The man who walked away from Goldman Sachs

by William D. Cohan

When Jon Winkelried first ventured inside Goldman Sachs it was early spring of 1981, and the future co-president of the 141-year-old firm was just finishing up the fourth year of his five-year undergraduate/MBA program at the University of Chicago. He had come to New York City in the hopes of securing a summer internship, but the firm’s hallways felt alien to him. While only 20 miles due west of Wall Street, the town of Millburn, N.J., where Winkelried grew up, was a world away. His mother was a schoolteacher, his dad the product of a Jewish, working-class neighborhood in Newark who managed local parking garages.

Winkelried had made his way to Chicago thanks to a full academic scholarship and his athletic promise (he had been a star pitcher and third baseman on his high school team). He had been invited to Goldman’s offices that spring day after doing well in the first two rounds of the firm’s notoriously exhaustive selection process — a series of on-campus interviews, followed by a second round of grilling at Goldman’s Chicago office. If he made it through the next step — a third round of eight interviews — he would be on the first rung of a stairway to vast wealth. Or as his enthusiastic tour guide told him, “If you get a job here and you’re successful and you become a partner, you’re going to be a millionaire.”

Winkelried (pronounced wink-el-reed) wasn’t sure the day went so well. After leaving the building, the aspiring banker was picked up by his dad, Irwin, in a Chevy Impala. As the two drove home over the Pulaski Skyway, the son was feeling disappointed, so his father leaned over to comfort him. “Listen, don’t worry about it. Don’t let anybody ever kick you in the ass.”

Twenty-seven years and $500 million or so in personal net worth later, Winkelried would be the one to dole out the anxiety when he walked away from Goldman (GS) not long after being anointed as a potential successor to the current CEO, Lloyd Blankfein. His unlikely departure, in March 2009, and subsequent disappearance from Wall Street at age 49 started a maelstrom of rumors about his and the firm’s finances — a maelstrom that Winkelried left Blankfein to navigate by himself.

Depending upon who was doing the gossiping, Winkelried left the firm for either political, financial, or medical reasons having to do with heart palpitations. Some thought Winkelried had made an unsuccessful power play with Goldman’s board — of which he had been a member since June 2006 — to oust Blankfein during the financial crisis. Others saw his departure as the result of suffering a personal liquidity crisis. It is difficult to imagine someone who in 2007 was paid close to $71.5 million, in a mixture of cash and stock, suffering from a shortage of the green stuff. But when Goldman announced that it was buying back around 30% of Winkelried’s illiquid private equity and hedge fund investments in various Goldman ventures — for $19.7 million in cash — that rumor spread like wildfire. “One of its wealthiest employees on paper, Winkelried was nonetheless facing a liquidity crisis last fall and had to be bailed out by Goldman,” is the wayFinancial Times columnist John Gapper described the incident in New Yorkmagazine last April.

Thanks to the Wall Street rumor mill, Winkelried’s 27 years at the firm were quickly reduced to a Victorian morality tale in which the banker had gotten drunk on margin loans to support an increasingly costly lifestyle that included a beach house and several ranches where he lived out his cowboy fantasies. After all, if he couldn’t manage his own finances, how could he be expected to manage Goldman Sachs? So he was kicked off the Goldman gravy train, or so the story went. This version of events was fueled in part by his and his wife’s decision to put their estate in the Monomoy neighborhood of Nantucket, Mass. — dubbed “Money-moy” around the island — on the market for $55 million, the highest price ever sought for a spread on Nantucket.

Never mind that Goldman had allowed Greg Palm, the firm’s general counsel, to cash out $38.3 million for 25% of his illiquid stakes, and that Palm remained at Goldman. This fact was overlooked, as were many others, as the rumors surrounding Winkelried became gospel. Speaking to the press for the first time since he left Goldman nearly a year ago, Winkelried addresses the rumors here and tells Fortune how a combination of burnout, office politics, and panic about his personal finances brought his career at the firm to an end.

The rise of “Winks”

Walking away from Goldman Sachs is a bit like walking away from a cult, albeit a particularly remunerative one. Among the central tenets of the faithful is one first articulated by Gus Levy, a legendary trader who ran the firm from 1969 to 1976. To Levy’s way of thinking, Goldman partners should be “greedy, yes, but long-term greedy.” He also felt that personal lives were almost expendable. Levy used to say, “The firm doesn’t come first, but it has to be second — a very close second.”

The firm puts a big emphasis on being a team player. “You can have a great career in banking as an individual, but it won’t be here,” is the way one Goldman partner described the ethos. Winkelried, known at the firm by the nickname “Winks,” turned out to be a team player. His career at the bank was largely a charmed one, in which he was able to move between the two principal factions — the traders and the bankers who were each vying for control of the firm during his formative years there.

