Money and Power

by William D. Cohan

  On November 19, the Times reported that Robert Reich, the head of Clinton’s economic transition team, had given assignments to frame economic policy to a dozen advisers, leading to further speculation about whom Clinton would choose for his team. Among those asked by Reich to write papers were Summers and Tyson. The paper reported that both Rubin and Altman, a friend of Clinton’s from Georgetown University, would be helping Summers, then on leave from Harvard at the World Bank, to craft a paper on tax policy and whether a fiscal stimulus program was needed. Beyond reporting these amorphous assignments, the press seemed at a bit of a loss to figure out who was in line for what job, which is precisely the way Clinton had designed the process. Those brash enough—or foolish enough—to speak with reporters about their visit to Little Rock were immediately eliminated from consideration. Rubin, of course, was keeping very quiet.

  Shortly after Rubin’s interview with Clinton in Little Rock, Warren Christopher, the head of Clinton’s transition team whom he knew from the board of the Carnegie Foundation, called Rubin to talk about a job in the new administration. Christopher didn’t mince words. “If you don’t become Treasury Secretary,” he said to Rubin, “would you be interested in running the National Economic Council at the White House?” Rubin told Christopher he would be interested in the position. Rubin recalled Christopher seemed a little surprised, since a staff job at the White House might be considered a step down for the co-chairman of Goldman. But Rubin preferred not to view it that way but rather as being the person responsible for coordinating economic policy.

  A few weeks later, at the beginning of December 1992, Rubin was on a business trip in Frankfurt, Germany. At 2:30 a.m., the phone rang. It was Christopher. He wanted to formally offer Rubin the NEC job. “Without any further deliberation, I said yes,” Rubin remembered. “Then I went back to sleep,” but not before calling his wife and telling her he had accepted the position. “She was more surprised than Christopher,” Rubin allowed. Why someone so devoted to “probabilistic thinking” had accepted a new, untested job as a policy adviser in the White House was a question Rubin would get frequently over the years. The answer, he explained, was that he just really wanted the job and did not let the negatives overwhelm his thinking. “My fascination with Washington and the political process—and my desire to get involved with issues I care about—overrode all other considerations,” Rubin wrote later. He had more than enough money, but the lure of power was irresistible.

  In early December, Rubin flew to Little Rock to be part of Clinton’s first announcement about his top economic appointees. Bentsen would be treasury secretary and Altman would be his deputy. Leon Panetta would be the director of the Office of Management and Budget; Alice Rivlin would be his deputy. Rubin was named director of the new National Economic Council. Before they all went to the press conference, Sperling warmed up the appointees with some questions that he figured the press might ask. “How can a wealthy guy from Wall Street possibly relate to the problems of working Americans?” Sperling asked Rubin. “Aren’t you just totally unsuited to understanding the problems of ordinary people?” While Sperling’s question was tongue-in-cheek, there was no denying Rubin’s accumulated wealth. Goldman had paid him $26.5 million in 1992, and his Goldman stock, although not publicly traded, was said to be worth $150 million. Nevertheless, he was still being described as a frugal ascetic who wore the “same pinstripe suit, white button-down shirt and patterned necktie every day.” In answer to Sperling’s questions, Rubin “deadpanned,” “Well, I think you’ve got a good point.”

  At the press conference, Clinton introduced Rubin last. “I have asked Robert Rubin to serve as assistant to the [p]resident for economic policy and to help to coordinate and to direct our new Economic Council,” Clinton said. “I’ve created this new role, similar to that of the national security adviser in the present White House, because the coordination of our nation’s economic policy is every bit as essential as the coordination of foreign policy to our long-term national security.”

  After the Little Rock press conference, Rubin flew back home to New York. There was never any doubt in Friedman’s mind that if Clinton got elected, he would ask Rubin to be part of his top team and Rubin would take the job. “It was very clear that he was very, very focused on that,” Friedman said. The next morning, before heading down to Washington, Rubin showed up briefly at Goldman Sachs. He and Friedman arranged for the two senior partners to meet for the final time together with the firm’s partners in a conference room on the thirtieth floor of 85 Broad Street. This was Rubin’s somewhat emotional good-bye.

