March 5 2008: 8:02 AM EST
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The man who must keep Goldman growing (pg. 3)

By Bethany McLean, editor at large

While clients may be crucial to Goldman, Blankfein did not have a reputation for being client-friendly when he took over. But in Street parlance, he has exceeded expectations. Jim Coulter, a founding partner of private equity giant TPG, says that in a year where there was a lot of tension between private equity firms and Wall Street as the markets turned sour, he was surprised to get a phone call from Blankfein during the week before Christmas, thanking him for TPG's business. "It was a great client service touch," says Coulter.

Then again, Lloyd Blankfein is not a guy who likes a predictable narrative. The son of a Brooklyn postal worker, he was the first in his family to attend college. At 16, he began putting himself through Harvard and then Harvard Law School, with scholarships and financial aid. But Blankfein complains that he is tired of being characterized as poor kid who made good and wishes that reporters would skip straight to the "Harvard-trained lawyer" part when recounting his background.

After graduating from law school in 1978, Blankfein worked as a lawyer for a few years, then tried to get a job at Goldman Sachs. He was turned down. Instead, in 1982 he took a job as a gold salesman at commodities trading firm J. Aron - which Goldman had recently acquired. J. Aron was a rough-and-tumble place. "We were street fighters," recalls Dennis Suskind, a former J. Aron partner who hired Blankfein. "We didn't wear suspenders." Blankfein himself joked in London, "We didn't have the word 'client' or 'customer' at the old J. Aron. We had counterparties - and that's because we didn't know how to spell the word 'adversary.'"

Blankfein started as a salesman, not a trader. (In fact, he has only worked as a trader briefly.) Yet he turned out to have a rare knack for managing traders, partly because he's so quick-witted. Even others with sharp minds note just how fast Blankfein is. Steve Schwarzman, CEO of Blackstone (BX), likens Blankfein to tennis great John McEnroe in that he has an "incredibly fast neural path between seeing and reacting."

Nor does Blankfein sacrifice thoughtfulness to speed. "He has a remarkable ability to be both impatient and reflective," says Richard Gnodde, who is co-head of Goldman's business in Europe, the Middle East, and Africa. Any issue "is like a diamond is his hand, and he's spinning it around, looking at it from every facet"

Blankfein also has a trader's ability to rethink a position (witness Goldman's deft moves in the mortgage market). "It's not about hanging onto a predisposition," Blankfein says. "The best traders are not right more than they are wrong. They are quick adjusters. They are better at getting right when they are wrong." Perhaps that quality helps explain why Blankfein is not complacent. "Lloyd is incredibly confident," says Dan Loeb, the CEO of hedge fund Third Point. "But he doesn't take either Goldman Sachs or his position for granted."

Wherever he went, Blankfein made money, and at Goldman, he who makes the money rises. In 1994, Blankfein was appointed co-head of J. Aron. In 1997, he was named co-head of a new division that combined Goldman's fixed-income operation with J. Aron's currency and commodities business in a unit labeled FICC. In 2004, Blankfein became Goldman's chief operating officer. In the spring of 2006, when Hank Paulson unexpectedly resigned to become the 74th Treasury Secretary, Blankfein became the 11th CEO of Goldman Sachs.

One criticism has dogged Blankfein throughout his career: that he is cliquish, with a "you're either with me or you're against me" attitude. Many high-level bankers left the firm after Blankfein took over. And it's true that Goldman's two chief operating officers, Gary Cohn and Jon Winkelried, are longtime Blankfein colleagues who share certain physical characteristics. "Do you have to be a white male with male pattern baldness and have spent a significant portion of your time at Goldman in FICC?" asks one former partner. To address that issue, I ask Blankfein - a history buff who often carries a pile of books on vacation - about Abraham Lincoln, who, as recounted in Doris Kearns Goodwin's book Team of Rivals, surrounded himself not with friends but with those who wanted his job. Blankfein knows the book well - "It's a great management book," he says - but he rejects the contrast, saying, "I think I would have done what he did and picked the best people." He continues, "I promote the people who do well and make them my friends. I gravitate to the people who are talented." Then he adds, "But I'm not sure I would have had Lincoln's graciousness in not having to say, 'I'm right and you're wrong' - his discipline in not having ground their faces into their mistakes. It takes a lot of discipline not to let people know how smart you think you are."

As his power increased, Blankfein learned to control his sense of humor. He had - and in some quarters still has - a reputation for being caustic. "Even on the management committee, I was aggressive in expressing my views, figuring I had to lean hard just to budge the firm a bit," he says. "You have to be aggressive if you're trying to move a big concrete block. But my seniority gives my views weight, and then if you use more than a pinky, you'll move that block a lot further than you want to." Now, he says, "I can't be provocative for the sake of provoking. And I sometimes miss that"

***

After the chairman's forum in London, Blankfein heads to India, where Goldman Sachs has just opened an office, a trip that gives him the chance to ask, "Is there a deli in Delhi?" more than once. Blankfein attends the opening ceremony decorated with a red bhindi on his forehead and wearing a garland of flowers. As he walks through the new offices, a TV on the wall happens to be broadcasting a speech by Hank Paulson. "Our ancestors are looking down at us," quips Blankfein.

