21. Guest Lecture by Paolo Zanonni, Part I

Uploaded by YaleCourses on 31.03.2011

Prof: We're very privileged today and Wednesday
to have my dear and good friend of thirty-five years standing,
Paulo Zanonni, who has for quite a long time
been a partner at Goldman Sachs, and is indeed the second most
senior member of the Goldman Sachs partnership,
by age.
Today we're going to do a very informal class with facts on the
slide sheet as background.
We're going to have Paolo talk about how Goldman actually works
at seeing from the inside, which will be a rare
opportunity to see the most remarkable American business
firm from the interior.
It's truly a great opportunity for all of us.
Then on Wednesday, Paolo will do a major European
case managed by Goldman Sachs, and a case which was in
progress when he was here a year ago,
and it has now come to its fruition.
The slide set for that is posted--that will be a little
more formal than today, but still informal in style.
Please help me welcome Paolo Zanonni.
Paolo let's talk about you to begin with.
You are Northern rather than a Southern Italian?
Paolo Zanonni: Center-north,
Prof: Yes, and is there any significance
in North/South in Italy?
Paolo Zanonni: Yes, I think there's
Prof: Are there--how many people of Southern Italian
descent in the room?
Sort of?
Student: Sicily.
Prof: Okay.
How do most Northern Italians look on that distinction?
Paolo Zanonni: They look at that
distinction like the South was almost a colony,
occupied or conquered in 1861, and never really--
sort of conquered but that never really assimilated.
Prof: Assimilated; the North is the industrial and
business part of Italy, is that a fair statement?
Paolo Zanonni: The North is the most
industrialized part, yes, but in the South you
have--I don't think you want to go into the Italian political
economic system, but in the South you have
certain areas that have a reasonably high level of
Prof: Paolo you came from--you first arrived in the
states in what year?
Paolo Zanonni: 1973.
Prof: 1973 and you came as a graduate student in the
Yale Political Science Department.
I remember it well.
Paolo Zanonni: Yeah.
Prof: Paolo became an outstanding touch football
Paolo Zanonni: Too small for that.
Prof: No, no you were really good at it.
You even picked up the brawl language of the game.
Paolo Zanonni: That's--size there is
Prof: The--and you left Yale?
Paolo Zanonni: In 1978.
Prof: In 1978 to go to work for Johnny at Fiat?
Paolo Zanonni: Yep.
Prof: Tell us a little about that stint.
Paolo Zanonni: That's the--
I worked for the Chairman of the Board and also the owner of
the controlling stake at Fiat for about five or six years--
Prof: Right.
Paolo Zanonni: --and after,
I became--I wanted to do some more operational experience and
so I went to manage the international business
development department at Fiat.
In that capacity I spent about five years in Washington,
here, because we had asked Chairman of Fiat U.S.A.,
because we had some issues with the then U.S.
Government, and after, I spent two years in Moscow in
1990 and 1991.
Prof: What were you looking at in Moscow?
Paolo Zanonni: In Moscow I was looking to
acquire the largest Russian manufacturer of automobiles that
the government-- first the government of the
Soviet Union, and second the government of
the Russia Republic, when the Soviet Union was
dismembered, or disappeared,
I decided to buy >
That company has been established by Fiat as a wholly
owned company from-- wholly owned by the Soviet
state about fifteen years earlier,
and so it was based on Fiat technology and both Gorbachev
first and Yeltsin afterward wanted to privatize,
and I was sent there to try to buy it,
Prof: Ultimately--you ultimately walked away from the
deal as I understand it?
Paolo Zanonni: Yeah.
We walked away because there was no deal for the simple
reason that the management and the region,
some area region wanted to become owners of the factory and
have ownership of the asset and 100% control on the profits,
and on the cash flow, and so they were definitely--
they were not willing to sell it to a foreigner.
Prof: So that's a non-starter.
Then after the stint in Russia?
Paolo Zanonni: I did a couple years more
at Fiat, and after, I decided to join Goldman.
Prof: Then you joined Goldman?
Paolo Zanonni: Yeah.
Prof: And you joined them as--what was your title at
that time?
Paolo Zanonni: At that time,
Goldman did not have managing directors,
as opposed to--so it only had vice president--
sorry it had associate--analyst,
associate, and vice president of various
degrees of seniority and I joined them as a--
the last degree of vice president, and after,
I became managing director in 1997 and a partner in 2000.
