Paulson, Hank 1946–
Chairman and chief executive officer, Goldman, Sachs & Company
Education: Dartmouth College, BA, 1968; Harvard Business School, MBA, 1970.
Family: Son of a wholesale jewelery business owner; married Wendy J. Paulson (naturalist and volunteer bird educator in New York City schools); children: two.
Career: Pentagon, 1970–1972, aide; Nixon White House, 1972–1973, assistant to John Ehrlichman; Goldman, Sachs, 1974–1988, investment banker; 1982–, partner; 1988–1994, co-head of Investment Banking; 1994–1998, COO; 1998–1999, co-chairman and coCEO; 1999–, director; 1999–, chairman and CEO.
■ Unlike other major financial-service firms in the new millennium that offered one-stop shopping for corporate financial needs, Goldman, Sachs resisted this trend. Henry M. "Hank" Paulson, its leader since May 1999, was one key reason why. He embraced a strategy to make Goldman, Sachs a leader in pure-play investment banking—the "go to" firm for major corporations, governments, and individuals with a high net worth. He also stood out for his public crusade against corporate malfeasance, the climax of which was his push for the ouster of Richard Grasso as chairman of the New York Stock Exchange. Depending upon whom one trusted, Paulson was either a paragon of virtue in the den of iniquity or a hypocrite seeking an easy scapegoat.
With 2003 revenues of $23.6 billion, Goldman, Sachs was a major player in global investment banking, securities, and investment management. Despite the economic downturn in the United States and a lackluster demand for deal making, the company had long enjoyed a position as the global leader in mergers, acquisitions, and initial public offerings. Founded in
1869, its services fall into two segments: Global Capital Markets, which includes trading, principal investments, and investment banking; and Asset Management and Securities Services, which comprises institutional brokerage, investment management, and merchant banking.
PLANS TO BECOME A FOREST RANGER
Paulson's upbringing on a farm outside Chicago led to his love of animals. As he recalled: "I wanted to be a forest ranger right up until the time I went to college" (Fortune, January 12, 2004). Instead, he went to Dartmouth College and then on to Harvard Business School. But he eventually returned to his roots, buying five acres of his family's farm and building a house for himself and his new bride. In addition to his two children, the family also included raccoons—which had free run of the house—flying squirrels, alligators, mice, birds, dogs, cats, turtles, frogs, lizards, a tarantula, and a few snakes.
Another major influence on Paulson as a child was religion. His parents were devout Christian Scientists, a belief system that he felt had nurtured his self-confidence: "Christian Science is a religion in which you emphasize love as opposed to fear. I think fear in young kids is the biggest inhibitor to success" (Fortune, January 12, 2004).
FROM PUBLIC SERVICE TO PRIVATE SECTOR
Paulson studied English literature at Dartmouth College, earning a Phi Beta Kappa key, and was an honorable mention All-American as offensive lineman on the football team. Following graduation from Harvard Business School, he was drawn to a political career, which included a stint at the Defense Department and (later) a job as an aide to the Nixon White House. Hoping to avoid the stress of Wall Street, in 1974 he accepted a job as an investment banker in Goldman Sachs's Chicago office.
Paulson spent two decades as an investment banker in Chicago, priding himself on his avoidance of the spotlight, later claiming that "clients don't want to read about their investment bankers" (New York Times, June 16, 2002). But he was a known entity within the walls of his firm, distinguished by his fierce work ethic. A CEO once confided to another Goldman, Sachs banker: "If I don't give the business to Goldman, Paulson will call all my board members" (Newsweek, June 7, 2004).
THE SPOTLIGHT'S GLARE
Ultimately, Paulson could not avoid the lure of New York City. He moved there in 1988, becoming co-head of investment banking. In 1994 he was appointed the number-two executive at the firm and in 1998 he was appointed co-CEO, sharing the title for seven months with Jon Corzine, the bond trader-turned-U.S. senator. However, they failed to develop the close working relationship necessary to make a shared power arrangement work. The main issue dividing them was whether—and how—Goldman, Sachs should end its partnership and go public. Paulson, who had been a vice chairman and COO reporting to Corzine, was a longtime dissenter on the IPO and pledged his support only when Corzine agreed to make him his equal. Another issue that divided them was whether Goldman, Sachs should use as much as $350 million in proceeds from the IPO to establish a charitable foundation, a cherished goal of Corzine. Ultimately Corzine left the firm and Paulson emerged on top. While some claimed that Paulson "ousted" Corzine, the average retirement age at Goldman, Sachs was 50 and Corzine, aged 52, left the firm with more than $50 million.