After graduating from the University of Chicago, he could have gone back to trading equities at Goldman, where he had spent his first summer as an intern. Instead he reapplied to the investment-banking arm of the firm. He was accepted but relegated to working with companies in the utility industry — an area he considered a “backwater.” Nevertheless he kept his eyes open and his mouth shut. He describes his mindset back then: “Be a student of the market. Always try to improve your game. Learn from experience. Learn from doing. Learn from mentorship.”

He spent several years helping pipeline companies defend themselves from the hostile incursions of raiders like T. Boone Pickens and Oscar Wyatt. Then, in 1984, he was asked if he wanted to go back to the trading floor as part of an effort — pioneered by Goldman and Salomon Brothers — to put investment bankers in newly formed “capital markets” groups on their or the firms’ trading desks. The thinking was that having bankers closer to the market action would make them savvier when they advised clients about raising capital. After a few years he was asked to run the bond syndication business. This new position came with a lot of responsibility because the banks were starting to put their own skin in the game.

For instance, if Ford Motor wanted to raise $5 billion in debt from public investors, chances are it would turn to Goldman Sachs to help it raise the money. In the past, Goldman would have lined up buyers for the bonds before committing its capital and would then sell the bonds on a best-efforts basis. Under the new, riskier system Winkelried and bankers like him were committing the firm’s own capital to buy the whole debt offering before selling it whenever and however they felt they could maximize profits. “That business is not a business where you make decisions by consensus,” Winkelried says, “because at some point, somebody has to decide, ‘We’re going to pay 42 [basis points] over the 10-year [Treasury] for these bonds. Period.'” In his new capacity Winkelried was often helping the firm’s most senior bankers raise money for their clients, so he got to know many of them — including future CEO Hank Paulson, who would become his rabbi.

Winkelried became a Goldman partner in 1990 at the beginning of a decade that would be one of the firm’s most challenging. The Russian crisis, the Long-Term Capital Management crisis, the firm’s first failed effort to go public, and the coup that toppled senior partner Jon Corzine and put Paulson at the top of Goldman Sachs all took their toll on the bottom line and morale. In one particularly grim year, 1994, Goldman lost hundreds of millions of dollars betting the wrong way on interest rates and on ill-fated trades. Those losses came out of partners’ capital accounts on a pro rata basis (although some partners had gains used to offset the losses). A wave of them left, including the two who ran Goldman’s high-yield group. Winkelried was asked to add this business to his portfolio.

By the end of the decade the firm was on surer footing after a successful IPO, and Paulson asked Winkelried to move to London to head up the European end of the firm’s huge fixed-income, currency, and commodities business, known as FICC. Back then FICC reported to Lloyd Blankfein and Michael Mortara, a former Salomon Brothers banker. Before packing up his wife and three children in the middle of a school year, Winkelried asked Paulson to guarantee him the top job at FICC if either Blankfein or Mortara moved up. Paulson told him no. He wanted Winkelried to earn the respect of the bankers and traders in those businesses before making any promises. When Mortara was moved to head up Goldman’s venture capital business (and shortly thereafter died tragically from an aneurysm), Paulson made Winkelried co-head of global FICC with Blankfein.

Even though Winkelried and Blankfein were ostensibly equals, Winkelried knew back then that Blankfein’s ascent would be faster than his own. “Lloyd is a great student of markets,” he says. “One of the things that he helped me understand is how sentiment is so powerful in driving markets and driving human behavior.” Together they turned around the FICC business — and put it on a trajectory to become a profit center of the firm.

As Blankfein continued to rise through the ranks, so did Winkelried, and his friendship with Paulson grew too. Winkelried and Paulson bonded on tarpon and bonefishing trips in the Florida Keys and on Andros Island in the Bahamas, and it was Paulson who gave Winkelried the heads-up that he possessed the right stuff to one day run the firm. So when Paulson agreed to become President Bush’s Secretary of the Treasury in June 2006 and selected Blankfein to become the new CEO, it was not a surprise to Winkelried that he was named co-chief operating officer and co-president, with Gary Cohn.

The view from the top

Winkelried now found himself in one of those bake-offs that define succession at Goldman Sachs. On the surface Winkelried and Cohn are not that different. Both are hard-charging, follically challenged alpha males. But Cohn, who grew up in Shaker Heights, Ohio, and graduated from American University, is a pure trader. He made his bones on the silver desk at J. Aron, the same shop where Blankfein was a gold trader. (Goldman acquired J. Aron in 1981.) Fittingly, when Blankfein divided up lines of business between his two deputies, Cohn was put in charge of trading and asset management. Winkelried was assigned investment banking and merchant banking. The two men worked well together, but they are not friends, according to former colleagues.

