury secretary, Paulson filed a shelf registration to sell 3.23 million of his Goldman shares—worth around $500 million. He retained, for the moment anyway, another $75 million in restricted shares and close to seven hundred thousand vested stock options. Under the government’s conflict-of-interest rules, Paulson had no choice but to sell his Goldman stock, but to make up for the hardship of the forced sale—again thanks to the government’s rules that only an investment banker could truly love—he was spared having to pay immediately capital gains taxes on the sale of his low-basis Goldman stock. Under the rules, Paulson could defer his capital gains—while locking in a high price for the Goldman stock—and then reinvest the proceeds into Treasury securities or an approved mutual fund. If and when he sold the Treasuries or the
mutual funds, the capital gains tax would have to be paid.
The Economist
estimated the exemption saved Paulson around $200 million at that moment. Paulson received one other unusual benefit upon leaving Goldman midyear: a bonus of $18.7 million and total compensation for the six months of work in 2006 of $19.2 million. No doubt his accumulated wealth helped him absorb the $32.65 million cost of the 7,500 acres he and his wife bought on the über-exclusive Little St. Simons Island, off the coast of Georgia (the only way to get there is by boat), as well as the cost of his $4.3 million Washington home.

——

B
LANKFEIN’S PATH TO
the pinnacle of finance nearly rivals for degree of difficulty that of his legendary predecessor Sidney Weinberg, who was one of eleven children of a Brooklyn bootlegger and started working at Goldman Sachs as a gofer shining spittoons, in 1907, a few years removed from elementary school. Blankfein moved with his family
from the South Bronx—where he was born—to 295 Cozine Avenue, in the East New York section of Brooklyn, “in search of a better life,” he explained. He was three years old.

The family lived in the Linden Houses, a complex of nineteen buildings completed in 1957 that contained 1,590 apartments and was—at the time—a predominantly white, Jewish, public housing project. After losing his job driving a bakery truck, Blankfein’s father, Seymour, took a job sorting mail at night at the post office—“which in our neck of the woods was considered to be a very good job, because you couldn’t lose it,” Blankfein said. The late shift paid 10 percent more than the day shift. “For the last few years of his life I’m sure he was doing something that a machine would have done better and more efficiently,” he said. Blankfein’s mother worked as a receptionist at a burglar-alarm company—“one of the few growth industries in my neighborhood.” Blankfein shared a bedroom with his grandmother; his divorced older sister and her son were in the next bedroom.

Richard Kalb, who grew up with Blankfein and has remained friendly with him, said his father worked at the post office, too. “
But Lloyd always teased me that my dad was a manager and his was a worker,” he said. Kalb and Blankfein went together to the local public school and to Hebrew school at B’nai Israel, near the Linden Houses. They were both part of a program in junior high school that allowed them to complete three years of school in two years by skipping eighth grade. In junior high school Blankfein was “voted most likely to succeed,” Kalb said.