Prof: Let's now turn to Goldman.
I'm talking to these people now for a second.
You'll remember the stark contrast we've drawn between the
ownership for-- of joint stock corporations,
publicly traded joint stock corporation on the one hand,
and a partnership on the other.
Can somebody help us out by naming the two or three
variables on which those two are most importantly different?
Okay I'll settle for one variable.
Student: Liability.
Prof: Okay limited liability in the case of the
joint stock corporation; good.
Student: Liquidity.
Prof: Liquidity; huge difference.
You can't sell your partnership in Goldman.
Student: Partnership income is not taxed separate
from the >
Prof: The partnership is invisible in the tax codes so
that the proceeds-- Paolo Zanonni:
The individuals get taxed, the individual partners get
Prof: The individuals get taxed, okay but it in effect
saves one layer of taxation.
Student: The right or ability to make management
Prof: Okay so that in the case of a partnership
everyone has a management job, all the partners have
management jobs.
Whereas, with a corporation you have centralized management
where the board appoints a chief executive and a chief executive,
at least in theory, is responsible for appointing
everyone else, and finally,
how did the two do as media for raising capital?
The mechanism for raising capital;
back to Paolo.
Student: A joint stock corporation is much more
It's got greater scalability; you can raise a lot more
capital than a partnership.
Prof: Okay.
The joint stock corporation was created as a mechanism for
gathering up capital in very large quantities and it's good
at it.
Now back to Paolo.
Historically, Goldman was straight-forwardly
a partnership?
Paolo Zanonni: It was a partnership up to
1999, but you have read the case study with the IPO of Goldman
Prof: And it was an extraordinary partnership with
an extraordinary record of success in nearly all of its
Is that a fair statement?
Paolo Zanonni: In 1999 with--it's a fair
There are a couple of exceptions--1929.
Prof: Tough on a lot of people.
Paolo Zanonni: Yes, tough on a lot of
Especially tough--almost killed the partnership.
There is another exception which is interesting for your
class because usually investment bank and securities firms tend
to do badly, tend to be very cyclical,
and to do badly on the downturn and well on the upturn.
There was one exception, one exception,
at least as far as Goldman is concerned,
which is very interesting, everybody else was doing very
well in 1994 but Goldman was doing very badly and it almost
killed the partnership.
As badly as--almost as badly in 1928, and as badly as the crisis
or >
and the reason for that, and that again,
mixed blessings, one of the facts of life.
The reason why Goldman was doing very badly was because
Goldman has tried very aggressively to do proprietary
trading, especially in fixed income,
and that was not really part of the Goldman culture.
The risk management and the trading organization of Goldman
was very bad, and in 19--toward the end of
1994, second half of 1994, Goldman started having losses
at that time that were staggered,
especially for a partnership.
Almost the--the capital of the partnership was almost wiped
out, and actually that's where the
firm had the remarkable ability of select--
a group of leaders that knew--that came from trading,
knew proprietary trading very well,
even if some of them were not born in the same--
in that same organization, and were able to restructure
the trading philosophy and especially the risk management
function of Goldman and probably one of the reasons why Goldman
has done not so badly when the credit crunched,
is because of that overhaul of the risk management and of the
trading format style, and control of the autonomy of
the traders.
Actually the two people that did it,
one was Corzine who was a managing partner when the firm
went public, and the other was Lloyd
Blankfein who is CEO today.
Prof: Corazine may be available for--
Paolo Zanonni: If he could come back to
Prof: Kidding.
Paolo Zanonni: I think it he wants too.
Prof: The mood--just notice the style of which Paolo
just said something.
He said Goldman has done fairly well in the current crisis.
Now that's a huge understatement;
Goldman has blown the doors off the current crisis.
Paolo Zanonni: End of 2008 wasn't a nice
Prof: It was an ugly period, but compared with all
its competitors, in this and in many other
matters, Goldman has been absolutely tops,
and part of the culture is not to--chest thumping is not the
Goldman style.
There's a very understated style that emerges,
and which Paolo, I think, embodies.
Now the move to a corporation--corporate ownership
form has an obvious upside in raising capital,
but an apparent downside in changing the incentives for top
management in a way that might, at first blush,
seem likely to undermine the cultural strengths of the
historical partnership.
