Henry Paulson's WSJ Interview

The esteemed Henry Paulson was interviewed by the WSJ in today's issue. See the article below.

Goldman CEO
Tackles Critics,
Touchy Issues

Paulson Defends Firm's Strategy
On Both Investing and Advising:
'We Are Very Much Client-Driven'

By SUSANNE CRAIG
April 26, 2006; Page C1

At Goldman Sachs Group Inc.'s last annual meeting, a shareholder blasted Chief Executive Henry Paulson Jr. for being an environmental do-gooder who isn't as focused on the firm's core business as he should be. Mr. Paulson defended himself, saying if there is one thing shareholders would agree on it's that Goldman is good at making money.

The firm had record annual profit of $5.63 billion in 2005 and its shares are soaring. Goldman is the world's leading provider of merger advice.

But Goldman also gets criticized for the way it makes its billions. Often, the global securities giant deploys its own capital to make big market bets for itself or take stakes in companies. This strategy is emblematic of what is going on across Wall Street -- more and more firms are putting their own money at risk to boost profits. By having more skin in the game, critics wonder if Wall Street firms, such as Goldman, are putting their interests ahead of clients. It's an assertion that gets Mr. Paulson hot under the collar.

Mr. Paulson, 60 years old, graduated Phi Beta Kappa from Dartmouth in 1968 with a major in English literature and All-East laurels as a tackle on the football team. He cut his teeth at Goldman as an investment banker in Chicago. He has worked at Goldman 32 years and has run the firm since 1999.

He recently sat down in his top-floor office at Goldman's Manhattan headquarters to discuss the firm's success, its critics and the challenges ahead. He also addressed his future plans, including an oft-rumored post in the Bush administration, and explains why he once brought a bird to work.

* * *

WSJ: There is a lot happening on Wall Street these days, and not all of it is positive. What is the biggest challenge facing Goldman these days?

Mr. Paulson: Managing growth. Since 1999 the number of people we have has roughly doubled, as has our revenue, and our capital base has gone up four times. All this is good. But there's no doubt that our culture likes things small. So the key ... is maintaining a very strong culture, staying entrepreneurial despite our current size. We spend a lot of time thinking how to do a better job of institutionalizing some of the processes that we were able to do on more of an entrepreneurial basis when we were smaller.

WSJ: Goldman was recently in the news when one of its employees and a former employee were ensnared in an insider-trading case. Are these the type of issues part of the growing pains?

Mr. Paulson: There's always some probability, no matter how hard we try, that we're going to hire some bad people. We have got 24,000 employees. Towns of that size have a jail. Hopefully, we have a better screening process but we are still very embarrassed that we had that person at Goldman Sachs.

WSJ: Tell us a little bit about your plans for the future. There is a lot of talk that you are a candidate for Treasury Secretary.

Mr. Paulson: I love my job. I actually think I've got the best job in the business world. I plan to be here for a good while and I'm very focused on the challenges we've got in front of us at Goldman Sachs.

WSJ: You talk about how important your clients are. But probably more than any other Wall Street firm people accuse Goldman of competing with its clients. You have a private-equity arm that makes investments. How do you manage it when client A calls up and says, "Why are you bidding for ABC Telecom Co. against us?"

Mr. Paulson: I strongly disagree with your assertion. We look to co-invest with our clients. Our clients, by and large, are very sophisticated. And so when our clients ask us to perform a role they are pretty thoughtful about it, and they're doing it based upon our history of being able to manage conflicts and potential conflicts.

I do believe that the way in which we manage the conflicts and perceived conflicts is critical to our reputation and we would not have the market share we have and the client relationships we have if we weren't able to manage those in a way in which it meets the high standards we set.

WSJ: Still, your firm continues to make headlines on this issue. In 2005, you acted as adviser to both the New York Stock Exchange and Archipelago Holdings when they merged. The CEO of the NYSE is a former Goldman president. People were outraged.

Mr. Paulson: I think that's a very good example of something that we don't think was a conflict. I'm gratified that deal has been recognized by the market for how great it was for the New York Stock Exchange and more importantly for the capital markets. We'll look back on that in a number of years and say, it is one of the few things we have played a role in that has made such a significant difference.

I think it is generally known we came up with the idea. The boards of each client very much wanted Goldman Sachs, and we agreed to work with them in developing the business model, figuring out how to put the two companies together. They didn't just ask, they insisted that we do that on a sole basis early on. It was very important to keep the transaction confidential. Also, we did not advise either side on price.

In addressing conflicts there is another issue at play: public perception. Does it appear appropriate? I have to tell you we are increasingly aware of that.

WSJ: Goldman has internal hedge funds and makes a lot of money using its own money to wager on the market. Your critics say Goldman is just one big hedge fund. Are they right?

Mr. Paulson: I think that's ridiculous. We are very much a client-driven firm. We are very good advisers. We have client relationships that are second to none. We're good investors, and we've got a first-rate team that knows how to anticipate market change and respond to client needs. I think that when people say, you know, gee, you're like a hedge fund, they look at the securities businesses and its results and so much of it comes under sales and trading. But the vast majority of that is us performing our role as a financial intermediary and taking risk to help clients make investments or execute transactions. That's very different from the role of a hedge fund.

WSJ: A lot of your business now comes from outside the U.S. What concern do you have about the growing backlash against foreign investment?

Mr. Paulson: There's not just a backlash outside of the U.S. There is a backlash inside the U.S. The way I think about it is that if the last 20 years have shown us anything, it's that there's no good alternative to globalization. What the last 20 years have shown is those countries that have opened themselves up to globalization have benefited. The others have been left behind.

In the U.S. we have benefited more from free trade and global competition than any country in the world. But yet, at a time when our economy is growing and new jobs are being created, there's still quite a protectionist sentiment here. I really believe that we need to be better at articulating the benefits of globalization to society and better at acknowledging the shortcomings and addressing them.

WSJ: Goldman is heavily invested in a number of countries, notably China. What is the next country Goldman might look at?

Mr. Paulson: I've been to China about 70 times since the end of 1990. I just got back from the Middle East. There are huge amounts of capital in that region. They have much more capital than investing opportunities. So there are real opportunities there.

Business in Germany is picking up. That economy is definitely stronger. We not only have India and China growing, but also Korea and Japan. In Latin America, whoever thought we'd see Brazil growing and with a surplus that's 6% of GDP?

WSJ: Everyone on Wall Street brags about how good they are at risk controls. What makes you different?

Mr. Paulson: We spend an enormous amount of time on risk controls. We look at all kinds of scenarios. For example we study market, credit and operational risks. But we're realistic enough to say that we don't know when there's going be a global financial crisis, or some kind of global shock. And when that comes, market positions that aren't supposed to correlate will correlate. Because many of us have similar positions, the things we thought were going to be liquid will be illiquid, and in some cases the reverse will be true.

When you deal with something like that, the most important thing you can do is have excess liquidity, and we do. In 1998, when we went through the last shock, because we had excess liquidity, we were able to maintain our strategy, hire people from our competitors and invested in Asia immediately.

In recent months there has been a lot of talk about your support of various environmental causes. It is true you once brought a live bird to a staff meeting?

Not exactly. I was chairman of the Peregrine Fund and they do captive breeding and releases of endangered raptors, originally the Peregrine Falcon... They were doing some fund-raising and I had people from the Peregrine Fund come by the office with a falcon.

Write to Susanne Craig at susanne.craig@wsj.com