Occasionally, Aron would talk to Levy about the sale of the family’s business. Whitehead was also part of the discussions. In 1979, with Aron looking to retire and take his money out—his sons were not interested in the business—Goldman came close to buying J. Aron. But the deal fell apart over how to handle the tax liability related to a major trading gain J. Aron had embedded in its balance sheet. Soon thereafter, Jack Aron decided to sell his stake in J. Aron to the other partners in the business, led by the shrewd Herbert Coyne, his brother Marty, and twelve other shareholders.
For his part, George Doty got to know J. Aron through work he was doing with the firm to help create tax-deferral schemes for Goldman’s partners. As a result, he became an increasingly supportive proponent of seeing if Goldman could buy the business. In 1981, that chance came again when Coyne asked Goldman to help it find a buyer for J. Aron, as consolidation was rampant in the commodities trading business. J. Aron received a bid from Engelhard Minerals and Chemicals Corporation, a publicly traded company, but J. Aron did not want to be part of a public company for fear that competitors would learn just how obscenely profitable it had become. “Aron’s philosophy was ‘Never tell anybody how much money you make, just smile on the way to the bank,’ ” explained one former Aron partner. Coyne and his partners rejected the Engelhard offer.
That’s when Whitehead, Doty, and Rubin got the idea that maybe Goldman should buy Aron. After all, Goldman was still private—thus eliminating the largest obstacle for a sale from the Aron perspective—and the business had been incredibly profitable, with return on equity in the range of 70 percent annually, well in excess of Goldman’s business, in large part because J. Aron made more money than Goldman did on a per-employee basis. “These people seem to have the same culture we do, and it’s a business we can understand,” Rubin told Doty. “Maybe we should try to buy them.” By then, Rubin had been appointed to Goldman’s Management Committee after Young had retired. Whitehead and Weinberg were also on board for making the acquisition.
But not everyone thought buying J. Aron was a good idea. Whitehead had asked Steve Friedman to analyze the deal and make a recommendation. He did not see the fit between J. Aron and Goldman Sachs. “I looked at it and I basically thought, ‘Culturally—I’m a merger guy, I know how difficult it is to make cultures work—I don’t see this working culturally at the senior levels,’ ” Friedman said. “And we’re paying a heck of a price, in terms of goodwill.” Friedman had no problem with Goldman being in the commodities trading business but preferred the approach of finding the right people and building the business the Goldman way. Friedman thought that approach would be less costly—financially and culturally. Friedman wrote a memo to Whitehead arguing that Goldman should pass on the J. Aron deal and build a commodities trading group itself. “Whitehead was somewhat annoyed with me because he asked me to get involved and then I disagreed with his judgment,” Friedman said.
Despite some internal opposition from other partners, at the end of October 1981, Goldman announced it was buying J. Aron, which had some $1 billion in annual revenue and $60 million in profits. In an interview with the Times, Whitehead declined to state the price Goldman paid, but the newspaper pegged it at “slightly more than $100 million,” or nearly half Goldman’s $239 million of capital (other estimates ranged from $120 to $135 million to as much as $180 million). One seat on Goldman’s Management Committee went to a J. Aron partner, and six J. Aron partners became partners of Goldman, 10 percent of the partnership ranks—not one of which had been vetted in the traditional, rigorous Goldman way. “While we prefer not to discuss the price involved,” Whitehead said, “we can say that the five top officers of J. Aron will become partners in our house”—it ended up being six partners—“and that J. Aron will continue to operate with its present staff” of around four hundred people “and company name, which is too well known around the world to change.”
Goldman’s acquisition was as much a reaction to what its competitors were doing as anything else. By 1981, Salomon Brothers had been acquired by Phibro Corporation (with the whole business later being renamed Salomon Brothers, Inc.), and Donaldson, Lufkin & Jenrette, or DLJ as it was known, the midsize but plenty savvy investment bank, had bought ACLI International, another large commodities trading business. At the same time as some Wall Street firms were getting into the commodity trading business in a big way, others were selling themselves outright: by then, American Express had bought Shearson Loeb Rhoades, Prudential Insurance had bought Bache Halsey Stuart Shields, and Sears, Roebuck, the longtime Goldman client, had bought Dean Witter.
