Authors: William D. Cohan
There were also many examples of unethical behavior. For instance, in 1995, government regulators forced
ITT Corporation to divest its financial services business, known as ITT Financial Corporation. There were several different pieces to the business, and Goldman, along with
Lazard Frères & Co., was hired to sell it all off. A big chunk, known as ITT Commercial Finance, was sold to
Deutsche Bank’s U.S. subsidiary in December 1994. Six months later, in June 1995, ITT announced it had sold the rest of the division off in various pieces to buyers it did not identify. According to a former Goldman executive, one of
the pieces of ITT Financial was a portfolio of “really weird” consumer loans that the Goldman banking team studied and decided might be an interesting acquisition for Goldman’s partners themselves, perhaps through SSG, the secret fund of partners’ money. Once the decision was made that Goldman wanted to buy the loan portfolio, word was that Goldman then slow-rolled the sale process, minimized its efforts to find a buyer, and eventually reported back to the ITT executives involved that no buyer could be found for the portfolio. That was the bad news. The good news was that the Goldman partners’ fund had agreed to buy the portfolio at a price at least $100 million below what the loans were worth. According to the former Goldman executive, when this was reported to the client, the ITT executive went ballistic—because there was the sense that Goldman had not been forthright in its marketing effort. But, instead of contrition, the Goldman banker involved expressed his own fury. “He screamed to the [ITT executive] that he had been busting his ass for nearly a year trying to sell the assets and if he heard one more word along those lines he was going to talk to Jon Corzine, who would talk to
Rand Araskog [the ITT CEO],” the former Goldman executive said. “And that was the end of that. When he got off the phone, everyone was giving each other high-fives because they knew they had just made $100 million. That was not an uncommon M.O. at Goldman.” So much for checks and balances.
Paulson said he understood clearly that as the firm ratcheted up its principal activity, the likelihood of conflicts of interest would rise exponentially. He said some people urged him to wall off the principal investing businesses completely from the banking and trading businesses. “
You could have someone up in the Arctic Circle and if he’s doing the Water Street activities, clients are going to be angry at you,” he said. “You had to do it with great transparency and with just a high level of integrity, and for people to know what it is you’re doing.” As the firm got bigger and bigger and more deeply involved in trading and principal activities, the task got even harder. “There’s more room to do something that’s unethical,” one senior-level partner said. “In other words, when you’re doing things in securities areas—not that the traders or salesmen are less ethical than bankers—but the markets give you an opportunity every second of the day to misbehave. You just have to look for behaviors. You have to look for people who are listening into conversations they shouldn’t be listening in on. You need to force traders to go on vacation so you can monitor their books. You’ve got to rotate people all the time. You’ve got to have fresh eyes. You’ve just got to look for people that are acting differently.
And then when you see something that’s not right, you’ve got to take action.” As always, the defense against conflicts of interest on Wall Street seems to boil down to the old adage “Trust me, I’m honest.”
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T
HE FRIDAY SESSION
at Arrowwood was plenty intense, and while the vast majority of the partners went off to dinner and to the bar to unwind, Corzine convened the newly reconstituted six-member Executive Committee to discuss further the prospect of the Goldman IPO. He was still intending to make his case for it, explicitly, the next morning. He wanted to know he had the support of the senior managers of the firm before proceeding. “
I got a little more preachy about it,” Corzine recalled, “and that undoubtedly didn’t set well with guys who said, ‘Well, we don’t need all this trading,’ and so that created a [negative] dynamic [about an IPO] even when we were becoming increasingly successful.” Corzine was right. The support was not there: Paulson, Hurst, and Thain were against the IPO, and
Eric Dobkin, who had been asked to do the financial analysis about the IPO, believed Goldman would trade at a discount to
Morgan Stanley because its earnings were so volatile and so heavily dependent on trading. By the time Corzine arrived at Arrowwood’s bar at 2:00 a.m., after a long battle inside the Executive Committee, he got an earful from a number of his inebriated partners: Drop the plan for the IPO.
