Authors: William D. Cohan
Despite suffering tremendous disillusionment as a result of the Watergate scandal, Paulson counted his time at the White House as an important and formative experience. He learned that he liked working on more than one project at a time. He also learned not to be intimidated and to be comfortable around powerful people. “I was never going to be awed by authority just because someone had a big title or a big position and they told you what to do,” he said. “It also helped me a lot in my early investment banking days since—when I was quite young—the fact that I had worked with the president and with senior cabinet officers gave me great self-confidence. I wasn’t afraid to go directly to the CEO.”
By the middle of 1973, Paulson had started interviewing for his next position. His eclectic background and his desire to work with CEOs made Wall Street—and investment banking, in particular—a perfect career path. He thought that Goldman or
Salomon Brothers would be best for him because they each had large, respected Chicago offices, led by individuals—James Gorter, at Goldman, and
J. Ira Harris, at Salomon—
who also had seats on their respective firms’ management committees. Both firms wanted Paulson, and neither firm was the industry leader it would soon become.
When Paulson started to meet the Goldman brain trust, the rapport was instant. “Not only did I love Jim Gorter,” Paulson said. “But I also met Whitehead, Weinberg, Rubin and Friedman and a whole bunch of other people and I just said to myself, ‘I don’t care where they rank in the league tables, these are really smart, good people and I want to work with them.’ ”
In January 1974, Paulson joined Goldman in Chicago as an investment banking associate, covering big industrial companies in the Midwest. It was a tough year financially at Goldman, given the Penn Central litigations. In this difficult financial environment, the Paulsons’ frugality served them well. They bought five acres of land from Paulson’s parents on the Barrington property where he grew up and built a “rustic” glass-and-steel house on a hill overlooking a prairie. He called the property “Merimar Farm” and cut the path for the driveway, constructed the retaining walls, and split boulders that were used in the stone fireplace.
At first, Paulson worked closely with Gorter on his existing client relationships, such as
Amoco and
Walgreens. Then he was given his own list of companies, where Goldman Sachs had been stymied for years, including
Caterpillar,
Kellogg,
Inland Steel, and
Archer Daniels Midland. Gorter told him to relax and not to worry about winning business from these companies in the short term. “If you do a good job,” Gorter told him, “I’ll be able to see it and see you’re making progress, and then ultimately if you do the right thing, the revenues will follow.”
The early years at Goldman were tough for Paulson. “Everything else I’d done,” he said, “if you were bright and worked hard, you were assured of success, but here you needed to win people’s trust.” But then he started getting a few breaks. First, the general increase in M&A deals—driven by
hostile takeovers—made it more natural for bankers to talk to the CEOs of companies about how to prevent a corporate raider from making a move. This played to Paulson’s confidence in dealing with powerful people. His unique, somewhat disheveled style played well. He also defined his role as a coverage banker “expansively,” he said—another trick he learned in government—and he figured he would have a better relationship with a CFO if he had an excellent relationship with a CEO (even though this risked offending the CFO).
Like that of a character from a
David Mamet play, Paulson’s objective in a meeting with a CEO was to make sure he got another meeting. “Every time I see that person they’ve got to learn something, they’ve got
to find it useful, and they’ve got to say, ‘I want to see this young guy again,’ ” Paulson said. “I didn’t try to be their buddy, didn’t try to be their equal.” He talked to the executives about the performance of their stock, or about M&A deals in their industry—subjects he knew they would be interested in. Over time, he came to realize CEOs were lonely and didn’t often have people to bounce ideas off. He would be their sounding board. “I would give them advice on a range of subjects some of which had nothing to do with traditional investment banking …,” he said, “such as weaknesses in their company, or I didn’t think this particular CFO was strong and there might be someone at another company that was stronger, or whatever. Or about the composition of their boards. I was candid sometimes to the point of bluntness. That was my trademark.” For a young banker, without much experience, Paulson had an unusual store of chutzpah. Sometimes clients would tell him to give them a breather, and not call so often. But he could hardly control himself.
Before long, Paulson began generating one major piece of business after another: a
Eurobond issue for
McGraw-Edison, creating a joint venture in Japan with
Inland Steel, and selling a bunch of small businesses for
Sara Lee. His success with many of these companies stemmed, in part, from the fact that he was not Jewish. There was no secret at that time that some executives at many large corporations in the Midwest were anti-Semitic and did not want to do business with a Jewish firm. “That was not lost on me …,” Paulson said. “In the late 1970s, you’d have a lot easier time doing business if your name were
Morgan Stanley … I just literally never gave it a thought. To me, the firm was a meritocracy.” Paulson spent his time focusing on winning business away from competitors. He loved being the underdog and fighting for greater and greater market share. “We loved to compete against Morgan Stanley,” he said.