Within a year Cohn was pulling ahead of Winkelried. The FICC business was generating the bulk of the firm’s profits, and Cohn was close to Blankfein personally. Both Cohn and Blankfein lived in Manhattan and had weekend homes near each other in Sagaponack, in the Hamptons. Their families vacationed together.

As his prospects to become CEO dimmed and burnout set in, Winkelried mentioned to his wife of 24 years, Abby Lipsey, a preschool teacher, that he was thinking of leaving the firm. It was a Friday night in January 2008, and he had just returned home after a long business trip to Asia. Bone tired, he had dinner with her and announced, “I’m just not sure how much longer I really want to do this.”

By the summer of 2008 he knew he wanted to spend more time on ranching than banking. The question of how a suburban kid from New Jersey became a cowboy is one that Winkelried gets all the time. The short answer is that the family used to ski in Telluride, Colo., among other resorts, but grew tired of the crowds and the glitz. Winkelried’s love of fishing took him deeper and deeper into the backwoods of a number of Western states. After a four-year search for the perfect ranch, he and his family purchased adjacent ones in Meeker, Colo.: the Marvine and the Pot Hole, where Winkelried quickly learned to be a near-professional-level “cutter,” a sport in which horseback riders separate one calf from the cattle herd.

The Winkelrieds have three children: Matt, a sophomore in college; Jen, a senior; and Jane, a high school senior. In Colorado, starting at age 14, Matt learned to be a roper, which is a rodeo event in which two riders work together to lasso a calf in the open ring.

Being a gentleman rancher did not come cheap. In 2003, Winkelried started building a facility to raise, train, and ride horses at the Pot Hole Ranch. In 2005 he spent $460,000 on a stallion named “I Sho Spensive.” He also owned cutting champions Quintan Blue and Copaspepto. He built Red Oak Ranch in Aledo, Texas, to breed and raise cutting horses. (All of his ranches go by the name Marvine Ranch these days.)

Unlike other firms where many bankers hang in long after they have lost the fire in the belly, there is an adage at Goldman: When you no longer have the passion to be here, make room for others. Winkelried had reached that point. “I was about to turn 50,” he says. “I was running around all over the place. This whole notion of ‘Was I in the slipstream to become the CEO?’ — I imagine I was one of two candidates, and I don’t know whether or not I would have gotten it. But here’s the important thing: It was no longer important to me. It just wasn’t … It changed for me somewhere. I don’t know where.”

Ain’t but one way out

The first time that Winkelried approached Blankfein about leaving Goldman Sachs was during the summer of 2008. Bear Stearns had collapsed into the arms of J.P. Morgan Chase (JPM) three months earlier, and there was a calm before the storm in the capital markets. He didn’t come right out and say he wanted to leave, only that he was wondering aloud how much longer he could stay. Blankfein told him there was “lots of stuff going on” and that he should just keep his “head down and keep driving.” Obviously Winkelried’s departure would make Blankfein’s life more difficult. Winkelried went back to work.

By the infamous weekend of Sept. 13-14, when Lehman Brothers, Merrill Lynch, and AIG (AIG) all were teetering on the verge of collapse, Winkelried knew that leaving was not an option. His biggest contribution during the crisis came from working with his partner Byron Trott to get Warren Buffett to agree to a $5 billion convertible preferred investment in Goldman on Sept. 24. (Trott was Winkelried’s fraternity brother and baseball teammate at the University of Chicago, and by far Buffett’s favorite Wall Street banker.) As part of the Buffett deal, however, Goldman’s top four partners would be unable to sell significant amounts of their shares for three years.

Thanks to Buffett and an additional $5 billion raised in the public markets, Goldman was still standing in the wake of Lehman Brothers’ filing for bankruptcy. But Winkelried was in a state of panic about his own finances. The majority of his net worth was tied up in illiquid assets: Goldman stock, Goldman private equity and hedge fund investments, three ranches, a beach house in Nantucket, and a primary residence in Short Hills, N.J. Sure, he had some Treasuries and municipal bonds, but he had the majority of his savings in Goldman stock — roughly 2.8 million shares, second only to Blankfein among the firm’s brass and nearly 800,000 shares more than his rival Cohn. If Goldman’s stock went to zero as Lehman Brothers’ had — or dropped to $6.71 per share as Morgan Stanley did that fall — then Winkelried’s decades of hard work would be vaporized in the blip of a Bloomberg screen. “I didn’t know what was going to happen, and nobody else knew,” he says of his state of mind at the time. His options to get liquidity were limited: There was a little-known proviso in the Buffett deal that allowed the top Goldman execs to sell up to 10% of their stock at any time. For Winkelried that would have been 280,000 shares at around $50 per share for a cool $14 million, but the firm did not want him to sell because an officer unloading stock could have spooked the market. “So I decided to go to the firm and say, ‘I’d like to sell back my interest in some of these [hedge and private equity] funds [instead],'” says Winkelried.