Paolo Zanonni: Yeah.
Prof: Why don't I shut up for quite a while now and
let's get you talking about how that has been accomplished and
how it works, and somewhere or another we
ought to talk about how people are recruited to the partnership
and to leadership roles in the firm,
and how that might relate to the style of management that you
get with Goldman.
Paolo Zanonni: I'm sure that you are--I'm
sure that in Doug's course you have gone through it and parties
in the case that I have read.
The two advantages of a partnership,
especially in the investment banking world,
and a securities firm how it might be is one that as opposed
to the joint stock corporation in which Doug--
that Doug discussed with you, in a partnership there is no
split between management and ownership.
The owners of the capital of the firm are also the managers
of the company, and so that's a--creates a set
of incentives but by not distinguishing between provider
of capital and the people that have the control of the
operation of the firm.
In Goldman, every generation of partners and leaders have always
been convinced that this was a great advantage.
The other advantage that you have is that--
and this is an advantage especially in investment banking
and securities firm, which are people business,
they have no-- if you look at these companies
they are remarkable in the amount of sales of revenues that
they have, they have no fixed capital.
They have no buildings, most of the buildings are
leased, they have no plant and
equipment, they have no patents, it's just a people's business
and so when you are running a people's business one of your
core competencies has got to be the ability of coordinating the
behavior to those people 3,000/4,000/20,000 and Goldman
has only been convinced that the partnership structure,
it's ideal to coordinate the behavior of the top echelon of
the firm.
So the real challenge that Goldman was facing when Goldman
decided to go public was to try to combine the advantages of the
joint stock corporation, especially in raising permanent
capital, because the partnership capital
is not permanent.
It's limited, but if you are very successful,
the limitations are not so much on the size as they are on the
availability on the capital for a long period of time,
because of course you can put restrictions on the partners on
taking away the capital when they become limited,
but those restrictions will just prolong their ability to
take capital out.
If not, nobody would like to be a partner, if the capital cannot
be taken out.
Goldman tried to--the then leadership of Goldman tried to
combine the advantages of the partnership as far as having the
owner management-- to get the owners managers to
manage the company and the ability to coordinate behavior.
What Goldman tried to do and is a unique form of corporate
governance, is the partnership that is also a joint stock
For instance, a title of partner was not
eliminated, and Goldman built a structure
in which partners are rewarded and incentivized in a different
way than the other stockholders.
The other thing that Goldman decided to do was,
which is unusual in a joint stock company,
and you won't find it in any other partnership that has
become a joint stock company, was to maintain the structure
of the selection of leadership; i.e., the selection of the
partners almost as it was before it became a joint stock company.
Prof: Maybe too-- Paolo Zanonni:
So what you have-- let me try to--what you have is
that you have the legal form of a joint stock liability company
imposed into an organization that,
as organizational structure, and institutional government,
except at the top, has maintained the same
institution and the same type of leadership selection that you
had in the partnership-- let's say partnership pre-IPO.
Prof: Okay, so let's talk about this
leadership selection process beginning with the entering
classes of employees.
Paolo Zanonni: Usually when you enter
Goldman you are given a class, like you are given a class when
you went to Yale, you are the class of 2007/2008.
Prof: We designate them by the year.
Paolo Zanonni: At the end that's correct.
We designate it by the year in which they start.
There is some sort of courses in which you are generally
considered for partnership once you have spent a fair amount of
time in the firm, and once you have been--you
have done a stint as a managing director.
When your class is up for partnership there--
Prof: How big are these classes, more or less?
Paolo Zanonni: It depends,
but let's say that they are a few hundred people.
Prof: 500 maybe?
Paolo Zanonni: No, a little less
because-- Prof: 400?
Paolo Zanonni: Between 400 and 200--it
also depends because, you know, the partnership has
been--it's not--there is no erasure.
When we went public the partnership--the partners were
about 200 ten years ago.
There were still less than 300 three years ago,
or four years ago, now there are more than 400.
There will be a lot less in 2010.
Prof: Okay, so you've got these groups of a
few hundred and at a certain point it comes time--
Paolo Zanonni: It comes time to be
For someone that has done--that they have had normal career,
it comes time to be considered.
The way the selection works is the partners of each division
make two or three lists of all the candidates of their own
division, an A list, a B list,
and a C list.
