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.
Goldman could not buy just any insurer, however; it would have to be a company large enough to put more than a dent in Goldman’s already hefty balance sheet. The top name on O’Neill’s list was AIG, American International Group, which by some measures was the biggest insurance company in the world. The stock price of AIG had recently been decimated, so it might even be economical. Doing a deal with AIG had not, in fact, been a new idea; a possible merger had been talked about in hushed whispers at 85 Broad Street for years. Previous leaders of Goldman, John Whitehead and John Weinberg, both of whom were friends of Hank Greenberg, had suggested to him that the companies should perhaps do a deal some day.
Everyone in the group had a view about AIG. Rajat K. Gupta, senior partner emeritus of McKinsey & Company, was intrigued, as was John H. Bryan, the former CEO of Sara Lee and one of Paulson’s closest friends.
Bill George, the former head of Medtronic, the medical technology giant, appeared a bit more hesitant, and Gary Cohn said frankly that the idea made him nervous. They all looked to one particular board member for direction: Edward Liddy.
As the chief executive of Allstate, the major auto and home insurer, Liddy was the one person in the room with actual experience in the insurance business. Some five years earlier Liddy had even tried to sell his firm to AIG, and Greenberg had dismissively rejected his pitch. “I think you ought to keep it,” Greenberg told him.
Whenever the subject of insurance had come up at previous board meetings, Liddy had been unenthusiastic. “It’s a totally different game,” he had warned. His view on the matter hadn’t changed, no matter how much of a bargain AIG may have seemed. “It isn’t worth getting entangled with AIG,” he insisted.
The morning session ended without any decisions being made about AIG, but the insurer came up again after lunch for an entirely different reason. AIG traded through Goldman as well as other Wall Street firms, and like many other companies would put up securities as collateral. There was just one problem: AIG was claiming that its securities were worth a good deal more than Goldman thought they were. Although Goldman’s auditor was looking into the matter, there was another snag: the auditor, PricewaterhouseCoopers, also worked for AIG.