Authors: William D. Cohan
Ironically, J. Aron, which was in the arbitrage business, found, in short order, that its business had been arbitraged away. It remained an open question whether J. Aron partners snookered Goldman at the
height of the market—the prices of gold and silver fell soon after the sale—and sold out because they knew it or whether the market just overwhelmed them, too. “
I honestly don’t know,” Rubin said, “and you’ll never find anybody who can tell you.” But some J. Aron partners, anyway, realized what a great deal they had cut. “
People thought we had made the sale of the century,” one Aron partner recalled. “The price of silver peaked, I think, in January of 1982, and we sold the company at the end of October of 1981. With the benefit of hindsight, the way the business went sour, with all the people that we had, I don’t know what would have happened. It would have been a very difficult time if we had not sold the company.”
Then there was the internecine warfare between Goldman and J. Aron about who should run the firm’s fixed-income business. “
The three senior people from J. Aron got into a disagreement with the people at Goldman’s fixed-income group about whether J. Aron should have its own fixed-income department or they should use the Goldman Sachs fixed-income department, which is what I thought they should do,” Rubin explained. “I didn’t really want two competing fixed-income departments. It would be chaotic. But it actually was a long dispute, with Weinberg and Whitehead having different views, which is what made it complicated. Ultimately, we decided to have one fixed-income department. In any event, the three guys running J. Aron left.” Within a year of closing the acquisition, both Coyne and his partner
Marvin Schur, who had been given the seat on Goldman’s
Management Committee, had left Goldman, complaining of chest pains and other ailments. “
With chest pains and $40 million apiece in the bank, who wouldn’t [leave]?” former Goldman partner
Leon Cooperman wondered.
Doty then went to work, and for the first time in Goldman’s history, the firm engaged in a mass firing, letting go nearly a quarter of the four hundred J. Aron employees. News of the “staff reductions” of some ninety people at J. Aron leaked out in August 1983, although Ed Novotny told the
New York Times
that the reports of that many firings were “vastly exaggerated” and that only “several employees” had been let go after a “study by J. Aron” determined that it could operate “as well as it had been with fewer personnel.”
But that was only the beginning of the changes that were to come at J. Aron. After Doty had made these initial cuts, the Two Johns gave to Rubin the responsibility for fixing J. Aron and returning it to profitability. It was a complicated task that would likely mean more firings and, equally momentous, would require Goldman to reengineer the business to compete in a more complex environment. “
I could have said to myself
that this might not work and could upend my position at
Goldman Sachs,” Rubin explained, with typical self-effacement. “At the very least, I might have done some probabilistic analysis.” Not Rubin. He did not “calculate,” he said. “I wasn’t 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.”
He quickly came to the realization that the Two Johns had given him an opportunity of a lifetime: if he could turn around Aron—the firm’s largest acquisition that had quickly become a disaster—his future prospects at the firm would be virtually unlimited. Of course, such raw ambition was not something he could admit. Instead, he conceded, “I very much wanted the responsibility, because it was interesting and would enlarge my role at the firm.” Moreover, since Aron was a “trading business, with a strong arbitrage bent,” he felt “suited to the task.” Before taking over at Aron, he spent two or three months just talking to the professionals there, making notes on his yellow legal pad and learning the business. He discovered, with some surprise apparently, that “the people doing the work had many thoughtful ideas about how to revise our strategy and move forward.”
That’s when Rubin made a wise decision and gave the day-to-day task of running J. Aron to
Mark Winkelman, a Dutch former
World Bank official who had almost quit the firm when he was surprised with the news that Goldman was buying J. Aron in the first place. Rubin chose Winkelman not only because he was “
extremely sophisticated” about “relationship trading in bonds and foreign exchange” but also because he had the “substantive background” to understand Aron’s problems and the “managerial skills to help set them right.” Another reason for sending Winkelman to J. Aron, according to Doty, was so that the firm could make him a partner, “
which he deserved to be. He was a really bright guy.”
