Much of Hank Paulson’s early life revolved around the Barrington farm. “We always had horses, hogs, cows, sheep and chickens, not to mention my pet raccoon and crow,” Paulson wrote in his 2009 memoir. “I spent a lot of time doing chores—milking cows, mucking out stalls, bailing hay. We churned butter for cream, drank milk from our cows. We put up food for the winter, butchering the chicken, hogs and sheep. Mom froze vegetables from the garden.”
Paulson’s father had a “fierce work ethic,” Paulson explained, and the message came early that Hank was expected to rise early and not linger in the shower for more than a few minutes. “You got up, you worked, you were useful,” Paulson wrote.
Before he started seventh grade, his parents concluded the family was “land rich but cash poor” and decided to sell the seventy-five-acre farm and buy a smaller, fifteen-acre property farther away from Chicago. Paulson described himself as a typical public school kid. “I was an Eagle Scout as early as you possibly could be an Eagle Scout,” he said. “I was a good student. I was a good football player. I was a good wrestler. I had a gold-star mentality.” On his high-school football team, Paulson played on both sides of the line, playing every minute of every game. “I was a very good football player,” he said.
Bob Blackman, the football coach at Dartmouth College, recruited Paulson heavily for Dartmouth. At Dartmouth, Paulson majored in English and started every game he could as the right tackle from sophomore year on. At six-feet two-inches tall, he wasn’t that big—two hundred pounds—but he played against defensive linemen who weighed fifty or sixty pounds more. Working on the farm and taking wilderness vacations had given Paulson the strength of a stevedore. In 1965, he was honorable mention All-American.
The Paulsons were Christian Scientists, and Hank Paulson regularly attended the Christian Science church. In his memoir, Paulson was matter-of-fact about his religious beliefs. “Christian Science has always been a big influence on me,” he wrote. “It is a religion based on a loving God, not a fearsome one. An authentic confidence comes out of this.” He also tried to debunk the myth that Christian Scientists are not permitted to rely on modern medicine and doctors to heal ailments. “There is, in fact, no prohibition against medical treatment,” he wrote. “But I am comfortable relying on prayer because it has proven to be consistently effective for physical healing, for dealing with challenges in my career, and for spiritual growth.”
His senior year, he was offered the Reynolds Scholarship to study English at Oxford but chose instead to apply to Harvard Business School, which was unusual for an English major without any business experience.
Like Corzine, Paulson was very concerned about being drafted into the Vietnam War after he graduated Phi Beta Kappa in 1968. He had joined the Naval ROTC program at Dartmouth and spent the summer after graduating from Dartmouth before going to Harvard at an ROTC program at Purdue University, in West Lafayette, Indiana. “It was a strange place for the Naval ROTC surrounded by cornfields with no water in sight,” he wrote. But there was a public swimming pool that he and a girlfriend—it was a summer romance—decided to hang out at during one of the last nights of the ROTC program. She was a lifeguard at the pool. Since it was after hours, the fence around the pool was closed and locked, but Paulson and the girl decided to scale the fence and hang out in the pool anyway. Paulson was jumping up and down on the diving board when the police came. Since Paulson does not drink, he was not drunk, which was a point in his favor.
The policeman was new to the West Lafayette force and had let someone out of jail the day before who had vandalized the pool area. He was not in a good mood when he saw Paulson on the pool’s diving board. “He took us down to the station, fingerprinted and mugged us, and charged us with misdemeanor trespassing,” Paulson recalled. They also towed his car, illegally. The next day, Paulson explained what had happened to his ROTC captain. “He checked out my story and found out it was true and there was no damage done,” he said. “The charges were dropped.”
