On the Brink (6 page)

Maybe it was because I was already balding and looked older than my 28 years that Goldman had me calling on clients early in my career, which was unusual. My experience in the White House interacting with Cabinet secretaries and the president gave me the confidence to deal directly with the chief executives of companies. Gorter, who ran Goldman’s Midwest business, was very helpful. He told me that if I were patient and always put the client first, I’d come out ahead in the long run.

He was right, but it was very difficult, and I felt a lot of stress. Before, it had been enough to be smart and work hard—success would follow. Now I also had to convince other people to trust me, and every potential client was already someone else’s. But I worked hard and built a big stable of Midwestern clients. I had to fight doggedly for each one. For example, Sara Lee, then known as Consolidated Foods, was a longtime Morgan Stanley client, but I called on the company with one idea after another, building our relationship through small transactions. Eventually we worked on more significant things. Along the way, I became close to the CEO, John Bryan, an extraordinary man whom I admired as an executive, as well as for his values: he had an active philanthropic life away from the office, and he became a friend and mentor to me. When Goldman went public, I convinced him to join our board of directors.

There are different ways to build relationships. It helps to socialize, but I liked to sell substance. I had a very direct approach that clients needed time to get used to. I wanted people to feel they’d learned something from me each time we met. I advised my clients on all kinds of things that, strictly speaking, had nothing to do with investment banking: from help with business strategies to advice on foreign competition and even insights on the quality of their executives. It was the beginning of the era of hostile takeovers and leveraged buyouts, and we advised many companies in the 1980s on how to defend themselves from unwanted overtures.

Long hours at the office can cause problems at home, and this was a period of great stress in my marriage. I’d come home too tired to want to do much with the children when they were very young. We couldn’t afford to finish our bedroom, so we were living in an open loft, with the kids in rooms right next to us. I sometimes locked myself in the bathroom with
Sports Illustrated
to relax in quiet. Wendy made it clear I had to help out and get home earlier to give the kids baths, read a story, and put them to bed.

With Gorter’s support, I began a pattern where I’d leave the office at 4:30 p.m., run for the 4:42 p.m. train, and be home at 5:25 p.m. After supper, I’d read to the kids. I had them trained so I could zip through a bedtime story very quickly. One night Wendy came in and urged, “Slow down and read with expression.” I tried, but as soon as I did, both kids started crying: “No, no! Read like a daddy, not like a mommy.” Once they were asleep, I’d get on the phone and start talking to clients, who’d say, “Good Lord, you’re still in the office working?”

When I tell this story about work-life balance, people say: “Paulson, you SOB, you worked people harder than anybody at Goldman Sachs.” Fair enough. But I always told folks at Goldman: It’s not your boss’s job to figure out your life. You spend so much time planning your work schedule and your career, you need to make that kind of effort to manage your private life, too. Learn how to say no. Remember, you are not going to get ahead, in any case, being a grunt.

These days, Amanda is the Midwestern bureau chief for the
Christian Science Monitor
in Chicago, and she and her husband, Josh, have two children. Merritt owns and runs the Portland Beavers Triple-A baseball team and the Portland Timbers soccer team. He and his wife, Heather, have a daughter.

Over the years I developed an interest in management. When Gorter moved up to run investment banking for Goldman, he prodded me to take over the Midwestern region. I chaired a couple of strategic planning committees, and in 1990, when John Weinberg retired as head of the firm, his successors, Steve Friedman and Bob Rubin, picked me to run investment banking with Bob Hurst and Mike Overlock. I was also asked to put together a strategy for growing our private-equity business and to oversee it. We had also decided to expand in Asia, and my New York colleagues said to me: “Chicago is closer to Asia than New York. Why don’t you take that?”

