Reckoning

by David Halberstam

  His timing was indeed exquisite. For one thing, he entered the field just as the old blue-chip stocks had ceased to dominate, and as investment money became available for companies no one had ever heard of. Suddenly the offbeat was what people wanted. If the Ford Motor Company had gone public five years later, it would never have created so great a stir, for by then blue-chips were no longer so important. For another thing, Tsai happened to start his fund just as the first generation of postwar entrepreneurs were surfacing. Tsai understood these new companies and what they represented for the future, and he understood that with the country undergoing unparalleled prosperity, the money would be there to invest in them. Starting with the $250,000 from Johnson, he reached $200 million three years later. When he began, there was only $78 million invested in mutual funds; within thirty years, in no small degree because of Tsai’s stimulus and example, it had risen to $24 billion.

  In those days he was like a man on a roll at a gambling table. He loved speculating. He bought in huge blocks, ten thousand shares at a time, and the turnover of his portfolio was incredible. Where in the past a stockbroker might have turned over a family’s portfolio some 5 or, at the most, 10 percent in a year, Tsai was turning over his portfolio more than 100 percent annually. Everyone wanted to know what he was buying. Tipsters used his name to push their pet stock: “Tsai is buying it.” In some ways there was an advantage to his fame, he mused, because the moment it came out that he had bought, others jumped in and the stock surged. But it was hard to keep his purchases a secret long enough to make his entire buy at the original price, because so many followers had their eye on him and would try to buy in. He was the action. In 1965 he attained a growth of 50 percent on a turnover of 120 percent. On February 9, 1966, the Dow hit 1000 for the first time, just as Tsai had predicted, and that made him all the more a prophet.

  In late 1965, aware that Johnson intended his own son as his successor, Tsai left Boston for New York, where he started the Manhattan Fund, a hedge fund (a private mutual fund restricted to the rich; a customer could not buy in with less than $100,000). Tsai hoped to sell about $25 million in shares, but his reputation was so extraordinary that he immediately sold $247 million. He eventually sold the company to CNA for $30 million.

  In the midst of the sixties, Gerry Tsai was the symbol of the new Wall Street. He was smart and charming, and he was hungry. He had no special respect for the past. In the past people had wanted financial gain but had been afraid to admit it. The fear of admitting it, of appearing to be greedy, had limited their success. Tsai was different. His driving motive was an ever-escalating profit, and so was that of his friends. They were the new conglomerateurs, like Harold Geneen, Charles Bluhdorn, and Saul Steinberg, men who were creating corporate kingdoms largely by astute use of accountants. They were making the Street an exciting place. To them the stock market was an end in itself, not a means of financing enterprise. In the old days there had been a loyalty between stockholder and company; these new stockholders, and particularly the new institutional investors, barely knew the company. All they knew was three or four facts—numbers, really. They were not there for the long haul; they were there to hit the right stock on the rise, and then get rid of it when it leveled out. Loyalty and emotion were encumbrances. By the mid-sixties the market became in effect a caricature of what many thought was its purpose and a nightmare for the managers of old-line companies. No one talked about safe buys; there was too much action for that. Companies like Xerox and Polaroid replaced U.S. Steel and Ford as smart buys, and they in turn were replaced by fried-chicken companies and nursing-home syndicates. That the effect of these transactions, the sudden surge and the equally sudden descent of the stock, might be dangerous to the companies themselves, and potentially damaging to the long-range health of the American economy, did not seem to matter. A basic assumption of the American system—that what was good for the market was good for American capitalism, and therefore good for the country—had been challenged. For the moment what was good for the market was good for the market.

  With less loyalty, there was less stability for the companies involved. Also significant for anyone involved in business—whether the investors, the managers of the companies, or the bright young men coming out of business schools—was the effect on the talent flow. One could make far more money by playing the market on Wall Street—where cleverness was rewarded immediately—than by joining a company and getting in line to do something as mundane as producing something. The effect of this drain of ability away from the companies themselves was incalculable.

  Few who were watching were particularly upset. Some of the older men were wary of the consequences, and some were shrewd enough to know that it could not and would not last, that the ascending spiral was too steep to sustain, that no country was that rich or could afford to offer that much profit to that many people for so long. To some it was clear that people were taking too much out of the companies and, worse, taking out more than was being put in. Some of the new conglomerates were put together not so much because their subsidiary companies had any connection to each other but because it gave accountants a creative run at the country’s tax policies and offered a chance to improve the looks of a given stock without necessarily improving the company’s basic productivity. The conglomerateurs displayed skill in the leveraging of money. One of the early ones, Meshulin Riklis, head of a conglomerate called Rapid American, once said, “I am a conglomerate. Me, personally,” and confessed that he was successful “because of the effective nonuse of cash.” This was creative bookkeeping at its most adroit. A company that had what was known as a high multiple bought a company that had what was known as a low multiple, and the merged company came out looking better and hotter than either of the originals. Paper, rather than reality, was emerging from an economy like this, and illusion rather than production preoccupied the successful new manager.

