Goldman Runs Risks, Reaps Rewards
Published:
June 10, 2007
LLOYD C. BLANKFEIN,
chief executive of one of the most wildly profitable financial firms in the
world, rifles through his trash searching for a thank-you note. He has a point
to make. Yes, his firm, Goldman Sachs, wasn’t
chosen to underwrite the Blackstone Group’s planned initial public offering,
but there are plenty of other Goldman clients grateful for the firm’s services
and Mr. Blankfein is going to find the note that
proves it.
Lloyd C. Blankfein has taken
This week: Racing to
cure
The
New York Times
Even
though Goldman is the most imitated, envied and at times griped-about
investment bank around, Mr. Blankfein — who has just
celebrated his first year at the helm and who happens to be smart, confident
and very capable — is still intent on proving himself and his firm to the
world.
“When I joined the firm
I thought, ‘How will I ever survive here?’ Then I worried about whether I’d be
able to make the area I was responsible for important for the firm,” he
recalls, leaning forward in his sparse 30th-floor office in the heart of Wall
Street. “When I was made a partner, I had all the statistics and I knew how
long partners lasted and I asked myself, ‘Can I last as long as an average
partner lasts in the firm?’ “
Lloyd Blankfein’s makeover from frumpy gold salesman to chief
executive has a bit of a reality-TV feel to it. Less than a decade ago, he
could be seen in shorts at a golf outing, tube socks stretched to his knees, 50
pounds heavier, and toting his BlackBerry in the same plastic bag as
his bagel with cream cheese. Today, he dons navy pinstripes and a power tie
and, having just returned from a business trip to
Even with careful
grooming, Mr. Blankfein remains a far cry from
central casting’s idea of a chief executive.
At 5 foot 8, he is
balding, has eyes more mischievous than intense and blankets himself in a
shield of one-liners. Why did he shed the weight and shave the beard? “I wasn’t
going to make myself taller.” How does he feel about the markets? “I haven’t
felt this good since July 1998” (a month before Wall Street went into a
tailspin after the Russian ruble collapsed). And to a photographer shooting his
portrait? “If I’d known you were coming, I’d have had my hair done.”
If Mr. Blankfein sometimes seems more master of the quip than
master of the universe, his intellect, knowledge of history and deep
understanding of trading set him apart from other titans of Wall Street, even
among those with their own formidable skills. So does his pay package. He took
home $54.3 million in total compensation last year, well shy of what hedge fund
stars pulled in but more than any other chief executive on Wall Street.
“Lloyd understands risk
taking,” said Kenneth C. Griffin, chief executive of Citadel Investment Group,
one of the country’s largest hedge funds. “In a sense, it’s his most
fundamental skill. Other firms want to emulate
Indeed, his familiarity
and comfort with risk make Mr. Blankfein, however
unlikely at first blush, perfectly suited for the role of Wall Street chief
executive circa 2007 — less Ivy League backslapper sipping a gin
and tonic after a round of golf, and more sharp-witted, quant jock.
While Wall Street still
mints money advising companies on mergers and taking them public, real money —
staggering money — is made trading and investing capital through a global array
of mind-bending products and strategies unimaginable a decade ago. Banks
navigating that complex territory do it for their own bottom line and for their
clients, and increasingly in far-flung corners of the world. And no financial
firm has mastered that more than
Mr. Blankfein
is an architect of this change at Goldman, and it has paid off richly for
shareholders, employees and clients. It has also generated criticism from those
concerned about possible conflicts of interest or unbridled power at Goldman.
“There’s an expression:
It’s easier to ask for forgiveness than permission,” says a senior private
equity executive who requested anonymity for fear of alienating Goldman.
“Rather than ask, ‘Can I com
WHEN Mr. Blankfein became Goldman’s chief executive, the internal
rap on him from some was that he was, perhaps, not reverential enough about the
firm’s culture. (He is known for saying “the graveyard is filled with
indispensable people,” blasphemy at a firm whose previous chief executive had
to apologize profusely for saying that a small group of executives generated
most of the profits.)
