Authors: William D. Cohan
For Paulson, the irony of working with Corzine was that while he was a much beloved figure around the firm, he was not an easy person with whom to work. Others noted that while Paulson often seemed not to be listening—his kinetic energy often had him bouncing around in the middle of a conversation—he was considered a very good listener, while Corzine looked like he was listening carefully to people but was often not paying attention. (His beard and cardigan sweaters made him look avuncular.) “He loved the firm,” one former partner said about Corzine. “He was committed to the firm. He worked incredibly hard. That was the biggest part of his life. But he had a real hard time compromising, and that was a strange thing. To work jointly with someone, to work well with them, you have to be able to say, ‘Okay, on matters of ethics or principle or conscience, I hold my ground,’ but if there is something that the other guy feels very strongly about and it’s not irrational or stupid on the face then you go that way.’ The key is to figure out what are the really big issues, and to Jon every issue was a big issue. He just saw it that way.”
Corzine also seemed to make
loyalty to him the litmus test for everything. “When you’d say, ‘Here are the three reasons why this doesn’t make sense,’ he would never say, ‘Well, I disagree with you for this reason’ and debate you,” said one member of the senior management of the firm. “He just would say, ‘Gee, I really think this makes sense,’ and ‘Gosh, I’d like you to support me on this. I just know this would be good.’ He’d put his arm around people and a lot of them would agree with Jon. But there were plenty of people at Goldman Sachs that didn’t want to do that.… It’s always been, at Goldman Sachs, more about a bigger group of partners than just the leaders at the time.”
In August 1997, the
Wall Street Journal
got hold of the fact that Goldman had considered buying Salomon Brothers two years earlier, and the idea was born that the firm was seriously considering a merger as a way to go public rather than doing an IPO. It was as if the firm’s thinking from two years earlier had found its way into the paper on a time-released basis. The Salomon talks—between Corzine, Maughan, and
Robert Denham, Salomon’s chairman—“were merely exploratory,” the paper reported, and didn’t amount to much, especially after Goldman reportedly insisted on running the combined firm but showed “that taking itself public may not be the only route open to Goldman should it decide that it wants to become a public company.” The paper also reported that
AIG had considered taking a 25 percent stake in Goldman after the 1994 debacle. At the time of the
Journal
’s article, mergers were rampant on Wall Street, as was speculation about what deals were next. In May, Morgan Stanley merged with Dean Witter, in a surprising bid to diversify its institutional franchise into the retail market. Then there were a series of three smaller Glass-Steagall-busting deals between commercial banks and investment banks that had people scratching their heads:
Bankers Trust Company bought
Alex. Brown Inc.;
BankAmerica Corp. bought
Robertson Stephens & Co.; and
NationsBank Corp. bought
Montgomery Securities. (Glass-Steagall’s repeal—long de facto—became de jure in November 1999, thanks in large part to Bob Rubin.)
The article speculated on the reasons why a merger with an existing public company would appeal to Goldman’s younger partners—particularly the fact that no so-called IPO discount of between 10 percent and 15 percent would be required to attract investors—but the whole idea that a company with as formidable a brand as Goldman Sachs would go public through a “back-door IPO” seemed far-fetched.
Indeed, quite the opposite seemed true: the firm performed so well in 1996 and 1997 that a Goldman IPO looked increasingly inevitable at some point during 1998, when the partners would reconvene for their
biannual meeting. Whatever else could be said about Corzine and his management style, there was no denying that he got the Goldman workforce out of its funk and focused intently on profits. In 1996, on revenue of $6.1 billion, the firm earned $2.6 billion in pretax profits, an unheard-of margin of 43 percent. In 1997, on $7.4 billion in revenue, Goldman earned $3 billion in pretax profit, a 41 percent margin. With regard to ROE, the performance measure Corzine had instituted in 1996, the firm’s performance was off the charts: 51 percent in 1996 and 53 percent in 1997. In the wake of the 1994 disaster, Corzine and Paulson had turned Goldman Sachs into a profit machine.
But Paulson was not happy. He had been paid millions of dollars in compensation for years. He owned 4.1 million Goldman shares worth hundreds of millions of dollars and was on the brink of realizing much of that wealth, assuming Goldman moved forward with an IPO in 1998 as expected. Instead, he was burned out. He had been traveling through Asia for much of the year, while at the same time overseeing the firm’s banking, private-equity, and asset management businesses. He could not get along with Corzine. “
The differences between Corzine and me became huge,” he said. “I was tired of bumping my head against a wall.” He believed Corzine surrounded himself with his cronies, who told him what he wanted to hear, and was irritated by an increasing number of Corzine’s decisions that he thought were wrong. For instance, one particularly galling situation occurred when Paulson fired a partner in Chicago who got caught having an affair with a twenty-one-year-old secretary. Corzine reversed the decision and reinstated the partner in New York. Or he would hear from his friends that Corzine was going around behind Paulson’s back and trying to undercut him with other partners.
