Authors: William D. Cohan
A bigger break came after about eighteen months, when a group of government bond traders at Goldman, led by Sheehan, walked out and joined
E. F. Hutton. It took Goldman months to hire new traders to replace those who had left suddenly. During that time, Corzine was pressed into service. “I got to trade everything for about three months before the firm could go reload …,” he said. “I made more money … than the desk had made in the previous couple of years. Pure luck, I’m sure, but it caught people’s attention.” Corzine quickly came under the wing of partners
Eric Schoenberg and
Victor Chang. When
Frank Smeal was hired from
JPMorgan to rebuild Goldman’s fixed-income business, Smeal took a shine to Corzine as well. “If you were successful at Goldman Sachs people paid attention to you,” he said. “If you worked harder than most folks they paid attention to you.” One year he got paid a bonus of $150,000, more money than he could imagine. He called his father and told him the news. “You ought to come home,” he told his son. After taking over the running of the government bond desk in 1979, Corzine became a partner the next year. He had made the run in four and a half years, a major accomplishment under any circumstances. He was thirty-three.
Mark Winkelman came to Goldman in 1978 after a four-year stint as a senior investment officer at the
World Bank. At first, Corzine and Winkelman did not get along. “He and I went head to head for a long time because we both saw the same opportunities,” Corzine said. But after Goldman bought J. Aron, in 1981, Rubin figured out how solve two problems at once when he separated the two men and sent Winkelman to run J. Aron, while Corzine remained on the bond desk. “Then we both began to understand that a lot of the stuff Aron was doing there and a lot of stuff we were doing in fixed-income was really the same thing,” Corzine said. Around 1986, Goldman decided to merge J. Aron and Goldman’s fixed-income businesses to create a super group called “FICC,” short for “Fixed-Income, Currencies and Commodities.” Winkelman and Corzine were working together again. (Some Goldman partners said Corzine needed—and benefited from—Winkelman’s intelligence and oversight.) This time, the two men made the partnership work. “We translated that into a very effective partnership on many things …,” Corzine said. “He is a really,
really
smart guy—as opposed to me—he could do the math as well as anybody, anywhere, anytime, and he was disciplined.” (Other partners said the relationship between Corzine and Winkelman was strained, at best, right from the start.)
Part of the reason that Weinberg, Rubin, and Friedman thought Corzine could use a little more oversight had to do with an incident that occurred during 1986 and involved a large and risky trade that the firm had concocted and that was not going well. It turned out that Goldman had bought, in quantity, Treasury securities with a coupon of 8.75 percent and shorted Treasury securities with a coupon of 9.25 percent. The trade went in the opposite direction of what the Goldman traders hoped, and soon the firm faced hundreds of millions of dollars in potential losses. Corzine, who had been managing the department, had to jump back into front-line action. “I went back on the desk for seven months,” he explained. “
Every
desk—the corporate desk, the muni desk, the J. Aron people—
all
had this same trade on.” Goldman had expected the
Japanese and the few hedge funds that owned the securities to roll them over, but that did not happen. “A huge, huge short squeeze developed over about six months,” Corzine said. “I think it was the biggest loss that I had ever been responsible for on a mark-to-market basis.” Although a member of the
Management Committee, he had to report to the committee every other day about what was transpiring with the trade. Finally, after about five months of worry, the bet began to reverse and the bonds behaved as the traders had expected.
Corzine had turned a $150 million potential loss into a $10 million gain. “That’s the last time I was a day-to-day trader,” he said. One of the traders came away impressed by Corzine’s guts. “He went around, he took everyone’s position, and he just traded it himself,” he said. “Good or not, it was very leaderly, and it worked out well enough. He was leaderly, strong. He was there late at night, because Japan was a major player in this, so he traded Japanese hours.” Quite understandably, though, the firm’s investment bankers didn’t appreciate how risky the trade turned out to be and questioned how Corzine could have allowed such a potential loss to metastasize. The 1986 near miss was the obvious precursor to what would happen again, in spades, in 1994, but Corzine believed his ability to navigate the 1986 crisis successfully put him on a trajectory that eight years later would lead to his becoming the firm’s senior partner.
