Authors: William D. Cohan
Thornton was the first victim of Paulson’s revised thinking. By March 2003—at least eighteen months after he had probably made the decision that Thornton would not get the top job—Paulson decided Thornton had to leave Goldman, and quickly. He had hoped Thornton would step up and help the firm deal with the Internet scandals, but instead he seemed to disappear, spending more and more time at the Carlyle or in Washington, where he had become chairman of the
Brookings Institution. He had hoped Thornton would take on more day-to-day operating responsibility for one or more business lines—such as investment banking—and relieve Paulson of having those daily interactions, but he did not. On March 24, Goldman announced Thornton was retiring from Goldman as of July 1, and would also leave the Goldman board of directors. Although he received no severance, he would not be leaving
empty-handed. He was paid $11.2 million in 2002. His Goldman shares were then worth around $230 million. He was named a senior adviser to the firm and agreed to be available to “work closely” with Paulson and Thain “on certain strategic matters” involving Goldman and its clients. He was also going to spend more time at Brookings, and—thanks to Paulson and his connections—was named a full professor at
Tsinghua University, in Beijing, described alternatively as the “MIT of China” and “China’s foremost institution of higher learning.” (Among Tsinghua’s graduates are
Zhu Rongji, China’s former prime minister;
Hu Jintao, China’s president; and
Wu Bangguo, the chairman of
National People’s Congress.) For reasons not entirely clear as to why this honor was bestowed upon him—he spoke no Chinese—Thornton was the first non-Chinese to be named a full professor at the university and was named the first director of the university’s newly established (thanks to Paulson)
Program for Global Leadership. Goldman also announced that Thornton would serve as a special adviser on China to
Richard Levin, Yale’s president.
All things considered, Thornton’s forced retirement came with a number of nifty consolation prizes. Paulson even managed some happy talk on the firing. “
John will be greatly missed,” Paulson said at the time. “He exemplifies the best of our firm: a tireless devotion to client service, to excellence, and to the development of our people. From the beginning of his career, John recognized the importance of the international business and has been a driving force behind our development into a global firm. We are grateful for his dedication and service over the past 22 years, and we are pleased that he will continue to be available to us as an advisor.”
The truth of what happened to Thornton—like many things at Goldman Sachs—was not quite the official version. One popular scenario had Thornton getting tired of waiting for Paulson to abdicate the Goldman throne, telling him he wanted the top job and asking Paulson to leave immediately. Offended by the raw power play, in this version of events, Paulson supposedly told Thornton that he was fired and sent him—immediately—to find the elevators and to leave the building. Another had it that Paulson just got fed up, once and for all, with Thornton’s elusiveness and failure to dig into the leadership role he had been given. Paulson denied that anything remotely like either scenario happened, especially since Thornton was a brilliant tactician and would never have initiated a coup without having already lined up the support needed to succeed. But there is no denying that something occurred to damage irrevocably their relationship between February 27, 2003—the date Goldman filed its proxy statement where the firm recommended Thornton be elected to a
new three-year term as a director—and March 24, when his unexpected departure was announced. In an interview that day, Thornton told the
Wall Street Journal
that he left because “it was clear to me that Hank is staying around for a while. When I was younger, I said I wanted to get out of the business at 40, but now I am nearly 50 and ready for a change. It is time to do something different and touch people’s lives in a different way.”
A number of people close to Paulson confided that Paulson fired Thornton deliberately. “Thornton left because Hank pushed him out,” explained one former senior Goldman partner. “The reason he pushed him out was Thornton was a very political guy. He had enormous talent, by the way. But something weird happened after nine-eleven where nobody could find him for weeks and months. Thornton always acted like he was a secret agent. Nobody ever knew where he was. And Hank finally concluded that he was a sinister force. So Hank created this opportunity in China and he pushed him out.”
What must have seemed like fabulous news to Thain in his quest to replace Paulson—his main rival’s departure—rapidly became more muddled. “At first, he thought he was a shoe-in,” a top Goldman executive said of Thain’s thinking after Thornton’s ouster. “
John A. Thain is not a flashy banker or a man with a thousand relationships,” the
New York Times
reported the next day. “But this understated, austere man who knows the firm’s inner workings might be the right man for the times at Goldman Sachs. With the abrupt departure of John L. Thornton, Mr. Thain becomes the sole president of the firm and the presumptive heir apparent to Henry M. Paulson Jr. As such, he represents the rapid rise of the numbers guy on Wall Street.… Glossed over was the broad gulf in the operating styles of the two ambitious executives. Mr. Thain, who has a degree in electrical engineering from the Massachusetts Institute of Technology, is a clinical, dispassionate man with a military bearing, say those who know him. He has a keen eye for the firm’s bottom line, keeps meetings short and spends less time traveling the world than most bankers at his level.”