After a few hours of sleep, Corzine succumbed to the inevitable, yet again. Although no vote was taken (again), he quickly ditched the printed agenda for Saturday—which had him arguing for the IPO—and scratched out a new speech. As the Saturday session opened, the opponents of the IPO had mobilized and one after another gave brief speeches in opposition. After an hour, Corzine proclaimed: “There will be no IPO. The IPO is off the table. It’s over.” With the IPO once again rejected, the Arrowwood retreat ended early on Saturday afternoon. But the issue was hardly resolved. “
He isn’t going to jam it down the partners’ throats,” one partner said of Corzine. “Like anyone in that kind of position, he wants to keep his job. But he won’t give up on the idea.”
W
hile the passion inside Goldman about the IPO had—once again—been doused, the rancor between Corzine and Paulson was heating up. The first bone of contention between the two alpha males was, of course, size. “Everything to him, if it was a position, if it was a hundred, he liked it better at two hundred and he liked three hundred better than two hundred,” explained one partner who knew Corzine well. From the outset, Corzine also seemed infatuated with making Goldman Sachs a bigger firm, through acquisition. During 1995, he spoke with
Deryck Maughan, the CEO of Salomon Brothers, about a merger. He spoke with Sanford “Sandy” Weill, the CEO of
Travelers Insurance (which owned
Smith Barney) about a merger. He spoke with Douglas A. “Sandy” Warner, the CEO of J.P. Morgan & Co., about merging their two firms. He had these exploratory, preliminary conversations quietly and on his own and then asked Paulson to go meet with these executives further to see if any of the deals made sense. Paulson said he basically thought one potential deal was more ridiculous than the next.
Paulson’s first shock came in early 1995 when Corzine told him about his interest in buying Salomon Brothers. The news “
just hit me like cold water in the face,” Paulson said, but he resolved to do what Corzine asked him to do—meet with Maughan and discuss the idea—and then to use the experience to try to educate Corzine about why putting the two firms together was not such a great idea. One senior Goldman partner remembered thinking about why Corzine seemed to be so keen on a Salomon deal. “He was a government bond trader,” he said. “We hit Salomon Brothers at about the knees. And so he sort of looked up to them. They were the heroes for what he did.” Paulson did the analysis for a potential merger with Salomon and talked with Maughan. Salomon had barely survived a scandal involving trading in Treasury securities, after investor
Warren Buffett came to its rescue. But by 1995, Buffett had had
enough of the business and wanted to sell Salomon and recoup his investment. But to Paulson the deal made no economic sense. “Their trading businesses overlapped with our trading businesses,” he said, without passing judgment on Salomon Brothers. “So do you want to be twice as big in the government bond business? This is not two plus two equals four. It’s two plus two equals three.” Then there was the fact that the firms had duplicative offices around the globe, which would have to be closed and scores of people dismissed. “It just was so obvious that it was absurd on the face,” one person said.
But Corzine was insistent. He kept calling Paulson and urging him to take the idea seriously and to figure out, possibly with Maughan, how it might be made to work. Paulson would have none of it and could not understand why Corzine was having such trouble understanding how little sense the combination made. Then Corzine would sic J. Christopher Flowers, the head of the Financial Institutions Group, or FIG as it was known, on Paulson to try to make the case again. Of course, Paulson’s relationship with Corzine would have been much simpler and easier if he had said, “You’re right, Jon, let’s go buy Salomon Brothers.” But Paulson couldn’t do that, even though his life would have been better had he simply acceded to the CEO’s wishes. He just did not think the deal made any sense for Goldman Sachs. Corzine had to tell Maughan the discussions were off. Then Corzine insisted Paulson go talk to Sandy Warner, at JPMorgan, who had an idea that Goldman and JPMorgan should be merged with Warner as the leader of the combined firm, or as the co-COO with Paulson. That discussion went away faster than did the one about merging with Salomon Brothers. JPMorgan had lost some of its “pizzazz,” Paulson said, and the idea of working
for
that management was a nonstarter. “Those guys thought they should run the organization, and none of us wanted to pursue that,” he said.
