Succeeding Blankfein at Goldman May Be Hurdle Too High for CohnMax Abelson and Christine Harper
Michael Ovitz, the former Hollywood agent whose company was said to have created enemies “the way a hurricane produces raindrops,” first met Gary Cohn over lunch at Goldman Sachs Group Inc.’s headquarters in June 2009.
The two men, one the founder of the most powerful talent agency in the entertainment business, the other president of the most profitable securities firm in Wall Street history, have been in daily e-mail contact since, Ovitz said. They talk by phone three or four times a week.
During a trip to the Caribbean in December, Ovitz, now an investor, visited Cohn on the Turks and Caicos Islands. Cohn, 50, a silver trader who worked his way up to the No. 2 position at Goldman Sachs, “was always on the phone, off in a corner,” Ovitz said. Cohn later told the former chairman of Creative Artists Agency Inc. he had been working on the deal to sell $1.5 billion of shares in Facebook Inc.
Ovitz, who received a severance package estimated at $140 million when he was fired in 1996 after 15 months as president of Walt Disney Co., said he’s impressed with Cohn. Any Goldman Sachs director who doesn’t want him to succeed Lloyd Blankfein as chief executive officer should have his “head examined,” Ovitz said. “He’s a trader. He has that whole feel in his body and brain and fingertips.”
Blankfein, 56, who marked his fifth anniversary as head of the New York-based bank on June 28, said he doesn’t have plans to step down. The firm’s shares have fallen 19 percent this year and 8 percent since he became CEO.
Goldman Sachs hasn’t been able to shake its reputation as the bad guy of Wall Street.
The firm paid $550 million to settle a case brought by the U.S. Securities and Exchange Commission last year accusing it of fraudulently marketing securities linked to subprime mortgages, without admitting to or denying the allegations. U.S. Senator Carl Levin, a Michigan Democrat who heads the Senate Permanent Subcommittee on Investigations, accused the firm of misleading clients and Congress, and the bank has been subpoenaed by the Manhattan District Attorney’s office.
In a May 4 note to investors, William Tanona, a UBS AG analyst who worked at Goldman Sachs, said “near-term” management changes were likely.
‘Culture of Commerciality’
As president, chief operating officer and the only company executive besides Blankfein on Goldman Sachs’s board, Cohn should be the obvious candidate to succeed him. He isn’t, say a dozen current and former colleagues who asked not to be identified because they weren’t authorized to speak about succession plans or didn’t want to jeopardize their relationships with the firm.
Cohn’s biggest handicap may be the qualities that got him to the No. 2 spot at Goldman Sachs, the colleagues say: an abrasive style, an appetite for risk and a long association with Blankfein, who also started at the company in metals. The two vacationed in the Mexican resort Cabo San Lucas before their 2006 promotions, sent their children to the same school and represent the shift from investment banking to trading, which now produces most of the revenue at the firm.
“Gary and Lloyd embedded the culture of commerciality,” said Tanona, referring to a focus on making money. “There was no surprise that Goldman’s risk-taking era was under the eye of both Lloyd and Gary.”
Ovitz and Daniel Rappaport, a former chairman of the New York Mercantile Exchange, where Cohn served on the board, both said the Goldman Sachs president could be “abrasive.” Ovitz said the toughness “is positive” and that an executive can’t be “all peaches and cream.”
Cohn, 6-foot-3 and 220 pounds, can be intimidating, two former colleagues said. He would sometimes hike up one leg, plant his foot on a trader’s desk, his thigh close to the employee’s face, and ask how markets were doing, they said.
Former Bear Stearns Asset Management CEO Richard Marin said Cohn’s arrogance is at “the root of the problem” at Goldman Sachs. “When you become arrogant, in a trading sense, you begin to think that everybody’s a counterparty, not a customer, not a client,” Marin said. “And as a counterparty, you’re allowed to rip their face off.”
George Collins, a former CEO of asset manager T. Rowe Price Group Inc., said that while Cohn is qualified to lead the bank, there are other considerations for the bank’s board.
“Goldman has a problem right now,” he said. “And I’m a client of Goldman. There are some questionable things that they have done in this financial crisis.”
Collins served with Cohn on the board of American University in Washington until 2005, when Collins resigned in protest over a multimillion-dollar severance package for the school’s president, a deal Cohn helped negotiate.
