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Opinion

7th June: Paulson & Goldman politics

“Ask not what your country can do for you – ask what you can do for your country,” thundered John F Kennedy in his inaugural address. Hundreds of column inches have been devoted to former Goldman Sachs chairman and chief executive Hank Paulson’s nomination as US Treasury secretary. Hank will not be pleased by this largesse of newsprint.

For Hank, like Prince Charles, is a tree-hugger. He is chairman of The Nature Conservancy, an American environmental group. In deference to Hank’s green side, I will therefore keep my remarks brief.

Indisputably, Paulson’s tenure at the top of Goldman has been a success. Look at the rocketing share price, record profits and the breadth of the business. Detractors grumble about conflicts of interest. The Economist, for example, criticizes Goldman’s “metamorphosis from being chiefly an agent that represented clients to a principal that found it profitable, sometimes, to help others as well”. To me this is akin to gloating at an inch of cellulite on a friend’s finely honed thigh. Don’t let’s forget that Mr Paulson’s job as CEO was not easy: keeping team Goldman together and the partnership spirit intact must have been challenging after the IPO in 1999.

More intriguing is why Paulson is leaving Goldman. It’s not about the opportunity. There are rumours that he was a candidate for the Treasury job before John Snow got it in 2003. And from what I read, there was an awful lot of huffing and puffing before Paulson accepted Bush’s proposal this time around. The Wall Street Journal reported that Paulson cancelled an invitation to have dinner with Bush in mid-April because he didn’t want the president to believe he would take the job. When Bush and Paulson did meet on May 20, Paulson was still prevaricating but relented the next day because, apparently, he felt he might have regrets.

 


“Is HP a bit of a PT?” I ask myself. His behaviour certainly resembles that of a pretty girl who can’t decide whether to sleep with an unprepossessing suitor. When Paulson didn’t go to Washington last time, Goldman Sachs lost both its then co-presidents, John Thornton and John Thain. How much longer would Hank’s number two, Lloyd Blankfein (responsible last year, some say, for 70% of the firm’s profits), have hung around? The inside story on this story is best summed up as: “It’s all about politics. Goldman politics, not Washington politics.”

My mole insists that Hank is “a do it my way or take the highway” type of guy who doesn’t respect dissent. I’d love to eavesdrop on a Hank and George conversation about the environment. The president is probably the only person left on the planet who won’t admit that global warming is a threat. And Paulson is probably the only person who hangs around Central Park trying to spot birds (not the human kind). Hank says: “It’s hard to think of an animal I’m not interested in.” George says (to paraphrase comedian Jay Leno): “I’m interested in alternative energy sources. How about solar energy? Let’s invade the sun.”

Paulson is poised to pick up a poisoned chalice. The words declining dollar, budget deficit, lame-duck presidency and mid-term elections trip off the tongue. In such circumstances, a bit of teasing is perhaps permitted. What do you think?

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My mole was more positive about Blankfein, who will be the next chairman and chief executive of Goldman Sachs. “It’s night and day,” she said. “Lloyd is warm, funny and genuine. He respects results. He will be great for Goldman.”

It will be fascinating to see how Lloyd shuffles the deck of cards he has inherited. Who will be a winner and who will wither in the new world?

Wild boy Oscar Wilde, the Pete Doherty of the 19th century, claimed: "We have really everything in common with America nowadays except, of course, language." I disagree. The Americans and the British are like two African tribes. The uninitiated assume we should love each other but in fact we love to hate each other. Tony Blair’s special relationship with George Bush is merely the Pavlovian response that the weak feel for the strong.

We British are reserved and understated: simple is good. Americans will reveal the highlights of their lives within 15 minutes of meeting you: money is good. Americans accept that setbacks are integral to success. Property tycoon Donald Trump is feted in the States even though he has faced bankruptcy on several occasions. The British don’t do failure. You’re either up or you’re down – and if you’re down, you’re out. The expectation is that you will crawl away in to a hole and not embarrass anybody.

Bob Diamond is an American who has risen to the top at British bank Barclays. My eternal thanks to the devoted reader who said after last week’s taster on the great man: “I felt like I had just been cheated by one of those US TV dramas that spend the whole episode telling you what's coming up next, only to then wrap up by telling you it's in the next episode.”

This week, I look at how B (Bob) grappled with A (adversity) when BZW hit a rough patch in 1997 (or as one source put it: “careered off a cliff”). It was during the autumn of 1997 that Martin Taylor, then chief executive of Barclays “threw a wobbly”.

During the previous year, Taylor had trumpeted to anyone who would listen that he was investing in Barclays’ merchant bank, BZW, in order to build a viable UK alternative to the US investment banks. He paid up to hire stars from other firms: in came Bill Harrison from Robert Fleming, Charlie Stonehill from Morgan Stanley and our hero Bob from CSFB.

The press worshipped Taylor. He was dubbed a cerebral wunderkind because he spoke lots of languages (but then so does my Polish cleaner) and had worked for Courtaulds, one of a dwindling band of British industrial companies. Taylor, a former Financial Times journalist, should have been smart enough not to believe his own public relations hype. However, there’s a gaping gap between intellectual smart (overrated, as far as I’m concerned) and street smart (do the names Bill Gates or Philip Green mean anything to you?).

In October 1997, Taylor, in the fashion of a Roman emperor, did a massive U-turn. He claimed that his previous vision had been flawed and announced that he was selling BZW. Or rather dismembering it.

Taylor appointed Goldman Sachs to find a buyer for the various divisions of BZW that he was discarding. But bankers don’t like leftovers and no one wanted to pay a premium for Taylor’s titbits. The entrails of BZW were hawked from one prospective purchaser to another – prodded, poked and regurgitated. To continue with my Roman analogy, think vomitorium.

The press started to refer to BZW as beleaguered. And those of us who worked there started to regard the dole queue as a real possibility. Diamond was caught in the middle of all this. Taylor had decided not to sell the fixed income division that Bob ran – ostensibly because there were synergies with Barclays’ commercial banking operations. However, journalists, investors and employees were all asking: “Is there another shoe to drop?” By that time, Taylor’s credibility was questionable. Did you ever feel the same way about Clinton after he told us: “I did not have sexual relations with that woman?”

Diamond, however, did not give up. He was already wealthy and could have walked away from the farce that the BZW auction was fast becoming. But there is something very Pollyana-ish (some might say Panglossian) about Bob. Where others see darkness, he glimpses light. He rallied the troops as only a true leader can do: “This is good news for our division,” I remember him saying. “Now there will be more investment in our businesses.”

And so, as our colleagues in the corporate finance and equities departments were sold at a bargain basement price to CSFB, BZW was buried and Barclays Capital created. As 1998 dawned, I imagine Bob must have breathed a sigh of relief. His annus horribilis was over.

So how could Bob have known that the bad times had just begun? The awful (or is it awesome) thing about the human condition is that we are unable to see what lurks around the next corner. If Princess Diana had foreseen that she was going to die at 36, what would she have done differently? Would Joe Kennedy have spent so much time and money ensuring Jack became the 35th president of the United States if he had known that he was conferring a death sentence on his son? Next week, I promise, we’ll get down to the details of the ‘brand of Bob’.

My favourite drink is neat vodka straight from the freezer. Appropiately, the next column will go Russian.

Please send news and views to abigail@euromoney.com

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