During his final semester at Dartmouth, Paulson had met Wendy Judge, a junior at Wellesley, on a blind date. That fall, Paulson started at Harvard Business School. He also began dating Wendy in earnest. “I did well enough there without studying too hard, and I spent much of my time at Wellesley,” he wrote. Like Paulson, she was a Phi Beta Kappa English major who loved the outdoors and wore secondhand clothes. She was president of her senior class at the same time that Hillary Rodham, her classmate, was the president of the student body. After she graduated from Wellesley, she was going to spend the summer teaching sailing and swimming in Quantico, Virginia. Paulson, now “very much in love,” wanted to be near her for the summer between his first and second years at Harvard Business School. He had been slated to spend the summer at sea with the navy, an adventure inconsistent with the desire to be with his girlfriend.
Instead, he picked up the phone and cold-called the office of the secretary of the navy, John Chafee, to see what he could finagle. He ended up being redirected to speak to Stansfield Turner, a navy captain (and later the director of the CIA under Jimmy Carter). Out of the blue, Paulson proposed to Captain Turner that he undertake a study of the ROTC program on Ivy League college campuses—this was during the summer of 1969, mind you, a time when students were torching ROTC offices throughout the country. Turner agreed, and Paulson spent the summer in a cubicle at the Pentagon. “My motive was to be next to Wendy, and so I wrote this report and I made a number of contacts,” he said. He also proposed to Wendy that summer. They were married eight weeks later.
After graduating from Harvard Business School in 1970, the Paulsons moved to Washington. Paulson headed back to the Pentagon to work for the Analysis Group, a small, elite cadre of bright young men working on special projects for Robert Moot, the assistant secretary of defense, comptroller. “The Analysis Group at the Pentagon was like a little investment bank,” Paulson said. “We had projects where we worked with various senior people in the Pentagon.”
While Paulson was happy working at the Pentagon, he really wanted to work at the White House, an idea that Treasury Secretary John Connally had planted in his head. When a colleague left the Analysis Group to go to the White House, Paulson had his connection to get some interviews in order to make the move. In April 1972, Paulson went to work at the White House for Lewis Engman, who was John Ehrlichman’s liaison with the Treasury Department. Working as a staff assistant on the Domestic Policy Council, he focused on tax policy, minority and small-business issues, and the minimum wage. The Watergate break-in occurred in June 1972, and Paulson, like others, didn’t pay the incident much attention. After the November election—where Nixon was reelected in a landslide—Engman left the White House to run the Federal Trade Commission, and Paulson replaced him as the White House liaison to the Treasury Department, then run by George Shultz (later Reagan’s secretary of state). Paulson recognized what a unique opportunity he had at such a young age. It was a “huge promotion,” Paulson said.
Early on during Paulson’s White House tenure, Ehrlichman told him it was “important not only to do the right things, but also to be perceived to be doing them right.” In January 1973, Paulson recalled speaking with Ehrlichman after stories had begun to appear in the press about H. R. Haldeman’s role in Watergate. The next day stories appeared about Ehrlichman’s role, too. “By February, Ehrlichman and Haldeman were out …,” he said. “That was very disillusioning because I saw Ehrlichman as a real force for good in that White House—really focused on policy, a moderating influence.… But it’s never really interesting why bad people do bad things, or why good people do good things; it’s really interesting to understand why good people do bad things.” Neither Paulson nor his direct boss was involved in any of the shenanigans. “The White House had a lot of power in those days before Watergate busted things open,” he said. “When a tax memo would come to the White House, I’d be the one that wrote the cover memo and went in to see the president and got back to the Treasury.” By December 1973
, though, Paulson realized that the end was near for Nixon, and he decided to leave.
Despite suffering tremendous disillusionment as a result of the Watergate scandal, Paulson counted his time at the White House as an important and formative experience. He learned that he liked working on more than one project at a time. He also learned not to be intimidated and to be comfortable around powerful people. “I was never going to be awed by authority just because someone had a big title or a big position and they told you what to do,” he said. “It also helped me a lot in my early investment banking days since—when I was quite young—the fact that I had worked with the president and with senior cabinet officers gave me great self-confidence. I wasn’t afraid to go directly to the CEO.”