But the combination that made the least sense to Paulson—although it seemed to make great sense to Corzine—was the one between Goldman and Sandy Weill’s Travelers. Nevertheless, Corzine begged Paulson to go meet with Weill and hear his reasoning. “
I remember Sandy Weill saying to me his first choice was to buy Goldman Sachs because he needed international presence and his second choice was to buy JPMorgan,” Paulson recalled. “I said, ‘Sandy, what if neither one of those are available? Why don’t you buy Salomon? They’re available.’ Just to test him. And he told me all the reasons why he wouldn’t buy Salomon.” (In recounting the story, Paulson laughed uproariously because in September 1997, Travelers bought Salomon Brothers for $9 billion.)
In many ways, Weill reminded Paulson of Corzine. “If it’s available, buy it” seemed to be their basic business philosophies. But Weill had a far deeper bench when it came to integrating acquisitions than did Corzine at Goldman Sachs, which had bought exactly one company—J. Aron—and wrecked it long before figuring out a way to make it pay off. Paulson could not make sense of the Travelers deal, either. “At least I couldn’t figure it out,” he said. “I wouldn’t have known how to make the combination successful,
particularly
when there was, in my judgment, no strategic rationale. Size is the enemy of excellence in investment banking, especially when you are trying to put together two different cultures.” Besides, he had had a tough enough time cutting people at Goldman in the wake of the 1994 losses; the thought of having to rationalize two overlapping businesses was not an assignment he relished in the slightest.
For his part, Corzine said the discussions with Salomon Brothers, JPMorgan, and Travelers were not in 1995, but were actually in 1996 and after. (A later
Wall Street Journal
article did peg the Salomon discussion to 1995.) He said he agreed to have the meetings—a dinner with Sandy Warner here, or a “
delegation” sent to meet with Sandy Weill there—because the bankers in his FIG, chiefly Flowers, thought the meetings were good ideas. Corzine believed the discussions were just casual encounters between CEOs of financial services companies and not particularly serious, nor were they intended to be. Throughout these discussions, he said he remained convinced that Goldman’s valuation would be higher if it conducted its own IPO rather than if it merged with an existing public company.
Corzine also mentioned a dinner held between Goldman and
AIG—six people on each side of the table—to explore a possible combination, with Corzine and Maurice R. “Hank” Greenberg, the strong-willed leader of AIG, leading the way. (For his part, even though some people think he arranged for the meeting, Paulson said he had no recollection of any discussion with AIG; Greenberg said AIG wanted to invest in Goldman, especially if Sumitomo and the
Bishop Estate were investors—he was a close friend of John Weinberg—but could not recall a discussion about a combination of AIG and Goldman.) “It was very, very exploratory,” Corzine said. “It wasn’t like we were committing to anything. But the question was, was there something to be done between these two firms? There were some people advocating a combination between investment banking and insurance.” Corzine said that while Greenberg was a “good leader and a good person,” he was also “an intimidating guy” and so he was always skeptical of the potential deal. “Wasn’t exactly like
I’m gonna sign up to be number two here,” he said. More important, few at Goldman liked the idea of a deal with AIG. “A lot of us on the trading side,” he said, “looked at that and said, ‘You’ve gotta be kidding.’ First of all, we’re going to get swallowed up in a bureaucracy, and second of all we don’t understand Financial Products at all”—a reference to AIG Financial Products, the London-based group that decided to sell billions of dollars of insurance against the potential default of various financial securities. (Later on, of course, Goldman’s involvement with AIG would have major consequences in the financial crisis of 2008.)
As irritating as these merger overtures were to Paulson, it wasn’t only the megamerger conversations that got him miffed about Corzine. There were also the failed efforts to acquire two money managers:
Miller, Anderson & Sherrerd, with $29 billion under management, which Morgan Stanley ultimately bought; and
RCM Management, with $22 billion under management, which sold to Dresdner Bank. Corzine also wanted to open new offices around the world. “Jon wanted to do business in every country, everywhere, and wanted to be big,” one partner said. “He was like the guy going through a cafeteria and he wanted to take everything and put it on his tray. That concerned people.” In 1995, Goldman opened offices in Shanghai and in
Mexico City and created joint ventures in
India and
Indonesia. Paulson thought Corzine was moving too quickly to open offices and seemed never to have met a location he didn’t like.
Lloyd Blankfein used to joke that “he was going to go away someday and wake up and find out we were opening up an office in Guatemala.”