Soon after Thornton’s departure, Paulson began to rain on Thain’s parade. He suggested to Thain that Blankfein, the rising star, be named his co-president, replacing Thornton. Thain would have none of that suggestion. “
He thought it was unfair and uncalled for, for me to suggest that Lloyd move up and share a title with him,” Paulson said. Paulson tried to reason with Thain. “I explained that he was doing an outstanding job working with his part of Goldman Sachs,” he said. “But that what Lloyd was doing he was doing well with the FICC organization. I thought that they could work together as co-heads and I thought that they complemented
each other very, very well and it was a very big job”—being sole president of Goldman—“and I thought that they could very well both move up and succeed me. And I think the board thought we should have more than one candidate.”
Either the two of them would succeed him as CEO or they would compete against each other and one would emerge as the obvious choice. “
I actually thought when I paired Lloyd with John,” Paulson said, “we’d see how they both would develop and one or the other or both of them would be my successor. John didn’t want any part of that. He wanted to be CEO, and he left to go be one.” Under those circumstances, Paulson likely would not have been too pleased with Thain’s subsequent decisions to go skiing for two weeks at Christmas and then for another two or three weeks in the spring. He might have hoped the two men would compete head-to-head to allow the board to determine who his successor would be, but the fight seemed to go out of Thain after Blankfein’s appointment.
In any event, Thain kept rebuffing Paulson’s suggestion, telling him he wouldn’t agree to it. “
There’s no pretense to Hank,” Thain said. “Hank says what he means. He means what he says. He’s not in any way a guy who veils his feelings or his thoughts. He certainly was good at maneuvering around and he had the power and authority and he used it.”
The other influencing factor was that the two men did not get along. Like Paulson and Corzine before them, the
gemütlich
and brilliant Blankfein could not have been more different than the diffident and cerebral Thain. “He seems much more self-deprecating than Hank,” one Goldman executive said about Blankfein, “but it’s not true.” Their growing rivalry could not have been helped by a November 2003 article in the
New York Times
about the scandal that had erupted two months earlier involving the outrageous compensation package—said to be close to $140 million—that
Richard Grasso received as the president of the
New York Stock Exchange and that resulted in his firing. The
Times
article linked the rise of the tech-savvy Blankfein at Goldman with the demise of Grasso, who rose to power at the exchange by defending the status quo of floor brokers and specialist firms. Blankfein’s ability to produce increasing amounts of profit from trading for Goldman—like Gus Levy before him—made him too important to the firm to ignore and “has allowed him to consolidate his power,” the paper reported. First came his appointment as a vice chairman, then came the board seat. In September 2003, Blankfein appointed
Gary Cohn, one of his longtime deputies, as head of the firm’s equities division. “Executives say Mr. Blankfein is now the most likely candidate to succeed Mr. Paulson,” the
Times
said. “But Mr. Paulson, at 57, shows no sign of retiring soon.”
By then, Thain had secretly started discussing with
John Reed, the interim CEO of the New York Stock Exchange and the former
Citigroup co-CEO, the idea of succeeding him (and Grasso) as CEO of the NYSE, while Reed would stay on as the NYSE chairman. Reed and Thain seemed cut from the same cloth and knew each other well from the MIT board of trustees. “Both are known as cool and professorial with a deep affinity for exploring how technology and finance intersect,” the
Times
reported. Thain’s name was reportedly at the top of the search committee’s list of possible permanent replacements for Grasso. On December 18, Thain’s decision to leave Goldman to become CEO of the NYSE was made official. He would start at the NYSE in January 2004. “I grew up in a small town in the Midwest,” he told the
Times
. “I never heard of Goldman Sachs growing up, and I never viewed myself as the president of Goldman Sachs or the C.E.O. of the New York Stock Exchange.” While he fulfilled one ambition—to become a CEO—it came at a substantial cut in compensation to $4 million a year, from the $20 million he received from Goldman in 2003, although he retained his Goldman stock worth at the time around $300 million. (For some reason, nobody seemed to object to the obvious conflict that Thain retained a large financial stake in Goldman at the same time that he was running the NYSE.)
