In an Uncertain World (13 page)

It was major surgery. I wore a brace for six months afterward and full recovery took about a year and a half, but the operation worked. Ever since then I have played tennis, fished, and done whatever I wanted to physically. But my back problem meant that I couldn't even consider the Carter position. When I saw the article in
The New York Times
about the person chosen for the job, I thought,
That could have been me
—though I also recognized that I almost surely wouldn't have taken the appointment anyway.

   

GUS LEVY SUFFERED a massive stroke in November 1976 and died shortly thereafter. He was sixty-six, young enough that he'd been able to ignore the issue of succession at the firm. However, shortly before the stroke, he had told George Doty, a senior member of the Management Committee, that he was going to name John Whitehead and John Weinberg co–vice chairmen of the Management Committee, and to George it was clear that Gus viewed them as his successors.

“The two Johns,” as we called them, were the logical heirs in any case. John Weinberg, Sidney's son, was warm, not openly assertive, but highly effective and a great culture carrier in the firm. Born into the business, he had his father's touch with clients, who loved him for his straightforward good sense. John Whitehead was extremely bright, lucid, and self-confident, and had a powerful strategic focus. He was central to converting the investment banking department from a highly individualistic operation, with Sidney Weinberg as the extraordinary star at the center, into an effective organization. Whitehead also began orienting the firm much more toward the world outside the United States. Our continued movement toward global involvement during my time at Goldman stood me in good stead during my years in Washington, when I looked at many of these same issues through the lens of public policy.

I learned a lot about management from both men. From Whitehead, I learned how to focus on being strategic despite the pressures of day-to-day business. He was always thinking in terms of where Goldman Sachs wanted to be years into the future. From Weinberg, I learned about working with people, both clients and colleagues, and how to treat the perspectives of others seriously and respectfully even when I disagreed with them. From both, I learned how to deal with joint management. There was initially much skepticism at Goldman about whether a co-CEO arrangement could work. When the Johns disagreed in a Management Committee meeting, there was no clear way to resolve the issue. But they figured out a way to function effectively that reflected their personalities. They talked to each other every weekend before the Monday morning Management Committee meeting and went through a list of issues. Weinberg was willing to let Whitehead take the lead on most, but if Weinberg felt strongly, he would assert himself. Though a problem would occasionally remain unresolved for an extended period because of their differences, their chairmanship showed me that a co-CEO structure can work—though I later came to believe that successful joint management is the infrequent exception, not the rule.

Ray Young represented all of the firm's equity trading and sales activities on the Management Committee. In 1980, he retired, and I was one of three people who replaced him on the committee. Somewhat thereafter, I was asked to take on the problem of J. Aron & Company. A few years earlier, working with George Doty, I had tried to extend the arbitrage mind-set and our experience with trading in derivatives into building a commodities trading operation. Then, the year after I joined the Management Committee, Goldman bought J. Aron, its first acquisition since the 1930s. A hugely successful, family-owned commodities trading firm, Aron had sophisticated, well-established commodities operations, with connections all over the world. What neither we nor they realized, however, was that, because of various changes taking place, it didn't have a viable business model for the future. Aron's profits, which had been $60 million in 1981, fell to $30 million in 1982 and then to nothing in 1983.

Doty had responsibility for J. Aron and took the first difficult step of downsizing. With that done, the two Johns and George asked me to take charge of the problem. I could have said to myself that this might not work and could upend my position at Goldman Sachs. At the very least, I might have done some probabilistic analysis. But here, as in other major career changes that strongly attracted me, I didn't calculate. I wasn't at all cocky about my ability to turn Aron around, but neither was I anxious. Once I had the job, I just focused on trying to do what needed to be done. And I very much wanted the responsibility, because it was interesting and would enlarge my role at the firm. Moreover, Aron was a trading business with a strong arbitrage bent, so I felt suited to the task.

I walked around with my yellow pad for two or three months, just taking notes and trying to learn about the business before actually taking over. In the course of my inquiry, I found that the people doing the work had many thoughtful ideas about how to revise our strategy and move forward. After a while we changed the leadership, putting Mark Winkelman, who had been in the fixed-income department, in charge, reporting to me. Winkelman, who was born in Holland and worked at the World Bank before coming to Goldman, was extremely sophisticated about the developing business of relationship trading in bonds and foreign exchange. He had both the substantive background to understand Aron's problems and the managerial skills to help set them right.

Together Mark and I worked with the Aron people to rethink the business model. Aron had been doing classic arbitrage, buying a currency or a commodity—such as gold—in one place and selling it as close to simultaneously as possible somewhere else. Aron was imaginative in crafting opportunities for classic arbitrage, for example by maintaining open phone lines to Saudi Arabia to trade gold and silver. This kind of trading had little risk, and Aron was intensely risk averse—so much so that when it lost track of its transactions, it would close in the middle of the day, to sort everything out and make sure it wasn't holding an extra hundred ounces of gold on its books. The only exception to this model was coffee, where Aron acted as a large importer and trader.

One of the first conclusions others led me to see was that the relative stability of commodity prices, improved communications, and increased competition had eliminated the meaningful profit opportunity in Aron's traditional business. Spreads were being squeezed, a reality that the Aron leadership seemed to have missed because of its great success in the past. I found over the years that the Aron experience was quite typical. Success often leads businesses and individuals to fail to notice change or to adapt to it, and so, eventually, to falter.