“You have to be lucky. You can make a lot of your own luck, but you have to be lucky.”

At a lunch for managing directors at Mumbai's Indigo restaurant, Blankfein fields questions from roughly two dozen men (they are all men). To get things going, Blankfein asks, "Do you have any advice for me?" "Don't f--- up," says one MD. When the laughter subsides, another MD asks, "What do you worry about most?"

"The vagaries of life," Blankfein responds. "You have to be lucky. You can make a lot of your own luck, but you have to be lucky." He adds: "I worry that we're too smug, and then I see everyone wringing their hands over the worry that we're too smug, and then I think we're too nuts, and we're destined to have unhappy lives, and we'll always be miserable strivers."

The trip to India is just another sign that, under Blankfein, Goldman Sachs is staking much of its future growth on the emerging economies of Brazil, Russia, India, and China, or BRIC, as a Goldman economist dubbed them. The firm is also putting teams on the ground in the Middle East and South Africa. Already, non-U. S. markets account for more than 50% of Goldman's revenue. The heart of Goldman's business strategy, says Blankfein, is "chasing GDP around the world."

Indeed, Goldman has no choice if it is to meet its aggressive, even grandiose, goals. Ask Gnodde about the firm's challenges, and he says, "How do we get more revenues in 2008 and 2009?" Ask Cohn why Goldman is going global, and he says that the key question was "How do we grow?" Cohn says that generating 20% growth in revenues, not each and every year but as an average over a cycle, is "a mantra around here."

But as the managing directors at lunch well know, emerging economies can plunge as rapidly as they soar. Few if any companies have ever sustained 20% annual growth for very long, and many have died trying. As John Weinberg, one of the former leaders whose picture Blankfein sees on the 30th floor of his building, used to say, "Trees don't grow to the sky."

***

Nothing has contributed more to the Goldman mystique than the firm's market-defying performance during the mortgage meltdown of 2007. That's especially true because Goldman takes more risk than many of its peers, which is why skeptics (including some short-sellers) thought Goldman would take a bigger hit in a bad market. Obviously, it didn't turn out that way.

There's no simple explanation. "People are looking for the magic formula," says David Viniar, Goldman's CFO. "There isn't one." Goldman spotted the problem early because it is fanatical about pricing its holdings at their current market value - even at times forcing traders to sell part of a position to establish a price. Because of that, the firm's books were showing losses on mortgage securities by late 2006. "At this firm it doesn't escape people's attention when you lose money for days in a row," says Viniar.

On Dec. 14, 2006, some 20 people, including Viniar, the heads of FICC, the heads of the mortgage business, and various people from the controller's side - the people who verify the prices at which traders are marking their books - met in a conference room for 2 1/2 hours. (To show respect, Goldman refers to these people not as the "back office" but as "the Federation." When I first hear the phrase, I say, "Like Isaac Asimov!" Blankfein quickly corrects me. "That's The Foundation. Don't test my knowledge of literature.")

The result: The firm should have "a bias to be short," as Viniar puts it. It isn't easy to short a house, but Goldman found a way. It pulled back the lines of credit that it offered to mortgage originators, meaning that it slowed the pace at which it purchased mortgages. It began to sell off its inventory of securities that were backed by mortgages. Goldman also hedged its risk by buying derivatives that would pay off if mortgages began to default.

And so last fall - when other Wall Street firms began to write off billions of dollars - Goldman posted what analyst Whitney called "Yes, we are that much better than our peers" results. Blankfein, true to form, worries about lording it over his peers. "I really think we are a little better," he says. "I will fight you if you say we're just like everyone else. But I think it's only a little better. It's not as much as recent events would suggest."

Goldman's success in dodging the subprime bullet renewed criticism that the firm puts its own interests ahead of its clients'. But Goldman says it stopped selling securities crafted out of problematic subprime mortgages after April, and that its customers were institutional investors who - theoretically - understood what they were buying. Viniar draws an analogy to the equity market. He says that Goldman may underwrite an offering for Ford at the same time that the firm's traders are short the S&P 500. "We disclose what the risks of owning Ford are, but we don't disclose that we're short equities," he says. "The risks of owning Ford over a long period of time are different from a trading view of equities." He adds, "The idea that a trading view should inform whether or not we underwrite a security is just uninformed."

Blankfein, who is normally so willing to consider all sides of an issue, doesn't think the criticism has any validity. "We make money when we do our jobs well," he says. "We take risk, we get compensated. Would an insurance company that went broke after Hurricane Katrina be more moral than one that didn't?"

And Blankfein has other things on his mind. As he's the first to admit, there's no way to know whether Goldman will dodge the next bullet. "They have put themselves right in the center of what's going on," says Griffin, which means that Goldman is vulnerable to the market's unpleasant surprises. You could argue that one quarter of subpar results might actually help Goldman by infusing a dose of hard reality into its seemingly magical numbers. Or, as I heard Blankfein say in India, "If everybody thought we were only here to make the most money for ourselves, who the hell would want to be on the other side of us?" One thing seems clear: Lloyd Blankfein will never run out of things to worry about.

RESEARCH ASSOCIATES Doris Burke and Patricia A. Neering contributed to this article. To top of page

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