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The natural.

Plagued in 1994 by massive losses, personnel defections, and internal bickering, Goldman Sachs is once more riding high. Leading the charge is the new guy at the top: Illinois farm boy-turned-trader Jon Corzine.

Everyone loves a good horror story. Particularly the business press. Thus, it's only natural that companies in trouble after a time at the top of their industry attract more than their share of the spotlight. Witness Intel's Pentium chip fiasco. Exxon's public flogging in the wake of the Valdez disaster. The focus on IBM as smaller, more nimble competitors began tearing a chunk out of its hide a decade ago. And the rapt fascination as government-supported Japanese monoliths in the mid-1980s took turns whacking the Xerox pinata.

Then there's Goldman Sachs, which built a reputation over the last several decades as the premier investment bank in the U.S. Until 1994, that is, when Goldman took a cannonball in the solar plexus after a wicked downturn in the bond market. For a time, the company appeared to be in a free fall. As losses mounted, partners jumped ship, tearing a gaping hole in the bank's talented Murderer's Row lineup. To be sure, Goldman's competitors were far from unbloodied. Archrival Salomon Brothers lost nearly $1 billion before taxes last year. But squeaky-clean Goldman - renowned for its unequivocal refusal to participate in hostile takeovers during the M&A mania of the go-go 1980s - was America's Team, and each spot of mud on its uniform was magnified. If Solly was boozy, foul-mouthed, swaggering Babe Ruth, forever craving the Long Ball, Goldman was Lou Gehrig - a clean-living, self-effacing Iron Horse, and the pre-eminent clutch player in the game. Two-bagger in the gap, clear the bases, send them home; all in a day's work. Precisely the type of player Wall Street's down-and-dirties love to root against. Publicly. Off the record, of course. 'Banner headlines proliferate: "The Goldman Standard Slips." Newsmagazine investigations take us "Inside Goldman's College of Cardinals."

It would be hard to sugarcoat Goldman's 1994 slide. Earnings at Wall Street's last major limited partnership collapsed to $508 million from $2.3 billion the year before. But America's Team is back, pumping on all cylinders, and surprising even the skeptics. Earnings in the six months ended in late May nearly matched the figure for all of last year, driven by an increase in underwriting revenue, merger fees, and the rallies in the stock and bond markets that began late last year. Analysts project the firm could earn $1 billion this year.

The prime mover behind this resurgence is the new senior partner, Jon S. Corzine, 48, who took the reins when Steve Friedman announced his retirement last November and became senior chairman. At first glance, Corzine fits the traditional Goldman profile. The son of a central Illinois grain farmer, Corzine spent virtually his entire career at Goldman, signing on as a bond trader in 1975, one year out of the University of Chicago Graduate School of Business. Co-head of the fixed-income division from 1988 to 1994, he was elected chairman of the management committee and senior partner in 1994.

But on closer examination, Corzine is a cat of a different stripe. Painfully sotto voce - even while sitting next to him, listeners must lean close at times to hear him - he represents a marked contrast to former Masters of the Universe such as previous Salomon Chairman John Gutfreund. A self-described consensus builder - no Big Swinging Dick, as Michael Porter of "Liar's Poker" fame called Wall Street's 1980s kingpins - Corzine entered the fray with a commitment to launch a wholesale re-engineering of white-shoe Goldman. He wears sleeveless, pullover sweaters - even in summer - and he sports a beard, a shocking bit of iconoclasm.

When Corzine took office, he vowed everything would be on the table, including compensation, planning, proprietary trading, and the partnership structure itself. Perhaps most critical - and central to Goldman's corporate makeover - is Corzine's commitment to cut costs and overhaul Goldman's risk management procedures. "As we grew globally and took on more activities, we may have paced our growth faster than we should have," Corzine says of Goldman's wild ride in the late 1980s and early 1990s. "We now have to adjust to a slower pace, and a more disciplined approach to investments, costs, and risk issues."