The A list is the best candidate, the B list is the
candidate that are somewhere in between,
and the C list is the candidates that are not--
that do not have a lot of chances in that particular year.
The partnership selection gets done every two years,
even years, 2000/2002/2004/2006/2008/2010.
Once these selections--when the first selection has been done,
what the firm does is takes a group of people and charge them
with the task of asking the community of mostly of the
professionals about the candidates,
and so there are a group of people that conduct rigorous--
reasonably rigorous interviews among everyone that has worked
with everyone.
A large number of the people--of the professionals
that have worked with the partner's candidate,
be they more senior peers, or more junior,
to try to gauge the quality of that individual,
and even more, the quality of that individual
vis-a-vis, the group that is being
considered as partner.
This is a process that sounds easy, but it's a process that
takes about two months.
Prof: If I remember our conversation correctly,
the firm insists on people making pair wise comparisons?
Paolo Zanonni: The first insists on
people make-- doing a qualitative analysis,
and after making-- make a ranking of everybody
they know, first, second,
third, fourth, and fifth;
and in certain cases making pair wise.
When there are two candidates that are in a similar position,
making pair wise comparison, which is a nice--
which is an old way to do leadership selection.
Because my understanding--but it my--
it's an understanding is that it was reasonably well used in
the Catholic Church orders on the twelfth--
eleventh centuries.
Actually there is someone that proposed that in electing the
Pope, the Pope had to be elected doing pair wise comparison of
the candidates.
Prof: Well did the Roman Catholic Church is one of the
few organizations with more distinguished administrative
history than Goldman Sachs.
Paolo Zanonni: I don't know one of the
few, but definitely.
I think that Goldman consciously or unconsciously
copied some of the--at least some of the criteria used by the
Catholic Church.
Prof: As you listen to this, think about what this
process would do to your thinking if you were a junior
person at Goldman Sachs.
This is all designed to shape and mold a certain kind of
person--of persona and management style.
Paolo Zanonni: And behavior--
Professor Douglas W.
Paolo Zanonni: And behavior in your daily
Prof: So--and you mentioned in our conversation
this morning an element of the process called cross roughing.
Paolo Zanonni: The cross roughing is the
one you just mentioned.
Prof: Is there a bridge player in the room?
Cross roughing is a bridge term?
Paolo Zanonni: I'll try to find out what
it means exactly.
I have no idea.
Prof: Is there not one bridge player in this room?
That's an interesting fact.
I think it-- Paolo Zanonni:
Lots of poker players but very few bridge players.
Prof: What's cross roughing in this process?
Paolo Zanonni: It is a process of a group
of people selected to search about the--it's the one that
I've just described.
That search about the qualities of the various candidates.
Prof: But it's from--they're not in the same--
Paolo Zanonni: They're not in the same
Professor Douglas W.
Rae: --their division.
Paolo Zanonni: They are not in the same
They belong to another division.
Of course when you look at an organization you have to think
about the organization.
I'm getting to theoretical, sorry too abstract,
you have to think about the organization in two dimensions,
vertical and horizontal.
If you take the divisions they are like the business in your
normal industrial organization and they cut vertically.
If you take the partnership it cuts the organization
If you want to have a very effective organization you
should have a good blend and a two mix of horizontal cleavages
let's say and vertical ones, so the way the selection to the
partnership is done, because of course you cannot
have a group of people that look at 500 candidates,
or 200 candidates, you do it by division.
The first selection is done by division.
When you do the least, the least are done by the
division, but afterward since you--since
the people that will do the selection are the gatekeeper to
a horizontal cleavage in a horizontal organization,
they are not--that gate are not kept by people from the same
division, but they are kept by people
from another division because you are moved to a horizontal
organization that should coordinate the top of the
various vertical divisions.
Prof: So this is a way--in part of checking the
tendency of divisions of the-- Paolo Zanonni: Silos
Prof: >
Paolo Zanonni: Becoming silosis.