By the middle of 1973, Paulson had started interviewing for his next position. His eclectic background and his desire to work with CEOs made Wall Street—and investment banking, in particular—a perfect career path. He thought that Goldman or Salomon Brothers would be best for him because they each had large, respected Chicago offices, led by individuals—James Gorter, at Goldman, and J. Ira Harris, at Salomon—who also had seats on their respective firms’ management committees. Both firms wanted Paulson, and neither firm was the industry leader it would soon become.
When Paulson started to meet the Goldman brain trust, the rapport was instant. “Not only did I love Jim Gorter,” Paulson said. “But I also met Whitehead, Weinberg, Rubin and Friedman and a whole bunch of other people and I just said to myself, ‘I don’t care where they rank in the league tables, these are really smart, good people and I want to work with them.’ ”
In January 1974, Paulson joined Goldman in Chicago as an investment banking associate, covering big industrial companies in the Midwest. It was a tough year financially at Goldman, given the Penn Central litigations. In this difficult financial environment, the Paulsons’ frugality served them well. They bought five acres of land from Paulson’s parents on the Barrington property where he grew up and built a “rustic” glass-and-steel house on a hill overlooking a prairie. He called the property “Merimar Farm” and cut the path for the driveway, constructed the retaining walls, and split boulders that were used in the stone fireplace.
At first, Paulson worked closely with Gorter on his existing client relationships, such as Amoco and Walgreens. Then he was given his own list of companies, where Goldman Sachs had been stymied for years, including Caterpillar, Kellogg, Inland Steel, and Archer Daniels Midland. Gorter told him to relax and not to worry about winning business from these companies in the short term. “If you do a good job,” Gorter told him, “I’ll be able to see it and see you’re making progress, and then ultimately if you do the right thing, the revenues will follow.”
The early years at Goldman were tough for Paulson. “Everything else I’d done,” he said, “if you were bright and worked hard, you were assured of success, but here you needed to win people’s trust.” But then he started getting a few breaks. First, the general increase in M&A deals—driven by hostile takeovers—made it more natural for bankers to talk to the CEOs of companies about how to prevent a corporate raider from making a move. This played to Paulson’s confidence in dealing with powerful people. His unique, somewhat disheveled style played well. He also defined his role as a coverage banker “expansively,” he said—another trick he learned in government—and he figured he would have a better relationship with a CFO if he had an excellent relationship with a CEO (even though this risked offending the CFO).
Like that of a character from a David Mamet play, Paulson’s objective in a meeting with a CEO was to make sure he got another meeting. “Every time I see that person they’ve got to learn something, they’ve got to find it useful, and they’ve got to say, ‘I want to see this young guy again,’ ” Paulson said. “I didn’t try to be their buddy, didn’t try to be their equal.” He talked to the executives about the performance of their stock, or about M&A deals in their industry—subjects he knew they would be interested in. Over time, he came to realize CEOs were lonely and didn’t often have people to bounce ideas off. He would be their sounding board. “I would give them advice on a range of subjects some of which had nothing to do with traditional investment banking …,” he said, “such as weaknesses in their company, or I didn’t think this particular CFO was strong and there might be someone at another company that was stronger, or whatever. Or about the composition of their boards. I was candid sometimes to the point of bluntness. That was my trademark.” For a young banker, without much experience, Paulson had an unusual store of chutzpah. Sometimes clients would tell him to give them a breather, and not call so often. But he could hardly control himself.
Before long, Paulson began generating one major piece of business after another: a Eurobond issue for McGraw-Edison, creating a joint venture in Japan with Inland Steel, and selling a bunch of small businesses for Sara Lee. His success with many of these companies stemmed, in part, from the fact that he was not Jewish. There was no secret at that time that some executives at many large corporations in the Midwest were anti-Semitic and did not want to do business with a Jewish firm. “That was not lost on me …,” Paulson said. “In the late 1970s, you’d have a lot easier time doing business if your name were Morgan Stanley … I just literally never gave it a thought. To me, the firm was a meritocracy.” Paulson spent his time focusing on winning business away from competitors. He loved being the underdog and fighting for greater and greater market share. “We loved to compete against Morgan Stanley,” he said.
