The Watergate

by Joseph Rodota

  In July 1977, the Watergate developers agreed to a $600,000 out-of-court settlement with the residents of Watergate West. Neither party shared details with reporters. The developers continued to publicly deny liability for heating and ventilation failures. “Both sides realized they were spending more in legal fees than they wanted,” said Henry Winston, representing the Watergate. “It involved only money, no principles,” said Mark Friedlander, Sr., attorney for the Watergate West owners.

  The Watergate was sold to Nicolas Salgo and Continental Illinois Properties on November 2, 1977. Salgo put in $500,000 and Continental Illinois Properties provided $9.5 million. The sale included the Watergate Hotel, two office buildings, a shopping mall and the Les Champs arcade. The purchase price of $49 million included $10 million in cash and the assumption of an existing first mortgage of $39 million. In the Wall Street Journal report about the transaction, a Continental Illinois spokesman declined to reveal the seller by name.

  Seventeen years earlier, Nicolas Salgo announced ten acres on the shore of the Potomac River had been bought by Società Generale Immobiliare for a new development that would become known worldwide as the Watergate. At age sixty-three, he now owned half of it. His new title: chairman of the Watergate Companies.

  THE NATIONAL COAL BOARD, OVERSEERS OF GREAT BRITAIN’S nationalized coal industry, represented 625,000 coal workers and retirees and managed pension funds with combined assets of $5 billion. There were two separate funds: the Mineworker’s Pension Scheme, representing the blue-collar workforce, and the National Coal Board Staff Superannuation Scheme, representing white-collar employees. Hugh Jenkins was in charge of investments for both funds and wanted to diversify their portfolios by adding assets in the United States. For nearly a year, he looked for someone to lead the U.S. expansion, ideally an “English-trained” real estate professional with a working knowledge of the American market.

  Wendy Luscombe was the only woman in her starting class in the estate management program at the Oxford School of Architecture. When she graduated and took her examination to become a professional appraiser, she was the only woman in a room of 350 men. While working as an appraiser with a London property consulting firm, she wrote an article for a London real estate magazine comparing the U.K. and U.S. appraisal methodologies and suggesting British firms could benefit from the in-depth research behind the American technique. Her article caused “a few ripples,” she recalled. Her colleagues didn’t appreciate being told they could learn something from the Americans. Jenkins, however, liked what he read. He tracked her down.

  Luscombe confessed she had spent only a few weeks in the United States and knew “very little” about the market, but Jenkins decided she was perfect for the job and hired her away, at age twenty-seven, to scout U.S. real estate opportunities on behalf of the National Coal Board pension funds.

  In her first month on the job, Luscombe visited eighteen American cities in a “windshield” tour, driving around the country and looking at properties. Taking time changes into account, she sometimes worked a thirty-hour day, taking morning calls from London through the following day, into the late-evening hours in Los Angeles. At her offices on Fifth Avenue in New York, callers sometimes asked if she was “Mr. Luscombe’s secretary.” Nonetheless, she considered New York an easier place for a woman in real estate than London. “People are less surprised here that you are young and female,” she said.

  To test the waters, she made an investment in a small office building in Florida and quickly turned a profit. The deal convinced Jenkins the U.S. market was worthwhile, but Luscombe thought it would be difficult to build a substantial portfolio by acquiring properties one at a time. Her fear was a British firm might be easily “ripped off” by unscrupulous players in the U.S. real estate market. A better course, she advised Jenkins, was to purchase an existing REIT with a strong portfolio. She already had in mind a possible takeover target: Continental Illinois Properties, one of the most successful real estate trusts in the country. It traded at $15 a share—$10 below its share price in 1971, the year Lehman Brothers took it public. Luscombe thought Continental was worth much more. One of its assets seemed to be significantly undervalued: the Watergate.

  SALGO HAD BEEN UNHAPPY FOR YEARS WITH THE DEAL Giuseppe Cecchi had negotiated with the Democratic club, giving them the restaurant space in the lower level of the Watergate Hotel “for peanuts.” Now that he was back at the Watergate, Salgo was delighted the Democrats had moved out. It was time, he decided, to put a “first class” restaurant into the Watergate Hotel.