With Paulson’s rainmaker banking skills increasingly obvious, he was named a Goldman partner in 1982. By then, although Bob Hurst might have disagreed, Paulson thought of himself as one of the firm’s top bankers. “I tried to be the best new business producer at the firm,” he said. When Paulson had his conversation with
George Doty about how much capital he would have to invest in the firm upon joining the partnership, he told Doty that he had only been able to finish two-thirds of his Barrington home and that he and his wife were sleeping in an open loft above the dining room, next to the children’s rooms. “We were going to put this addition on to the house,” Paulson told Doty, “but I’m not going to put the addition on now so I have ‘this much’ to put in the firm.” But Doty took pity on Paulson and told him to build the addition to the
house and put a smaller amount of capital into the firm. “I even forgot what it was, but it was a relatively small amount of capital I put in,” he said. “Being a partner was extraordinarily important until I became one and then afterwards it was something I never really thought about much again.” Even though Paulson became increasingly wealthy, his material interests remained minimal, especially for a Goldman partner. Wendy wanted her husband to be happy but otherwise, he said, “she could care less,” about the money. “We lived out in a rural area where people didn’t know what Goldman Sachs was,” he said, “and they certainly didn’t know what a Goldman Sachs partner was.”
The word around Goldman was that
nobody
worked harder than Paulson. “I worked hard,” he said. But in addition to both his legendary work ethic and his revenue-generating ability, part of Paulson’s appeal to people like Whitehead, Gorter, Rubin, and Friedman was his combination of frugality and family values. Paulson didn’t drink or smoke or chase women. There was a sense that Paulson would never put himself in the position that Lew Eisenberg had. Nor was he likely to spend his growing wealth conspicuously. “
Johnny Weinberg used to say—and I think this was very insightful—‘As people progress some of them grow and others swell,’ ” Gorter said. “And when you can sense that people are swelling, you want to get the hell out of there because they’re losing their initiative and they’re not going to do the job. Hank never swelled. He always grew.”
To be sure, Paulson was no Boy Scout. He made plenty of enemies at Goldman. His brash, take-charge mentality offended some of his partners who thought he spoke too quickly or made decisions too impulsively. “He’s an action-oriented person, and one of his great skills was identifying smart people and absorbing good ideas that they had, and then pulling the trigger,” was how one of Paulson’s rivals at Goldman described him, choosing every word very carefully. Paulson had heard the criticisms and didn’t deny that he has his flaws.
But none of these imperfections seemed to hamper his career. After Paulson
made partner in 1982, Gorter asked him to run Goldman’s Midwest investment banking operations. By then Gorter had been on the
Management Committee for years, was a real power at Goldman, and could not have been a better rabbi for Paulson. For his part, Paulson said he hadn’t given much thought to being in management. But he took on the responsibility and found that the regional banking effort needed to be rebuilt. He hired a bunch of new bankers and then trained them. From there, Gorter and Friedman decided Paulson should be more involved in thinking about Goldman’s long-term strategy and asked him to join two committees devoted to that topic.
Working on the firm’s overall strategy not only gave Paulson input into decisions about how best to deploy the firm’s limited resources and how best to expand internationally—exposing him to the leaders of
Japan and
China, among others—but also gave him ongoing access to Friedman, an opportunity Paulson did not fritter away. “Even though I was in Chicago, Steve and Bob made me feel relevant,” he said. “They always seemed very interested in what I had to say about strategy and my views on how we should be working with clients, and I had
very
strong views about the role that Investment Banking Services”—or IBS, the evolution of Whitehead’s New Business effort—“should play and how we should work with clients.” But Paulson claimed that as much as he enjoyed the management responsibilities, he never aspired to a leadership position at Goldman. “It never had occurred to me that I would someday run Goldman Sachs or that I would want to run Goldman Sachs or that I’d want to run a big group of people or that I would want to ever go to New York,” he said. “What I aspired to do was to be an outstanding investment banker in the Midwest.”
