In 2004, Harvey Schwartz, who was then head of the financing business at Goldman Sachs Group Inc's investment bank, came up with a new way for the bank to make money from a seemingly mundane activity: helping companies buy back their shares.
He created a product that could save companies money by getting them improved pricing on buybacks while generating fees and trading profits for the bank. To build what became a multibillion-dollar market, Schwartz had to convince dozens of skeptical Goldman sales people, derivatives traders, corporate finance specialists and lawyers that they could make buybacks more enticing, said Martin Chavez, a Goldman quantitative analyst who worked with Schwartz.
"He said, 'I know the details are going to be immensely complicated, and it's going to seem impossible. But there is a solution here. We're all going to work until we figure it out,'" Chavez recalled Schwartz as saying. "And when Harvey says that, people listen."
At the end of this month, Schwartz will need many more to listen when he takes over as Goldman's chief financial officer from David Viniar, the firm's long-time finance chief who is seen by insiders, analysts and investors as a tough act to follow. Viniar, 57, will remain a Goldman director.
How Schwartz, 48, who has so far worked in relative anonymity as co-head of the firm's securities and trading unit, fills those shoes could have far-reaching impact on Goldman's outlook and even its culture. After 15 years of selling products to clients and inventing ways to generate revenue for the firm, Schwartz will now be responsible for reining in risk-takers and worrying about costs.
About half of Goldman's 32,600 employees will report to Schwartz, including staff in finance, accounting, legal and technology. As CFO, he will have a vast and diverse portfolio, overseeing everything from the bank's $949 billion balance sheet to risk-management and Goldman's relations with analysts, investors and regulators.
Schwartz declined to comment for this article. But interviews with Goldman executives who know the incoming CFO give insights into why the bank picked him for the job and what he may do with it.
In many respects Schwartz is like Viniar, the executives said. Schwartz is a capable risk-manager who is expected to maintain Viniar's cautious stance on risk-taking.
They said Schwartz understands the nitty-gritty of complex finance and is also able to speak in plain English in front of investors and clients. He already commands respect within the firm and is beginning to build a following outside, having met with investors and analysts dozens of times over the past year, they said.
But Schwartz has never overseen as much money or risk as he will as CFO. He also faces a very different set of challenges than his predecessor did when he came into the job in 1999: The financial crisis is behind Goldman, but the firm must now navigate an environment that is less conducive to risk-taking and deal with much more onerous regulation.
One of his immediate tests will be figuring out how Goldman offsets the cost of maintaining a $176 billion pool of extra cash and assets. That pool of liquidity enables the firm to meet regulatory requirements and cushions it against a new crisis, but it is also costly and drags on earnings.
Schwartz could try to cut costs or change how capital is allocated to various units to increase revenue, analysts said.
"CFOs of financial firms are under significant pressures to improve efficiency and at the same time respond to regulatory changes and meet heightened compliance requirements," said Darrell Duffie, a Stanford University finance professor who dissects, with his students, Goldman's regulatory filings in a "Debt Markets" class. "Managing all of this is an enormous task for CFOs, particularly of banks like Goldman."
The next clues to how Schwartz will approach the job may come when he makes his first public appearance as CFO on February 12 at a Credit Suisse conference in Miami. Viniar will host his final conference call with analysts as CFO when Goldman reports its earnings this week.
A DIVERSE ROLE
Viniar - who took over as CFO the same year that Goldman went public - saw the job gain importance during the financial crisis of 2008 as risk management and liquidity became key to the bank's survival.
The CFO at Goldman has seven main responsibilities, the top one being risk-management. The finance chief also oversees the bank's dealings with external constituencies, like investors, analysts, ratings agencies and regulators, bank insiders said.
Other responsibilities include managing Goldman's balance sheet and liquidity pool, signing off on financial statements, developing corporate strategy in consultation with Chief Executive Lloyd Blankfein and Chief Operating Officer Gary Cohn, handling expenses, including compensation, and communicating with the board of directors, the insiders said.