  Salgo’s initial idea was to rotate six different three-star chefs through the hotel annually, giving each chef a two-month contract. He flew to France to pitch his idea to every three-star chef he could find. There were no takers. But one chef told Salgo about the youngest French chef in history to earn two Michelin stars. He was unhappy with his current business partner and might be available. His name was Jean-Louis Palladin.

  Nic and Josseline Salgo knew Palladin’s restaurant, La Table des Cordeliers, in the city of Condom in southwestern France. They dined there often and Jean-Louis had catered events for Josseline’s family. In addition to the two Michelin stars, Palladin had been awarded seventeen of twenty possible points in the Gault et Millau guide and his restaurant was listed in the influential Guide to the 50 Best Restaurants in France by Nicolas de Rabaudy.

  Salgo met up with Palladin in Paris. “I will pay your trip to the United States,” Salgo offered. “Don’t bring anything with you. Absolutely nothing. Don’t even bring salt in your pocket. My people—including Josseline—will go with you to the market in New York and you will cook for us and for some of our friends there. Then we will take you to Washington, DC, and you will cook for a big crowd. If you like what you see—and if we like what we are getting—you have a job.”

  Salgo had abandoned his idea of rotating chefs through the restaurant below the Watergate Hotel. He wanted Palladin full-time.

  Palladin arrived in New York and prepared a dinner in Salgo’s Manhattan apartment for chefs and friends, including the architect I. M. Pei. After the dinner, Salgo handed Jean-Louis a legal pad and said, “Write down what it will take to get you to come to America.” Palladin wrote his demands: a salary of $90,000 a year, an apartment at the Watergate for his family, and a full month of vacation every August—at full salary, plus all travel expenses. Salgo looked at the list. “When can you start?” he asked.

  “I was fed up with problems,” Palladin said. “I had spent 31 years in my region, in the same town. It was a grand experience, but very hard. I thought perhaps it was time to see something else, to take my work somewhere else.” Salgo said he found Palladin at “a good moment.”

  Salgo was “very intimidating,” recalled Jean-Louis’s wife, Regine, but he spoke French beautifully and was a bit “mischievous.” Looking back, she thought this mischievousness was one of the reasons Salgo and Palladin were “well-matched.”

  Salgo also agreed to hire Palladin’s three top assistants from France: Sylvain Portay, Jean-François Taquet and Larbi Dahrouch. They arrived in Washington on August 10, 1979, and met Salgo at the Watergate Hotel the following day. The men had heard of the Watergate scandal, but had no idea there was a complex of buildings with that name, Dahrouch later recalled. With Salgo behind the wheel of his Bentley, Palladin and his team headed to Maryland to sample the local crab.

  Regine joined her husband in their new Watergate South apartment. Her first impression was the building was “a little strange.” With its sweeping curves and massive scale, the Watergate was “not like anything we had seen in France.”

  Salgo gathered a group of Washington diners, including local restaurant critics and food writers. Jean-Louis prepared a spectacular meal, using only what he found locally in Washington markets. “He met the challenge,” Salgo said.

  To design the interior of the new restaurant, Salgo hired George Lang, who had transformed Café des Artistes into one of Manhattan’s most suc
cessful and romantic spots. Lang and Salgo were both Hungarians, but their wartime experiences were vastly different. Salgo spent World War II working in Switzerland. Lang survived a forced-labor camp on the Czechoslovakian border. His parents were murdered in Auschwitz. In the chaos of the closing days of World War II, Lang joined the Fascist Arrow Cross militia; assisted Jews in hiding, for which he was arrested and sentenced to death; was tortured and put on trial by the Soviet occupying army, only to be finally acquitted when several Jews testified in his defense; and escaped to Austria hidden in a coffin, before making his way to New York.

  Lang started as a busboy at the landmark Reuben’s Restaurant and Delicatessen in Murray Hill, sold wedding banquets at a converted Greek Orthodox church on Houston Street and the Waldorf-Astoria, and directed food operations for a dozen restaurants at the 1964 New York World’s Fair. He formed his own restaurant consulting business, George Lang Corporation, in 1970.

