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

By now Blankfein had started on the track toward becoming a partner at the firm, but in 1981 he had what he termed a “prelife crisis.” He decided that he wasn’t meant to be a corporate tax lawyer and applied for jobs at Goldman, Morgan Stanley, and Dean Witter. He was rejected by all three firms but a few months later got his foot in the door at Goldman.

A headhunter sought him out for a job at J. Aron & Company, a little-known commodities trading firm that was looking for law school graduates who could solve complex problems and then explain to clients precisely what they had done. When he told his fiancée, Laura, who was also a corporate lawyer, with the New York firm of Phillips, Nizer, Benjamin, Krim & Ballon, that he was taking a job as a salesman of gold coins and bars, she cried.

Several months later, Blankfein became a Goldman employee when the firm acquired J. Aron in late October 1981.

After the oil shocks and inflation spikes of the 1970s, Goldman was determined to expand into commodities trading. J. Aron gave the firm a powerful gold and metals trading business and an international presence, with a significant London operation. But while Goldman was disciplined and subdued, J. Aron was wild and loud. When Goldman ultimately moved the trading operations of J. Aron into 85 Broad Street, its immaculately groomed executives were stunned to see traders with their ties wrenched loose and their sleeves rolled up, who shouted out prices and insults alike. When angered, they pounded their desks with their fists and threw their phones. This was not the Goldman way. And while Goldman prided itself on its culture and its calculated hierarchy, J. Aron had no use for formalities. After joining, when Blankfein asked what his own title was, he was told: “You can call yourself contessa, if you want.”

Goldman’s Mark Winkelman was given the task of taming this unruly crowd. The Dutch Winkelman was one of Goldman’s first foreign partners, known for his analytical brilliance; he was one of the first executives on Wall Street to recognize the importance of technology for trading, as computers became smaller and more powerful. Winkelman first noticed Blankfein when he saw the short salesman wrestle the phone away from a trader who was trying to yell at a client who had cost him money.

He shielded his protégé from a wave of job cuts at J. Aron that came the following year, the first widespread layoffs at Goldman. Blankfein was fortunate in other respects as well. Goldman had decided to make a major push into trading bonds, commodities, and currencies, and to take on larger risks. The firm had been a pioneer in commercial paper and a leader in municipal finance, but remained an also-ran in fixed income, compared with Salomon Brothers and others. Winkelman and Jon Corzine overhauled that part of the business and recruited talent from Salomon.

Impressed by Blankfein’s well-honed diplomacy and his obvious intelligence, Winkelman placed him in charge of six salesmen in currency trading and, later, the entire unit.

Robert Rubin, who then ran fixed income with Stephen Friedman, was opposed to the move.

“We’ve never seen it work to put salespeople in charge of trading in other areas of the firm,” Rubin told Winkelman. “Are you pretty sure of your analysis?”

“Really appreciate your experience, Bob, but I think he’ll do all right,” Winkelman responded. “Lloyd’s driven, and he is a very smart guy with a very inquiring mind, so I have some confidence.”

The young lawyer soon demonstrated his trading prowess by structuring a trade that allowed a Muslim client to obey the Koran’s proscriptions against interest payments. At the time, the complex $100 million deal, which involved hedging Standard & Poor’s 500 contracts, was the biggest Goldman had ever done.

Blankfein was also a serious reader, taking stacks of history books with him when he went on vacation. Never flashy or self-promoting, he was an almost ideal embodiment of the culture at Goldman, where no one ever said, “I did this trade,” but rather, “We did this trade.”

Winkelman was crushed when he was passed over for Corzine and Hank Paulson in the top jobs at Goldman in 1994. Blankfein, who was made partner in 1988, was one of four executives named to take over Winkelman’s responsibilities. Winkelman left the firm.

By 1998, as co-head of fixed income, currency, and commodities, Blankfein was running one of the most profitable businesses at the firm, but he was not seen as an obvious candidate for the top job.

Eventually, Paulson was won over by Blankfein’s raw intellect and made him his co-president, prompting John Thain to leave the firm. For his part, Blankfein shaved his beard, lost fifty pounds, and quit smoking. When Paulson was nominated as Treasury secretary in May 2006, he announced that he had selected Blankfein as his replacement.

For as long as Blankfein could remember, Goldman had been thinking that it might need a partner. In 1999, during Paulson’s stewardship, he had held secret merger talks with JP Morgan, soon after the firm had gone public. Those discussions ended abruptly when Paulson came home to his apartment one day and had an epiphany: “Legally, we would be buying Morgan, but JP Morgan was so much bigger than Goldman Sachs that in reality they would be taking us over, and they would bury us,” he later recalled. “I also knew that somehow we’d figure out how to do everything they could do.”

During the Clinton administration’s first term, Congress was working on the legislation that would repeal the Glass-Steagall Act of 1933, tearing down the walls dividing banks, brokers, and other financial businesses. At the time, lobbyists for Goldman actually persuaded the committee writing the bill—which became the Gramm-Leach-Bliley Act of 1999—to include a minor amendment they had sought in the event that they ever wanted to become a bank holding company. That provision allowed any bank that owned a physical power plant to continue to own it as a bank holding company. Of course, Goldman was the only bank that owned a power business.

Blankfein reflected on this history as O’Neill finished his presentation with a series of questions: Do we need to become a commercial bank? What does it mean if we become a commercial bank? How can we use deposits? How do we build a deposit base?

Blankfein was quick to speak up afterward to encourage discussion. “Deposits provide funding only for certain activities,” he reminded the group.

Gary Cohn tried to explain the situation in greater detail, saying that they wouldn’t be allowed to make bets with all of the deposits and advising them that they would “have to go out and buy some mortgages or go into the credit card business or originate mortgages.” These were businesses in which Goldman had no experience, and entering them would mean changing the company in a fundamental way.

Sitting beneath twenty-foot-high chandeliers in the conference room, the directors and executives batted around a number of different ideas—developing an Internet bank, growing the firm’s private-wealth-management business. After an hour of debating alternatives, O’Neill shifted the discussion in another direction by proposing a different alternative: buy an insurance company.

Insurance might have seemed, at first glance, an even more radical departure for Goldman than becoming a commercial bank. But Blankfein made the case that the two industries were more similar than dissimilar. Insurers use premiums from ordinary customers, just as bankers use deposits from customers, to make investments. It was no accident that Warren Buffett was a big player in the industry; he used the float of premiums from his insurance companies to finance his other businesses. Similarly, what was known in insurance parlance as “actuarial risk” was not unlike Goldman’s own risk-management principles.