Prof: Silos--I heard last week a great expression to
this, for a frog at the bottom of the
well, the sky is very small,
and that's certainly true in many organizations right,
where people get into their little parts and they're not
seeing what other people are seeing across the other
Paolo Zanonni: Not only,
and having gone through a fair amount of restructuring in my
professional life, both in an industrial
organization-- in a partnership and in an
investment bank that was a limited liability company,
when you get to restructuring it is very difficult to make a
rational decision if the organization is mostly based on
vertical division, because the vertical logic
limits to some extent-- not to some extent,
limits to a major extent, the horizontal movement of
So you tend to consider them only on a vertical scale,
and when on the contrary, you are trying to restructure
the organization or change the organization,
or reduce the number or develop new business units,
you have to be able to cut across a vertical division,
because if not, you utilize your manpower
badly, and you give your people a
limited set of choice.
They can only move either up or down,
but not sideways, or the move sideways becomes
difficult, and if the move sideways
becomes very difficult, it becomes very difficult for
the organization to follow new business opportunities because
those tend to be lateral.
Its increase in scope, not the increase in depth.
Sorry we tend to become too abstract, sorry.
I'm sorry.
Prof: What are the qualities that are most
important to cultivate?
Students, you've seen the fourteen commandments in the
Paolo Zanonni: Fourteen business
Prof: Business principles, seen from inside,
commandments seen from outside--what are we trying to
achieve here, the behavior of the partnership
and those who aspire to be in the partnership?
What would be the top two or three qualities?
Paolo Zanonni: A reasonable degree of
autonomy and independence, but without getting too
independent-- without pushing the independent
to some extreme that it gets disruptive for the organization,
so if you want you try to strike a balance between
independence, creativity, and conformity,
and historically I think Goldman has a premium to some
extent on conformity versus creativity.
I think that there are a fair amount of innovations in which
Goldman has come second or third and other firms have had--
have been a lot more creative, or somewhat more creative,
so you try to strike that balance and of course one of the
characteristic of that balance is the adherence to a very
reasonably straight belief system,
or corporate culture.
Prof: How about chest thumping and conspicuous display
of wealth?
Paolo Zanonni: Chest thumping definitely
is out.
A conspicuous display of wealth I would say, consider the
standard of the industry is not too bad, but consider the
standard of the industry.
If you look at it from the outside the industry,
it's hard to judge, but it seeing it from the
inside, at least its frowned upon,
it's not considered-- actually it's sanctioned to
some extent.
Prof: Well, and-- Paolo Zanonni:
Prof: --and it can actually, if I'm not mistaken,
damage a Goldman career if you are sort of wildly ostentatious
and pick up $10,000 restaurant tabs and that sort of thing.
Paolo Zanonni: Yeah, it usually--you
usually don't do it twice.
Prof: So Goldman-- Paolo Zanonni:
What is the--let me think about, for a moment,
about another characteristic.
Within the limits of the adherence to a straight belief
system, and I know the two things seem
contradictory, it also pushes you to be an
entrepreneurial because de facto partners run their own
business unit.
The levels of hierarchy are very, very, very short.
The organization is very flat, and one of the reasons why it's
flat is it's trying to foster entrepreneurship,
especially in the partners, because,
see, the business in which Goldman operates,
the industry in which Goldman operates,
and you will see it, I'll to give some examples in
the printout that you have, changes very, very quickly.
For instance if you take a picture--we don't give those
details for many, many reasons,
one of which is they change too often.
If you take the thirty-six--let's say thirty
major business lines of Goldman five years ago,
they are not the same as what they are today,
so--because the environment changes so fast that if you
are-- if you still try to operate and
maximize, or be efficient in the business
of yesterday, or of this morning,
mostly you are-- so if you are a good manager
maybe you are a bad interpreter and you are missing new
opportunities of the changes and the changes the environment
What the firm is trying to do is to have global leaders that
more or less think along similar lines,
but that are able to capture new opportunities and new
business line.
Let's take--let's for instance--I'll start to make
some examples; we run the risk of being too
Let's take, for instance, I'm sure that some of you,
most of you, are familiar with the crisis of
the savings and loan association of the U.S.
at the end of the 1980s.
Before that crisis Goldman Sachs had never done a real
estate principal investment, never.
Didn't even own the building where they were because they
thought that there were no capabilities inside the firm for
making investments.
Actually when they--what was it National Trust,
or whatever, what was the trust that the
federal government-- Prof: RTC.
Paolo Zanonni: Yeah.