  Looking back, Friedman said he was happy for his longtime partner—“We’d never had an argument that I can recall. We agreed on most things and when we differed, we worked it out,” he said—but happiness was not the prevalent emotion that emerged during the impromptu partners’ meeting on December 11. After the requisite jokes about how quickly Rubin had become irrelevant to the assembled Goldman partners, Friedman told the group the meeting would be brief because Rubin had to be on his way to Washington. “This has been an exceptional partnership …,” Friedman said. “I am going to miss him a great deal.”

  Rubin seemed disheveled. He said he was “caught up in a mess” but had managed to make a few notes on the flight back from Little Rock about what he wanted to say. “I looked at them this morning and they don’t really quite express my feelings,” he said. “On the one hand, I think this has the opportunity to be an extraordinary experience,” he said. “I mean if I have nothing other than yesterday it would have been an extraordinary experience sitting around with these people that are going to run this bloody place and it’s a strange kind of thing. On the other hand, just deciding to do this I have come to realize ever more—I’m not an enormously emotional person ordinarily—how much Goldman Sachs and its people have meant to me and how much a part of my life they’ve been.”

  Rubin moved to Washington, living in a suite of rooms at the Jefferson Hotel, near his office at the Treasury. The annual rent on the suite was more than his government salary, much of which he declined to take.

  A few days before Clinton’s first inauguration, the New York Times profiled Rubin. In trying to assess Rubin’s tenure at Goldman, the Times reporters wrote about how profitable Goldman had become under his aegis, earning $1.1 billion in pretax profit in 1991, more than any other Wall Street firm. The paper noted that he favored “management by cross-examination” and used his “keen wit to poke fun at himself and cut sharply into others and, while a patient listener and open-minded, he nonetheless can be impatient.” Friedman agreed with that assessment. “He is very unaccepting of intellectually weak and flabby arguments,” he told the paper. “He will cut right through that.” One unnamed Goldman partner, asked to assess Rubin’s leadership tenure at the firm, said, “Bob is not a legendary figure, like some people who have run this firm. I don’t think he wants to be. But he has been a better leader than some of the legends.”

  CHAPTER 14

  THE COLLEGE OF CARDINALS

  John Weinberg was not asked by the Times to comment on Rubin’s unplanned departure, but he was not happy about it. In fact, he was highly pissed off. He had carefully groomed both Rubin and Friedman to be his successors. Not only had they proved to be seamless in their decision-making and leadership of the firm, their knowledge of and experience in the two sides of the firm’s business—investment banking and trading—were perfect complements. While Rubin and Friedman had rotated together as co-heads of Goldman’s fixed-income division, there was no question that Rubin’s skills were highly focused on trading and principal investing—taking serious risks with the firm’s capital—while Friedman’s banking skills revolved around providing M&A advice and other client-related services. Some Goldman partners believed Rubin had been taking 80 percent of the responsibility for running the firm, leaving the balance to Friedman. Friedman had only a tangential understanding of how the increasingly important aspect of Goldman’s business�
�risk taking—actually worked. The two men—and his selection of them—represented his legacy. “I don’t think John was particularly sympathetic when Bob Rubin exercised his patriotic duty to go to Washington,” his nephew Peter Weinberg explained. “Bob was asked to be the co-senior partner of the firm, and that was exactly what he was expected to do. Period.” In short order, John Weinberg would also rue the day that Steve Friedman was left to run Goldman Sachs by himself. “The single most serious thing that happened to the firm was when Rubin went to Washington and left Steve in charge,” said one former Goldman partner.