Published:
June 10, 2007
(Page 2 of 3)
There was also concern
internally that he had not spent enough time with high-profile clients, an art
that had helped all four of his immediate predecessors later land in the Senate
or in presidential administrations.
Henry R. Kravis, the financier, says he shares thoughts with Mr. Blankfein every few months.
Mr. Blankfein
has worked mightily to fill in his gaps, going on a world tour that has
included meeting prime ministers and scores of chief executives. In the last
four weeks alone he has taken separate trips to
“Over the past few
years, I’ve had to involve myself in parts of our business that I wasn’t as
close to,” says Mr. Blankfein, who spent most of the
earlier part of his career managing traders and their books. “There was a swath
of the firm I didn’t deal with as much.”
Henry R. Kravis, founder of the private equity giant Kohlberg Kravis Roberts, recalls Mr. Blankfein’s
first visit three years ago when the Goldman executive knew nothing about the
private equity business. “I had as good a conversation as I’ve had with
anyone,” Mr. Kravis says. The two men now get
together every few months.
“What he’s had to do is
make himself into a client person,” says
AS he rounds off his
education, Mr. Blankfein has also reached out to the
firm’s top brass. Since March, he has been enmeshed in a “chairman’s forum,” a
series of meetings that allow him to meet with every managing director at the
firm in small groups and address important strategic issues. He is focusing on
clients, including potential conflicts with them. The sessions are global, last
an entire afternoon and involve case studies, debate and discussion.
The meetings are just
part of protecting the Goldman brand, which Mr. Blankfein
says is important to him. “It allows us to do things, and allows the people in
the firm to lead professional lives, that wouldn’t otherwise be possible,” he
says.
Case in point: Lloyd Blankfein. Over a 25-year career at Goldman he has worked
in almost every part of the firm. He grew up in the projects of the East New
York section of Brooklyn, one of the worst neighborhoods in
He is reluctant to talk
about perceived disadvantages, but they were clear. More-pedigreed Goldman
employees knew people to call for business; he did not. But his ability to
manage risk and people earned him the nod to run J. Aron,
then the fixed-income business, and, later, all of Goldman’s securities units.
“There are many people
in our business with huge egos,” says S. Donald Sussman,
founder of the Paloma Funds, a hedge fund, who is a
close friend of Mr. Blankfein. “That is not Lloyd.”
After Mr. Blankfein became Goldman’s president in 2004, he studied
every aspect of Goldman’s business, extending the circle of people who would
receive his frequent 2 a.m. e-mail messages. Today, the co-presidents Gary D.
Cohn and Jon Winkelried run the firm’s day-to-day
operations and Mr. Blankfein spends more time on
clients and strategy.
Mr. Blankfein,
who has been married for 24 years and has three children, is well aware that
some see his management style as overly driven. “There are real consequences to
being the arbiter,” he says. “In the past, if I had an idea and, say, I wanted
to move the firm 30 degrees to starboard, I’d go push with 500 pounds of
pressure because my base assumption would be that the organization would
resist.
“In my current role, if
I exerted that kind of pressure, I’d probably end up with a 180-degree turn,”
he adds, by way of saying why he now uses his power more conservatively.
(Page 3 of 3)
But he was not Mr.
Conservative over the last five years as he led the charge to reshape Goldman
from being a firm focused on its advisory business to one that embraces more
risk and more principal transactions — including private equity investing,
proprietary trading and using the firm’s own capital to facilitate complex
client transactions.
The impetus, Mr.
Blankfein says, was the 1999 repeal of the Glass Steagall
Act, the Depression-era law that separated investment and commercial banking —
and had protected the core business of smaller advisory firms like Goldman from
lending behemoths like Citigroup.
“If you take an
historical perspective, clients want us to do what clients have always wanted
their bankers to do — give good advice and provide them with the financial
means with which to be able to act,” he says. “We’ve come full circle, because
this is exactly what the Rothschilds or J. P. Morgan
the banker were doing in their heyday. What caused an aberration was the Glass Steagall Act.”
