In April, I said I'd eat the first chapter of Dow 36,000 if President Bush could convince a Wall Street big shot to succeed the flailing John Snow as treasury secretary. This morning, Bush nominated arguably the biggest of the big shots on Wall Street— Goldman Sachs CEO Henry Paulson. (At least it'll be a cheap meal. Dow 36,000 is going used on Amazon.com for as little as four cents a copy.)
The move is good for Bush, good for Henry Paulson, and, quite plausibly, good for investors. With interest rates and volatility on the rise, the dollar on the wane, and hot money coursing through the globe's financial system, we're due for a crisis. Should it come, having a treasury secretary who is a creature of the capital markets and who has solid connections to China will come in handy. (Paulson serves on the advisory board of a Chinese business school.) Bush is also signaling that unlike the previous two treasury secretaries, Snow and Paul O'Neill, Paulson may actually have a say in formulating policy. "As treasury secretary, Hank will be my principal advisor on the broad range of domestic and international economic issues that affect the well-being of all Americans," Bush said. (Of course, Bush made similar statements about O'Neill and Snow, who were promptly exiled to policy Siberia.)
But the appointment suggests a larger question: What's the deal with Goldman Sachs? Brainpower has never been more broadly diffused on Wall Street—scattered among private equity funds, investment banks, and hedge funds. And yet the 137-year-old firm remains the default choice for publicly minded financial adepts. Indeed, a politico's view of Wall Street must look like an inversion of Saul Steinberg's famous New Yorker's view of the rest of the world: Goldman Sachs' headquarters building standing tall in a vacant desert. When governments and institutions need some Wall Street credibility, they almost invariably turn to Goldman, as this impressive list shows.
What accounts for Goldman Sachs' dominance? It's not that the bosses of Lehman Brothers, Citigroup, Merrill Lynch, and the Blackstone Group are merely a bunch of undifferentiated hacks uninterested in public institutions and public service. Rather, Goldman remains in some ways unique, and so do its leaders.
Goldman is no longer a private partnership; it went public in 1999. But it is still the most partnershiplike among the large Wall Street firms. And so the firm is governed more like a collegial organization than the top-down, CEO-as-benevolent-dictator organism popularized by Jack Welch and his acolytes. Goldman's chief assets are people—really rich people who can afford to retire or who can easily find lucrative employment elsewhere. This means that a top executive has to rely more on persuasion than on intimidation. To rise to the top at Goldman, you have to be a centrist statesman with demonstrated operating competencies, firm ideas about where to take the company, and an ability to assuage, coddle, accommodate, and lead massive egos.
There's another crucial Goldman difference that allows its bosses to slip seamlessly into other realms. The firm has historically either avoided or downplayed consumer-oriented retail businesses like stock brokerage, credit cards, and mutual funds. Instead, Goldman makes its immense profits chiefly from investment banking and proprietary trading. It's a giant, extraordinarily profitable hedge fund lashed to a highly profitable investment bank. As Goldman's remarkable first-quarter earnings report shows, $6.88 billion of the firm's $10.34 billion in total revenues came from trading and principal investments. In the 1990s, exposure to the retail sectors of the financial services industry—and to the conflicts of interest and scandals that ran through them—tarnished the images of many large Wall Street banks and their leaders, including Citigroup, Merrill Lynch, and Credit Suisse First Boston. Although Goldman Sachs was a party to the Wall Street research settlement, it emerged from the scandals in better shape than many of its rivals.
Precisely because it doesn't need to appeal to a broad public, Goldman has long been tolerant of top executives who get involved in politics and public policy. The CEO of Goldman has far more leeway than, say, the CEO of Citigroup or Merrill Lynch to embrace causes. Paulson, for example, is a committed environmentalist. He's chairman of the Nature Conservancy. Under his leadership, Goldman has made significant investments in renewable energy and has donated huge tracts of land to the Wildlife Conservation Society. That may not win Paulson allies among yahoos like the managers of the Free Enterprise Action Fund, but it will help win over hostile Democrats.
Former Goldman heads have something else to recommend them to public service: They're insanely wealthy. According to Goldman's most recent proxy statement, Paulson has a 4.58 million-share stake in the company worth nearly $700 million. (You can see how much he was paid last year here.) And people who have amassed generational wealth often demonstrate a greater ability to absorb the criticism and indignity that occasionally accompanies public service. John Snow, a rich man though not obscenely wealthy by Wall Street standards, found it increasingly difficult to weather the storms of criticism. His low point came in late April when he lashed out at Robert Rubin and the founders of the Hamilton Project.
But the $64,000 question—or, to put it in terms Paulson can appreciate, the $64 million question—remains. Will Paulson make a difference? Can he square the circle of the administration's desire to maintain massive government spending and extend tax cuts? Can he stop the Alternative Minimum Tax from spreading further? And will a guy worth nearly $700 million do a better job at convincing economically insecure Americans that it's in their best interests to shred their income insurance—i.e., Social Security? Will he do a better job than Snow of telling American workers, who have seen the median income fall, that they've never had it so good?