Hank Paulson Goldman Sachs CEO Strategy 1999-2006

Excerpts from various articles on Goldman Sachs

March 2002

The balance sheets of universal banks dwarf Goldman's. The largest, Sanford I. Weill's giant Citigroup (C ), has $1 trillion in assets, more than triple Goldman's $312 billion, while J.P. Morgan Chase & Co. has double that amount.

By offering companies a wide range of services, including cheap loans, the behemoths have been attracting profitable investment banking business their way. That's how Citi's Salomon Smith Barney unit clawed its way to become the leading issuer of corporate debt and equity and to hoist itself up the list of top M&A dealmakers.


But Paulson is determined that Goldman will remain a pure-play investment bank.

The core of Paulson's strategy is simple: "We want to be the premier global investment-bank, securities, and investment-management firm," he says. "We want to have a disproportionate share of the business of the most important clients in the most important markets." To achieve that, Paulson believes Goldman must gain a lock on providing financial advice to marquee corporations, government authorities, and superrich individuals in the world's major economies--the U.S., Germany, Britain, Japan, and China. At the same time, the firm wants to add market share in the most profitable securities businesses: mergers, IPOs, equities, and commodities trading, high-yield offerings, and complex financial instruments called derivatives. To do that, Paulson has made targeted acquisitions in these fields to give Goldman greater depth, not breadth.

With a market cap of just $39 billion, vs. Citigroup's $216 billion and J.P. Morgan's $56 billion, Goldman looks like a tasty morsel to predators.

Paulson had spent lavishly on expensive talent and acquisitions at the peak of the market. After Goldman went public in 1999, he behaved as if Goldman were invincible. By mid-2001, Goldman's staff had tripled, to a peak of 25,000, as Paulson added high-priced specialists in everything from M&A and IPOs to investment advice for the superwealthy, junk bonds, and equity trading. And once he had publicly traded shares at his disposal, he went on a buying binge costing well over $7 billion--the first time Goldman had ever made major acquisitions in its then-130-year history. Since July, 1999, it has taken over a specialist share trader, an online investment bank, an options trading outfit, and two market makers. The biggest, costing $6.5 billion, was Spear, Leeds & Kellogg, which trades on all listed U.S. exchanges and over-the-counter markets.


Paulson now switched his focus to pruning costs. Now, say Goldman insiders, the firm is preparing another hefty round of layoffs. Many who survived last year's cuts were bitter because they were asked to accept options instead of cash as a large part of their 2001 bonus. Making matters worse is the so-called partnership compensation pool that Goldman created when it went public in 1999 to protect the status of the firm's upper echelon. The effect has been to create three classes of employees: the old-guard partners, the veterans who never made partner, and a legion of newbies, the 40% of staff who have been on board for two years or less. Some of the newer arrivals were angry that they had to take larger pay cuts than members of the pool at the start of this year. Paulson doesn't have much sympathy for the disgruntled. "We try very hard to be fair. But if people don't like what they got paid, they don't have to work here," he says.

Some are getting the message loud and clear. On Feb. 11, three Goldman sales and trading executives left for Morgan Stanley. Meantime, co-head of investment banking Steven M. "Mac" Heller, a 20-year veteran, is about to retire. Other managing directors who have been hanging on until this May, when they will be able to sell the shares they received in Goldman's IPO, will probably follow him out the door. Since going public, Goldman has lost 6 of its 22 management committee members. But losing even one top exec can prove critical. After head of research Steve Einhorn left in 1998, Goldman's research slipped from No. 2 to No. 7 in the closely watched Institutional Investor rankings. Moreover, 7 of the 13 female partners at the time of the IPO have quit.

It's up to Paulson to prove them right. A lanky and athletic six-footer, he's a complicated man who alternately terrifies and inspires employees. But some employees avoid riding in elevators with him rather than face his probing questions, though they can't escape the voice mails he regularly leaves at 2 a.m. He expects his employees to work as hard as he does: He makes 360 visits a year to executives at top companies.

