Andrew Sorkin - Too Big to Fail - The Inside Story of How Wall Street and Washington Fought to Save the FinancialSystem--and Themselves

At a meeting at Friedman’s apartment on Beek man Place, Paulson expressed resistance to the idea of working under Corzine, or even of relocating to New York, which he had doggedly avoided all these years. Corzine, who was known to be especially persuasive in one-on-one encounters, suggested that he and Paulson take a walk.

“Hank, nothing could please me more than to work closely with you,” Corzine said. “We’ll work closely together. We’ll really be partners.” Within an hour they had reached a deal.

On arriving that year in New York, Paulson moved quickly. He was so focused on work, he never even had time to inspect the apartment Wendy wanted them to purchase before he agreed to buy it, sight unseen.

As president and chief operating officer respectively, Paulson and Corzine worked tirelessly in the fall of 1994 to address Goldman’s problems, traveling around the world to meet with clients and employees. Paulson was given the unenviable task of cutting expenses by 25 percent. Their efforts paid off: Goldman Sachs turned around in 1995 and had strong profits in both 1996 and 1997. Yet the crisis convinced Corzine and some others at Goldman that the firm needed to be able to tap the public capital markets so that it could withstand shocks in the future. The solution, they believed, was an initial public offering.

But Corzine did not have a strong enough hold on the firm when, in 1996, he first made the case to its partners for why Goldman should go public. Resistance to the idea of an IPO was strong, as the bankers worried it would upend the firm’s partnership and culture.

But with a big assist from Paulson, who became co-chief executive in June 1998, Corzine ultimately won the day: Goldman’s initial public offering was announced for September of that year. But that summer the Russian ruble crisis erupted and Long-Term Capital Management was teetering on the brink of collapse. Goldman suffered hundreds of millions of dollars in trading losses and had to contribute $300 million as part of a Wall Street bailout of Long-Term Capital that was orchestrated by the Federal Reserve Bank of New York. A rattled Goldman withdrew its offering at the last minute.

What was known only to a small circle of Paulson’s closest friends was that he was actually considering quitting the firm, tired of Corzine, New York, and all the internal politics. However, the dynamic at Goldman shifted dramatically in December 1998: Roy Zuckerberg, a big Corzine supporter, retired from Goldman’s powerful executive committee, leaving it with five powerful members: Corzine, Paulson, John Thain, John Thornton, and Robert Hurst. At the same time, Goldman’s board had become increasingly frustrated with Corzine, who had engaged in merger talks with Mellon Bank behind their backs.

A series of secret meetings in various apartments quickly followed and resulted in a coup worthy of imperial Rome or the Kremlin. Persuaded to stay and run the firm, Paulson and the three other committee members agreed to force Corzine’s resignation. Corzine had tears in his eyes when he was told of their decision.

Paulson became sole chief executive, with Thain and Thornton as co-presidents, co-chief operating officers, and heirs presumptive. And in May 1999, shares of Goldman made their trading debut in a $3.66 billion offering.

By the spring of 2006, Paulson had stayed longer in the CEO spot than he had expected and had risen to the very top of his profession. He was awarded an $18.7 million cash bonus for the first half of the year; in 2005 he was the highest paid CEO on Wall Street, pulling in $38.3 million in total compensation. Within Goldman he had no challengers, and his hand-picked successor, Lloyd Blankfein, was patiently waiting in the wings. The bank itself was the preferred choice as adviser on the biggest mergers and acquisitions and was a leading trader of commodities and bonds. It was paid handsomely by hedge funds using its services, and it was emerging as a power in its own right in private equity.

Goldman had become the money machine that every other firm on Wall Street wanted to emulate.

After thirty-two years at Goldman, Paulson had a tough time adjusting to life in government. For one, he had to make many more phone calls because he could no longer blast out long voice-mail messages to staffers, as was his custom at Goldman; Treasury’s voice-mail system, he was repeatedly informed, did not yet have that capacity. He was encouraged to use e-mail, but he could never get comfortable with the medium; he resorted to having one of his two assistants print out the ones sent to him through them. And he had little use for the Secret Service officers accompanying him everywhere. He knew CEOs who had security with them constantly, and he had always considered such measures the ultimate demonstration of arrogance.

Much of the Treasury staff did not know what to make of Paulson and his idiosyncracies. The staffers would go to Robert Steel, his deputy secretary and a Goldman alum, for advice on how best to interact with their quirky new boss. Steel would always tell them the same three things: “One: Hank’s really smart. Really smart. He’s got a photographic memory. Two: He’s an incredibly hard worker, incredibly hard. The hardest you’ll ever meet. And he’ll expect you to work just as hard. Three: Hank has no social EQ [emotional quotient], zero, none. Don’t take it personally. He has no clue. He’ll go to the restroom and he’ll only halfway close the door.”

Early in his tenure, Paulson invited some staff members to his house, a $4.3 million home in the northwestern corner of Washington (which, in a bizarre coincidence, had once belonged to Jon Corzine). The group gathered in the living room, whose big windows looking out over the woods almost made it seem as if they were sitting in a fancy tree house. Surrounding them were photographs of birds, most of them taken by Wendy.

Paulson was intensely explaining some of his ideas to the group. Wendy, thinking it odd that her husband had forgotten to offer their guests anything to drink on such a hot summer day, interrupted the meeting to do so herself.

“No, they don’t want anything to drink,” Paulson said distractedly before resuming the meeting.

Some time later Wendy came out with a pitcher of cold water and glasses, but no one dared indulge in front of the boss.

Paulson had inherited a department that was in disarray. His predecessor, John Snow, the former chief of the railroad company CSX, had been marginalized, and the demoralized staff felt both neglected and underappreciated. Paulson thought he could remedy that. But what surprised him was how few employees there actually were. He had assumed that government inefficiency would guarantee that he would have to deal with thousands of bodies being underutilized. Although he now oversaw a department of 112,000, it was light on the financial side, and he knew he would have to bring in seasoned Wall Street veterans who knew what it meant to work hard.

The Goldman connection was the one factor of which Paulson had to be mindful, as impractical as that seemed to him. He knew conspiracy theories about Goldman’s supposed influence over Washington bloomed anew whenever a top Goldman executive took a government job, whether it concerned Robert Rubin’s becoming Treasury secretary under Clinton or even Jon Corzine’s election as senator from New Jersey, despite being ousted from the firm. (Rubin, who was now at Citigroup, also reminded him before he took the job about being careful in dealing with Goldman.)