Whitehead’s vision for J. Aron was that it could vastly increase Goldman’s reach into trading commodities and gold and would allow the firm to provide its clients with the opportunity to trade stocks and bonds in any currency anywhere around the world. Before J. Aron, he said, Goldman’s clients would have to go to a commercial bank if they wanted to trade in, say, Swiss francs. He wanted to change that dynamic. “I saw huge moneymaking opportunities,” he said, “for instance, if we could have bought the entire coffee crop of Brazil, in one transaction with the Brazilian government, at a fixed price, and then sell it simultaneously to the coffee makers in the United States.” He said with J. Aron, Goldman could assume the responsibility for storing the coffee in Brazil, for putting it on ships, for bringing the ships to New York, for insuring it, and then for selling the coffee at the same time to the coffee companies. “We could have supplied them with all their coffee,” he said, “ready to be ground, in a warehouse in New York for X dollars. I saw that as a big arbitrage opportunity. The efforts to do something like that in the first couple of years were unsuccessful by the Aron people. They weren’t used to taking any positions at all, not a single dollar of risk. I saw this as a riskless transaction. We would get the insurance in advance, we would get the warehouse rented in advance, we would think of all the things that might happen and hedge ourselves against those and take them into consideration and still provide coffee beans in New York at a lower price than all the big coffee companies could buy them if they went on their own. And so eventually it worked, but it only worked after Goldman people had taken over the management of J. Aron, which they basically did within five years after we had acquired it. There were hardly any J. Aron people left.”
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BUT MUCH AS some of the partners, especially Steve Friedman, had feared, J. Aron was a near disaster for Goldman from the start. The six J. Aron partners and their four hundred colleagues seemed like a poor fit at the buttoned-down Goldman—“[I]t was something of a shock to find a division full of people who would not have made the first cut,” Lisa Endlich wrote—and many of the younger, ambitious Goldman bankers and traders were offended that six coveted partnership spots had been ceded to the J. Aron crew, making their path to the top even more difficult than it already seemed to be. Such was the growing level of antipathy between the two groups that in the 1983 Goldman “annual review” photograph, the former J. Aron employees—including Lloyd Blankfein—wore red suspenders in order to mock the straitlaced Goldman bankers. “J. Aron was a graft on the body which never took,” according to one former Goldman partner.
But what led to near-open revolt at Goldman was the simple fact that the J. Aron business stopped performing financially. “It was less than six months after that that all of a sudden, instead of being this very profitable thing, they started not making money,” Rubin explained. Part of J. Aron’s competitive advantages were lost when its competitors became better capitalized after being bought by DLJ and Salomon, and part was lost when those who left J. Aron after the Goldman acquisition took their intellectual capital to other firms that could then compete more effectively against J. Aron. Whatever the reasons, J. Aron quickly became a major problem for Goldman. In 1982, J. Aron’s profits were half of what they were the year before, and by 1983, the profits were gone. “You had the combination of people not really blending well together,” one former partner of both f
irms said. “There was defensiveness on the part of the Aron people. If you were making $50 million it would not have mattered but we weren’t making any money, we were just sort of surviving.” He recalled speaking with one of the senior Goldman partners. Echoing Walter Sachs, “He said, ‘Anybody can be your partner when things are going well. Now you’ll find out who your good partners are and who are not.’ I have never forgotten that and I still think about it today. He was right.”
Ironically, J. Aron, which was in the arbitrage business, found, in short order, that its business had been arbitraged away. It remained an open question whether J. Aron partners snookered Goldman at the height of the market—the prices of gold and silver fell soon after the sale—and sold out because they knew it or whether the market just overwhelmed them, too. “I honestly don’t know,” Rubin said, “and you’ll never find anybody who can tell you.” But some J. Aron partners, anyway, realized what a great deal they had cut. “People thought we had made the sale of the century,” one Aron partner recalled. “The price of silver peaked, I think, in January of 1982, and we sold the company at the end of October of 1981. With the benefit of hindsight, the way the business went sour, with all the people that we had, I don’t know what would have happened. It would have been a very difficult time if we had not sold the company.”