With Paulson’s rainmaker banking skills increasingly obvious, he was named a Goldman partner in 1982. By then, although Bob Hurst might have disagreed, Paulson thought of himself as one of the firm’s top bankers. “I tried to be the best new business producer at the firm,” he said. When Paulson had his conversation with George Doty about how much capital he would have to invest in the firm upon joining the partnership, he told Doty that he had only been able to finish two-thirds of his Barrington home and that he and his wife were sleeping in an open loft above the dining room, next to the children’s rooms. “We were going to put this addition on to the house,” Paulson told Doty, “but I’m not going to put the addition on now so I have ‘this much’ to put in the firm.” But Doty took pity on Paulson and told him to build the addition to the house and put a smaller amount of capital into the firm. “I even forgot what it was, but it was a relatively small amount of capital I put in,” he said. “Being a partner was extraordinarily important until I became one and then afterwards it was something I never really thought about much again.” Even though Paulson became increasingly wealthy, his material interests remained minimal, especially for a Goldman partner. Wendy wanted her husband to be happy but otherwise, he said, “she could care less,” about the money. “We lived out in a rural area where people didn’t know what Goldman Sachs was,” he said, “and they certainly didn’t know what a Goldman Sachs partner was.”
The word around Goldman was that nobody worked harder than Paulson. “I worked hard,” he said. But in addition to both his legendary work ethic and his revenue-generating ability, part of Paulson’s appeal to people like Whitehead, Gorter, Rubin, and Friedman was his combination of frugality and family values. Paulson didn’t drink or smoke or chase women. There was a sense that Paulson would never put himself in the position that Lew Eisenberg had. Nor was he likely to spend his growing wealth conspicuously. “Johnny Weinberg used to say—and I think this was very insightful—‘As people progress some of them grow and others swell,’ ” Gorter said. “And when you can sense that people are swelling, you want to get the hell out of there because they’re losing their initiative and they’re not going to do the job. Hank never swelled. He always grew.”
To be sure, Paulson was no Boy Scout. He made plenty of enemies at Goldman. His brash, take-charge mentality offended some of his partners who thought he spoke too quickly or made decisions too impulsively. “He’s an action-oriented person, and one of his great skills wa
s identifying smart people and absorbing good ideas that they had, and then pulling the trigger,” was how one of Paulson’s rivals at Goldman described him, choosing every word very carefully. Paulson had heard the criticisms and didn’t deny that he has his flaws.
But none of these imperfections seemed to hamper his career. After Paulson made partner in 1982, Gorter asked him to run Goldman’s Midwest investment banking operations. By then Gorter had been on the Management Committee for years, was a real power at Goldman, and could not have been a better rabbi for Paulson. For his part, Paulson said he hadn’t given much thought to being in management. But he took on the responsibility and found that the regional banking effort needed to be rebuilt. He hired a bunch of new bankers and then trained them. From there, Gorter and Friedman decided Paulson should be more involved in thinking about Goldman’s long-term strategy and asked him to join two committees devoted to that topic.
Working on the firm’s overall strategy not only gave Paulson input into decisions about how best to deploy the firm’s limited resources and how best to expand internationally—exposing him to the leaders of Japan and China, among others—but also gave him ongoing access to Friedman, an opportunity Paulson did not fritter away. “Even though I was in Chicago, Steve and Bob made me feel relevant,” he said. “They always seemed very interested in what I had to say about strategy and my views on how we should be working with clients, and I had very strong views about the role that Investment Banking Services”—or IBS, the evolution of Whitehead’s New Business effort—“should play and how we should work with clients.” But Paulson claimed that as much as he enjoyed the management responsibilities, he never aspired to a leadership position at Goldman. “It never had occurred to me that I would someday run Goldman Sachs or that I would want to run Goldman Sachs or that I’d want to run a big group of people or that I would want to ever go to New York,” he said. “What I aspired to do was to be an outstanding investment banker in the Midwest.”
Money and Power Page 49