What would Sherman McCoy, the anti-hero of Tom Wolfe's "Bonfire of the Vanities," think of such a restrictive environment? "Things are quieter than they were a few years ago," allows Roy Smith, a professor of finance at New York University's Stern Business School, who retired as a Goldman general partner several years ago. "There are some differences of style and personality." Nonetheless, particularly on the trading side, Smith adds, today's markets hardly lack for excitement. "You have proprietary traders making huge amounts of money with black-box arbitrage systems with a shelf life of less than 12 months - before other people figure them out or markets move and the opportunity closes," he says. "There's the impact of electronic trading and the fact that with most large firms, more than 50 percent of business comes from risky international markets."

Corzine sounds a similar note: "We were barely involved in the derivatives business in 1985, and the kind of risk controls you need for that business in 1995 and a swap book of 1985 are just legions apart. There's a huge difference in the levels of sophistication today."

There's a host of challenges for Corzine to confront over the next several years. He must resolve lingering cultural friction between traders and Goldman's client-oriented investment bankers. Corzine acknowledges that managing these two functions is a "balancing act." Some clients have griped that Goldman's trading for its own account compromised their interests. Recently, for example, Goldman offered to buy a stake in a real-estate investment trust formed to take over New York's Rockefeller Center from its bankrupt owners, foiling a deal the trust struck with Goldman clients GE, Disney, and Chicago financier Sam Zell.

Meanwhile, as consolidation in the investment banking arena continues, and larger players continue to expand overseas, raising capital will become a mounting concern. Some observers speculate such needs eventually will force Corzine to take Goldman public, a postulate with which he flatly disagrees.

Corzine still is defining the terms of a power-sharing arrangement with Hank Paulson, the firm's vice chairman and chief operating officer; and there's a new class of younger partners (Goldman added 57 new partners last year) that will require seasoning. The youngsters also may be less comfortable with Goldman's "family-like" partnership arrangement, under which a partner takes less in salary in exchange for the ability to build an estate for retirement.

"The larger you get, the harder time you have looking at the organization as a fraternity, where you pledge for life," says Samuel L. Hayes, a professor of finance at the Harvard Business School. That dynamic also may step up the pressure to go public, Hayes says. "Today's partners know that if the firm goes public, that $15 million they take out at retirement may be worth three times that much now. No matter how ungreedy you are, that's certainly worth a look."

Is Goldman once more the best-managed firm on Wall Street? Was it ever? "To some degree Goldman got credit for being better managed than it really was," says Stern School's Smith, who retains a position at Goldman as limited partner. "It's the 'Colin Powell' effect - the attribution of genius and great integrity," because outsiders don't really know what's going on inside.

In a conversation with Managing Editor Joseph L. McCarthy, Corzine says simply that Goldman has weathered a stiff, mid-course correction and now is back on course. Asked whether he is a kinder, gentler breed of investment banker, Corzine's eyes flicker and his voice rises to audible levels. "No one I dealt with in the trading room would characterize me quite that way. But I've never found it productive to be a chest beater. People ought to judge you for what you do, rather than what you say. The real test of excellence is what you accomplish."


As you look at the market and global opportunities, how would you characterize the future?

Globalization trends that began in the '80s and early '90s will continue to be driving forces in our business, and give reason for relative optimism. The situation in Eastern Europe, for instance, looks better than it did 18 months ago. No one would have thought Mexico would have turned around as rapidly as it has. On the other hand, China is opening up at a slower pace than we expected. There are pluses and minuses, but I'm optimistic.

Goldman moved quickly on a global scale, then retrenched. How has the market rebound affected your plans?

"Retrench" might easily be phrased as a "reallocation of resources." There was retrenchment of personnel in the early part of this year. But there was no backing away from the basic strategies: commitment to global markets, and commitment to a global perspective on how we operate in the wholesale financial-services business.

What direction do you see for your individual businesses - investment banking versus trading?

Balance is a good way to describe it. Diversification has been, and continues to be, a source of the firm's ongoing strength. We may have let our trading activities become somewhat oversized, and that subsequently created stress within the organization. We've rebalanced that, but we will continue to be active and significant traders in securities markets on a global basis in the future. On the other hand, we are committed to our merchant banking activities, advisory business, mergers and acquisitions, and so on.

Speaking of M&A, do you see continued growth in that area?

