Why Gary Cohn May Not Be Goldman's Next CEO

Gary Cohn’s ties to the Goldman CEO and the culture of trading could count against him

As president and chief operating officer of Goldman Sachs, Gary D. Cohn should be the obvious candidate to succeed Chief Executive Officer Lloyd C. Blankfein. That isn’t a sure bet, say a dozen current and former colleagues who did not want to be identified. While Cohn has helped the firm earn billions in profits, his handicap, they say, may be the qualities that got him to the No. 2 spot: an abrasive style, an appetite for risk, and a long association with Blankfein.

Blankfein, 56, has led Goldman Sachs for five years and has said he has no plans to step down. The bank’s shares have fallen 6 percent since he became CEO, while the Standard & Poor’s financial stock index has dropped 52 percent. Through July 26 this year, the shares are down 18 percent, while the financial stock index has lost 5 percent. In the second quarter, profit fell short of analysts’ estimates. The company declined to comment for this story.

Bungled public relations and the public’s eagerness to find a scapegoat for the worst U.S. economic slump since the Great Depression may partly explain why Goldman Sachs is having trouble shaking its bad-guy reputation. That image, and waning investor faith in the company, is rooted in something more fundamental: Blankfein and Cohn’s reliance on trading and investing the bank’s own capital to reap profits, even if that meant sometimes competing with clients.

Cohn, 50, has worked with Blankfein since their days at Goldman Sachs’s commodities trading division, J. Aron. Their trading background gives them an approach to the business that differs from that of some former leaders, says Michael C. Aronstein, president of Marketfield Asset Management. John C. Whitehead and Henry Paulson were investment bankers whose focus was on persuading executives to hire Goldman Sachs as an investment banker on takeovers or financings. “The people who ran Goldman back in my early days had a banking background,” Aronstein says. “They built that business on the basis that if you hired them, you would be part of the team that won. The commodity business is completely different. You have to guess whether you’re somebody’s customer or their prey.”

Goldman Sachs “has a problem right now,” says George J. Collins, former CEO of asset manager T. Rowe Price Group. “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—a deal Cohn helped negotiate—for the school’s president, who left under fire. While Cohn is qualified to lead the bank, there are other considerations for Goldman Sachs’s board, says Collins: “If they feel strongly enough you have to make a break, obviously you make the break.”

At 6 foot 3 and 220 pounds, Cohn can be intimidating, according to two former colleagues. Visiting Goldman Sachs’s trading floors, he would sometimes hike up one leg and plant his foot on a trader’s desk, his thigh close to the employee’s face, and ask how markets were doing, they say. Michael Ovitz, who once ran one of Hollywood’s biggest talent agencies, and Daniel Rappaport, former chairman of the New York Mercantile Exchange, where Cohn served on the board, both say he can be “abrasive.” Ovitz, who says he has been in daily e-mail contact with Cohn since having lunch with him in 2009, sees the toughness as “positive.” An executive can’t be “all peaches-and-cream,” he adds.

Cohn, who declined to be interviewed, grew up in Shaker Heights, Ohio, the son of an electrician-turned-real estate developer. He earned a bachelor’s degree from American University’s Kogod School of Business in 1982. Then, on a day off from a job selling window frames and aluminum siding, he spent a few hours at the Comex, the commodities exchange. He cadged a ride to the airport with a trader, according to a commencement speech he gave at American University in 2009. The man said he needed someone to help trade options. “I’m your guy,” Cohn said. To prepare for the interview, he spent a weekend reading Lawrence G. McMillan’s Options as a Strategic Investment four times. He got the job.

He struck out on his own as an independent silver trader in 1983. “He was tough,” says former Comex Chairman Martin B. Greenberg. “Gary got in with the right people, worked his ass off, and used his head.” For Cohn, the rules of the trading pit apply broadly. “Every day you are competing, and every day you are playing to win,” Cohn said in the 2009 speech. “So remember, wake up every morning and figure out how to win.”

In 1990, Cohn was hired by Goldman’s J. Aron unit. Blankfein became co-head of J. Aron in 1994 and two years later tapped Cohn as global head of the commodity businesses. A former partner remembers accompanying Cohn that year to a meeting with another commodity 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, says the former partner. Treating companies as clients and competitors is typical in the commodity markets, where the largest commodity producers are also big traders, says the former partner. Three former employees say it was an approach that Blankfein and Cohn spread through other trading businesses.

In December 2003, Cohn became co-head of the firm’s global securities businesses, which handle trading of stocks, bonds, currencies, and commodities. He pushed to build bigger trading businesses and take more risks, including in the mortgage bond market, say two former partners. Cohn, who gained oversight of the mortgage unit by 2000, supported its requests for more capital, more people, and the ability to take bigger risks, says one of them. In the 2009 commencement speech, Cohn emphasized the role that risk had played in his success. “If there is one thing out of this on how to stand out, it’s take risks,” Cohn said. “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. His investments in Goldman-managed funds have paid $53 million over the period.

The Blankfein-Cohn business model was ideal for a period of high leverage and low regulation, producing average annual profit more than double that achieved under Paulson. With the phasing in of new rules requiring banks to hold more capital and limiting how much speculating they can do with their own money, that profit may be harder to achieve. “Goldman Sachs’s business model faces significant challenges in a post-crisis world,” according to a June 13 investor note by RBC Capital Markets analysts led by Fiona Swaffield, who rates the stock underperform.

In its 142-year history, Goldman Sachs has never chosen an outsider to lead the firm. Blankfein and the board continue to show confidence in Cohn, and he was reelected to the board in May with 99 percent of shareholders’ votes. If the board decides against Cohn, other candidates include J. Michael Evans, 53, who oversees the bank’s business in growth markets and Asia, and Michael Sherwood, 46, co-CEO of Goldman Sachs International.

Ovitz thinks Cohn would be up to the new challenges. He is “a trader,” says Ovitz. “He has that whole feel in his body and brain and fingertips.” Any Goldman Sachs director who doesn’t want him to succeed Blankfein, says Ovitz, should have his “head examined.”


    The bottom line: Cohn’s trading background and close relationship with Blankfein might hurt his chances of getting the CEO job.

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