“If they feel strongly enough you have to make a break, obviously you make the break,” he said.
‘I’m Your Guy’
Cohn, who declined to comment for this story, grew up in the Cleveland suburb of Shaker Heights, the son of an electrician who became a real estate developer, and received a bachelor’s degree from American University’s Kogod School of Business in 1982. He bluffed his way into his first Wall Street job as a trader on Comex, a New York commodities exchange, he said in a 2009 commencement address at the school.
On a day off from a job selling window frames and aluminum siding at the home-products division of United States Steel Corp., Cohn spent a few hours at Comex. He cadged a ride to the airport with a trader, according to the speech. In the taxi, the man said he needed someone to help trade options.
“No problem, I’m your guy,” Cohn said.
He was invited to an interview the following Monday and spent the weekend preparing by reading Lawrence G. McMillan’s “Options as a Strategic Investment” four times, according to Cohn’s account. He got the job.
‘Pungency of Fear’
His boss, Charles Federbush, said in an interview that he tried to teach new clerks “not to get emotional.” Federbush’s brokerage, Volume Investors Corp., was placed into receivership in 1985, and in 1992 he was sentenced to three years’ probation after pleading guilty to conspiracy and fraud.
Cohn went off on his own as an independent silver trader on Comex in 1983. Donna Redel, who became the first woman to head the exchange in the early 1990s, said the trading floor smelled like sweat and had “the pungency of fear.” Martin Greenberg, who preceded Redel as chairman, said he once choked another colleague over a trade.
“He was tough,” Greenberg said of Cohn. “Gary got in with the right people, worked his ass off and used his head.”
Redel, who said there was no truth to a tale that she stabbed a colleague with a pencil -- she said she was using her hands defensively and wasn’t holding anything -- described Cohn as “firm,” “strategic” and “driven.”
Starting at Goldman
“Every day you are competing, and every day you are playing to win,” Cohn said in his commencement speech. “So remember, wake up every morning and figure out how to win.”
In 1990, Cohn was hired by Goldman Sachs’s J. Aron & Co. unit, which traded commodities and currencies. Blankfein, a former tax lawyer, had joined J. Aron eight years earlier as a gold salesman and became a Goldman Sachs partner in 1988.
It was a tumultuous time for Goldman Sachs, the largest private partnership on Wall Street. Chairman and Senior Partner John L. Weinberg retired in late 1990, leaving Robert Rubin and Stephen Friedman to share his responsibilities. Rubin left to join the Clinton administration about two years later.
In 1994, rising interest rates led Goldman Sachs’s bond traders to rack up losses. Friedman decided to leave, was replaced by Jon Corzine, and as dozens of partners departed the firm sold about 4 percent of the company to help shore up its capital. Cohn, based in London at the time, was invited to become partner that year.
Clients or Competitors
Blankfein became co-head of J. Aron in 1994 and two years later tapped Cohn as global head of the commodities businesses. A former partner remembers accompanying Cohn that year to a meeting with another commodities-trading firm in a developing country. Cohn delivered a warning that the company could do business with Goldman Sachs or Goldman Sachs would find a way to compete with it, according to the person.
Treating companies as both clients and competitors was typical in the commodities market, where the largest producers are also some of the biggest traders, according to the former J. Aron partner.
Three former employees said it was an approach that Blankfein, Cohn and their colleagues spread through other trading businesses as they climbed the ranks of the fixed-income, currencies and commodities unit, known as FICC, the top revenue contributor at the company.
Ramping Up Risk
In December 2003, Cohn became co-head of the firm’s global securities businesses, which include FICC and equities. The next year, the bank’s pretax profit from trading and principal investments was $5.04 billion, more than 12 times as much as Goldman Sachs’s investment-banking business, and an increase of 44 percent from the previous year.
As the bank’s balance sheet swelled, its average daily value-at-risk -- or VaR, a measure of the sum that could be lost on a given day -- hit a record $92 million in the first quarter of 2006, the year Cohn was promoted to co-president. Goldman Sachs executives said in an earnings conference call that equities, in particular derivatives, drove that figure. VaR was more than $100 million at the end of 2006 and, after breaking records for six consecutive quarters, hit $184 million in 2008.