  Lang furnished the subterranean, barrel-shaped dining room with modern furniture and “stylish table appointments.” There were fourteen tables, limiting the space to forty diners per seating, although more diners could be accommodated—as was often the case, as Jean-Louis sometimes invited friends to dine, even on nights when the restaurant was fully booked. Because the room lacked a river view, Lang created a curtained wall, lighting it from behind. The interior was “an orange cave,” wrote the Washington Post’s Phyllis Richman, “with mirror tricks turning the curving walls into more unorthodox shapes.”

  While Lang tackled the new restaurant, Salgo launched a number of improvements throughout the Watergate complex. He ordered a $3 million refurbishment of the Watergate Hotel interiors. He brought in Elizabeth Siber, who had previously launched the restaurants at the World Trade Center in New York, to become general manager of the Watergate’s restaurants. Siber reviewed Palladin’s ideas for menus and prodded him to increase portion size and reduce the number of kidneys and sweetbreads. She also told him to lay off the purees. “Americans like to chew things,” she told him.

  In October 1979, Jean-Louis at the Watergate opened for business with a series of private parties and test dinners. The grand opening was low-key—just a small OPEN sign posted in the doorway—but the restaurant represented a “major gastronomic coup,” according to Washington Post food writer William Rice. “Never before—in the memory of contemporary observers,” Rice wrote, “has a French chef of such stature come to the United States to direct a restaurant.”

  IN MARCH 1979, THE BOARD OF CONTINENTAL ILLINOIS PROPERTIES received an offer of $25 a share for all outstanding stock, valuing the trust at $120 million. The offer came from Brabant NV, a company based in the Netherlands Antilles and owned by Saudi Arabian interests. Brabant announced it planned to serve as “passive investors” and form a management group that would include at least three current directors or executives. Continental called a special shareholder meeting to accept the offer and close the deal within ninety days.

  Wendy Luscombe preferred to avoid bidding wars by making her first bid her last. But she was also an astute, conservative investor. She shared with the New York Times her motto: “We demand a little blood.”

  Luscombe bid $30 a share—$5 more per share than Brabant had put on the table—and in July 1979, the shareholders of Continental Illinois Properties accepted the offer.

  DURING THE 1976 PRESIDENTIAL PRIMARY, REPORTERS pressed incumbent President Gerald Ford and his challenger, former California governor Ronald Reagan, to release their personal tax returns.

  The Reagan campaign at first released only a four-paragraph statement referring reporters to a Statement of Economic Interest filed in 1975, covering the last year of Reagan’s second term as governor. “Since leaving office,” Reagan said in a written statement, “I have placed such assets as I have in a blind trust. The trust will continue at least for the duration of the time I am a candidate and under its terms I can neither inquire of the trustee’s action, nor can they inform me of their actions. The trustees may deal with these assets as they see fit without my permission.” After the Ford campaign released a table showing the President and Mrs. Ford’s sources of income and taxes paid each year since 1966, the Reagan campaign released a table showing their candidate’s “adjusted gross income”—net income, after all deductions, per his federal tax return—and “total taxes paid,” which included federal and state income taxes, local property taxes, sales taxes and other “misc. taxes” for the period 1970 to 1975. That table showed Reagan had an adjusted gross income of $111,585 in 1974 and paid $50,429 in various taxes. In April, the campaign disclosed the Reagans paid $65,000 in federal income taxes in 1975, on an adjusted gross income of $252,000.

  A New York Times analysis concluded Reagan “almost certainly paid no Federal income tax in 1970,” despite earning at least $73,000 that year. The Times reached this conclusion by deducting property taxes—which were public record—from the total taxes of all kinds Reagan reported to have paid. The Times asked the Reagans to disclose additional information about taxes paid each year, but they refused. “Ronald Reagan has an unusual tax problem,” the Washington Star editorialized. “The tax laws possibly operated too much in his favor in recent years.” In an appearance on Meet the Press, Senator Paul Laxalt of Nevada, the national chairman of Citizens for Reagan, asserted the information provided by the campaign had settled the question. The Star disagreed. “We see nothing unreasonable about the public curiosity as to what a would-be President contributes to the national till,” the Star wrote. “He is full of opinions about the uses of federal money, and the inadequacy of the country’s $100 billion defense effort. And whether or not his tax contributions are seen as paltry in his years of $100,000-plus earnings, Mr. Reagan owes it to himself to have the judgment made on the basis of fact rather than the present mixture of fact and speculation.”

