Money and Power

by William D. Cohan

  There was also mention made of the stealthy and secretive process by which Goldman weeded out older partners, clearing room at the top for the next generation. The magazine suggested this delicate surgery was Paulson’s purview. “Often enough, someone important is quietly asked to leave,” The Economist reported. (According to Goldman lore, Paulson had such a hair trigger that he fired one partner, even though his colleagues decided to rethink the initial decision. But it was too late.) “This is one of Mr. Paulson’s most critical roles. He apparently does it well enough that word rarely leaks out in the firm. Sometimes even the person being dismissed is unaware they are being forced out—there is a brief discussion about a more interesting future. Typically, senior Goldman employees are on several charitable boards and, invariably, there is a lot of personal wealth to be invested, given away, or, after a lifetime in an office, spent on something grand. Goldman, says Mr. Paulson, is a hard place to be hired, a hard place to be promoted and a hard place to stay. And if you want an explanation of how Goldman endures, that, perhaps, is the best explanation of all.”

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  BY THE TIME the Economist article appeared, Paulson was deep into highly secretive negotiations with the president of the United States, George W. Bush, and with Josh Bolten, Bush’s chief of staff and a former colleague of Paulson’s, about becoming the seventy-fourth treasury secretary of the United States. Paulson told virtually no one at Goldman Sachs that Bolten had approached him about taking the Treasury job to succeed John Snow. He shared the news with John Rogers, Paulson’s chief of staff at Goldman and a longtime power behind the throne at the firm, but he did not share the news even with Ken Wilson, Paulson’s partner and close friend at Goldman who would soon enough join Paulson at Treasury as an unpaid adviser. “The idea of being Treasury secretary in the abstract appealed,” Paulson told Vanity Fair reporter Todd Purdum, “but my initial inclination was that it wasn’t right for me to take that step.” Purdum reported that Paulson clicked through the issues in his mind that he cared most about—“reforming Social Security and Medicare, overhauling the tax code, rethinking trade and investment policy”—and concluded that given the president’s lame-duck status and abysmal political standing, his chances of accomplishing his agenda were minimal. (“He would be right about that,” Purdum wrote.) Paulson recommended someone else for the job.

  But Bolten kept after his former boss. He “offered something almost unheard of for the Bush team,” Purdum continued, “a private meeting with the president even before Paulson decided whether he wanted the job.” Not surprisingly, Paulson agreed to meet with Bush but not before thinking to himself, “Wait a minute—what am I smoking? … You know, how could I possibly presume to take the president’s time” but then not take the job being proffered? “Part of the reason I hadn’t then taken this on was I said [to myself], ‘How many Cabinet secretaries had I seen come to Washington and leave in recent times with a better reputation than they came with?’ ”

  Paulson’s rhetorical question, of course, had the obvious answer of “very few,” with the notable recent exception of Robert Rubin, who had indeed proved himself to be a much admired treasury secretary—though many grumble that he helped created the conditions that led to the Great Recession by supporting deregulation of the financial industry from whence he came and then took for himself a $115 million serving of pie from Citigroup while urging the traders there to ratchet up the risks they were taking. Paulson decided not to meet with Bush, after all. But a month or so later, he changed his mind—“There are no dress rehearsals in life,” a friend told him—and decided to meet with Bush and accept his offer to take the job. Bush, as part of the bargain to lure the CEO of Goldman Sachs to Washington, ceded an unprecedented amount of power to Paulson to run the economy and Treasury as he saw fit. This was probably the equivalent of giving him the sleeves off his vest, considering how little Bush really knew about business and the functioning of the capital markets—despite being a graduate of Harvard Business School, a member of Ken Wilson’s class—and how little political clout he had in the final quarter of his difficult presidency.