  There was a certain madness to all this, a frenzy. The old stock market, which was still alive and which was for fuddy-duddies, was perhaps turning over at 10 or 12 percent. The new market was for the dazzling young men, and it was turning over at 40 and 50 percent. Soon it was not just the hotshots who were embracing it. In 1969 the prestigious and conservative Ford Foundation, whose very name reflected the legitimacy of the old companies, issued a report saying in effect that institutional investors such as universities should not just sit there clipping coupons but should become more hip and more speculative with their portfolios.

  Over the years this view profoundly influenced bedrock American capitalism. While the go-go market rewarded those shrewd enough to skim it quickly, exploiting the first surge of the postwar economy, it was the industrial core, ironically, that it most threatened. The immediate problem was a difficulty in competing for talent. Who, after all, by the early sixties wanted to go from Harvard Business School to U.S. Steel or Ford or some small-parts manufacturer in Ohio when Xerox or Donaldson Lufkin & Jenrette or other comparably exciting companies beckoned? Why go to an already carved-up and probably diminishing world when there were brand-new worlds opening up right in front of you? And of those whom the older companies were able to woo from the great business schools, who wanted to go out and work in the assembly plants? The traditional companies, already having difficulty recruiting able young people, had to offer as much incentive as they could now. In those older companies there was a fast track and a slow track. The fast track, with quicker advancement and bigger pay and bonuses, was in management, which now meant the financial end, and the slow track, for the second-class citizens, was in the factories.

  But the long-range impact was even more serious. What was happening, slowly, unconsciously, insidiously, was that the industrial companies were adapting to the norms being set by the hot new companies, the darlings of the Street. In the most difficult of atmospheres, they had to drive their stock up, and over two decades that effort systematically gave power to the finance people. It was the need to compete with young companies on the as
cent that in many ways was changing the internal balance of these old-line companies, deeding power not to manufacturing and product men but to finance men. The finance men, after all, were the ones who could at least try to make the stock competitive. What was happening at the Ford Motor Company was a good example. Not only were the top people there mainly from finance, but the bias of the market invisibly but critically bore on the company’s decisions. Arjay Miller, who was for a time president of Ford during this period, later denied that he was affected by the market, and it was probably true that Ford was less dependent on the market for its financing than many other companies; it had to raise less money from the equity market than others did. But in all kinds of subliminal and not so subliminal ways, Miller and men like him were responding to pressures that had become so much a part of the equation that no one was even aware of responding to them anymore. There was a great deal of talk about the effect of production decisions on the stock. Henry Ford II was always aware of the value of the stock, everyone in the company knew that; it was an aspect of his stewardship of the company, a family company the value of whose stock was the true indicator of the family’s current wealth.

  A good example of the insidious pressure came in the early seventies, when the trustees of the Ford Foundation decided it was time to diversify the portfolio. That meant selling Ford stock, and the higher the stock, of course, the better for the foundation. Within the company there developed an all-out need to get the price of the stock up. If it was low, then the Ford Foundation’s resources were smaller. If the Ford Foundation was smaller, Henry Ford was unhappy. He did not, in those years of flamboyant American affluence, like coming to New York and hearing that the stock was low.

  13. THE QUIET MAN

  FINANCE WAS SOON A power of its own. Its principal driving force was Bob McNamara, and its basic philosophy was: Whatever the product men and the manufacturing men want, deny it. Make them sweat and then make them present it again, and once again delay it as long as possible. If in the end it has to be granted, cut it in half. Always make them fight the balance sheet, and always put the burden of truth on them. That way they will always be on the defensive and will think twice about asking for anything.

  By the early fifties there was growing tension between McNamara and Lewis Crusoe. Crusoe had become general manager of the Ford division, one of the two or three most important jobs in the company, in 1949. He was a man who could bridge both sides in a company in transition. A former finance man whose roots were in accounting, he had come from the Fisher Body division of General Motors, where he had been divisional controller, and he had also served as assistant treasurer of GM. He was a money man, then, meticulous, always careful about spending money. But he was also a man steeped in the car industry, with a genuine love of cars, and the product men at Ford enjoyed working for him. He knew all the tricks of the finance people, and he protected product. The original two-seat Ford Thunderbird, one of the loveliest automobiles of the postwar era, was completely his. Since finance did not think a two-seat sports car practical, he had virtually had it designed in secret and sneaked into production.

  Starting in 1949 he engaged in a full-blown battle with McNamara and Ted Yntema, who had succeeded Crusoe in finance, over the condition of the manufacturing plants. The factories, Crusoe complained, were in desperate condition. They were antiquated and run-down; they limited production, and they made it impossible for the manufacturing people to provide quality. They were really leftover Model T factories. The plant people could not even get a forklift into them to move materials back and forth, because the aisles were too narrow. They could barely get the cars through the paint ovens and could not generate enough heat in the ovens to get modern paints to dry properly.