He emerged as a major player at Goldman in 1994 after he was yanked from the Chicago office to New York as COO, charged with slashing costs 25%. He managed to do that.

Paulson, with the help of his now co-presidents, John A. Thain, 46, and John L. Thornton, 48, run Goldman as a team. Unlike other Wall Street houses, where power struggles are common and very public, the three are considered so close and complementary that employees refer to them in one breath as "Hank, John, and John." While Paulson came up through the ranks as an investment banker, Thain "the Humane" is a trader at heart and makes more operational decisions. Thornton is the group's strategist, who built up the firm's European operations with Thain. The three tag-team decisions on most major transactions, sometimes from different corners of the globe in a typical daily blitz of 50 voicemails. Anything O.K.'d by one is considered approved by all. Occasionally they disagree. If that happens, they may take hours or even days to hammer out a decision in their tight circle. "If we don't agree, we lock ourselves in a room until we come to an agreement," says Thain.

Whether in unison or as individuals, they will have to ensure that employees execute flawlessly. Paulson's nightmare is that an employee may feel too pressured and make a mistake--and put the firm's reputation on the line.

Until three years ago, Goldman groomed its bankers for leadership roles through informal apprenticeships. But with thousands of employees spread around the planet after the hiring splurge, that's no longer possible. So, Goldman is drafting a succession plan that extends down to its division heads. It has also hired management gurus to figure out how its top three officers can best reach their people. One result: Paulson, Thornton, and Thain teach managing directors in a leadership program called Pine Street. "We want people to act as though they've been here for 10 years when they've been here for two," says Lloyd C. Blankfein, a managing director.

So concerned is Paulson that his ambitious strategy might be torpedoed by a screwup that he's at pains to remind staffers of incidents that put the firm in jeopardy. In December, he walked all the managing directors through a litany of past blunders. They included angering Japanese regulators with careless recordkeeping, annoying the Singapore government by advising on a hostile bid where such practices are usually taboo, and advising dot-coms with questionable business plans. Since January, all Goldman employees have been taking refresher courses on everything from the so-called Chinese walls that separate investment bankers from research analysts to appropriate ways to manage risk. On Feb. 19, Goldman announced that it will make its research department independent from its equities division and banned analysts from owning stocks in industries they cover.

Paulson's tactic of deepening Goldman's expertise is starting to pay off in U.S. equities trading, too. Through acquisitions, Goldman has patched together critical mass in everything from self-directed electronic trades to processing and clearing services. In two years, Goldman has gone from making markets in 500 stocks to 6,000. And with the ability to clear its own trades after it bought Spear Leeds, it is now handling transactions and back-office work for more than 600 investment managers with $100 billion in hedge-fund assets, up from nothing two years ago.

That may sound like grunt work, but Paulson argues it will help Goldman to grab more underwriting deals. His reasoning: Companies want the highest prices when they issue equity, so they will flock to the best-informed firm. "The more knowledge we have on what is really going on in the capital markets--the market's pulse--the more insight we can provide investor and issuer clients," says Robert K. Steel, Goldman's head of equities.

Likewise, Goldman's investment management business may be about to pay off. Years in the building, it now spans the globe and offers clients a wide variety of products ranging from fixed income to hedge funds. Division co-head Peter S. Krauss believes he can deliver 40% profit from asset management. While other divisions are cutting staff, Krauss has been training 200 brokers to add to a 500-strong force catering to superwealthy individuals with $20 million or more to invest.

All this positioning should have a big payoff when the economic recovery finally kicks in and mergers and IPOs pick up. And if the rebound is as synchronized around the world as the downturn was, Goldman will benefit more richly than rivals without its heft in Europe and Asia. "Look at what's happening around the world," says Paulson. "The forces of globalization. Restructuring. Open trade. Pension reform. Goldman Sachs operates at the sweet spot of capitalism."

http://www.businessweek.com/magazine/content/02_09/b3772001.htm