Authors: William D. Cohan
Unbeknownst to most people, the decision to “withdraw” the IPO, as opposed to “delaying” the IPO, was another clever piece of Goldman Sachs alchemy. This was the brainchild of Bob Hurst—“
He emerged as the real hero,” Paulson said—who asked the lawyers if there would be any tax consequences of reconstituting the partnership by retiring a bunch of older partners and adding a new generation of younger partners. Being able to do this was very important to Paulson philosophically
because he wanted to be “forward looking” by giving more of the IPO bonanza to the future generation of Goldman partners than to the past generation of Goldman partners. After examining the issue, the lawyers told Goldman that by “withdrawing” the IPO, the Goldman partnership could be “reconstituted” without tax consequences. Even though the process of pushing a bunch of partners into limited status with the IPO so close was exceedingly painful, Paulson said, it was the best thing for Goldman Sachs. “
Politically, it was probably a mistake,” he said, “because I had to talk with some people who were some very good friends of mine—really good friends—and we treated them fair economically, but retired them before we went public. I thought that the more money the more senior people had, the worse it was going to be. I wanted to put shares in the hands of the future. The idea of making fifty-seven new partners that would have some stock and we would bind them to us seemed important.”
Among those that Paulson shoved out the door in October 1998 was Executive Committee member
Roy Zuckerberg—a Corzine ally—and, at sixty-two, then the longest-serving Goldman partner. He was also the firm’s largest individual shareholder, and becoming “limited” would cost him millions. No matter, he had to go. It was yet another fateful decision. Zuckerberg put the best face on it he could. “
I decided the best thing for me in this case was to move on,” he told the
Times
. “I have been here 31 years. The business has become extraordinarily intense as it has become more globalized. I was faced with a decision whether to sign an agreement to stay on for another two years and decided not to.” He said he planned to serve one year as chairman of the
Securities Industry and Financial Markets Association, a key Wall Street industry group, and spend time at his recently purchased $7.1 million house on eleven acres in East Hampton, with an eight-acre agricultural reserve suitable for farming and horses. “Now I have more time and can enjoy it more,” Zuckerberg said. Michael Corleone had nothing on Hank Paulson.
The firm had also—relatively quietly, amid the IPO commotion—taken the unprecedented step of further bolstering its world’s-best M&A department by hoovering up the top M&A bankers at its major competitors. Turned out it wasn’t too difficult: Who could possibly resist the allure of being named a Goldman partner before its game-changing IPO? In short order, Goldman hired
Ken Wilson, then a senior partner at Lazard, to work in FIG;
Gordon Dyal, the head of M&A at
Morgan Stanley; and
Michael Carr, the head of M&A at Salomon Brothers. It was an M&A street sweep of unprecedented proportions and one only Goldman Sachs at the height of its powers could have had any hope of accomplishing.
(To complete the sweep, in March 2000, Goldman also hired
Jack Levy, the head of M&A at
Merrill Lynch.) Not even when Goldman was desperately trying to build up its fixed-income business in the 1980s—and hired a group of traders from Salomon Brothers—had the firm done anything so audacious. Such was Goldman Sachs’s power at the end of the second millennium.
——
I
N THE WAKE
of the LTCM crisis and the $300 million contribution to solve it, the pulled IPO and the contentious decision to force the retirement of a group of older partners, the relationship between Corzine and Paulson had reached a breaking point. Adding to the growing rift, Goldman had nearly $1 billion in trading losses in the second half of 1998. (The firm’s pretax income for the year was $2.9 billion, some $100 million below 1997.) What would soon be known around 85 Broad Street as “the Glorious Revolution” was imminent. Unlike the civil war that broke out between the traders and bankers at Lehman Brothers that ended up tearing that firm apart in the 1980s, the war between the states at Goldman was less turf driven than personality driven. Paulson and Corzine simply did not get along, and the events of the second half of 1998 had merely shown others that the rift could no longer be covered up. Unfortunately for Corzine, he had shown himself to be the more strategically reckless of the two men and had lost his political support.