LEADING A LONG-ANTICIPATED IPO
In 1999 the Goldman, Sachs IPO went forward, with Paulson deciding to distribute the financial rewards more broadly. He required partners to give up $5 billion, which was distributed among the firm's 13,000 employees. The idea was to retain the firm's best employees during a tumultuous period and to promulgate a sense of loyalty throughout the organization. Employees received stock worth half of their previous year's compensation. According to Joan Zimmerman, a Wall Street headhunter with G. Z. Stephens: "It certainly is something that has never been done on the Street before" (BusinessWeek, March 29, 1999).
The transition to a publicly held corporation was not easy. During Goldman Sachs's first annual meeting in March 2000, Paulson and his executive team came under fire for a security breach involving a temporary employee of the firm who had stolen and sold information about merger deals. Evelyn Y. Davis, a well-known corporate activist, criticized Paulson by asking: "Which idiot in this company is responsible for hiring a temp to work on mergers?" Paulson had no regrets about taking the company public; it was a necessary step toward raising the money needed to compete. Nevertheless he conceded: "Was it easier to be private? You betcha" (both New York Times, June 16, 2002).
WORKING CAPITAL FUELS GROWTH
After the company went public, Paulson spent more than $7 billion to expand the business. It was the first time in its history that the company had made major acquisitions. His biggest transaction was the $6.5 billion acquisition of Spear, Leeds & Kellogg, the largest share dealer, or specialist firm, on the New York Stock Exchange and the number-three market maker on the NASDAQ stock market. Market makers buy and sell shares from investors and pocket the difference between the asking and bidding prices. Paulson also spent lavishly to bulk up the executive ranks with talent; between 1999 and 2001 the staff tripled, growing to 25,000.
A TRANSITIONAL YEAR
In 2002 Paulson resisted the industry-wide trend of acquiring commercial banks and using lending as an entrée into accounts with investment-banking needs. Instead he held firm to his belief that the company's future lay in dominating the investment-banking market: "We want to be the premier global investment-bank, securities, and investment-management firm. We want to have a disproportionate share of the business of the most important clients in the most important markets" (BusinessWeek, March 4, 2002).
Skeptics wondered whether Paulson could execute his grand vision in the midst of a slump in the markets. A global recession started in 2001, merger-and-acquisition (M&A) activity had tapered off, and the Enron debacle had cast a long shadow across the entire industry. Another challenge to Paulson's plan to stay independent was his own employees, who in 2000 owned 55 percent of the company. At the time Guy Moszkowski, a financial-services analyst with Salomon Smith Barney Holdings Inc., remarked: "If Goldman's employees feel that preservation of their wealth requires affiliation with a commercial bank, I don't think they'd hesitate to do it, and I think they'd move very quickly" (BusinessWeek, March 4, 2002).
PROVING HIS CRITICS WRONG
Goldman, Sachs put an end to any speculation about the viability of Paulson's strategy in 2003, when the firm held on to the top spot in global-equities underwriting and M&A advisory. The trading unit that included fixed income, currency, and commodities generated record net revenues of $5.6 billion, while equities trading added another $1.74 billion. The company generated an annual profit of more than $3 billion, nearly surpassing its earnings at the height of the bull market.
Paulson also found a way to compete with the megabanks that had been using discount lending to attract investment-banking business. An arrangement with Sumitomo Mitsui Financial Group allowed Goldman, Sachs to offer bigger loans to its marquee clients while protecting itself with $1 billion in first-loss insurance. According to Paulson: "The challenge for us was to be able to meet our clients' needs and, at the same time, be able to do so in a prudent manner" (Investment Dealers Digest, January 19, 2004).
MAINTAINING A STRONG CULTURE
Another competitive advantage was the intense loyalty and dedication its employees felt toward Goldman, Sachs. It was a culture that encouraged teamwork and discouraged independence. Instead of being measured solely on their individual performance, compensation was also based on divisional and overall company performance. Paulson commented at the time: "We've always stayed away from a star system. We've got very good people, but we're part of a team, and people work here because they like working with the other people at Goldman, Sachs" (Investment Dealers Digest, January 19, 2004). Paulson insisted that public ownership also contributed to the firm's unity.