When they started--when the RTC, or at least the national
struggle, the federal owner of all the
real estate property, if you remember,
most of the crisis originated from the loans that the savings
and loan association had done, especially for real estate
developers, so of course the federal
authority that ran-- the bureaucrats,
in good sense, that ran that authority started
selling a lot of real estate cheap all over the United
It was obvious that there was a business opportunity there,
but it was also obvious that Goldman didn't know about how to
do it, because I mean IPOs,
rate defense, trading of stock--
of loans, yes, but never real estate.
An exceedingly smart person, who by the way happens to be a
Yale graduate, saw the opportunity,
saw the lack of capability, and decided to form a
partnership with someone that knew a lot about real estate all
over the United States and didn't have any capital.
Goldman started buying real estate,
and real estate loans, for themselves--
or for ourselves and for investors,
and they--the massive investment history of Goldman in
real estate, both real estate asset and real
estate loans, started then just because of
the opportunity-- because of the opportunity
offered by this trust corporation that was selling a
large amount of real estate, obviously very cheap and the
ability of one of the partners to see that there was an
opportunity, but that inside the firm there
was no capability and understanding which one was
cheap and which one was not cheap.
It seemed cheap but maybe it's too expensive,
but it would have been a bad investment anyway.
And at the end, the partner that we had got
tired, he made too much money and--but
he had transferred enough knowledge to the partners and we
bought it out and made >
The same is true with our huge private equity.
We--when I joined the firm we didn't do much private equity.
We did it on behalf of clients, we advised them when they are
buying or selling companies, but we didn't do it on our own.
On the contrary, immediately after the crisis of
2000, the dot com crisis,
we started seeing an opportunity and started seeing
an opportunity that you were going to make a lot more money
if you did it on your own than if you are advised by
A lot of banks saw it, however, this is a very
interesting-- I forgot when--a lot of banks
saw it, but they decided not to do it
for one very basic and valid reason.
The fact that if you do private equity you start competing with
your clients, and that is supposed to be the
sin number one in a service organization.
However, the hubris of Goldman was such that Goldman believed
that they were smart enough and good enough to be able to manage
the companies.
It was a conscious decision, there was a debate,
I remember it because I was part of the debate,
I was not part unfortunately of the debate of going public,
but I was--I was on the outside.
Actually I was--can we joke?
I was actually cheated because I thought I was going to be in
the next partnership, and so the partnership was
going public in 1999 and I was up for election in 2000,
the big prize was postpone or snatched to a limited,
so actually-- Prof: Pretty good prize
as we all know.
Paolo Zanonni: Yeah it was a very good
prize, but I was part of the private equity one.
Prof: Can I get you to talk for a minute about how
Goldman manages its relationships with power in
government and other branches of society,
not just in the states but worldwide.
Paolo Zanonni: As me and you have
discussed, I think that investment banking
is a business where culture is very important and in all of you
that are going to be here on Wednesday,
you'll see that when I speak about Enel/Endesa take over,
the financial variables are important,
but I will say that the variables that determine winning
or losing sometime, what we call soft variables,
but have little to do with prize and finance.
For a global firm that operates in this business it is very,
very difficult, if not impossible,
to be able to understand the complexities of the business
culture in which it operates.
Your best way to understand those complexities and to avoid
the landmines that are in different business cultures is
to get someone that knows the business culture of that
particular culture very well, so you end up selecting a group
of advisors, in any nation in which you
operate, that have a very deep
understanding of that particular business culture and can guide
you and your client through that particular culture.
I want to give you an example that is so--if not we have too
I want to give you an example that it's--actually it's
personal to some extent.
Goldman was very late compared to the other firms in moving
Goldman started a small operation in London in 1987,
when JPMorgan was big, when Lehman was big,
when Meryl was big--no Meryl started a little later,
but definitely when Morgan Stanley was big,
and at one point the problem that the Goldman people sent
overseas faced was how do we get--
how do we enlarge in Europe without making too many
The usual traditional way of American firms to do that was to
send investment bankers from the U.S.
and waited until they learned the various cultures.
A very smart banker, Goldman, who,
by the way, is one of the first graduates of these SOM;
when he had the responsibility of Europe he said--the reason
why I know it and I say it's personal because that's the way
in which I wasn't counted.
He said, "Wait a second, here we have to do something
totally different.
We have to select for every nation where we operate,
someone that maybe is not a banker,
who cares, but that knows that business culture very
well," and so we had a generation of lateral hires.