  Bush announced Paulson’s nomination on a beautiful, sunny late May 2006 day in the Rose Garden. The ceremony lasted eleven minutes. Paulson would take “this new post at a hopeful time for American businesses and workers,” Bush said. “The American economy is powerful, productive and prosperous, and I look forward to working with Hank Paulson to keep it that way. As Treasury Secretary, Hank will be my principal advisor on the broad range of domestic and international economic issues that affect the well-being of all Americans. Hank shares my philosophy that the economy prospers when we trust the American people to save, spend and invest their money as they see fit.” Bush—with no inkling of how ironic the statement would become—also said Paulson, an active Republican, knew a little something about fiscal restraint and intended to show some. “Hank also understands that the government should spend the taxpayers’ money wisely or not at all,” Bush said. “He will work closely with Congress to help restrain the spending appetite of the federal government and keep us on track to meet our goal of cutting the deficit in half by 2009.”

  Paulson told Purdum that after he changed his mind and decided to move to Washington and take the new job, he called Blankfein, then Goldman’s president and chief operating officer and Paulson’s obvious successor, and told him the news. “I think I surprised and delighted him,” Paulson said, adding that Blankfein, who has a highly evolved sense of humor, “thought it was great for the country—and for him.”

  At Paulson’s confirmation hearing, on June 27, the most pressing questions the Senate Finance Committee—and in particular its chairman, Iowa senator Charles Grassley—had for him pertained to getting a copy of a settlement agreement between the IRS, which is housed in the Treasury, and the Nature Conservancy, a nonprofit organization to which Paulson had donated tens of millions of dollars. (His family foundation has set aside $100 million for donations to conservation causes.) Senator Grassley was concerned that “too many” people who worked at tax-exempt organizations take advantage of them for their own personal benefit. “As you have seen first-hand with the Nature Conservancy, with the best of intentions, things can run afoul,” Senator Grassley said, a reference to accusations that the Nature Conservancy had violated the IRS rules regarding the donation of conservation easements. He then asked Paulson about his specific concern. “Despite repeated requests by our committee, we still have not received a copy of Nature Conservancy’s closing agreement with the IRS based on the IRS audit of the Nature Conservancy,” Senator Grassley said. “It is important for the public to understand, what was the resolution of matters raised by the press and the Finance Committee in the review of the Nature Conservancy.” Paulson answered the senator that he was not the CEO of the organization, merely its chairman of the board—the current CEO of the organization, Mark Tercek, is a former Goldman managing director installed there by Paulson in July 2008—but said that he preferred that the document Senator Grassley was seeking come from the IRS itself, “so it would be kept in confidence,” rather than come from the Nature Conservancy.

  That was about as tough as things got for Paulson. Piped in Senator Trent Lott, “I am excited that you have agreed to take this assignment. It is a very critical one. You know what the issues and the problems are that we face, but your background, your experience in administrations over the years, your experience at Goldman Sachs, your education: you have everything we need in this very important position, so I congratulate you on your nomination and certainly will vote for your confirmation.”

  On June 30, just after the Senate unanimously confirmed his appointment as the nation’s seventy-fourth treasury secretary, Paulson filed a shelf registration to sell 3.23 million of his Goldman shares—worth around $500 million. He retained, for the moment anyway, another $75 million in restricted shares and close to seven hundred thousand vested stock options. Under the government’s conflict-of-i
nterest rules, Paulson had no choice but to sell his Goldman stock, but to make up for the hardship of the forced sale—again thanks to the government’s rules that only an investment banker could truly love—he was spared having to pay immediately capital gains taxes on the sale of his low-basis Goldman stock. Under the rules, Paulson could defer his capital gains—while locking in a high price for the Goldman stock—and then reinvest the proceeds into Treasury securities or an approved mutual fund. If and when he sold the Treasuries or the mutual funds, the capital gains tax would have to be paid. The Economist estimated the exemption saved Paulson around $200 million at that moment. Paulson received one other unusual benefit upon leaving Goldman midyear: a bonus of $18.7 million and total compensation for the six months of work in 2006 of $19.2 million. No doubt his accumulated wealth helped him absorb the $32.65 million cost of the 7,500 acres he and his wife bought on the über-exclusive Little St. Simons Island, off the coast of Georgia (the only way to get there is by boat), as well as the cost of his $4.3 million Washington home.

