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 Blankfein is going to find the note that proves it.
Even though Goldman is the most imitated, envied and at times griped-about investment bank around, 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?"'
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 Turkey, enjoys conversing about the Ottoman Empire.
Even with careful grooming, 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 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 Goldman Sachs but they have neither the culture, the risk-taking appetite nor the understanding of the capital markets at the top of the house to do so."
Indeed, his familiarity and comfort with risk make 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 Goldman Sachs, which reshaped itself from an advisory-focused business to a trading machine with a bank that advises, finances, invests in and hedges deals.
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 compete with you?' they say, 'Sorry, but we'll help you get another deal.' And they get away with it because it's hard not to be in business with Goldman Sachs."
When 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.)
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.
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 Russia, China, Turkey and the Middle East.
"Over the past few years, I've had to involve myself in parts of our business that I wasn't as close to," says 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 & Co., recalls 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," 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 David M. Rubenstein, founder and chief executive of the Carlyle Group, another major private equity player. "When you are a trader you care about performance and you measure it minute by minute, day to day. When you are in the business of winning clients you have to learn different skills."
As he rounds off his education, 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 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 New York, and went to Harvard at 16 on a scholarship, applying not because he knew a lot about Harvard but because he'd heard the name. He went on to Harvard Law School and then worked as a tax lawyer before applying for a job on Wall Street. Goldman initially rejected him, but J. Aron, a little-known commodity trading shop, hired him. Soon after, Goldman bought J. Aron and got Blankfein, too.
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 Blankfein. "That is not Lloyd."
After 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 Blankfein spends more time on clients and strategy.
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.
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, 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 by 29% from the first quarter of 2006 -- which was, of course, a record. Its investment bank now contributes only about 15% of Goldman's revenue, yet another benchmark of its makeover.
But 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 by 168%. From 1999 to today, its balance sheet has grown by 265% to $1 trillion.
The occasional backlash against Goldman's financial supremacy leaves 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 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 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 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 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.