On November 8, seemingly out of nowhere, the
Sunday Times,
in London, ran a 375-word story under the headline “Goldman’s Corzine Urged to Resign.” (An earlier version of the story appeared on October 28 but then seemed to disappear.) According to the paper, “a leadership crisis is developing at Goldman Sachs in the wake of its aborted attempt at a stock-market flotation this autumn. The situation has become so extreme that Jon Corzine, chairman, is facing calls to resign.” Citing “senior figures within the firm,” the article said, “Goldman was badly in need of leadership and clarity on its future” and that since the IPO had been withdrawn, “the firm has seemed unable to recover its former confidence and recriminations have been rife.” The
Sunday Times
floated the notion that Thornton and Thain—both working in London (with one of them likely being the unnamed source for the story)—who were “the most public in opposing” the IPO, might be the next logical leaders of the firm. In any event, the story was an extremely rare breach of Goldman’s Victorian decorum. “For almost a year they ate, slept and drank the IPO,” explained one partner. “Suddenly they understood that it could not go ahead and were plunged into coping with issues like LTCM. It is not surprising that against that background you don’t have total clarity in the
direction of the firm.” The paper even added the gratuitous thought that the firm’s preoccupation with the IPO had hurt the quality of its work—the “quality of Goldman’s work is not what it used to be.”
According to
Charles Ellis, Corzine was in London when the story first appeared on October 28. (Goldman naturally denied the accuracy of the paper’s report.) He had breakfast with a fellow partner and the story became the topic of conversation. When Corzine said he was not sure what he was going to do about it, his partner blew up. “
You should be sure, Jon,” he reportedly said. “Since you’re wearing a business suit, I assume you have another meeting scheduled this morning, so here’s what you should do: Cancel any other meetings you’ve booked. Go directly to Heathrow and fly back to the States. Before you take off, call
Roy Zuckerberg and Bob Hurst and tell them to meet you at your house in New Jersey today and make it absolutely clear to everyone that before the executive committee meets Monday morning, both Thain and Thornton are out—fired for playing politics and doing it in public so that it hurts the firm.… If you do this immediately, everyone will understand and will back you. And if you don’t, you’ll be in real trouble, because in six months
they
will force
you
out.” Corzine replied, according to Ellis, “I couldn’t do that. It would hurt the firm.” And he didn’t.
There was no question Paulson had had it with Corzine. He could no longer envision the possibility of working with him as the co-CEO of a public Goldman Sachs. If the firm was to remain private, they could have divvied up responsibilities along business and strategic lines, but as a public company with public shareholders, that would simply not be possible. Even though the IPO had been withdrawn, there was no question that when markets improved—and when the firm’s leadership conundrum had been resolved—a new S-1 would be filed. Paulson simply could not wait any longer. While Corzine was skiing in Telluride, Colorado, he demanded clarity from his fellow senior partners.
Before Christmas vacation, Paulson told them they had to choose between him and Corzine to lead the firm. But there was no real suspense. Once upon a time in the modern era of Goldman Sachs, the firm’s bylaws required a vote of 80 percent of the full partnership to remove any partner from the firm. But sometime in the 1990s (no one was precisely sure when), one partner who was fired refused to leave. In order get him out, the partners agreed to change the partnership agreement to make it possible for a vote of 80 percent of the
Management Committee (or the Executive Committee, as Corzine had renamed it) to be what was needed to get rid of a partner, including the senior partner of the firm. With Zuckerberg gone from the Executive Committee and no one yet
selected to replace him, the fait was accompli: Hurst, Thornton, and Thain (and Paulson, obviously) were resolved that the time had come for Corzine to go. The 80 percent was in hand. Had the vote been put to the full partnership, Corzine’s personal popularity would have likely carried the day—a point Paulson conceded. “
He was more popular among the partners than I was,” Paulson said. “He was better known than I was.”
On January 12, the time had come to implement the palace coup. It was decided that the cerebral Thain, a onetime protégé of Corzine’s, should be the one to deliver the bad news (again) to the former government bond trader. As part of the coup, Thornton and Thain were named co–chief operating officers under Paulson. It was perfectly Shakespearean. But Thain was extremely nervous about confronting Corzine with this decision and supposedly mumbled the words to him that he would have to go and the decision had been made. Corzine got pissed at him, forcing Paulson to double back and deliver the news to Corzine himself: Corzine needed to immediately give up the title of co-CEO but could remain at the firm as co-chairman with Paulson until the completion of the IPO, whenever that would be. After that, he needed to leave. “And that’s how it all worked,” explained the senior Goldman partner, matter-of-factly.