Rubin also likely figured that if Aron turned out to be hopeless, he would have one layer of insulation between him and the problem. Rubin turned out to be very demanding of Winkelman. Winkelman’s first business plan for the newly revamped Aron would be for the firm to make $10 million, a meaningful rebound toward profitability after years of slippage. “
Mark, ten million dollars is not why we bought J. Aron,” Rubin told him. “Tell us what we need to do to make a profit of one hundred million dollars
this
year.” Winkelman was reportedly “dumbfounded” by Rubin’s demand and was not even sure he was serious. But, of course, he was.
Together, the two men determined that Aron needed to transform its business from one that took little or no risk—the firm would shut down during the middle of the day if it could not account for an extra
hundred ounces of gold (then worth around $85,000)—into one that would take far more risk. Keeping in mind that the Goldman partners’ net worths were on the line with every trade, Winkelman and Rubin transformed Aron into a business that took advantage of short-term price differentials between various commodities and securities tied to them. They also decided Aron needed to become a much bigger player in foreign exchange trading, by, for instance, helping clients hedge
against currency risk, and in the trading of
oil and other petroleum products. “
That meant taking risks that the Aron people had always been proud of not taking, and with the firm’s own money,” Rubin explained. “The firm decided to abandon the sure thing that no longer existed in favor of calculated risk taking.” For his part, Winkelman realized Aron “had to start over” and “risk our capital and work as dealers.” Together, Rubin and Winkelman transformed Aron into a global force trading commodities on behalf of Goldman’s clients and Goldman itself. And Doty took the brunt of much of his partners’ ire for pushing the Aron deal. “
I took tar and feathers from several of my partners,” he said.
Although he makes no mention of Aron in his memoir, Whitehead—together with Weinberg—committed to their Goldman partners that they would “take care of this situation.” They met with Winkelman weekly to review the emerging strategy for how to change Aron. “
At first I thought it would be difficult, a real punishment,” Winkelman recalled, “but soon I realized that it was a golden opportunity.… They got personally involved to be
sure
we would eventually solve the many problems at J. Aron—and there were
lots
of problems.”
His first task was figuring out how many more people at Aron had to be fired. “J. Aron was in real trouble,” he said. “Costs had to be cut back sharply, and cutting costs meant cutting people—something Goldman Sachs traditionally did not do.” The Goldman brass decided the firings should occur in one day, with each person’s boss informing him or her of the decision. Since Aron was still in a separate building, firing people there was not considered the same as firing people at Goldman. “We were fighting for our very existence,” Winkelman continued, “and we had to cleanse the culture from a bootlicking family-run business.” Not only did that mean firing those that no longer fit but also hiring new people into the business who were capable of executing the new business plan, as opposed to those people who were hired, according to Rubin, based on “horse sense” and who just might be decent traders.
Not surprisingly, Rubin described the firings at Aron more diplomatically than did Winkelman as “certain personnel changes” and a “
most delicate undertaking.” He and Winkelman concluded that while
Aron had “some extraordinarily capable people” who could clearly help to execute the new strategy, “some others were so steeped in the old, risk-free way of doing business” that they could not make the transition “to a risk-based approach.” They would have to go. In the end, another 130 or so of the Aron employees were fired, leaving a smaller, core group out of the original 400 that Goldman would rely on to build the new business.
“There is an incredible bitterness at the way the departures were handled,” a former employee told
Institutional Investor
. “People who spent 28 years with the firm were fired.”
One of the people who Winkelman decided to save was Lloyd Blankfein. The decision to keep him would be a fateful one for Goldman Sachs.
——
W
HILE RUBIN AND
Winkelman were preoccupied behind the scenes in trying to resurrect the nearly moribund J. Aron, Goldman—with the help of Novotny, the PR maestro—was busy helping the
Wall Street Journal
provide a December 1982 front-page advertisement for the firm’s increasingly lucrative business of advising
on mergers and acquisitions. Goldman’s role in the burgeoning M&A business had been highlighted once before in the
Journal,
in September 1965, in another front-page article about how the use of “merger-makers” was greatly expanding in corporate America and “demand for their services is climbing sharply.” In that article, John Weinberg, who founded Goldman’s M&A department while at the same time supposedly “overseeing” the
commercial paper department, was quoted as explaining that the “merger-makers” provided “the lubricant in the transaction” to get it done and could often make the extraordinary sum of $1 million for their work.