I welcomed the challenge. Asia, and China in particular, was on the verge of the incredible boom we have seen in recent years, but we did almost nothing on the mainland then. My first meeting with China’s senior leaders came in 1992, when Tung Chee-hwa, who was then running his own company and later became chief executive of the Hong Kong Special Administrative Region, took me to meet President Jiang Zemin. We were talking about economic reform, and Jiang told me that he had been reading about the U.S. economy, ticking off the names of companies he knew, like General Electric, Boeing, and IBM. Then he looked me right in the eye and said, “Assets equal liabilities plus equity.”

I’m not sure that our country’s leaders could have summed up a balance sheet as succinctly as this born-and-bred Communist. I flew back and told Rubin and Friedman that there was a huge opportunity in China and that I thought we should expand aggressively. From having virtually no presence there at all in 1992, we went to having perhaps 1,500 people in the country when I left Goldman in 2006. In that time I made about 70 trips to China.

The effort paid off in many ways—including some I couldn’t have imagined before. It made Goldman the leading banking adviser in the world’s fastest-growing economy, and it gave me a range of close relationships and contacts with the most senior Chinese leaders. These would help us enormously when I was at Treasury, especially during the financial crisis. Because of the high-profile nature of the work—generally privatizations of state-owned companies—I got very involved in our early efforts. These deals required a terrific amount of strategic and technical work as we prepared China’s often bloated and creaky state-run companies for the demands of Western investors, who expected world-class business operations and sound corporate governance. The Chinese, for their part, were eager to adopt the best practices from the West.

During this time Goldman was growing rapidly all over the world and prospering handsomely. But we also had two big scares that made me reexamine my views on risk. Both episodes led me to take a greater role in the management of the firm.

The first came in 1994, when Goldman had a very difficult year, with big trading problems. The firm lost more than a hundred million dollars every month for a number of months. Our capital structure was also a big problem. When partners left, they took half of their money and left the rest in the firm, earning interest on it. That year, spooked by the trading losses, far more partners than usual decided to leave and “go limited,” putting our capital under great strain. As long as we could keep the partners, the firm’s viability was never in question. Even though the size of our balance sheet had grown dramatically, Goldman’s leadership had always understood that if you were relying on wholesale funding, like an investment bank does, you had better have great amounts of excess liquidity—in layman’s terms, more than enough cash on hand at all times to pay off any immediate demands from creditors.

Complicating matters, Steve Friedman, a mentor and friend who had been running the firm alone—Bob Rubin had joined the Clinton administration—decided to retire in September because of concerns about his health. Jon Corzine was named chairman, with me as vice chairman and chief operating officer. Out of our near disaster, we set up new oversight committees and installed far better systems, processes, and controls for managing risk.

The next scare came in 1998. That spring the partners voted to become a public company. A number of investment banks were making big bets on Russia, which defaulted. As these firms lost money, they raced to raise cash. They couldn’t sell their Russian holdings, which had become worthless, so they started selling other investments, like mortgage securities, which drove down their value.

Even if you had a conservatively managed mortgage business, as Goldman did, you lost heavily. The markets began to seize up, and securities that had been very liquid suddenly became illiquid. The biggest victim of this was the hedge fund Long-Term Capital Management, whose failure, it was feared, might lead to a broad collapse of the markets. The investment banking industry, prodded by the Federal Reserve, banded together to bail out LTCM, but the pain was broader. I remember watching some of our competitors struggling for survival because they had relied on short-term funding that they couldn’t roll over. Goldman made money—I think we ended up earning 12 percent on capital for the year—but we were hemorrhaging for a month or two, and it was frightening. We had to postpone our initial public offering, which had been scheduled for the fall.

Meantime, tension was growing between Jon Corzine and me. I had been named co-chairman and co-CEO that June, and, frankly, the pairing was never right. The structure wouldn’t work for a public company, and I concluded I could not continue to work with Jon as co-CEO. I secured the support of our management committee, and in early January 1999, Corzine’s friend and protégé John Thain, then our CFO, went to talk with him. Then I followed and told Jon that he would need to step aside.

“Hank,” I remember him saying, “I underestimated you. I didn’t know you were such a tough guy.”