Given Blankfein’s ascendancy and Paulson’s lingering, Thain said the opportunity was too good for him to resist. “
There were a lot of public policy reasons to do it,” he said in an interview. “The exchange was in a lot of trouble. The combination of the opportunity to be the CEO, the opportunity to really make a difference to help a part of the U.S. financial system that needed a lot of help, and the fact that Hank wasn’t leaving led me to decide to run the New York Stock Exchange.”
Thain told Paulson he was leaving Goldman two days before the public announcement. Paulson was “stunned,” Thain said in a later deposition, and “
didn’t say anything for several hours.” Some accounts of that conversation had Paulson raising his voice in anger at Thain’s decision and its timing. But Paulson said he did not raise his voice, although he said he was not pleased to hear the news from Thain. He said he told Thain he thought taking the job was a mistake and tried to talk him out of it (although some people think Paulson orchestrated Thain’s appointment much as he had orchestrated Thornton’s nine months earlier). “
I told him I thought the NYSE was a very difficult business to manage,” Paulson said. “I thought the way the world was going he was putting himself into an impossible situation. I was wrong. He said I showed no signs of leaving, no signs of anointing him as my successor. He wanted to go and learn something else and when he left I think it was a bigger issue than just not getting my job.”
On the same day that Thain announced publicly he was leaving Goldman, the firm announced that Blankfein would become the firm’s sole president and chief operating officer. Goldman also announced that Steel would be leaving to teach at the Kennedy School of Government, at Harvard. “
These were not easy decisions for me personally,” Paulson said. “But I just felt an enormous responsibility as CEO of a public company. And I wanted to be in the position where I wouldn’t have to do the job forever.” He harked back to the lunch conversation he had with
Steve Friedman as he was thinking about what to do with Thornton and Thain. Friedman had rejoined the Goldman board of directors in 2005 after his two-year stint as one of Bush’s top economic advisers. At the lunch, Friedman asked him if he controlled Goldman Sachs on his own and his entire net worth was tied up in it, whom would he have run the place in his stead? “Without skipping a beat I said, ‘Lloyd,’ ” Paulson recalled.
As long as Paulson retired at some point, Blankfein’s path to the top job was clear. “But if Mr. Blankfein hopes to succeed Mr. Paulson, he may have to be more patient than Mr. Thain was,” the
Times
reported. “As long as Mr. Paulson is chairman and chief executive—and he could hold those jobs for five years or more—no drastic changes are expected at Goldman Sachs. Mr. Paulson has overseen the firm’s strong recovery this year and, by all accounts, has the full support of its directors.” Indeed, the paper quoted
Jim Johnson, the head of Goldman’s Compensation Committee, saying he hoped Paulson would be staying around for a long time. “The board has the view that Hank Paulson is doing a fabulous job,” Johnson said. “We think he is one of the most outstanding C.E.O.s in the world.”
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I
N CASE ANYONE
was worried that Hank Paulson, investment banker extraordinaire, would cut back on the risks that a newly—and successfully—publicly traded Goldman Sachs would be taking, they need not have bothered. Paulson embraced risk taking with alacrity, in nearly every part of Goldman’s business. “
We managed the transition from a partnership to a public firm seamlessly without losing a beat,” he said. “We didn’t lose people. We went from being the medium-sized firm to being a large firm and we kept the best attributes of the culture. We went from being a firm where we were behind
Morgan Stanley and right there with
Merrill Lynch to being a firm that was clearly the global leader.” By the time Blankfein was named Paulson’s heir apparent, Goldman’s transformation to a risk-taking juggernaut was obvious, both anecdotally and in its financial performance. “When people think about Goldman Sachs, they think about a first-class investment banking franchise,”
Henry McVey, an analyst at
Morgan Stanley, told the
Times
at the time of Thain’s departure. “Blankfein’s appointment reminds investors and clients that some of the company’s heritage is in capital markets and trading.” He said replacing Thain with Blankfein was a “subtle shift” rather than a change of great import because “the trading and risk-taking are already substantial.” For 2003, Goldman earned net income of $3 billion, up from $2.11 billion in 2002. Like Thain, Paulson and Blankfein were each paid $20 million in 2003.