  ——

  AT FIRST, the Goldman financial juggernaut roared ahead on all cylinders. Goldman’s traders had made a huge bet on something Friedman described as the “European currency mechanism,” which was just an elaborate bet—in the days before the euro was created—on the direction a group of European currencies would trade against one another. At that time, the deutsche mark was the strongest European currency and Goldman bet it would continue to remain strong and the other European currencies that were pegged to it—the Italian lira and the French franc—would continue to be weak. “If your trade was to be long the deutsche mark and short the lira you were highly unlikely to lose money because it was highly unlikely that all of the sudden the lira’s going to get much stronger against the deutsche mark,” Friedman explained. “Much more likely it would get weaker. And I think to some extent the non-German central banks were artificially propping up their currencies to keep them within this band.”

  Normally, Friedman said, he tended to be cautious—although “you’re in a risk business so caution doesn’t mean we’ve got to be in a fetal position,” he said—but this was an obvious moneymaking opportunity. “I looked on it as the best trading opportunity I’d ever seen,” he said. Many traders were making a similar bet, including hedge-fund manager George Soros, and winning fortunes. “That’s the time you break up the furniture and throw it in the fire,” Friedman said, recalling how Cornelius Vanderbilt made his fortune by betting on steamships. “Other times you cut back, cut back, cut back. But things were going well for us and we did very, very well in 1992 and 1993.” That was an understatement. Goldman made $2.7 billion in pretax profits in 1993—by far the firm’s most profitable year ever to that point. Friedman made $46 million, and other members of the Management Committee pocketed at least $25 million each—unheard-of sums of money on Wall Street at that time.

  Not surprisingly, the firm’s success rekindled the idea among some on the Management Committee that the time had come—again—for Goldman Sachs to go public. Jon Corzine, the co-head of fixed-income (with Mark Winkelman), the firm’s former CFO, and a member of the Management Committee, was the leading advocate for beginning the IPO process after the blowout performance in 1993. Corzine raised the matter with Friedman, who was not against the idea. Friedman saw it as “a crucial thing to do for the long term when you’re going to be competing on a global basis against people with permanent capital.” But, he told Corzine, even though the firm had done spectacularly in 1993, Friedman remained concerned about the reputational fallout from the Freeman and Eisenberg scandals and he worried that despite the success of the European currency trade, he didn’t think Goldman had its “trading legs under us very well.” That must have come as a bit of a shock to Corzine, who had just presided over the huge trading gains. Friedman was also thinking about retiring at the end of 1993—going out on a high note, so to speak—and there could be no IPO without a leader.

  The idea of the IPO got bandied around on the Management Committee at the end of that year, but Friedman rejected it and decided not to retire—“to give it one more year,” he explained. He said he wanted to try to complete several strategic imperatives he and Rubin had started, for instance, to continue Goldman’s international expansion and to more fully integrate the private-equity business into the firm and to manage the firm through what he thought might be a down year in 1994.

  ——

  FRIEDMAN WAS ALSO deeply worried about another simmering crisis: Goldman’s involvement—and potential liability—in helping to prop up the financial house of cards that was the transatlantic publishing empire of onetime British tycoon Robert Maxwell. On November 5, 1991, Maxwell allegedly committed suicide by jumping off his yacht, Lady Ghislaine, near the Canary Islands, although many conspiracy theories abound about his demise. In any event, he suffered a heart attack and drowned. The working assumption was that he knew that his financial empire was quickly coming unraveled. His death exposed Maxwell’s colossal scheme to defraud his companies’ creditors and shareholders. He had been desperately trying to prop up the value of the shares in his companies since he had pledged them as collateral for loans he had taken out. Maxwell had also secretly transferred more than $800 million from his companies’ employee pension funds to try to stay one step ahead of his creditors. “The complex ownership and financial structure of his empire and the concealment of the use of the pension funds made it difficult for banks to gain a clear picture,” according to a 2001 report of the financial collapse by Britain’s Department of Trade and Industry.

  Maxwell’s complex relationship with Goldman is detailed in the DTI’s withering 407-page report—and then some more in a 355-page appendix. It began in August 1986 when Goldman agreed to take a five-year lease on an office building—Stand House—in Central London that Maxwell had bought the previous February for £17 million. After reaching the lease arrangement with Goldman, Maxwell sold the building, in November 1986, to Pergamon Holdings Limited, one of his affiliated companies, for £18 million, a nifty profit, and renamed the building Maxwell House. Goldman set up its U.K. trading operation at Maxwell House. Soon thereafter, Goldman’s business dealings with Maxwell increased dramatically.

