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Greener Pastures For Paulson
By Liz Moyer, 05.31.06
Goldman Sachs' rivals are not likely to be disappointed at the departure of Goldman CEO Henry M. Paulson Jr. for the greener pastures of the U.S. Department of the Treasury, if only because it gives them breathing room to catch up with Goldman in investment banking and trading.
But these same rivals are likely to cheer him on as the new Treasury secretary. There hasn't been a Wall Street heavy at the top of the department since fellow Goldman alumnus Robert Rubin held the role from 1995 to 1999.
Paulson, if confirmed, would succeed two industrialists in trying to promote the administration's economic agenda at a time when President George W. Bush lacks the political clout to push through his tax and budget reforms.
A straight-talking, aggressive banker with plenty of experience negotiating deals with top executives and world political leaders, Paulson is seen as having a limited ability to overcome the administration's hurdles, despite his considerable clout with Wall Street and Capitol Hill.
His influence will likely be greatest in clarifying U.S. dollar policy and in negotiating with the Chinese government over the revaluation of the renminbi. "He's a stronger candidate for that than anyone else," said Ben Carliner, director of research at the Economic Strategy Institute in Washington, D.C.
What's more, Paulson is seen as having a soothing "Rubin effect" on U.S. markets. Soaring oil and commodities prices, rising interest rates, a relatively unknown new Federal Reserve chairman and jittery stock markets have created anxiety, despite plenty of evidence that the U.S. economy is healthy and growing.
"When there's a lot of uncertainty, it can't hurt to have a U.S. executive in there who knows these issues well and has a level of expertise" beyond that of most other people, Carliner said.
Of course, that "Rubin effect" hasn't kicked in yet. The Dow Jones Industrial Average plunged nearly 200 points Tuesday. Goldman's own shares were down close to 2%.
Paulson has been sole chief executive of Goldman since 1999, when he prevailed in a coup that forced the ouster of former co-CEO Jon Corzine. Corzine has since entered public office, first as a New Jersey senator and now as that state's governor.
Yet even as recently as a few weeks ago, Paulson said in interviews that he was content to remain at Goldman, where profits are at record highs and the firm seems to have an unlimited ability to mint money, particularly from risk-taking for its own account.
Analysts said Tuesday that there were plenty of executives at Goldman ready to step into the top role, most likely Lloyd Blankfein, the current president and chief operating officer, who has run the firm's most profitable businesses of late: fixed income, currencies and commodities. "These transitions are not uncommon for Goldman Sachs," wrote Buckingham Research analyst James Mitchell in a note Tuesday.
An ardent bird watcher, devoted nature conservationist and fly-fisher, Paulson has an image that is quite apart from that of a typical Wall Street honcho. He grew up on an Illinois farm and still owns property there, visiting frequently on weekends. He graduated Phil Beta Kappa from Dartmouth, where he was an all-Ivy football player, and he holds a Harvard M.B.A.
He is known for not being materialistic, despite the fact that he was the best-paid CEO on Wall Street in 2005, earning $38.3 million in compensation. He has an estimated net worth of $500 million.
Paulson is chairman of the Nature Conservancy and chairman emeritus of the Peregrine Fund. Earlier this year, he donated $100 million in Goldman stock to a family foundation dedicated to conservation and environmental education. And last year he directed Goldman Sachs to donate 680,000 acres in Chile to the Wildlife Conservation Society, despite objections from shareholders that it was not in the best interests of the company.
Paulson, who joined Goldman in 1974, has served as CEO since May 1999. He has been an advocate of corporate governance reform and a staunch Republican, serving as one of Bush's "Pioneers" by raising at least $100,000 for his 2004 re-election campaign.
He has described himself as a blunt, non-charismatic leader, focused on getting the job done rather than wowing the crowds. Competitors and colleagues have described him as an intensely driven salesman who leads by example rather than words. But Paulson is not one to step down from acting as a spokesman for Wall Street when the spirit moves him.
After the implosions of Enron and WorldCom and other corporate disasters, he spoke out about the need for governance reform. He was also instrumental in the ouster of former New York Stock Exchange chairman Richard Grasso after questions about his multimillion-dollar pay package exploded in negative headlines in the fall of 2003.
While Rubin was avowedly in favor of a strong dollar, observers said Tuesday it is less clear which way Paulson would angle. The current administration has not taken such a hard line on a strong dollar, and Paulson isn't likely to contradict that. However, he may make better public statements to clarify the administration's position. "Hopefully, his first statement on the dollar will be more concise," said Mark Witner, chief economist for Wachovia.
Paulson's contacts with foreign governments are seen as a huge leg up in trade negotiations. He has visited China dozens of times, arguably more frequently than anyone in the government. The Bush administration has been eager to persuade China to move more quickly to a market-based currency exchange rate, and Paulson's contacts may help.
"The whole world is dependent upon the U.S. economy as a major engine of its growth," Paulson said in the Rose Garden Tuesday. The U.S. economy "is truly a marvel, but we cannot take it for granted. We must take steps to maintain our competitive edge in the world."
Washington typically turns to Wall Street to add clout to its message, analysts said. President Ronald Reagan's first Treasury secretary was Donald Regan, the chief executive of Merrill Lynch throughout the 1970s. His third secretary (and President George H.W. Bush's first) was Nicholas Brady, the former chairman of Dillon Read & Co.
Rubin served as President Bill Clinton's second Treasury secretary from 1995 to 1999, shuttling the U.S. economy through several global currency crises and the collapse of hedge fund Long Term Capital Management. Rubin has since taken a senior advisory role at Citigroup.
But since Rubin left Washington, the Treasury has been headed by non-Wall Streeters. Paulson's appointment "is a huge contrast," said Mark Zandi, the chief economist at Moody's Economy.com. "If there were some kind of global financial event, he's the best person to be in that job."