  What became an almost three-year struggle over the condition of the factories started innocently enough. Crusoe, frustrated and increasingly angry over what the run-down plants were doing to the quality of his cars, asked for the modernization of the Louisville plant. That job would cost several million dollars. McNamara, then controller of the company, immediately said no, they needed a comprehensive study of all the plants. That sounded logical enough to Crusoe, and he agreed, thinking the study would take six months. But it dragged on and on. Three years passed. The more information Crusoe and his people produced, the more McNamara wanted. Crusoe knew exactly what McNamara was doing, he was stalling and stalling—later the phrase for it, among the product people, was slow walking—delaying the massive expenditure as long as he could. Meanwhile the 1952 Ford was a winner, selling very well, but the factories simply weren’t able to turn them out quickly enough to meet the demand. Crusoe was not a man who used expletives lightly, but in private he would rage about McNamara, what the son of a bitch was doing, did he think he was fooling anyone. My people, he said, are damn well dying out there because they can’t get the cars built. There were more and more meetings, more and more documents. (The finance people were clever at using documents, piling them up, making every presentation seem more impressive by the height of the stacks; so one of Crusoe’s men filled a number of briefing books with cut-up Wall Street Journals, which the manufacturing men wheeled into the meetings to make their own case look weightier, as if the briefing books were full of information that could be summoned to support their arguments.)

  In early 1953 they held the meeting that would decide the plant renovation issue. The total cost of building new plants and modernizing the existing ones, Crusoe told the meeting, was $1 billion. (“Why, that’s more money than the entire net worth of Chrysler,” a stunned Ed Lundy, one of McNamara’s principal aides, said later.) Not all of the money would be spent at once, Crusoe noted; some of the bad plants would be closed, and there was a schedule for renovating the remaining ones. Again McNamara began to argue against the expansion. Max Wiesmyer, who was in charge of the assembly plants, started to argue back. Crusoe patted him on the hand. “I’ll take care of this, Max,” he said. So again he spoke: What they were talking about, he said, was not so much spending money on factories but a larger question, whether Ford had an expanding future and whether it would ever be able to compete with General Motors and, as he had always dreamed of doing, overtake Chevrolet. It could not compete with a dying physical plant. Did anyone in that room, he asked, believe for a minute that GM’s plants were like this? Did anyone believe that GM in this boom economy was not going to pour more and more money into its plants? “We will never catch GM unless we decide to go ahead today,” he said.

  When Crusoe finished, there was a dramatic silence. Finally Henry Ford said, “Isn’t anybody going to say anything?” McNamara got up and said that the finance people had been in close touch with the people in charge of the study, that they essentially agreed with the findings of Crusoe and his staff, but that considering the size of the project, the amount of money involved, the fact that Ford would surely have to go to the bank and borrow the money (that was still the special raw nerve, touching as it did on the traditional Ford fear of banks, which had survived long after the old man had died), perhaps it would be a good idea if they studied this a little longer.

  Crusoe, listening to him, began to shake with anger. “We have to go now,” he said. “We can’t wait anymore. The quality is bad, the paint is bad. We can’t even get our cars dried out. We can’t meet our own standards.” Although he did not say so, he privately believed that it would be a good idea if Ford borrowed from the banks, that the discipline of owing money would be beneficial for the company, that one of the problems in the past had been that Ford had too much cash and that the cash had bred a great many bad habits.

  The decision hung in the balance. Henry Ford started going around the room. First he turned to his brother Benson. “Benson, what do you think?” he asked.

  “Come on, Henry,” the younger brother said, “you know I’m no big brain. What do you expect from me?” No one else volunteered. This seemed to be a decision so important that it had to be made by the family. That meant Henry.
Finally he spoke. “Bob,” he said, “the problem with you is you always want to study things. You never want to do anything.” With that he gave the go-ahead to a compromise that would commit some $500 million to the modernization of the Ford division alone. It was less than half of what Crusoe felt was needed if Ford was to be strong and competitive, but it was a victory of sorts.

  In those years Crusoe was still convinced that he could handle McNamara. Like McNamara, he knew numbers, but unlike McNamara and his staff, he knew cars, and that gave him an advantage. He believed that McNamara was a major asset to the company. The problem, he always said, was in controlling the controller. Crusoe was sure he could do it. Shortly after the modernization battle, McNamara went to work for Crusoe as his assistant in the Ford division. When colleagues questioned Crusoe, he told them not to worry. McNamara, he said, was extremely able—brilliant, really—possibly the smartest man who had ever entered the company. The trick was to keep him in check; without firm direction he became too strong, but with it he accomplished great things. Crusoe was confident he would be able to stay in effective charge of McNamara for a long time.

  Crusoe was wrong. In January 1955 he was promoted at Ford, made executive vice-president of the car and truck division, assigned to strengthen Lincoln and Mercury and help with the secret new car they were working on, the Edsel—all as part of a long-awaited challenge to GM in the upper range, where the profits were far greater. At the same time, McNamara got Crusoe’s old job, becoming general manager and vice-president of the Ford division. It was ten years after the war, and with McNamara’s appointment the old order had clearly changed at the company; this was the highest operational job attained by one of the Whiz Kids. Almost the first thing McNamara did when he took over at Ford was to call in Sanford Kaplan, who had been Crusoe’s man in charge of much of the manufacturing-plant study. He told Kaplan to produce a brief report showing that delaying the modernization of the plants, rather than going ahead right away, had been more profitable for the company.