  In June 1987, Goldman underwrote and syndicated a £105 million loan, secured by a group of Maxwell’s real-estate assets, including Maxwell House, the value of which was appraised at double its value seven months earlier. Back in April 1986, Maxwell announced that it was his intention to transform Pergamon Press, a scientific-journal and reference-book publisher that he started in 1951—and would rename Maxwell Communications Corporation—into a global communications and information company with revenues of £3 billion to £5 billion by the end of the 1980s. This was to be no mean feat considering that the company’s revenue at the end of December 1985 was £265 million. By September 1986, Goldman had started helping Maxwell expand his empire through a series of block trades that helped Maxwell acquire Philip Hill Investment Trust plc, which had £331 million of investment assets. “It was the start of a significant relationship,” according to the DTI report. “It was an important and profitable piece of business for Goldman Sachs.” Some at Goldman, including a few partners in London, questioned the wisdom of doing business with Maxwell, but any concerns were quickly jettisoned in favor of the moneymaking opportunity.

  Of course, had Goldman—and Eric Sheinberg, Maxwell’s banker at Goldman in London—given serious consideration to a 1971 DTI report about Maxwell’s duplicitous nature, the firm might have stayed away from Maxwell completely and avoided the scandal. The DTI’s earlier report arose after a deal between Maxwell and Saul Steinberg, the flamboyant New York corporate raider, went sour. According to Roger Cohen, in the New York Times, Maxwell was “a Czech-born Jewish immigrant who had changed his name three times and survived humiliation by Britain’s clubby City establishment [and] he was incorrigibly suspicious of others.”

  In June 1969, Steinberg’s Leasco agreed to buy Pergamon from Maxwell. But Steinberg quickly came to believe Maxwell had deceived him about the value and substance of Pergamon. The DTI’s report seemed to back Steinberg. The agency found Maxwell’s “apparent fixation as to his own abilities causes him to ignore the views of others if these are not compatible” and that his shareholders’ reports betrayed “a reckless and unjustified optimism” that sometimes led him “to state what he must have known to be untrue.” He was found to have infl
ated the revenue at his encyclopedia business and sold scientific journals to his other private companies to make revenue at Pergamon look higher. “He sold a lot of scientific journals to related private companies and inserted them as profit,” Ronald Leach, an accountant who was one of the DTI’s investigators on the matter, told the Times. “It’s an old accountancy trick, but not one to be recommended.” The report concluded: “We regret having to conclude that, notwithstanding Mr. Maxwell’s acknowledged abilities and energy, he is not in our opinion a person who can be relied on to exercise proper stewardship of a publicly quoted company.” Maxwell was soon ousted from Pergamon.

  When Eric Sheinberg heard about the DTI’s 1971 report on Maxwell, he gave little weight to it, since he knew Saul Steinberg and found him unsavory. Plus there was money to be made from Maxwell. Sheinberg had learned about risk from Gus Levy, who had taught him “never worry about how much money you are going to make on a trade … focus instead on how much you are going to lose if you make a mistake.” Sheinberg told the DTI team investigating Maxwell again after his death that Maxwell “was thought to be enormously wealthy and apparently dealt with virtually every major UK financial institution.” Sheinberg said he thought Maxwell “was controversial.” He had heard of the 1971 DTI report about him but “from his knowledge of the other party to the dispute”—Steinberg—“that had given rise to the [report], he was inclined to think that [Maxwell] would have behaved the better.” But Owen Stable, a judge and the other author of the 1971 DTI report, told the Times in December 1991 that Maxwell simply repeated his bad behavior. “What has happened now amounts to a repeat performance,” he said. “I thought back then that he was one of the biggest crooks I’d ever met. He invented deals between his private and public companies. He was incapable of distinguishing between other people’s money and his own.”