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  BLANKFEIN’S PATH TO the pinnacle of finance nearly rivals for degree of difficulty that of his legendary predecessor Sidney Weinberg, who was one of eleven children of a Brooklyn bootlegger and started working at Goldman Sachs as a gofer shining spittoons, in 1907, a few years removed from elementary school. Blankfein moved with his family from the South Bronx—where he was born—to 295 Cozine Avenue, in the East New York section of Brooklyn, “in search of a better life,” he explained. He was three years old.

  The family lived in the Linden Houses, a complex of nineteen buildings completed in 1957 that contained 1,590 apartments and was—at the time—a predominantly white, Jewish, public housing project. After losing his job driving a bakery truck, Blankfein’s father, Seymour, took a job sorting mail at night at the post office—“which in our neck of the woods was considered to be a very good job, because you couldn’t lose it,” Blankfein said. The late shift paid 10 percent more than the day shift. “For the last few years of his life I’m sure he was doing something that a machine would have done better and more efficiently,” he said. Blankfein’s mother worked as a receptionist at a burglar-alarm company—“one of the few growth industries in my neighborhood.” Blankfein shared a bedroom with his grandmother; his divorced older sister and her son were in the next bedroom.

  Richard Kalb, who grew up with Blankfein and has remained friendly with him, said his father worked at the post office, too. “But Lloyd always teased me that my dad was a manager and his was a worker,” he said. Kalb and Blankfein went together to the local public school and to Hebrew school at B’nai Israel, near the Linden Houses. They were both part of a program in junior high school that allowed them to complete three years of school in two years by skipping eighth grade. In junior high school Blankfein was “voted most likely to succeed,” Kalb said.

  They were both bar mitzvahed the same year. Blankfein celebrated his at the Astorian Manor—“the finest in catering,” it boasted in neon lettering on its façade—in Queens, with a band, dancing, and a smorgasbord. “He was brilliant as a twelve-year-old boy,” Rabbi Abner German said about Blankfein. “He was a great planner.” To earn some spending money while attending Thomas Jefferson High School in his Brooklyn neighborhood, Blankfein worked as a lifeguard and got himself into better shape, after years of struggling with his weight. He would also regularly hawk hot dogs and soda at Yankee Stadium, in the Bronx. Blankfein would ask Kalb to go work with him, but Kalb would always decline. “And of course I work for the government now”—at the Department of Homeland Security—“and he’s the CEO of Goldman Sachs,” he said.

  While Kalb and Blankfein were in high school, in the early 1970s, the neighborhood started to deteriorate economically. Two gangs, the Black Panthers—not the better-known political organization of the same name—and the Young Lords, seemed to hold sway at the school. Blankfein would take the bus there in the morning but “if there was a big fuss in front of the building or there was a lot going on or there were policemen, you stayed on the bus and you took it around again and just went home,” he said. He adapted to his surroundings and learned to be “careful” but was not isolated. “Even in the projects, there were kids around all the time,” he said, and pickup games were easy to come by. “[T]he problem with trying to play football is you ended up with sixteen people on each side,” he said. He was a diligent student and, according to Kalb, the teachers loved him. “He was very personable, very witty, and very smart,” he said. “So he could interact with them on their level much better than I think most of the rest of us could.”

  For his part, Blankfein said he did well in school not because he was “some roaring genius” but because he wanted to succeed, whereas most of his classmates couldn’t have cared less. “It was easy to distinguish yourself but the motivation to distinguish yourself was a lot harder to come by,” he said. He could have graduated at fifteen but stayed for another year. He was the school’s valedictorian, class of 1971. “You survive at either one of two things,” Robert Steel, one of Blankfein’s former partners at Goldman, remembered Blankfein told him about Jefferson High; “you were either a great athlete or funny and entertaining, and I decided to go with funny and entertaining.” Harvard recruited at Thomas Jefferson High School, spotted Blankfein, accepted him, and offered up a combination of financial aid and scholarships to make it possible for him to attend. The first time he had ever seen someone wear a tie and jacket—without matching suit pants—was when he went to the Harvard Club, in Manhattan, for his Harvard interview.