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A
SIDE FROM THE
fact that they both grew up on farms in Illinois and both were non-Jews in a predominantly Jewish firm, Hank Paulson’s upbringing and career had little in common with Jon Corzine’s. Paulson’s grandfather on his father’s side, Henry Paulson, owned a fine-watch wholesaler. Eventually the company became the largest watch wholesaler
and watch repair operation in the Midwest and “supported a prosperous lifestyle,” including a home in Evanston, Illinois, and “a modest” winter home in Palm Beach, Florida.
Paulson’s father, also named Henry Paulson, loved farming, and after graduating from Principia College, a small Christian Science school—a “Christian Science family” is how Paulson described it—in southern Illinois, convinced his father to buy some farmland in Stuart, Florida, north of Palm Beach, where the Paulsons moved after World War II and started a ranch to raise Brahman bulls. Henry Paulson—the third, known as Hank—was born in Palm Beach on March 24, 1946. That same year, Paulson’s grandfather’s business started to fail, and his father was forced to sell the Florida ranch and move back to Chicago to take over the watch business, which eventually went bankrupt. The family lived in a small apartment in a garage in Winnetka, Illinois, before moving to a seventy-five-acre farm in Barrington, Illinois, about forty miles west of downtown Chicago.
Much of Hank Paulson’s early life revolved around the Barrington farm. “We always had horses, hogs, cows, sheep and chickens, not to mention my pet raccoon and crow,” Paulson wrote in his 2009 memoir. “I spent a lot of time doing chores—milking cows, mucking out stalls, bailing hay. We churned butter for cream, drank milk from our cows. We put up food for the winter, butchering the chicken, hogs and sheep. Mom froze vegetables from the garden.”
Paulson’s father had a “fierce work ethic,” Paulson explained, and the message came early that Hank was expected to rise early and not linger in the shower for more than a few minutes. “You got up, you worked, you were useful,” Paulson wrote.
Before he started seventh grade, his parents concluded the family was “land rich but cash poor” and decided to sell the seventy-five-acre farm and buy a smaller, fifteen-acre property farther away from Chicago. Paulson described himself as a typical public school kid. “I was an Eagle Scout as early as you possibly could be an Eagle Scout,” he said. “I was a good student. I was a good football player. I was a good wrestler. I had a gold-star mentality.” On his high-school football team, Paulson played on both sides of the line, playing every minute of every game. “I was a very good football player,” he said.
Bob Blackman, the football coach at Dartmouth College, recruited Paulson heavily for Dartmouth. At Dartmouth, Paulson majored in English and started every game he could as the right tackle from sophomore year on. At six-feet two-inches tall, he wasn’t that big—two hundred pounds—but he played against defensive linemen who weighed fifty
or sixty pounds more. Working on the farm and taking wilderness vacations had given Paulson the strength of a stevedore. In 1965, he was honorable mention All-American.
The Paulsons were Christian Scientists, and Hank Paulson regularly attended the Christian Science church. In his memoir, Paulson was matter-of-fact about his religious beliefs. “Christian Science has always been a big influence on me,” he wrote. “It is a religion based on a loving God, not a fearsome one. An authentic confidence comes out of this.” He also tried to debunk the myth that Christian Scientists are not permitted to rely on modern medicine and doctors to heal ailments. “There is, in fact, no prohibition against medical treatment,” he wrote. “But I am comfortable relying on prayer because it has proven to be consistently effective for physical healing, for dealing with challenges in my career, and for spiritual growth.”
His senior year, he was offered the Reynolds Scholarship to study English at Oxford but chose instead to apply to Harvard Business School, which was unusual for an English major without any business experience.
Like Corzine, Paulson was very concerned about being drafted into the
Vietnam War after he graduated Phi Beta Kappa in 1968. He had joined the Naval ROTC program at Dartmouth and spent the summer after graduating from Dartmouth before going to Harvard at an ROTC program at Purdue University, in West Lafayette, Indiana. “
It was a strange place for the Naval ROTC surrounded by cornfields with no water in sight,” he wrote. But there was a public swimming pool that he and a girlfriend—it was a summer romance—decided to hang out at during one of the last nights of the ROTC program. She was a lifeguard at the pool. Since it was after hours, the fence around the pool was closed and locked, but Paulson and the girl decided to scale the fence and hang out in the pool anyway. Paulson was jumping up and down on the diving board when the police came. Since Paulson does not drink, he was not drunk, which was a point in his favor.