Then there was the internecine warfare between Goldman and J. Aron about who should run the firm’s fixed-income business. “The three senior people from J. Aron got into a disagreement with the people at Goldman’s fixed-income group about whether J. Aron should have its own fixed-income department or they should use the Goldman Sachs fixed-income department, which is what I thought they should do,” Rubin explained. “I didn’t really want two competing fixed-income departments. It would be chaotic. But it actually was a long dispute, with Weinberg and Whitehead having different views, which is what made it complicated. Ultimately, we decided to have one fixed-income department. In any event, the three guys running J. Aron left.” Within a year of closing the acquisition, both Coyne and his partner Marvin Schur, who had been given the seat on Goldman’s Management Committee, had left Goldman, complaining of chest pains and other ailments. “With chest pains and $40 million apiece in the bank, who wouldn’t [leave]?” former Goldman partner Leon Cooperman wondered.
Doty then went to work, and for the first time in Goldman’s history, the firm engaged in a mass firing, letting go nearly a quarter of the four hundred J. Aron employees. News of the “staff reductions” of some ninety people at J. Aron leaked out in August 1983, although Ed Novotny told the New York Times that the reports of that many firings were “vastly exaggerated” and that only “several employees” had been let go after a “study by J. Aron” determined that it could operate “as well as it had been with fewer personnel.”
But that was only the beginning of the changes that were to come at J. Aron. After Doty had made these initial cuts, the Two Johns gave to Rubin the responsibility for fixing J. Aron and returning it to profitability. It was a complicated task that would likely mean more firings and, equally momentous, would require Goldman to reengineer the business to compete in a more complex environment. “I could have said to myself that this might not work and could upend my position at Goldman Sachs,” Rubin explained, with typical self-effacement. “At the very least, I might have done some probabilistic analysis.” Not Rubin. He did not “calculate,” he said. “I wasn’t all cocky about my ability to turn Aron around, but neither was I anxious. Once I had the job, I just focused on trying to do what needed to be done.”
He quickly came to the realization that the Two Johns had given him an opportunity of a lifetime: if he could turn around Aron—the firm’s largest acquisition that had quickly become a disaster—his future prospects at the firm would be virtually unlimited. Of course, such raw ambition was not something he could admit. Instead, he conceded, “I very much wanted the responsibility, because it was interesting and would enlarge my role at the firm.” Moreover, since Aron was a “trading business, with a strong arbitrage bent,” he felt “suited to the task.” Before taking over at Aron, he spent two or three months just talking to the professionals there, making notes on his yellow legal pad and learning the business. He discovered, with some surprise apparently, that “the people doing the work had many thoughtful ideas about how to revise our strategy and move forward.”
That’s when Rubin made a wise decision and gave the day-to-day task of running J. Aron to Mark Winkelman, a Dutch former World Bank official who had almost quit the firm when he was surprised with the news that Goldman was buying J. Aron in the first place. Rubin chose Winkelman not only because he was “extremely sophisticated” about “relationship trading in bonds and foreign exchange” but also because he had the “substantive background” to understand Aron’s problems and the “managerial skills to help set them right.” Another reason for sending Winkelman to J. Aron, according to Doty, was so that the firm could make him a partner, “which he deserved to be. He was a really bright guy.”
Rubin also likely figured that if Aron turned out to be hopeless, he would have one layer of insulation between him and the problem. Rubin turned out to be very demanding of Winkelman. Winkelman’s first business plan for the newly revamped Aron would be for the firm to make $10 million, a meaningful rebound toward profitability after years of slippage. “Mark, ten million dollars is not why we bought J. Aron,” Rubin told him. “Tell us what we need to do to make a profit of one hundred million dollars this year.” Winkelman was reportedly “dumbfounded” by Rubin’s demand and was not even sure he was serious. But, of course, he was.