Mark and I determined that Aron needed to make several basic changes. The first was to focus on relative value arbitrage, or relationship trading, which Goldman was already doing in fixed income and equities. In the Aron context, that meant looking for distortions in the price relationship between different commodities or currencies, or between them and derivatives based on them, using interest rates and other factors to estimate the appropriate relative values. For example, short-term gold futures could be traded against long-term gold futures to profit when prices that seemed out of whack converged. That meant taking risks that the Aron people had always been proud of not taking, and with the firm's own money. We decided to abandon the sure thing that no longer existed in favor of calculated risk taking. We also decided to greatly expand Aron's foreign exchange trading, going from a pure arbitrage operation into relative value arbitrage, outright position taking, and increased client business—for example, helping businesses and individuals hedge against currency risk, which added to the services that Goldman could offer clients. Somewhat later, we went into trading oil and petroleum products, adding a vast new arena to our business.

These transformations at Aron required certain personnel changes, our most delicate undertaking. After extensive observation, we concluded that Aron had some extraordinarily capable people—who had already contributed greatly to rethinking the strategy—but that some others were so steeped in the old, risk-free way of doing business as to be unable to make the transition to a risk-based approach. We had to find places for those people elsewhere at Goldman or encourage them to move on. And we needed a process for recruiting. Hiring at the old Aron had been based on horse sense—somebody seemed as though he might make a good commodities trader. We formalized the process, looking for people whose experience and qualifications met our new needs. With all of these changes, we had reengineered Aron and the business started to work again—though in a very different way. We didn't reach our ambitious $100 million goal the first year, but we exceeded it the second year and created a base from which Goldman earned enormous profits in the years after.

Like arbitrage, commodities and currency trading was an example of a good business based on calculated risk taking and that involved living with the large losses that sometimes—and inevitably—ensue. But the Aron transformation was also an illustration of how difficult change can be at big organizations. Michael Porter, a professor at Harvard Business School, argues that great institutions fail because, once successful, they become satisfied with themselves and stop changing, and the world passes them by. That was the case with Aron, which had lost its strategic dynamism. But even with an effective business model and a dynamic, strategic mind-set, a company needs a structure that works, a system for attracting capable people and putting them in the right jobs, and a culture in which people work together in a mutually supportive way.

But perhaps the most important management point about Aron was that the ideas for remaking its business came largely from the people who worked there, exemplifying my career's experience that the people in the front lines of a business often have a better sense of what's happening and what to do about it than the top executives. Our success at Aron was more evidence of Ray Young's and Dick Menschel's advice that to be most effective I was best off being surrounded by strong people, listening to them, and being sensitive to their concerns and quirks of personality—just as they had to be sensitive to mine.

   

AT THE SUGGESTION of Bob Strauss, the Democrats asked me to chair their 1982 congressional campaign dinner in Washington. Never having done anything like it, I wondered whether I would be able to raise enough money. Instead of saying yes or no immediately, I tried to get a better idea of how much I had to raise personally to be viewed as successful. People I spoke to named a figure of $100,000. So I called a family friend in Florida who had made a lot of money from my arbitrage advice. He and his partner said they'd each put up $20,000. With the $20,000 I could contribute under the legal limits and a few other ideas about where to raise money, I felt close enough to the $100,000, and I said okay. The dinner was successful: I raised much more than $100,000 on my own, and the dinner took in more than $1 million—large numbers by the standards of that era. Bob Strauss had told me that chairing that dinner put someone in a different position in the party. He was right. Soon after, both Walter Mondale's and John Glenn's campaigns sought my help for the 1984 election.

Substantively, I felt that the Reagan administration's budget deficits created a serious threat to future economic conditions and that sooner or later we would pay the price. I remember speaking at a House Democratic Caucus meeting in the late 1980s. Congressman Barney Frank (D-MA) said, pointedly, that although I had been concerned about deficits for some time, the economy had continued to grow reasonably well. I replied that the laws of economics hadn't been revoked. The timing of any market impact can be complicated, but the inevitable would surely occur at some point—as, indeed, happened not much later.

Many conservatives shared this concern. Martin Feldstein, the distinguished economist who was Ronald Reagan's second chairman of the Council of Economic Advisers, argued strongly against large budget deficits, but his arguments were unsuccessful and he stepped down near the end of that administration's first term. Gary Wenglowski, Goldman's highly regarded chief economist, said he thought Reagan's economic policy was the worst since Herbert Hoover's. At that time, some conservatives argued that tax cuts should be accompanied by commensurate reductions in the cost of running the federal government. But that would have required program reductions that neither party was prepared to support, especially during a period when defense and entitlement spending were rising at a rapid rate. Another view was that tax cuts would generate sufficient additional growth to pay for themselves, which George H. W. Bush referred to in his 1980 presidential primary campaign against Reagan as “voodoo economics”—which seems to me about right.

The other aspect of Reagan's policy that most concerned me was the failure to address the country's social problems, many of which were clearly getting worse. Around that time, I read Ken Auletta's book
The Underclass.
In vivid fashion, Auletta described the replication of poverty through generations. The book crystallized a lot of my thinking on the topic—though later, when I worked in a Democratic administration, I learned that the term “underclass” is no longer politically correct. (I was told that the acceptable alternative is “people who live in distressed areas, rural and urban.”)

I had some direct exposure to the problems of inner cities at meetings of a neighborhood group called the 28th Precinct Community Council in central Harlem in the 1970s. In searching for a way to get involved with these issues, I had met Warren Blake, an African-American police officer in charge of community relations for the precinct. Warren, a huge man with a personality to match, had strong ties to the community and cared deeply about what was happening to it. His wife's family had run a prosperous funeral business in the neighborhood for many years, and the Blakes lived nearby in a large Victorian house that had once belonged to James A. Bailey of Barnum & Bailey Circus. When he was off duty, Warren sometimes drove a hearse. I remember a dinner Judy and I went to at their home. One of the other guests was a political activist from Papua New Guinea who proposed that Goldman Sachs finance a revolution in exchange for some of the country's shrimp and timber concessions. I didn't pursue this.