Before the Christmas break, Paulson went to see Corzine and told him he was thinking of leaving. “
I said to him I didn’t think it was healthy for both of us to be here,” he said, “and that I was willing to leave. We just needed to negotiate who was going to be paired with him to run the firm because I wasn’t comfortable having him run the firm unchecked.” He wanted to negotiate with Corzine a bigger management role for both John Thain and John Thornton, who were quickly emerging as the leaders of the next generation at the firm. Corzine ignored him. “He didn’t really respond,” Paulson said. Corzine’s nonresponse was increasingly typical of him, some of his partners had noticed, with growing frustration, when he seemed to be giving them “the limp leg.” The “Fuzzy” nickname was heard with greater frequency within the halls of power at the firm. Paulson used the Christmas vacation to think about how to respond to Corzine’s indifference. He and his family went to the Yucatán Peninsula
for a little kayaking, birding, and fishing. Wendy counseled him not to be rash and to think through his decision. “You’re miserable now,” she told him. “I want you to be happy. But just make sure you’re going to be happier if you leave.”
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AULSON DECIDED TO
keep fighting and went back into battle in 1998. Within weeks, though, Corzine made a major political misstep—or at least that’s how it was perceived—and handed Paulson the opening he had long been seeking that would give him the upper hand at the firm.
Chris Flowers, the highly respected FIG banker, was one of Corzine’s closest allies at the firm. Flowers was classic Goldman. Born in California, he had moved to Weston, Massachusetts, a suburb of Boston, at age six, when his father retired from the navy and took a job as an administrator at
Harvard Business School. In high school, Flowers was a math whiz and a chess champion.
He then enrolled at Harvard, where he majored in applied mathematics. He said, “
I found people at Harvard who made me look like a moron at math.” Flowers knew he wanted to go into business. He got a summer job at Goldman Sachs after his sophomore year, and after graduating from Harvard a semester early, Flowers joined Goldman full-time in March 1979, working as an analyst for
Steve Friedman in M&A. “The first thing I learned at Goldman was how to work hard,” he explained. That first year he worked “three hundred and sixty-five days straight,” and Goldman paid him $16,000. He says he also learned how to “sell,” the mundane but crucial aspect of investment banking that requires bankers to persuade clients to hire you and your firm rather than someone else and his firm. Flowers bloomed at Goldman. He was invited into Goldman’s nascent Financial Institutions Group as the M&A guy and quickly shone. By 1988, he’d been named a partner at the tender age of thirty-one, the youngest at the time to attain that distinction.
Corzine seemed utterly captivated by Flowers. They had worked together for ten years on different assignments, and Flowers impressed Corzine with his understanding of both strategy and capital markets. “
He was our franchise with financial institutions and he was extraordinary,” Corzine said. “I don’t think anybody would dispute that he was number one or two in the world at giving advice to financial institutions.” Flowers went out of his way to introduce Corzine to the other leaders in the financial industry. “Some of the original introductions were actually from Chris,” Corzine said.
One of those introductions was to
Frank Cahouet, the CEO of
Mellon Bank. Mellon and Cahouet had been a longtime client of Goldman
and Flowers. For instance, in April 1997, Mellon hired Goldman to sell its corporate trust business. Then, in October 1997, Mellon hired Goldman to represent the bank in an unfriendly $18 billion bid to acquire
CoreStates Financial, another Pennsylvania bank (Goldman’s principles about not representing hostile bidders having once again fallen by the wayside apparently). When CoreStates rejected Mellon’s offer, Mellon dropped its bid. Early in 1998, Flowers arranged for a meeting between Corzine and Cahouet. To Corzine, the potential combination of Goldman and Mellon made tremendous sense. Mellon had no investment banking business (so no overlap) and a huge asset management business (one of the key areas in which Goldman was looking to grow) plus a commercial banking business that would allow Goldman access to a steady form of cheap financing from customer deposits. Mellon also had a nascent prime brokerage business, which provided brokerage services to hedge funds and other large institutional investors, another area that Goldman was also looking to build. In many ways, a combination with Mellon made tremendous sense for Goldman—at least on paper. “
It was one meeting,” Corzine said. “I was more enthusiastic about that, though, than any of the others. If we had been able to get through the ‘King of the Hill’ stuff, maybe it could have gotten done. But that wasn’t happening with Frank and so it really wasn’t going anywhere. I think it got deeply exaggerated by some of the folks who wanted to use it as another excuse to say I didn’t know what I was doing.” Corzine told Paulson about the meeting, told him it was “very preliminary” but that it “made a lot of sense” and that he thought he and Cahouet would be co-CEOs and Paulson would have the “much bigger role” of being head of the combined firms’ commercial and investment banking businesses.