Together, the two men determined that Aron needed to transform its business from one that took little or no risk—the firm would shut down during the middle of the day if it could not account for an extra hundred ounces of gold (then worth around $85,000)—into one that would take far more risk. Keeping in mind that the Goldman partners’ net worths were on the line with every trade, Winkelman and Rubin transformed Aron into a business that took advantage of short-term price differentials between various commodities and securities tied to them. They also decided Aron needed to become a much bigger player in foreign exchange trading, by, for instance, helping clients hedge against currency risk, and in the trading of oil and other petroleum products. “That meant taking risks that the Aron people had always been proud of not taking, and with the firm’s own money,” Rubin explained. “The firm decided to abandon the sure thing that no longer existed in favor of calculated risk taking.” For his part, Winkelman realized Aron “had to start over” and “risk our capital and work as dealers.” Together, Rubin and Winkelman transformed Aron into a global force trading commodities on behalf of Goldman’s clients and Goldman itself. And Doty took the brunt of much of his partners’ ire for pushing the Aron deal. “I took tar and feathers from several of my partners,” he said.
Although he makes no mention of Aron in his memoir, Whitehead—together with Weinberg—committed to their Goldman partners that they would “take care of this situation.” They met with Winkelman weekly to review the emerging strategy for how to change Aron. “At first I thought it would be difficult, a real punishment,” Winkelman recalled, “but soon I realized that it was a golden opportunity.… They got personally involved to be sure we would eventually solve the many problems at J. Aron—and there were lots of problems.”
His first task was figuring out how many more people at Aron had to be fired. “J. Aron was in real trouble,” he said. “Costs had to be cut back sharply, and cutting costs meant cutting people—something Goldman Sachs traditionally did not do.” The Goldman brass decided the firings should occur in one day, with each person’s boss informing him or her of the decision. Since Aron was still in a separate building, firing people there was not considered the same as firing people at Goldman. “We were fighting for our very existence,” Winkelman continued, “and we had to cleanse the culture from a bootlicking family-run business.” Not only
did that mean firing those that no longer fit but also hiring new people into the business who were capable of executing the new business plan, as opposed to those people who were hired, according to Rubin, based on “horse sense” and who just might be decent traders.
Not surprisingly, Rubin described the firings at Aron more diplomatically than did Winkelman as “certain personnel changes” and a “most delicate undertaking.” He and Winkelman concluded that while Aron had “some extraordinarily capable people” who could clearly help to execute the new strategy, “some others were so steeped in the old, risk-free way of doing business” that they could not make the transition “to a risk-based approach.” They would have to go. In the end, another 130 or so of the Aron employees were fired, leaving a smaller, core group out of the original 400 that Goldman would rely on to build the new business. “There is an incredible bitterness at the way the departures were handled,” a former employee told Institutional Investor. “People who spent 28 years with the firm were fired.”
One of the people who Winkelman decided to save was Lloyd Blankfein. The decision to keep him would be a fateful one for Goldman Sachs.
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WHILE RUBIN AND Winkelman were preoccupied behind the scenes in trying to resurrect the nearly moribund J. Aron, Goldman—with the help of Novotny, the PR maestro—was busy helping the Wall Street Journal provide a December 1982 front-page advertisement for the firm’s increasingly lucrative business of advising on mergers and acquisitions. Goldman’s role in the burgeoning M&A business had been highlighted once before in the Journal, in September 1965, in another front-page article about how the use of “merger-makers” was greatly expanding in corporate America and “demand for their services is climbing sharply.” In that article, John Weinberg, who founded Goldman’s M&A department while at the same time supposedly “overseeing” the commercial paper department, was quoted as explaining that the “merger-makers” provided “the lubricant in the transaction” to get it done and could often make the extraordinary sum of $1 million for their work.
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