But it wasn’t about being tough. It was about what I thought was the right thing for Goldman. Corzine stepped down immediately as CEO and left in May 1999, when Goldman went public, ending 130 years of partnership.

Like many Goldman executives, I worried about what it would mean to the culture and ethos of the firm to be a public company. We worked hard to maintain the cohesiveness and the frankness of the old partnership culture. I was determined to properly align my interests with those of our shareholders. During my final three years as CEO, my bonus was paid entirely in stock. With the exception of charitable giving (including donations to our family foundation), I decided that as long as I remained CEO, I would not sell a single share of the stock I had received in exchange for my partnership interest when we went public, nor would I sell those shares I received for my annual compensation. This emulated the pre-public Goldman Sachs, whose leaders were long-term owners with the vast majority of their net worth invested in the firm.

Those first years were trying ones. We had to contend with the end of the dot-com boom and the subsequent recession, the effects of the 9/11 terror attacks, and the onset of a bear market for stocks. But I think it fair to say that by any measure, we were successful. In the seven years between May 1999 and May 2006, just before I left, the number of Goldman employees (including affiliates) grew from nearly 15,000 to about 24,000. Net earnings of $5.6 billion for 2005 were more than double the pro forma net earnings of $2.6 billion of 1999.

Success notwithstanding, the financial industry had plenty of problems, and we had our share. Much of Wall Street, including Goldman Sachs, got tarred with the scandal over tainted securities research that came to light in 2002. I was concerned about such lapses in judgment, particularly at Goldman Sachs. I knew we could all do better, and I began to speak out.

I soon earned a bit of a reputation as a crusader or at least as a moralist. I wasn’t a wild-eyed reformer, and I had never wanted a microphone. For me the issue was simple: in business, as in life, we should do not just what is legal but what is right. I hadn’t heard anybody state this obvious point, which was what I tried to do when I gave a well-covered speech at the National Press Club in June 2002.

“In my lifetime, American business has never been under such scrutiny,” I said. “And to be blunt, much of it is deserved.”

I was later told that my speech was helpful in passing the Sarbanes-Oxley legislation. These reforms were enacted after a rash of corporate and accounting scandals, most notoriously the collapse of Enron, and created tougher standards for public accounting firms and the management and boards of public companies.

Every now and then I’d chide my colleagues about the dangers of the ostentatious lifestyles I saw among Goldman bankers. I’d get in front of the partners—I was never scripted—and say things like: “You have got to remember something. No one likes investment bankers. You make your life more difficult when you build a 15,000-square-foot house.” Of course I also recognized that for some of our people, the desire to make money was what kept them working so hard and kept Goldman Sachs doing well.

I guess it’s fair to say that the excesses of investment bankers were just an extreme example of conspicuous consumption in a disposable age. Wendy groused about this all the time—people buying things they didn’t need, then casually throwing those things away. Wendy is an avid environmentalist: she carries trash off airplanes to recycle it. She still wears clothes from the early ’70s and uses pots and pans that came from my parents’ basement. We even use the same toaster oven we’ve had since we got married 40 years ago. Why wouldn’t we? It works perfectly well.

Wendy and I share a love of natural landscapes and wildlife, which has led to a strong interest in conservation. We have been active in philanthropic activities, devoted to the stewardship of our natural heritage both here in the United States and globally. For me this has meant serving as chairman of the board of the Nature Conservancy, co-chairman of the Asia Pacific Council of the Nature Conservancy (where, among other initiatives, we worked to establish parks in the Yunnan Province of China), and chairman of the board of the Peregrine Fund, which is dedicated to protecting birds of prey around the world.

By the spring of 2006, Goldman Sachs was enjoying record levels of activity and income, its shares were at an all-time high, and I was not looking to make any change in my life when the possibility of my going to Treasury started being discussed. There were rumors that Treasury Secretary John Snow would be leaving, and one Sunday morning I woke to see a
New York Times
article with a picture of me and the American flag, suggesting that I would be the next Treasury secretary.