A SERIES OF SCANDALS AND QUESTIONS OF FAITH
In 2002 Wall Street came under fire for a host of allegedly unethical business practices. Unlike his peers, who claimed the industry was taking the fall for a few unscrupulous players, Paulson called for reforms in the financial industry to guard against future transgressions. In a speech entitled "Restoring Investor Confidence: An Agenda for Change," delivered at a 2002 meeting of the National Press Club in Washington, D.C., he said American business was facing its largest crises in more than 50 years.
Ironically, former foe Corzine, by then a New Jersey senator, was one of the first people to commend Paulson's willingness to take a public stand on the issue. While leading Goldman, Sachs, Paulson continued to be a person who professed strong Christian values: "My wife and I try to begin every day by affirming Jesus. Sound ethics and morals have got to be the underpinning—the basis—of everything we do" (Christian Science Journal, May 2000).
MOTIVES CALLED INTO QUESTION
Paulson's position nevertheless raised a few eyebrows. Goldman, Sachs was the leading underwriter of new-economy companies in the heady years leading up to the market bust. Paulson insisted that "if you don't speak out on these things, it could be construed as tacit approval" (New York Times, June 16, 2002).
At the time of his speech, Goldman, Sachs and its primary rivals were being investigated to determine whether their analysts' stock recommendations were influenced by the quest to retain and attract new investment-banking customers. Stocks were being recommended by brokerage houses seeking to distribute those firm's shares in order to win lucrative investment-banking fees from the companies. Doing so meant that the small investor was frequently given biased research, which often led to their losing money. In 2003 New York State found that the 10 brokerage houses had corrupted the stock-research process. As part of a historic settlement, Goldman, Sachs ultimately paid $110 million—less than its main competitors—to settle charges that the investment-banking business influenced research. The 10 brokerage houses had to put a total of $432.5 million into an independent-research fund to finance free research ("Goldman CEO on Enron Effect" (CNNMoney, February 4, 2002).
Paulson's desire to speak out about corporate governance was intensified by the 2001 Enron scandal. Once the largest U.S. buyers and sellers of natural gas, Enron estimated that the collapse of its stock would cost all investors in the firm at least $25 billion. Paulson, who considered Enron a bellwether that could irrevocably change the industry's accepted business practices, argued: "We've all got to work to restore business confidence … but I believe that longer term we may look at Enron as being a positive as opposed to a negative. It may lead to greater transparency" (CNNMoney, February 4, 2002). He also insisted that greater visibility in earnings, along with a clearer picture of a corporation's financial health, could become a catalyst for increased M&A activity in the future.
THE DESTABILIZATION OF CAPITALISM
In 2003 Richard Grasso, longtime chairman and CEO of the New York Stock Exchange (NYSE), resigned following several weeks of intense criticism over his $139.5 million compensation package. Paulson played a central role in the scandal, which threatened to have a profound impact for years to come. The NYSE, generally considered the most prominent symbol of the capitalist economy, is a nonprofit, member-owned entity originally founded in 1792. It is the world's largest and most lucrative securities exchange. However, the NYSE had historically been accused of being too insular, self-referential, unrepresentative of its membership, and lacking input from investors. Having led the NYSE since 1995, Grasso oversaw the most significant period of growth in its history. He relaunched the NYSE following 9/11 and dealt with the fallout and embarrassment of the corporate scandals being highlighted on Wall Street.
Grasso's fate was sealed with the disclosure of an employment contract, struck in August 2003, that provided payments totaling $139.5 million in deferred compensation, savings, and pension benefits. Although NYSE officials claimed that Grasso had accumulated the sum by deferring significant components of his pay during his 20 years as an executive at the exchange, he was forced to resign when details about his pay package emerged. Nevertheless, he left with the $139.5 million in his pocket. Federal regulators, politicians, and investors insisted that Grasso's leadership of a quasi-public organization—one where he was supposed to be regulating the financial markets—meant that his pay was inappropriate and unethical. Jeffrey A. Sonnenfeld, associate dean of the Yale School of Management, remarked that this represented the first time in American history that a person was considered to have done a good job but was fired because the board was paying him too much. Sonnenfeld considered the board's accountability to be a secondary, but important, issue.
SAINT OR SNAKE?
In 2004 New York State Attorney General Eliot Spitzer announced that he would sue Grasso to recover the $100 million of pension allowance he had received. Grasso filed a $48 million countersuit. He threatened to make Paulson's board service at the NYSE a key issue, claiming that Paulson had never objected to the size of his pay when he was on the compensation committee. Grasso also said Paulson helped him handle the controversy, suggesting he release details of his pay package close to Labor Day 2003 because "the press won't be around" (Newsweek, June 7, 2004). Paulson never disputed his account. For his part, Grasso repeatedly called Paulson a "snake" and said he looked forward to watching him "squirm" during cross-examination.