  At Harvard, he found himself surrounded by a bouillabaisse of legacy students, rich kids, and prepsters, many of whom seemed to know which final clubs to join and how to make the connections that might last a lifetime. Not Blankfein. He was a scholarship student, had to work in the cafeteria, and was shunned by the social clubs. “I was as provincial as you could be, albeit from Brooklyn, the province of Brooklyn,” he said. He remembered that when he read The Catcher in the Rye, he didn’t realize Holden Caulfield was in high school because he kept referring to his “prep” school. “I always thought that a prep school was what some people went to after high school to prepare themselves for college,” he said.

  Blankfein was young and knew it. He settled into a group of friends who shared his modest upbringing. (To this day, many of Blankfein’s closest friends come from his youth.) He seemed oblivious to the social jockeying swirling around him. “I wasn’t defensive about the fact that I was working,” he said. “I always felt that it was the legacy kids that had to justify themselves.” David Drizzle, the son of a brick-factory worker in Atlanta, was Blankfein’s roommate in Winthrop House, at Harvard. He is now chief counsel at the Federal Aviation Administration. “We were completely unprepared for the world that we entered into,” he said of the two of them. “It wasn’t the money, because at that time in our society, the flaunting of wealth was pretty much looked down on. But there was a worldliness that most of the students had that he and I were just completely lacking. And so we were socially at sea when we arrived there, and I think that’s one of the things that drew us together.” Added another friend from Harvard, Roy Geronemus, a dermatologist and the director of the Laser & Skin Surgery Center of New York, “Many of the people who now would beg for an audience with him would have nothing to do with him [then].”

  Since Blankfein had been on his high-school swim team, he thought he’d give Harvard’s a try. He said he had no idea the top prospects had been in contact with the coach—who had been the coach of the 1972 Olympic swim team—for years. “There were Olympic swimmers and Olympic medalists on the Harvard team,” he said. “These guys all looked like a different species.” In his tryout, he swam a long-distance event. “I’m not built for speed, if you haven’t noticed, but I’m built for endurance,” he said. The guy he started swimming with in the race was out of the pool and dressed before Blankfein finished. “I got out of the pool, I toweled myself off, I p
ut my jeans right on over the thing, and I walked to the boathouse,” he said. He thought he’d give crew a try, only to meet another crop of perfect physical specimens. But he made a go of it, and he and Drizzle were on freshman crew together.

  He may have been equally clueless about his schoolwork. He was a government major but did not do a thesis, as did many others. “To the extent I bloomed, I’m a late bloomer,” Blankfein said. Drizzle said that he and Blankfein used to procrastinate by watching Star Trek every night and having long dinners before tackling the books. “As exam period approached,” Drizzle remembered, “a terror would set in that would focus our attention, and we would basically work all night continuously for several nights and swear that we would do a better job the next semester and then would repeat the same experiential procrastination.” What classmates seemed to recall most often about Blankfein were his sense of humor and his memory. “He’s able to spot irony in ways that I don’t know anyone else who can do it,” Drizzle said. He also could sing, from memory, nearly every sitcom theme song known to man in the 1970s.

  Blankfein remembered how—when he was in grade school—someone once referred to him as being a “Philadelphia lawyer” and “it kind of always stuck with me,” he said, and just naturally gravitated to thinking he was going to be a lawyer. He applied to Harvard Law School and was accepted, although he chalked it up to a predilection for accepting students at the law school from Harvard undergrad. “I don’t know that if they had taken half as many that I would have been in there,” he said. Drizzle said that at Harvard Law, Blankfein buckled down academically, and he “became more studious,” but not in a way that would land him on the law review or result in any other scholastic honor. Blankfein conceded that while at Harvard, “at some point, I can’t say that I had a disadvantaged background. After a while, I kind of evolved into having an advantaged background.”