1995 has been a gangbusters year for us and the industry. Margins are under some pressure there, but there's enormous activity, and we've benefited.


How do you manage the disparate philosophies inherent in your business, that is, the mentality of the trader versus that of the investment banker?

It's a challenge, but one of the great advantages of the partnership is that we all succeed or fail based on what the firm does. And if one looks at our success, there has been a great balance between our trading and banking activities. Our equity trading activities right now are doing extraordinarily well, and we're doing better in places we suffered in 1994.

There's been a recent influx of new, mostly younger partners at Goldman Sachs. Do you foresee a push by them to take the bank public?

The newer generation of partners is more inclined to defend the partnership than some of the people who've been around a longer period. The wealth-creating leverage of the partnership is one based on participation over time, so the younger generation in general prefers the partnership format.

Is going public inevitable?

No. We've had those discussions and debated it, but it's not inevitable at all. The partnership structure continues to support Goldman Sachs' culture and financials.


Where do you see the most likely places for change within Goldman?

We have a healthy need to challenge all the assumptions in our business, more so now, after 1994, than at any time in our history. This organization should make incremental, evolutionary - not revolutionary - change. It's important to recognize that we can't be the same firm when we're in 32 countries than when we were a purely domestic firm. We need to change the organization to meet our clients' expectations and demands, as well as partnership needs.

Are you less inclined now than three or five years ago to take risks, given some of the market bumps you've experienced in the last two years?

We have learned a lesson from over-concentrating risk in particular sectors, and have taken a step back from concentrated exposures. We were certainly more careful early in 1995, and we are rebuilding our risk profile - not necessarily on the levels we were in 1993 - but as a significant trading participant in most markets. Now there's a greater emphasis on credit risk-taking, but we are rebuilding our market exposures, as well.

Is cost-control still a priority for you, despite the good year you're having?

We're still very active in maintaining the disciplined budgeting and planning processes we established. We're maintaining detailed reviews of our expenses; we're very tight on adding new people, we're maintaining a tight approach on both capital and current expense budgets. This discipline will be a permanent part of Goldman Sachs' future.

What do you think the investment bankers of the mid-1980s would have said about an investment banking world that put a priority on risk management and cost controls?

If you'd asked John [Weinberg, CEO of Goldman Sachs in the mid-'80s], he'd have said we had careful cost controls and risk management in place in the '80s. As we grew globally and took on more activities, we may have paced our growth faster than we should have. We now have to adjust to a slower pace, and a more disciplined approach to investments, costs, and risk issues.

How quickly do you foresee consolidation taking place in investment banking?

I suspect there will be some additional consolidation among U.S. participants over the next year or two. But most of the leaders in the investment banking field appear to me to be pretty independent people, representing independent-minded organizations.


Are you the nonconformist that has been portrayed in the business press?

I don't think I'm a nonconformist. I have a fairly normal life. A wife, three kids, and live in the suburbs. I work hard, and I work with a great group of people. Goldman Sachs has had a sense for allowing diversity of personality. I hope tolerance and promotion of diversity will be part of my leadership legacy.

Are you a kinder, gentler investment banker?

No one I dealt with in the trading room would characterize me quite that way. But I've never found it productive to be a chest beater. People ought to judge you for what you do, rather than what you say. The real test of excellence is what you accomplish.

You're coming up on your first anniversary here as senior partner. Have the responsibilities between you and Vice Chairman Hank Paulson been more clearly defined?

Hank and I try to work as a team on issues. I feel strongly about his good judgment, and I hope he feels the same about mine. Ours is a true partnership in that we tend to share responsibilities - more so than I might have thought a year ago.

What legacy would you like to leave when your tenure as head of Goldman Sachs is over?

I hope Goldman Sachs has the same credibility as the premier investment bank, as has been the case before my tenure, and that this credibility will be sustained and enhanced by a legacy of hiring, retaining, and motivating the very best people.
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Title Annotation:interview with Goldman Sachs senior partner Jon Corzine
Author:McCarthy, Joseph L.
Publication:Chief Executive (U.S.)
Article Type:Cover Story
Date:Oct 1, 1995
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