Cohn pushed to build bigger trading businesses and take more risks, including in the mortgage-bond market, according to two former partners.
Goldman Sachs’s mortgage business lagged behind those of rivals such as Lehman Brothers Holdings Inc. because the firm’s managers questioned whether the returns were worth the risks, according to one of the partners. Cohn, who gained oversight of the unit by 2000, supported its requests for more capital, more people and the ability to take bigger risks, the partner said.
The mortgage team continued to take on risk until December 2006, when 10 days of losses alerted senior executives to a problem, according to documents released by the firm and the U.S. Senate. The executives met with Daniel Sparks, the head of the unit, and told him to curb the size of the team’s subprime bets, according to documents.
While strict in enforcing risk-discipline and making mortgage traders adhere to the firm’s value-at-risk model, Cohn also understood their concerns that the model was flawed, according to the former partner. He wasn’t afraid to lose money if a trade had been thought out and described, the partner said.
“If there is one thing out of this on how to stand out, it’s take risks,” Cohn said in his 2009 commencement address. “Everything I’ve done in my career, and everything that most of you have done to this point, is to take risks.”
The risks have paid off. Cohn has taken home more than $61.5 million in salary and cash bonuses in the past five years, plus restricted stock valued at $61.3 million when granted, even with no bonus in 2008. His investments in funds managed by Goldman Sachs have paid $53 million over the period, according to company filings. Cohn was the firm’s largest employee-shareholder after Blankfein as of March 7. At last week’s closing price, his 1,956,249 shares were worth $265 million.
Cohn and his family have an apartment on New York City’s Park Avenue, another co-op on the Upper East Side and a house near the ocean in Sagaponack, New York.
He travels on business about 40 percent of the year, and when he’s home puts in 11- or 12-hour days, often followed by bank-related dinners, according to a person who works with him. He checks his e-mail and makes calls until midnight. At the office, he is a sounding board for Blankfein, walks the floors and spends most of his time meeting with clients, investors and the firm’s business heads, the person said.
‘Based in Jealousy’
At Nymex, where he became a director in 1997, Cohn’s success at Goldman Sachs was a liability and he “wasn’t very well-liked,” said Rappaport, the former chairman. Traders wondered about the firm’s relationships with gold-mining companies and OPEC ministers, he said.
“Some of it, I’m sure, is based in jealousy,” he said. “Goldman always seemed to be on the right side of the market.”
In 2000, a year after Goldman Sachs went public, Cohn approached Rappaport with a proposal to join an over-the-counter electronic market for metals and energy trading. The bank was developing, along with Morgan Stanley, BP Plc and others, what would become IntercontinentalExchange, or ICE.
“Things that Gary wanted to implement were things that would encroach upon the floor-trading franchise,” Rappaport said. “It would basically, which is how it actually evolved, put the floor community out of business.”
Cohn held secret talks with a group of Nymex executives that included Rappaport, the former chairman said. When the proposal was brought to the board, members were offended that a small group had been holding conversations and that directors were given a “short window” to decide, according to Rappaport.
“If there was a sensitive issue coming up for board discussion, he wouldn’t show any sensitivity,” he said of Cohn. “That happened, without exaggeration, 100 times.”
Neal Shear, who headed commodities at Morgan Stanley at the time and worked with Cohn on the development of ICE, said the issue “wasn’t about sensitive or not sensitive. It was about the way the world was going to work.”
The electronic exchange, which now owns the world’s largest credit-default swaps clearinghouse, started that year without Nymex, whose board rejected the plan.
Conflict of Interest
The exchange’s executive committee asked a law firm to examine Cohn’s role, and it concluded that Cohn shouldn’t have been involved in the talks because he had a conflict of interest, according to a 2000 article in Securities Week, an industry newsletter. No legal action was recommended, according to the article, citing people familiar with the matter.
“We never saw a conflict,” Richard Schaeffer, the Nymex treasurer at the time, said in an interview. “It is sour grapes from people.”
Chris Grams, a spokesman for Nymex, now owned by Chicago-based CME Group Inc., declined to comment.
Cohn was more willing to seek compromise at American University. In 2005, an anonymous letter was sent to the school’s board, accusing President Benjamin Ladner of using university funds to buy $100 bottles of wine, pay for a personal French chef and spend weekends in Europe.