The policeman was new to the West Lafayette force and had let someone out of jail the day before who had vandalized the pool area. He was not in a good mood when he saw Paulson on the pool’s diving board. “
He took us down to the station, fingerprinted and mugged us, and charged us with misdemeanor trespassing,” Paulson recalled. They also towed his car, illegally. The next day, Paulson explained what had happened to his ROTC captain. “He checked out my story and found out it was true and there was no damage done,” he said. “The charges were dropped.”
During his final semester at Dartmouth, Paulson had met Wendy
Judge, a junior at Wellesley, on a blind date. That fall, Paulson started at
Harvard Business School. He also began dating Wendy in earnest. “
I did well enough there without studying too hard, and I spent much of my time at Wellesley,” he wrote. Like Paulson, she was a Phi Beta Kappa English major who loved the outdoors and wore secondhand clothes. She was president of her senior class at the same time that Hillary Rodham, her classmate, was the president of the student body. After she graduated from Wellesley, she was going to spend the summer teaching sailing and swimming in Quantico, Virginia. Paulson, now “very much in love,” wanted to be near her for the summer between his first and second years at Harvard Business School. He had been slated to spend the summer at sea with the navy, an adventure inconsistent with the desire to be with his girlfriend.
Instead, he picked up the phone and cold-called the office of the secretary of the navy,
John Chafee, to see what he could finagle. He ended up being redirected to speak to
Stansfield Turner, a navy captain (and later the director of the CIA under
Jimmy Carter). Out of the blue, Paulson proposed to Captain Turner that he undertake a study of the ROTC program on Ivy League college campuses—this was during the summer of 1969, mind you, a time when students were torching ROTC offices throughout the country. Turner agreed, and Paulson spent the summer in a cubicle at the Pentagon. “
My motive was to be next to Wendy, and so I wrote this report and I made a number of contacts,” he said. He also proposed to Wendy that summer. They were married eight weeks later.
After graduating from Harvard Business School in 1970, the Paulsons moved to Washington. Paulson headed back to the Pentagon to work for the Analysis Group, a small, elite cadre of bright young men working on special projects for
Robert Moot, the assistant secretary of defense, comptroller. “The Analysis Group at the Pentagon was like a little investment bank,” Paulson said. “We had projects where we worked with various senior people in the Pentagon.”
While Paulson was happy working at the Pentagon, he really wanted to work at the White House, an idea that Treasury Secretary
John Connally had planted in his head. When a colleague left the Analysis Group to go to the White House, Paulson had his connection to get some interviews in order to make the move. In April 1972, Paulson went to work at the White House for
Lewis Engman, who was
John Ehrlichman’s liaison with the Treasury Department. Working as a staff assistant on the
Domestic Policy Council, he focused on tax policy, minority and small-business issues, and the minimum wage. The
Watergate break-in occurred
in June 1972, and Paulson, like others, didn’t pay the incident much attention. After the November election—where Nixon was reelected in a landslide—Engman left the White House to run the
Federal Trade Commission, and Paulson replaced him as the White House liaison to the Treasury Department, then run by
George Shultz (later Reagan’s secretary of state). Paulson recognized what a unique opportunity he had at such a young age. It was a “huge promotion,” Paulson said.
Early on during Paulson’s White House tenure, Ehrlichman told him it was “important not only to do the right things, but also to be perceived to be doing them right.” In January 1973, Paulson recalled speaking with Ehrlichman after stories had begun to appear in the press about
H. R. Haldeman’s role in Watergate. The next day stories appeared about Ehrlichman’s role, too. “By February, Ehrlichman and Haldeman were out …,” he said. “That was very disillusioning because I saw Ehrlichman as a real force for good in that White House—really focused on policy, a moderating influence.… But it’s never really interesting why bad people do bad things, or why good people do good things; it’s really interesting to understand why good people do bad things.” Neither Paulson nor his direct boss was involved in any of the shenanigans. “The White House had a lot of power in those days before Watergate busted things open,” he said. “When a tax memo would come to the White House, I’d be the one that wrote the cover memo and went in to see the president and got back to the Treasury.” By December 1973, though, Paulson realized that the end was near for Nixon, and he decided to leave.