Seventeen years after that somewhat quaint description of M&A bankers, it seemed the supposedly press-shy Goldman partners were willing to make an exception for writer Tim Metz’s 1982 page-one story, which portrayed the firm—virtually alone on Wall Street—as unwilling to represent a corporate raider in an unfriendly, hostile deal for a company. Whether intentional or not, in one fell swoop, Goldman had whitewashed a meaningful chunk of Levy’s role in the 1950s and 1960s on behalf of raiders—such as the Murchison brothers and Norton Simon—in mounting hostile takeover attempts. The
Journal
’s story would not only prove invaluable in marketing Goldman’s M&A business but would also ratify what Levy had told
Institutional Investor,
in December 1973, that the firm would not work for
corporate raiders on hostile deals. Indeed, the story’s headline said it all: “
The Pacifist: Goldman Sachs Avoids Bitter Takeover Fights but Leads in Mergers.”
Metz’s story explained how Goldman opted out of one of the most contentious hostile takeovers ever, then just finishing up on Wall Street: the 1982 fight for
Bendix among
Martin Marietta,
Allied Corporation, and
United Technologies. Bendix, led by its charismatic CEO,
William Agee, took the offensive by launching a hostile offer for Martin Marietta, another aerospace company. Martin Marietta then partnered with United Technologies and countered with its own bid for Bendix. Ultimately, though, Allied won Bendix, but not before Bendix had acquired 70 percent of the public equity of Martin Marietta and Martin Marietta had acquired 50 percent of the public equity of Bendix. Allied ended up with Bendix and 38 percent of Martin Marietta. The two-month battle during the summer of 1982 played into the media’s fascination with takeovers. There were the high-profile bankers, of course, but this mess had four huge corporations fighting a public war on multiple battlefields. There were more fronts than World War II. There was even the additional spice of the revealed affair between Agee and
Mary Cunningham, one of his executives.
Goldman wanted no part of it. Indeed, it had been asked to represent at least one of the four combatants but declined because of “potential conflicts of interest,” the paper reported. “Thank God we didn’t have to get involved,” Whitehead told Metz. Instead, during the summer of 1982 Goldman was busy advising
each
party in two separate mergers—the $4 billion merger between
Connecticut General Corp. and
INA Corp. (to create
CIGNA, the global insurer) and the near $550 million merger of
Morton-Norwich Products, Inc., and
Thiokol Corp. to create
Morton Thiokol Inc.—four fee-paying clients in all, a highly unusual turn of events fraught with potential conflicts. But Goldman was only too happy to crow about how it was able to manage the conflicts satisfactorily. The executives at the four companies “told us they couldn’t think of anyone else they trusted as much as us,”
Geoffrey Boisi, Goldman’s head of M&A, told the paper, which noted that Goldman ended up with only a $5 million fee in the CIGNA deal, despite representing both sides, while First Boston received $7 million representing Bendix, even though that merger was half the size of the CIGNA deal. (Left unsaid by Metz was that in the mid-1970s, Goldman got itself into a pack of trouble with one client—Booth Newspapers, Inc., in Michigan—when it greased media mogul
Samuel I. Newhouse’s purchase of big blocks of Booth’s stock against the wishes of the Booth management. Newhouse’s Advance Communications eventually bought Booth for $305 million in 1976.)
As was often the case in such articles, the
Journal
made sure to include a few arrows from Goldman’s competitors. The firm’s “pacifist
stance” was “intensely irritating” to others on Wall Street, who claimed to dislike Goldman’s “sanctimonious airs” and found its M&A advice to be of a “cookie-cutter fashion.” There were also digs aimed at Goldman’s hard-to-fathom tactic of not playing one bidder off against another in the selling of a company. Competitors claimed Goldman did its clients a disservice by not getting the highest possible price and gave the example of Goldman’s sale of
Marshall Field for $330 million to
B.A.T. Industries, a British conglomerate. “The price they got for Marshall Field wasn’t exactly mind-boggling,” one of them said. But Boisi defended the practice. “If you know that you’ll very probably have one chance and one chance only to put your bid in, then you are going to think long and hard about keeping any extra money in your pocket when you make that bid,” he said. (Despite Boisi’s explanation, it seems highly improbable that Goldman’s M&A bankers would not have played one bidder off against another.)