Jim Citrin Leadership by Example

He's the man who is getting $700 billion to bail out the nation's financial system.  He personally drove the US government acquisition of insurance giant AIG and stepped in to engineer the nationalization of the formerly private mortgage behemoths Fannie Mae and Freddie Mac. He cajoled Jamie Dimon and Alan Schwartz to consummate the fire sale of Bear Stearns to JP Morgan Chase with a promise of $29 billion in financing from the Fed only to decide a few weeks later to allow the equally venerable Lehman Brothers to go into bankruptcy.

Move over Senators Obama and McCain and make way for the most powerful Treasury Secretary to come our way in modern times.  He's Henry Merritt Paulson Jr., a.k.a. Hank.  He leads a department that employs over 110,000 people and important institutions including the IRS, the U.S. Mint, and the FBI.  But who is Hank Paulson? Where did he come from? What drives him? How has he changed since grudgingly agreeing to come to Washington in 2006 after a distinguished career culminating in becoming chairman and CEO of the bluest of blue chip firms, Goldman Sachs, and where does he go from here? 

To get at these questions and push beyond well known sources, I interviewed a cross section of current and retired Goldman Sachs partners, including two members of Paulson’s executive committee, as well as a variety of leaders from the financial community more broadly.  Let’s take each of the above questions in turn.

Who is Hank Paulson?

Now 62, Paulson was born in Palm Beach, Florida and grew up in a suburb of Chicago, Barrington Hills, Illinois.  As a youth excelled in just about everything he did.  He was an Eagle Scout, a star football player, and a talented student.  He attended Dartmouth College, graduating with Phi Beta Kappa honors in 1968, where he reveled in protecting his quarterback and breaking holes for his running backs as an all-Ivy League offensive lineman. He was a direct admit to Harvard Business School, graduating in 1970. 

As a person Paulson is direct and self-confident with a palpable inner strength. Some say this comes from his faith as a Christian Scientist, which prohibits him from smoking or drinking.  He and his wife Wendy have two children, daughter Amanda, who is a journalist for the Christian Science Monitor, and a son, Merritt, who owns minor league baseball and hockey franchises in Portland, Oregon.  Disciplined about keeping fit, Paulson has always been an adventurer, traveling the world, and developing a passion for and expertise in environmental work and endangered animal species.

His career has been a model of private sector accomplishment and public service leadership.  After receiving his MBA, Paulson went to Washington to become staff assistant to the Assistant Secretary of Defense at The Pentagon. Two years later he moved to the White House, serving as assistant to John Ehrlichman from 1972 to 1973.  He joined Goldman the following year in the firm's Chicago office and became a partner in 1982.  He rose through the investment banking group, becoming co-head in 1990.  At the end of 1994 Paulson became chief operating officer of the firm, and in June 1998 succeeded Jon Corzine (another famous Goldman alum now Governor of New Jersey) as chief executive.

When President Bush asked him to become Treasury Secretary, he is said to have balked; and for good reason.  The two prior Treasury Secretaries, Paul O’Neill, former CEO of Alcoa and John Snow, former CEO of railroad giant CSX, were regarded as largely ineffective and what’s more, the President had only two and a half years left in what was an increasingly unpopular term.  Paulson told the President that he would only agree to the job if he was guaranteed to have the authority to make an impact.  Since his confirmation by the Senate in June 2006, he certainly has had his authority and he certainly has made and continues to make his mark.

What Motivates Him?

People who know Paulson stress that his motivation is pure, to help achieve stability in the financial system and the economy.  He genuinely views his role as giving back to the nation and to the industry that has given him all of his advantages.  He has a deep faith in markets but also in a role for government, especially when markets break down. 

Paul certainly did benefit from the markets, which have afforded the financial opportunities from his career at Goldman Sachs.  While he took a significant pay cut moving into Treasury, it was from an atmospheric level, swapping out more than $20 million in annual compensation for a governmental salary of $183,500.  He also built an equity stake in the firm that grew to approximately $500 million which he had to sell prior to joining the Cabinet (like other federal appointees, he benefited from a capital gains tax exemption given to all who have to sell their holdings prior to taking office).

A $700 Billion Checkbook

Last Saturday, the Bush administration formally proposed a vast bailout of financial institutions in the United States, requesting unfettered authority for the Treasury Department to buy up to $700 billion in distressed mortgage-related assets from banks and other private firms. The proposal, which would raise the national debt ceiling to $11.3 trillion, is notable for its simplicity and the power it will bestow upon Paulson.  It would grant the Treasury Secretary unprecedented authority to buy and resell mortgage debt with no restrictions other than requiring semiannual reports to Congress. 

The bill seems certain to be approved swiftly by Congress, which is a testament to the credibility that Paulson has earned with his hands-on management of the current financial crisis.  It should be noted that a key part of Paulson’s effectiveness and credibility is based on the seamless partnership that he has built over the past two years with Federal Reserve Chairman Ben Bernanke (during the current crisis they reportedly speak up to ten times a day).  Together they forged the ambitious plan to buy $700 billion in troubled assets with taxpayer money.

To put the $700 billion in context, it is roughly equal to what the United States has spent so far in direct costs on the Iraq war and more than the Pentagon's total yearly budget appropriation.  Another way to look at it, spread across the entire population, it would amount to more than $2,000 per person.

I asked a leading real estate investor, who oversees a market-outperforming multibillion dollar fund, to give me his assessment of Paulson’s performance.  “I'm incredibly impressed with Hank Paulson's decisiveness, leadership and pragmatism,” he said.  “I remain scared to death of what the ongoing de-leveraging and reversal of years of lax credit may still lead to, but I believe that history will applaud his interventions.”

Another senior Wall Street executive told me, “Paulson has been very hands on and taken the captain’s chair.  He stepped up to the plate while the White House and Congress simply didn’t know what to do.  It is not an overstatement to say that Paulson’s aggressive interventions, with Bernanke’s support, helped prevent a crash of the world financial markets.  Like him or not, you have to respect him.”

How has Paulson’s Management Style Changed Since Goldman?

If you watch Paulson at press briefings or in Senate hearings, you get a sense of the man.  Some of the adjectives that describe him best are direct, intense, powerful, serious, competitive, can-do, and frankly, ballsy.  One of his former Goldman executive committee members said, “Hank hasn't changed at all since he was at Goldman. Literally.”  Another current partner added, “He is exactly the same, very forceful and willing to take the lead and take a position. But he also uses a strong team around him to affect the game plan.  I think he has done a tremendous job in the face of extreme pressure and be willing to make tough decisions. Thank goodness he is in the job.”

Where Does Paulson Go From Here?

Common sense would dictate that Senators Obama and McCain would plan to keep Paulson on as Treasury Secretary.  He has said publicly that after he leaves his Treasury post, he would like to play a leading role in environmental work on a global basis.  However, the aforementioned real estate investor, who like Paulson is a Dartmouth grad, has a somewhat different plan for the Secretary. “I’d like him to remain Treasury Secretary for the time being, but only until he accepts the role of Dartmouth's seventeenth president in 2009!”