  In April 1980, President Jimmy Carter released his 1979 federal tax return. Reagan, the presumptive Republican nominee for president, at first told reporters he would make “any and all disclosures required by law”—noting the law did not require tax returns be released—but reporters continued to press the matter. During the GOP convention in July, Reagan promised to make “a comprehensive disclosure” and on July 31, Ronald Reagan made public his 1979 federal tax return, abandoning a long-standing practice of treating his financial affairs as “a private matter,” according to the Washington Post. “Governor Reagan still has strong feelings about his privacy,” a Reagan campaign aide said, “but he and his advisers felt he had nothing to hide, so he did it.”

  The tax return showed the Reagans earned $515,878 and paid $230,146 in taxes in 1979. The return also showed income of $234,455 in capital gains from the sale of stocks, most of which the Reagans purchased after he completed two terms as governor of California. William French Smith, Reagan’s personal attorney, said a decision was made eight to ten months earlier to sell all of Reagan’s stock “because it was good from an investment standpoint and because he was declaring his candidacy.” By far the best-performing stock in the Reagans’ portfolio was Continental Illinois Properties, half-owner of the Watergate. The Reagans purchased 11,000 shares in 1975, paying $11.53 per share; the stock was sold to the National Coal Board pension funds on July 11, 1979, at $30 per share, netting the future president and first lady a profit of $203,099.

  NICOLAS SALGO HAD A NEW BUSINESS PARTNER: Wendy Luscombe. When the Washington Post reached him for comment about the sale of Continental’s share in the Watergate, he played down the transaction. He had yet to meet Luscombe or anyone else at the National Coal Board. “Operationally there is no change here,” he said.

  Wendy Luscombe had other plans.

  Chapter Seven: The Reagan Renaissance

  The Watergate is to Washington what the presence of a beautiful and charming lady is to a dull cocktail reception.

  —Gabor Olah de Garab

  General Manager, the Watergate Hotel

  WHILE HIS NEW RESTAURANT WAS
BEING BUILT OUT, Jean-Louis Palladin and his team worked upstairs in the Watergate Hotel kitchen, developing dishes and scouting local sources for ingredients. Back in France, Palladin had driven from Condom to Bordeaux weekly to purchase fresh fish. In Washington, he prowled the markets of Georgetown. The local vegetables lacked flavor, he said, but they were fresh and “handsome enough to be useful.” He did not put escargot on his menu because he could not find any fresh snails. He refused to serve canned snails. “The only good thing about them was the garlic butter!” he fumed. When he tried to buy fresh peas, a supplier instead handed him a can of Le Sueur petit pois and assured him these were the same peas served at the Carter White House. According to a profile in the Washington Post, Jean-Louis was “less pleased with chicken, still experimenting with ducks and is downright unhappy about cheese.”

  Palladin and his team went to work and built their network of suppliers. They headed up to Maine to source lobsters and other fresh seafood. Palladin sourced live scallops that could be flown in from Europe. He sourced a vendor to raise rabbits and another to forage mushrooms. “Doug the Egg Guy” delivered eggs that were one hour old.

  One day, Richard Ober arrived at the door of Palladin’s restaurant at the Watergate, carrying the renowned Louise de Vilmorin seed catalog tucked under his arm. Ober said he worked at the nearby State Department but felt stifled. He had bet a friend he could grow herbs and vegetables and sell them to the best restaurant in Washington. He handed Jean-Louis a sprig of mint he had grown himself.

  Ober was more than a state department bureaucrat with a midlife crisis. He attended Harvard at the same time as Washington Post executive editor Ben Bradlee, graduated in 1943 at the height of World War II and went into the OSS. After the war, Ober joined the CIA, where he worked for counterintelligence chief James Angleton. Beginning in 1967, Ober managed a domestic “intelligence collection program” under the code name Operation CHAOS, reporting directly to CIA director Richard Helms. According to New York Times investigative reporter Seymour Hersh, the operation amassed files on ten thousand Americans before shutting down in 1968.