After investigating the allegations, the trustees voted to dismiss Ladner. Cohn was named to a three-person committee that helped negotiate an exit package of about $3.7 million. Four board members, including former T. Rowe Price CEO Collins and Paul M. Wolff, a partner at law firm Williams & Connolly LLP in Washington, resigned in protest.
“I like Gary,” Wolff said in an interview. “I found him pleasant to deal with. Ultimately, I found him very disappointing. He was far more willing to seek accommodation than he was to take a firm stand.”
Leslie Bains, chairwoman of the board, also stepped down. A managing director of Citi Private Bank, she said that while she was unhappy with Ladner’s severance, Cohn had been dedicated to the school.
“You put American University first and move on,” she said of Cohn, who’s still on the school’s board and also a director of the Harlem Children’s Zone and the NYU Langone Medical Center in New York.
Two of Cohn’s friends, Ovitz and Orin Snyder, a litigation partner at Gibson Dunn & Crutcher LLP in New York, said there’s more than one side to Cohn’s personality.
“He’s wildly compulsive about his business, as opposed to his personal life, where he’s incredibly loose and fun to be with,” said Ovitz, whose Hollywood agency was likened to a hurricane in a 2002 Vanity Fair profile by Bryan Burrough. “He can be stern. He can be gentle.”
Snyder, who has represented Facebook, Freddie Mac, LeBron James and Goldman Sachs, has known Cohn since they bonded about 15 years ago at birthday parties they went to with their kids. The lawyer said that while Cohn can be blunt, he hasn’t seen him aggressive, “if by aggressive you mean unduly harsh, unduly punitive, or unduly sharp.”
Snyder and Cohn go to concerts and sporting events together, drink an occasional glass of tequila and attend spinning classes at SoulCycle, a cycling studio.
“Why I’m attracted to him is, to be honest, I don’t want to sound too conceited, but I’m a good guy and he’s a good guy,” Snyder said.
Another reason is that Cohn “cares deeply about people,” he said.
“If something is not right, sometimes he has trouble letting it go: If someone slights his kid, someone does something in business that he doesn’t like,” Snyder said. “He has high expectations for people. I think he just gets disappointed.”
Cohn recently told a colleague he can’t remember the last person he yelled at, and when upset with someone he now gives the silent treatment, the colleague said.
Cohn displayed his brusque side before Goldman Sachs’s annual shareholder meeting in Jersey City, New Jersey, on May 6, when a reporter asked if he would meet to talk over a cup of coffee. Cohn said he didn’t drink coffee. The reporter asked about tea. “I don’t drink hot beverages,” Cohn said.
The same brusqueness was evident last year at Minetta Tavern, a restaurant in New York that serves $26 hamburgers. Cohn ran into an analyst who covers Goldman Sachs for one of the country’s largest banks, having dinner there with his wife. When the analyst said hello, Cohn asked if the place weren’t too chic for him, according to the analyst, who asked not to be identified because he wasn’t authorized by his firm to speak.
That treatment can also extend to shareholders and clients, according to a person who attended one of a series of August 2009 meetings Cohn held with Boston institutions, both investors in and clients of the bank. Cohn wore New York Yankees cufflinks, taunting the clients and investors ahead of a four-game series against archrival Boston Red Sox, according to the person, who spoke anonymously because he didn’t want to jeopardize his relationship with Goldman Sachs. He said he couldn’t imagine Blankfein or Chief Financial Officer David Viniar doing the same thing.
The baseball-team cufflinks were part of a running joke, the person who works with Cohn said, and some Boston clients answer Cohn’s calls with jokes at New York’s expense.
Blankfein and the board haven’t said anything publicly about the next CEO. Besides Cohn, candidates may include J. Michael Evans, a 53-year-old Canadian who oversees Goldman Sachs’s business in growth markets and Asia, and London-based Michael Sherwood, 45, co-CEO of Goldman Sachs International. Goldman Sachs has never chosen a chairman or CEO from outside the company in its 142-year history.
Snyder said he isn’t worried about Cohn, whether his friend makes it to the top or not.
“He’s going to be fine whether he’s the president of his block association, or the president of Goldman Sachs, or the president of Gary Cohn Inc.,” Snyder said. “He’s a winner.”