Corzine took the news hard, very hard. “He tends to be very emotional,” one partner remembered being told about Corzine’s reaction. “There were elephant tears and vomiting and things like that. But he got the message. He was very unhappy, but he took it like a man.”
Looking back, Corzine said he was blindsided by the turn of events, which seems somewhat hard to believe for a man with his political gifts. “
I couldn’t quite understand why there so much dissidence but there was,” he said. “But most of it at the end of the day was about whether we went public, how we went public, and the timing of that issue. The tension just constantly festered underneath the surface, with the known characters on one side” and Corzine on the other.
Corzine said that perhaps he was too trusting of Thain—the quickly jettisoned former executor of his estate—and failed to conceive of the fact that he could turn on him. “
I was devastated,” he said. He said he is still not sure why Thain changed his mind. “Maybe somebody whispered very sweet nothings in his ear,” Corzine said. “I don’t know. Maybe he was just convinced of the alternative strategy. I, frankly, never thought John Thain would ever turn, and by my calculation that gave me enough to protect myself.” One former Goldman partner said the coup came about because of raw, alpha-male Darwinian behavior. “It was just pure ambition between these guys about who was going to run the place,” he
said. “And I thought the behavior, particularly of Thain, was just reprehensible. You know, Thain would just be one more guy if Corzine had not lifted him up and made him the important guy he is and he just absolutely stabbed the guy in the back. It was absolutely pathetic and it was just all about who was going to run the place and ambition and all that shit. Thain wanted to take over after Paulson.” For his part, Thain said, “
Corzine and Paulson fought constantly and completely inappropriately and couldn’t get along, and they got to the point where they made us choose between the two of them.” His said his decision to support Paulson over Corzine was an exceedingly difficult one and ended his relationship with Corzine. “It was very hard for me because I was much closer to Corzine,” he said. “I had worked for him. I was closer to him personally. I liked him a lot as a person, but I had to pick who I thought would be the better long-term leader of the company, so that was a very hard decision to make.”
There are those who believe that Thain and Thornton were willing to make a deal with Corzine that would have saved Corzine his job: if Corzine had been willing to name Thain and Thornton the heirs apparent, they would have voted with him against Paulson and Hurst. But Corzine couldn’t make that deal. He didn’t feel the two men were ready, plus neither of them understood the trading side of the business as well as he figured they should. Besides, there was
Lloyd Blankfein coming up fast in the leadership ranks of the firm. Whatever the reason, Corzine did not make the deal with Thain and Thornton and it cost him his job. “
I may not be the smartest guy in the world,” he said. “But I’m certainly not the dumbest but I’m not the smartest. I knew you needed different perspectives in the management. The irony of all of this was I accelerated Thornton onto the management committee among his peers and obviously Thain before that. Their actions caused me great emotional frustration.”
“This Time, Shared Reins Didn’t Work at Goldman” read the headline in the
New York Times
the next day. The dissolution of the working partnership between Paulson and Corzine came as a “surprise” to many and was laid at the doorstep of the fact that, in the end, the two men didn’t like each other very much. “The biggest single factor here is that the two guys really did not get along with each other,” explained one partner. “Hank and Jon are not friends.” The
Times
observed that “the failure of Mr. Corzine and Mr. Paulson to bond together and become a close team” became “a liability,” especially with the news earlier in the week that Paulson thought the Goldman IPO would happen in 1999 and “Goldman’s top executives felt that they could not risk management instability while they were trying to sell the firm to the public.”
Observed the
Financial News
astutely, “
The news that Jon Corzine had been abruptly pushed aside came as no surprise to experienced Goldman Sachs watchers. Never the most friendly of firms, the recent in-fighting at Goldman has reached new levels of ferocity. There are two principal reasons for the dissension. First, the failed IPO last summer. You would have to be a Goldman manager to understand the humiliation of having to withdraw the issue. Wall Street folklore says that Goldman Sachs never makes mistakes. Second, Goldman has suddenly realised that it is no longer the best investment bank in the world. This indignity is almost as embarrassing as fluffing the IPO. Goldman was always a cut above the rest, but now the firm is being run ragged by
Morgan Stanley
Dean Witter. With so much egg on their faces either Corzine or Hank Paulson had to go and it was no secret in London that outspoken investment banking superstar John Thornton was orchestrating a ‘night of the long knives.’ In the end, Corzine was made to walk the plank.”