In late September the firm agreed to buy back a portion of his illiquid fund investments for the fire-sale price of $19.7 million, around a 5% discount to their already heavily discounted mark-to-market value. Winkelried paid a steep price for this cash in the middle of the crisis. (It is difficult to say what those stakes would be worth in today’s calmer markets, but his Goldman stock has more than tripled and is worth a little under $500 million.)

Even after this personal bailout Blankfein urged Winkelried not to resign when Winkelried brought up leaving at his annual review in December. Over the holidays, at their ranch in Colorado, Winkelried and his wife reached the decision that as soon as he “was comfortable” that the firm was “on sound footing in terms of the future,” he would retire. That moment came on Feb. 12, 2009. “What was clear to me was that Goldman was probably going to be net-net a beneficiary of what happened,” he says.

Winkelried went to talk to Blankfein one final time and told him he intended to leave at the end of the first quarter. Blankfein was not pleased. This seemed like a selfish act — leaving the firm during a moment when it was becoming a lightning rod for populist rage over its role in the financial crisis — but Winkelried did not see himself as disloyal. He felt he had paid his dues for 27 years, stayed through the worst of the crisis, and now wanted to figure out his next act. There was some discussion between the two men about the wisdom of the timing of the decision and whether Winkelried truly wanted to proceed down this path. “He didn’t want me to leave,” Winkelried says of Blankfein. “He felt it was going to place more of a burden on him.”

Blankfein declined to comment for this story, but a Goldman spokesman confirmed that the above account is accurate. “Winkelried certainly wasn’t pushed,” says Lucas Van Praag, Goldman’s global head of corporate communications. “[He was] increasingly disenchanted” and didn’t love the “enormous pressures” of the top job. As for Winkelried’s financial pressures, Van Praag added that his ranch was a “big business that employs a lot of people. Winkelried was very focused on that. The business had no debt, but there were big cash-flow demands, and he had no liquidity.”

According to Winkelried, there was no shouting during the meeting in which he resigned, but another Goldman partner told Fortune that the bailout of Winkelried and his subsequent decision to leave caused Blankfein a great degree of angst. “It really pissed Lloyd off because the buyout happened in the midst of a complete disaster and he had to spend three weeks explaining this every day, and it’s hugely embarrassing that he’s got to bail these guys out.” Added another partner, “You really want to get Lloyd going? Ask him about Winks’ departure.”

So how will that departure be remembered at the firm? A former partner and friend of both Winkelried and Blankfein answers the question this way: “I can relate to his decision of wanting to do something else, but I don’t like how he did it or when he did it. If he had asked me for advice, I would have told him wait another year. A year’s nothing.”

Since leaving the firm, Winkelried has continued to study the markets every morning, and he reads research to keep up. He has fielded a few calls, mostly from friends, about the possibility of getting back into the money game. But his heart really isn’t in it. “My next chapter, whatever it is, has to be something different,” he says. He dreams about succeeding Bud Selig as commissioner of Major League Baseball, being Secretary of the Interior, head of the U.S. Forest Service, or the head of the U.S. Fish and Wildlife Department. (Unfortunately Winkelried has few, if any, of the political connections enjoyed by other Goldman honchos.)

He’s been living the cliché about spending more time with his kids. In September his daughter Jen called and told him she was moving into a new apartment, which was in poor condition. He drove to upstate New York and spent three days repainting her whole apartment. “I like doing that kind of stuff,” he says. “It reminds me of the kinds of chores I used to do with my father.”

One thing is clear about Winkelried: He likes being able to pursue his passions without having to worry that he should be focused instead on a client or on the insatiable demands of the firm. “When you’re the president and co-chief operating officer — or in particular if you’re the CEO — you are 24/7,” he explains of the all-encompassing demands of running a firm like Goldman Sachs — demands he does not miss. “In the executive office of Goldman we had something called ‘executive office whereabouts.’ They know where you are every minute. They should know where you are every minute. They need to be able to get you if something happens.” But these days one of those masters of the universe is unaccounted for. Winkelried is now free to roam about the country.