In those diverse roles, the CFO has to work with all kinds of people in a range of professions, from accountants and risk-managers to regulators and risk-takers.
Schwartz, a graduate of Rutgers University and Columbia Business School, got his start at the firm in 1997 when he joined the commodities broker J. Aron & Co. The Goldman unit was also the launch pad for several other senior Goldman executives, including Blankfein and Cohn.
A New Jersey native from Morristown, Schwartz now lives with his long-time partner Annie Hubbard in a posh condo building about a mile from Goldman's headquarters in Lower Manhattan.
Goldman insiders said Schwartz, who is 6-foot-4 and holds a black belt in karate, has shown both the disposition and the ability to handle the CFO's many responsibilities.
"He's a bear of a man, but he's gentle in his presentation," said John Rogers, Goldman's chief of staff and secretary to the board.
BRIDGING THE GAP
Schwartz has outlined a three-pronged approach as Goldman's response to new financial regulations, which are a source of much consternation for big banks, said Rogers, who also co-chairs an internal regulatory committee with Schwartz.
Schwartz's approach: Be sympathetic to regulators, who are overwhelmed by the enormity of their rulemaking task; keep in mind the objectives of global regulatory reform; portray yourself to regulators as a helpful educator and never overreact, Rogers said.
Chavez, the Goldman quantitative analyst, said Schwartz excels at being persuasive. Chavez, who holds a doctorate from Stanford University in medical information sciences, had left Goldman several years earlier to start his own business when Schwartz approached him in 2004 for the accelerated buyback project.
The two met at Delmonico's, a Wall Street steakhouse, where Schwartz made his case to a reluctant Chavez.
"I was very skeptical. I thought, what does that have to do with what I'm good at?" Chavez recalled. But "he got me excited about the things that we could do within the financing business."
Former Goldman co-President Jon Winkelried, who was Schwartz's boss in 2004, said Schwartz could get people across the bank to work with him.
"We needed people who were very product literate, very product savvy, who could package products appropriately, explain them and put them in perspective for the investment bankers. Harvey was very effective at bridging that gap," Winkelried said.
Using the accelerated buyback product, clients could lock in prices to quickly repurchase their shares at a discount, while the bank used side bets to earn money for itself on volatility in the client's share price. By 2008, the product had become a $131 billion market that Goldman led, according to research by University of Pittsburgh professors.
A big task facing Schwartz in the coming months is one that every major bank is grappling with: how to improve profitability while managing risk and meeting regulatory demands for large, costly capital and liquidity buffers.
Viniar increased Goldman's stockpile of extra cash and U.S. and European government debt to $176 billion as of the 2012 third quarter, from $111 billion in the 2008 fourth quarter. He extended the average length of borrowings under a type of secured short-term funding called repurchase agreements to 150 days on average from 100 days. He also started parking more money at the U.S. Federal Reserve instead of at other banks.
While those moves made the bank safer, especially in the aftermath of the financial crisis, the cost associated with managing added capital and liquidity hurts Goldman's profits.
In the third quarter, the firm reported a return on equity - a measure of the profit a bank generates from its balance sheet - of 8.6 percent. That compares with returns of more than 30 percent pre-crisis.
As CFO, Schwartz must find the balance between meeting regulatory demands and positioning Goldman for the future.
He can encourage colleagues to come up with new products like the accelerated share repurchase product to increase revenues in the new regulatory environment, analysts said. He may also look to cut expenses, such as by reducing jobs — but not so much that the firm can't take advantage if the stock and bond markets improve with the economy in the coming months.
"It's a huge job," said Howard Chen, a Credit Suisse analyst. "Goldman is just sitting there hunkered down and weathering the storm. That's tough because they need to earn adequate returns for shareholders."
(Reporting by Lauren Tara LaCapara and Carrick Mollenkamp in New York; Editing by Dan Wilchins, Paritosh Bansal, Martin Howell and John Wallace)