Me, my colleague in France, one in Spain,
one in Germany, one in England,
one in Holland, one in Sweden,
none of them came from investment banking;
very few of them came from banking.
My French colleague came from the States,
and when I did my interview with John Soren before the
selection I said-- he said what would you like to
do, I said, "How can I think about
going into investment banking, I can't even count.
I can't count now.
I can't balance a checkbook."
He said, "Don't worry, we have hundreds of people that
can do that, and we will give you a smart VP
that knows everything about investment banking,
but you can operate an Italian business in
I said, "I think so."
He said, "Do you under--we want to have twenty clients,
no more in Italy, or fifteen clients.
Do you know which client we want and which we don't?"
I said, "I think so."
He said, "Do you know the way the client we want to
operate inside?"
I said, "I think so," and he said,
"Okay, who cares if you can't balance a checkbook?"
Goldman became the first investment bank in Europe from
1994 to 1997 in three years, when in 1993 it was well below
everybody else, and it is due to that
particular creativity of John >
who saw it clearly, at least at this cultural
How can I send an American or British in Italy?
They don't even speak the language.
Or in France they--I mean how can you?
You ever try to do a deal in France, or in Spain,
even for someone that has a--some sort of exposure to
different business culture like myself.
I would never be able to do it.
Like someone else would like to try to do it in Italy,
try to understand how Fiat works, or Enel thinks,
or only >
Prof: So when--in the context of the states you sent a
beaten up, Dartmouth linebacker to Washington?
Paolo Zanonni: Hank was--now the story
about Hank is he has always been a Republican.
Prof: Do you want to give your little imitation of
his voice style?
Paolo Zanonni: Paolo--his real voice
style was, the real imitation,
"Paolo go and get the business,"
at 3:00 in the morning.
Hank has always been a Republican.
He--if you talk to him, he ascribed his success at
Goldman with the fact that he didn't know what to do when he
got out of The Harvard Business School and he went to work for
The Nixon Whitehouse in the domestic affair division,
and he finds himself at 24/25 immediately after Watergate,
and everybody about him is either in jail or had to resign,
so he becomes the most senior person in that department and he
has to deal with the CEO.
He has to deal for a year and a half with the CEOs of large
corporations, and he learns,
and at the end he decided he doesn't like the government and
he tries to get a job at Goldman and he gets hired,
and what he was always telling me he would say,
see the real skill that I had was not what they taught me,
The Harvard Business School, but the fact that I spent a
year and a half in interacting with CEOs and CFOs from the
largest corporation because I was at The White House and there
was-- nobody was more senior than me.
So he had been--Bush tried to get him to be the Secretary of
the Treasury, to my knowledge which is
limited, at least twice before he accepted.
At one point he decided that it was time to let Glen Klein be
the chairman and that was a perfect exit.
Prof: Last question for today, a simple observation
would be that Goldman has essentially bet its life on the
quality of the people.
Just meaning all the things you're talking about,
plus something to do with just sheer mental horse power,
smart people.
Paolo Zanonni: There is a reasonable
amount of smart of people.
Wait-- Prof: Don't overstate
here Paolo.
Paolo Zanonni: No, there is a reasonable
amount of smart people, but do you know what the
characteristic--you know it.
I mean everybody who goes to an Ivy League school would know it.
Determination, it's almost as important as
brain power, and definitely
Goldman--definitely you will not get a chance,
not even of becoming a VP, not a partner,
if you are not determined.
The associate and the analyst work 100 hours per week,
for years, for five years, seven years,
and ten years.
The partners work 70 or 80 hours per week until they
retire; unless you are ready to do
that, no way.
Prof: And if the phone rings--
Paolo Zanonni: If the phone rings--
I told you, Hank was used too--when he was the chairman,
Hank was used to listening to voicemail,
because now we communicate via email,
then we communicated only via voicemail.
In a firm that was--that had $25 billion in revenues,
you could leave a voicemail to Hank Paulson,
and unless he was on a plane, you got an answer in less than
five hours, and if he was on a plane,
it depends how long the flight was,
but fifteen hours you got your answer after fifteen hours.
Prof: Terrific, so please review the slides for
Wednesday, and let's thank Paolo for this very interesting
conversation Paolo Zanonni:
Thank you.