From Paulson’s perspective, Corzine’s “one meeting” with Cahouet was actually something more. Paulson worried that perhaps Corzine had already started negotiations to put the two firms together. Then, “
after he was pretty far along he said something to me,” Paulson said, “and then he said he wanted Chris Flowers to talk with me about it.” Flowers, whom Paulson described as “incredibly commercial, really bright, and quite straightforward,” had an amazing message for Paulson. “Chris had explained to me that my stock would be worth $850 million after we got done [with the merger],” he recalled. “I remember they thought that would really do the trick.” After his meeting with Flowers about the deal, Paulson said he spoke with Corzine and raised some objections—particularly that he thought Corzine might be getting ahead of himself—and that if he was going to have another meeting with Cahouet, Paulson wanted to be there.
But Corzine told him he was just getting to know Cahouet and
wanted to do the next meeting by himself. He told Paulson he wasn’t going to get into any details, he was just going to listen and take notes. Paulson wasn’t happy about Corzine’s decision, but Corzine was the CEO. What could he do? After Corzine had the second meeting with Cahouet, Paulson asked him how it went and what had transpired. “Well,” Corzine told him, “I just listened. I didn’t get any details.” Then Paulson called Flowers—“a heat-seeking missile looking for the money,” he said—and asked him to come by and see him that day, which happened to be a Sunday. Flowers told Paulson that Corzine had made a merger proposal to Cahouet, including specifics on the economics of the deal, the exchange ratio, and who would be leading which business units. “
I got angry,” Paulson said.
At the
Management Committee meeting the next morning, Paulson asked Corzine to describe what had happened between him and Cahouet and the possibility of a merger between Goldman and Mellon. Corzine didn’t respond. “He gave a limp leg and basically said nothing,” one partner at the meeting recalled. Incredulous, Paulson then asked Flowers to come to the meeting and give the Management Committee a briefing. Flowers came in and gave all the details of the discussion, just as he had done the day before with Paulson. “Jon’s so mad and angry, he ran out of the management committee and into his office,” another participant in the meeting said. Corzine’s allies on the Management Committee then got angry with Paulson. “One person said, ‘You guys shouldn’t have done that. You’ve embarrassed him and now what if he quits or something?’ ” But the majority of the Management Committee was so irate at Corzine for discussing a merger with Mellon without its knowledge or consent—and then not coming clean about it—that they decided to prevent him from engaging in any future strategic discussions at all. The committee gave that responsibility to Paulson exclusively. Not a word of this decision leaked beyond the Management Committee itself. The discussions with Cahouet and Mellon were terminated immediately.
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AULSON PUT TOGETHER
a strategic-planning committee—including on it Lloyd Blankfein, the head of FICC, Goldman’s immensely profitable business focused on fixed-income,
interest rates, and
currencies; Steven Einhorn, the head of research; Christopher Cole, another prominent FIG banker; and
Peter Weinberg, one of the three heads of investment banking—to begin to explore what the future of the banking industry would look like and whether (again) the firm should go public or should consider a merger. “
We concluded we needed a lot of
capital,” Paulson said. The committee was divided about whether an IPO was the right answer or whether a strategic merger would get the firm to the place it needed to be. For his part, Paulson was again becoming increasingly irritated. First, Flowers was going around and showing various senior partners how much his or her Goldman stock would be worth in an IPO, behavior Paulson thought especially uncouth. Flowers’s attempts to appeal to employees’ greed infuriated Paulson to the point where he resolved that Flowers’s days at the firm were numbered. Second, in the wake of the Mellon breach, Paulson was now openly feuding with Corzine. Their arrangement made him uncomfortable under any circumstance, but on the eve of what certainly was looking like a serious vote of the partnership in mid-June about the idea of an IPO, it was terribly unseemly for the two senior partners running the firm to be clashing.