With Gorter’s retirement in 1988, Paulson became head of the Chicago office. At the end of 1990, Friedman asked Paulson to co-head investment banking with Hurst and Overlock. At first, the arrangement was a bit awkward, but the three men got along reasonably well and were able to divide up the managerial responsibilities. They also continued to work with clients, an arrangement that made Paulson comfortable. He also took on responsibility for Asia, which for Paulson was a revelation, since most of his international experience centered on canoeing trips in Canada. “I got Asia by default,” he said. “No one wanted to go to Asia. We had almost no business there. I remember Bob Hurst telling me, ‘You should go to Asia because Chicago’s closer.’ ”
Paulson said he became “fascinated” by Asia and determined to build up the firm’s presence there. One way to do that—as he and Rubin had done in
Mexico with Goldman’s assignment to privatize
Telmex, the telephone company—was to work hard to win the assignment to privatize formerly state-owned enterprises. Paulson believed this represented a “branding opportunity” for Goldman in these foreign countries. He convinced Goldman’s partners to invest $1 million in
Star TV, the largest satellite-TV provider in Asia, owned by Hong Kong billionaire
Li Ka-shing. He convinced
Tung Chee Hwa, a shipping executive who became the first chief executive of Hong Kong in 1997, to take him to China, in 1992, to meet
Jiang Zemin, just before he became China’s president. “I was very impressed with President Jiang Zemin and what he knew about the U.S.,” Paulson said. “And what he knew about markets.” Paulson and
J. Michael Evans worked together intently to win for Goldman the assignment to underwrite the IPO of China Mobile. “I still remember the legendary Chinese premier Zhu Rongji, whom I greatly admired, looking at Mike Evans and saying, ‘Mr. Evans, if I had ten people like you I’d restructure all of our state-owned enterprises. And if I had 100, I’d turn around this country,’ ” Paulson recalled.
There was no question that by the fall of 1994—and his walk in Central Park with Corzine—Paulson was a premier investment banker. The question on the table, though, was could he figure out a way to work with Corzine in a subservient position to lead Goldman Sachs out of its funk?
——
I
MMEDIATELY AFTER
F
RIEDMAN’S
announcement that he would resign came the stories that Goldman would experience an unprecedented “wave of retirements” of limited partners that could “suck about $400 million of partners’ capital out of Goldman” in the next five years, reducing the firm’s $5 billion capital account. Friedman then admitted the firm was in discussions with private investors to replace the capital that its limited partners—including Friedman, who reportedly had $100 million tied up in the firm—might take out after they left. But there was no pressure on Goldman to raise new money, Friedman insisted. “We have never been in a stronger capital position,” he said. “Each time we raised money we didn’t have a pressing need for it.” Two months later, on November 29, Goldman announced that it had raised another $250 million in equity capital from the
Hawaiians, at the
Bishop Estate, for between another 4 percent and 5 percent of the firm, which valued it at between $5 billion and $6.25 billion, a higher valuation than two years earlier. The new investment increased the total ownership by outsiders in Goldman to 20.5 percent, from 16.5 percent.
With his decision to take the number-two job at Goldman made and announced, Paulson had some serious explaining to do to Wendy. He had left Chicago a few days earlier, telling her his view that he was unlikely to become a leader of the firm. Indeed, such was his mind-set going into the weekend that he did not bring enough clothes with him for an extended stay in New York. Someone went to Brooks Brothers and bought him a bunch of shirts and ties. Wendy sent him some suits. He moved into the Pierre for months. “I didn’t go home,” Paulson said. “I just stayed in New York.” He called her on Sunday night before the public announcement. She was in a state of shock. “Wendy, I have to do this,” he told her. He just needed to help the firm get “through the crisis and then I can reassess.” He told her he needed to help the firm in its time of
acute need. With Corzine’s appointment as the firm’s new leader, he felt his presence was essential to make sure the firm’s strategic direction stayed on track and to make sure that any personnel cuts were not made irrationally. “The investment bankers were so disillusioned with what was going on,” he said. “We had a disproportionate number of investment banking partners relative to the profit, and they were very concerned about the trading losses.” He told his wife, “I’ll be able to play a key role in getting them to stay. I just have to stay and work here and get this done.”
Wendy Paulson was not happy with the turn of events. “Wendy has always been very supportive of me,” Paulson said, “and she basically said, ‘This is terrible, but I’m going to come to New York and find an apartment for us.’ ” (In February, they moved into a modest apartment in a building above the movie theater at Sixty-seventh and Broadway, around the corner from the Second Church of Christ, Scientist, at 77 Central Park West, which the Paulsons attended regularly. Later, they bought two apartments in the building, for $2.88 million, and combined them; they sold the combined apartment in 2006 for just under $8 million.)