The merits of Grasso's pay can be debated ad infinitum. What was thought to be central to the Grasso case is the fact that he was paid proportionally to what members of the NYSE compensation committee earned, such as Paulson and Richard S. Fuld Jr. of Lehman Brothers. Fuld served on the committee in 1999 and 2000, while Paulson was on it in 2002. In 2001 Paulson received a total award of over $12 million. In 2000 Fuld received over $20 million in stock and cash.
Whether Paulson participated in the initial deliberations of Grasso's contract became a subject of debate. Paulson contended that he had arrived late at the crucial meeting and was only briefed on the pay package a full month later. Other directors on the NYSE said Paulson did participate and wondered why he had not spoken up when the issue was first presented to the board. Former NYSE director Kenneth Langone, billionaire founder of Home Depot, vigorously defended Grasso and attacked Paulson. Langone was also sued by Spitzer in 2004. According to one former director: "Hank was the most aggressive in getting Dick out. But people questioned his loyalty: Was he looking out for the exchange or for his own company?" (New York Times, November 23, 2003).
In addition to helping orchestrate Grasso's ouster, Paulson called for a removal of conflicts of interest in the NYSE, expressing a desire to see it devoid of any director who also headed a Wall Street firm. Paulson suggested that a more appropriate way for Wall Street members to voice their opinions on NYSE issues would be through the creation of a separate advisory committee. In 2004 the publicity fallout from the Grasso scandal threatened Paulson's career. If it were to intensify, the consequences could be deadly. Paulson's number-two executive was said to be angling for his job, and the likelihood that he would succeed was only increased by the possibility of a highly publicized lawsuit.
In his private life Paulson devoted a great deal of time to conservation. In 2004 he served as vice-chair of the board of governors for the Nature Conservancy, then the world's biggest nonprofit environmental organization. The group established partnerships with companies to encourage and help them make decisions that would not harm the environment. According to Paulson: "It compromises to achieve its goals, and it collaborates with business. That bothers some people. It attracts me" (Fortune, January 12, 2004). Paulson's passion for what he has called the "ultimate global issue" resulted in tireless fund-raising; as of early 2004 he had raised $7 million for Asian projects.
Although Paulson's motivations were charitable—a byproduct of his childhood upbringing on a farm—he insisted that his nonprofit work paid off in the for-profit arena: "It helps me do my job better because I learn about cultures and people in a way that you can't when you're just getting them financing." His work involving the environment has made people "see me in a different light" (Fortune, January 12, 2004). For example, when Paulson traveled to China to pitch a deal, he talked to executives about conservation efforts, not simply investment banking. Paulson even considered leaving Goldman, Sachs for a full-time career in environmental protectionism. The Nature Conservancy was searching for a new CEO in 2001 and asked Paulson whether he would consider leaving his job. Although he told the group that the timing was not right, claiming that he was bonded to his mission at the company, he nevertheless added: "Whenever I do finish here, I have no doubt that I'll do something with the environment" (Fortune, January 12, 2004).
See also entry on Goldman, Sachs & Co. in International Directory of Company Histories.
sources for further information
Celarier, Michelle, "For the Prize: Navigating Risky Waters, Goldman Is Named IDD's Bank of the Year," Investment Dealers Digest, January 19, 2004.
Gasparino, Charles, "Power Play," Newsweek, June 7, 2004, p. 39.
"Goldman CEO on Enron Effect," CNNMoney, February 4, 2002, http://money.cnn.com/2002/02/04/news/davos_goldman.
McGeehan, Patrick, "An Unlikely Clarion Calls for Change," New York Times, June 16, 2002.
Nathans Spiro, Leah, "Goldman's Quiet Man Gets His Shot," BusinessWeek, March 29, 1999, p. 178.
Plitt, Todd, "Economy Has Turned Around, but Look for Yellow Flags," USA Today, February 1, 2002, http://www.usatoday.com/money/companies/management/2004-02-01-insana_x.htm.
Sellers, Patricia, "Hank Paulson's Secret Life," Fortune, January 12, 2004, p. 121.
Shippey, Kim, "Heading True North," Christian Science Journal, May 2000,
Thomas, Landon, Jr., "The War between the Street and Floor," New York Times, November 23, 2003.
Thornton, Emily, "Wall Street's Lone Ranger," BusinessWeek, March 4, 2002, p. 82.