Goldman recently closed
a $20 billion private equity fund, which means it now controls one of the
biggest funds in the world. It runs the second-largest hedge fund group
globally, manages the largest mezzanine fund and is expected to announce a $2
billion credit fund, all housed in its asset management division.
Goldman’s transformation
has allowed it to remain the bank to beat. Each earnings call inevitably breaks
the firm’s previous record of just a quarter or a year earlier.
For the first quarter
this year, there were record quarterly net revenues in fixed income ($4.6
billion), equities ($3.1 billion) and investment banking ($1.72 billion). Net
earnings of $3.2 billion, or $6.67 per diluted share, were up 29 percent from
the first quarter of 2006 — which was, of course, a record. Its investment bank
now contributes only about 15 percent of Goldman’s revenue, yet another
benchmark of its makeover.
But Mr. Blankfein believes that this makeover has emboldened the
advisory unit. “We couldn’t have had the client business we have today if we
hadn’t developed our skills and expertise as principals and financiers,” he
says.
But some executives
worry that the firm may be putting its desire to make money before its stated
No. 1 business principle, which is always putting clients first. “We used to
agonize about how having a failed private equity fund or an aggressive one
would affect our reputation,” said one senior Goldman executive who requested
anonymity because he is not authorized to speak to the press. “Today they don’t
worry about it. It’s about generating earnings.”
GOLDMAN, like many other
Wall Street firms, has had a strong wind at its back as the markets have rushed
skyward. But its business mix and its astute take on the financial world have
made it particularly well positioned to cash in on the vast availability of
cheap credit and high-octane global growth. From 2001 to 2006, Goldman’s
trading revenue surged 168 percent. From 1999 to today, its balance sheet has
grown 265 percent, to $1 trillion.
The occasional backlash
against Goldman’s financial supremacy leaves Mr. Blankfein
bemused: “In the space of five years, we went from being a firm with a small
balance sheet which was considered to be too advice-oriented and lacking the
financial muscle to be taken seriously, to an organization which generates articles
with headlines like ‘Too Big? Too Powerful? Too Bad!’ ”
Goldman is often
described as a hedge fund on steroids because of its proprietary trading,
little of which is publicly disclosed. Partly because of that lack of
disclosure, the price of its shares trades at a teeny earnings multiple of 10,
a fact that colleagues say irks Mr. Blankfein. He has
said privately that he thinks equally opaque competitors with far less
experience than Goldman, like newly minted private equity firms and hedge
funds, unfairly snare higher multiples. Goldman does not comment on its
multiple.
Despite all of this,
clients often turn to Goldman first because of its expertise as both a trading
machine and marquee adviser, even if it means offering Goldman a look at their
own portfolios (an age-old fear that clients have about Wall Street).
“I always worry about
what they learn,” says Mr. Griffin at Citadel. “But on the flip side, I know
the minds and the skills and the ability to bridge buyers and sellers of risk
is ultimately more important to me.”
While Mr. Blankfein jokes that he is a worrier, not a warrior, he is
cautiously optimistic about the current market. Like any savvy trader, he will
seek to minimize the fallout. “Ultimately, what will happen, will happen,” he
says. “And we’ll either have been right or wrong in our assessment of the risks
but, to be successful in this business, you have to have a degree of risk
tolerance.”
But the worrier says he
will also make sure that Goldman’s hard-won reputation stays intact.
“I’d hate it if someone
I’d recruited to join the firm would have been better off going to a
competitor,” says Mr. Blankfein, frowning at the
prospect. “I care about people having satisfying careers, which includes being
commercially successful, but it also means how people live their lives, how
they feel about what they have chosen to do and whether they feel fulfilled by
what they’re doing.”
He adds: “I don’t want
to sound too flip, but you know that line from
‘Citizen Kane’: ‘It’s no trick to make a lot of money, if what you want to do
is make a lot of money’? That’s not enough here. That may sound — well,
whatever it sounds like, it’s true. It’s not enough.”
He also has his own
appearance to worry about. He wants to lose another 15 pounds and wants thicker
skin to help deflect criticism loosely hurled at him or his firm.
“Do you think I can do
both?” he asks.