In an Uncertain World

by Robert Rubin

  Toward the end of my year at LSE, I had briefly met a junior at Wellesley named Judy Oxenberg, who was passing through London with a girl I’d been dating back at Harvard. They were on their way to spend a summer in France. When I arrived at their boardinghouse to take her friend out to dinner, Judy answered the door and I thought to myself, My God, she’s beautiful. The next evening I fixed her up with a friend from Canada, and the four of us went out.

  When Judy arrived at Yale to do graduate work in French, at the beginning of my second year at the law school, I invited her to dinner. Judy’s real passion was for the performing arts, and, in addition to her French studies, she was taking classical voice lessons at the Yale School of Music. I decided that holding on to such an accomplished and attractive woman in the graduate environment of Yale—which in those days had few women—was unlikely. So I decided to fix Judy up with friends of mine, on the theory that they would return the favor by fixing me up with women more on my own level.

  Luckily, that plan never went into effect and we ended up seeing each other exclusively. Judy had different interests from mine; she was immersed in theater, music, and literature, and in that context I was a bit of a heathen. But both of us shared something more important—a sense of curiosity about everything around us, from the people we knew to world affairs to the books the other person had read. We also tended to have the same reactions to people and shared a somewhat irreverent sense of humor. People’s interests often evolve in unexpected ways. Over the years, Judy developed a good sense of politics and spent four years as New York City mayor David Dinkins’s commissioner for protocol and friendly confidante. Meanwhile, I became a bit of a theatergoer. And there is something else we have in common: while both of us have led active civic lives, we are both relatively private people and have not taken much part in the social whirl.

  By November, Judy and I were engaged. We were married that March, at the end of Easter break, in Branford Chapel at Yale. There were fourteen people at the wedding, including both sets of parents. We took a one-day honeymoon—borrowing a car from my law school classmate Steve Umin, whose devotion to music and theater matched Judy’s and who has become a lifelong friend. The next day I was back in the library, preparing for exams.

  I ENTERED LAW SCHOOL not really intending to practice law but feeling that it would be good training for whatever I might do and would help to keep open a broad array of options. I didn’t have any career path in mind, but I had a vague sense of wanting to do something financial and entrepreneurial. In the back of my mind was the idea that I might eventually return home to Miami and go into the real estate business, perhaps drawing on my father’s knowledge in some way. But I felt I should go to a big law firm for a time, to see what it was like. Lots of our friends were headed to New York, and Judy and I never really considered moving to any place else.

  I interviewed at several firms, and decided to go to Cleary, Gottlieb, Steen & Hamilton because it had a more comfortable environment and was somewhat smaller than most major firms, but with an establishment practice. I thought the hours would be a little shorter, and Cleary had a reputation for paying higher bonuses in addition to the starting salary—that year, $7,200—that was uniform across the major law firms, antitrust laws notwithstanding.

  That wasn’t much to live on, even in those days. Judy and I had to get help from my parents to pay the rent on what our landlady called a “garden” apartment—in reality a basement in Brooklyn Heights. But living in the city suited us. We spent a lot of time wandering around, going to restaurants and attending theater. Judy had some parts in musicals. The job at Cleary worked out well for me. I liked the people and the atmosphere, which did turn out to be relatively collegial and less formal than those of its counterparts. Working at such a firm also had a certain cachet; I liked being part of an establishment organization—a predilection that coexisted, for the most part peacefully, with my sporadic countercultural inclinations.

  I worked as an associate at Cleary for two years, doing research for big litigation, tax analysis on an estate issue, and background work on some corporate matters. I saw how this type of law could be highly engaging, but it wasn’t for me. Also, realistically or not, I figured my odds of making partner weren’t great. I still wanted to do something more entrepreneurial and have the possibility of major financial reward. When I look back, I’m surprised that I wasn’t more involved in the larger social and political issues of that time. In law school, I had engaged in endless discussions about Vietnam, civil rights, and problems of poverty. But it would be a few more years before I would become actively involved.

  My career epiphany came while I was working, at a junior level, on behalf of a client called Hayden Stone, a Wall Street investment firm that no longer exists. Hayden Stone was the lead underwriter helping to take public a company called COMSAT. In meetings, the investment bankers were the ones figuring out how to do a big deal. When I’m forty, I thought, I want to be doing what those guys are doing, not what we’re doing.

  I had also begun to pay more attention to the stock market, applying in a limited way my father’s highly analytical approach to investing. It was based on the method laid out by Benjamin Graham—probably best known for his disciple Warren Buffett—in Security Analysis, the classic book Graham wrote with David Dodd in 1934.

  Graham and Dodd believed that, in the short term, the stock market is a “voting machine,” reflecting emotion and fashion more than rationality, but over the long term, the stock market is a “weighing machine,” valuing securities based on earnings prospects, assets, risks, and other fundamentals. They argue that you should invest only for the long term, and then only when the price is below the fundamental value calculated on the basis of these factors. My father analyzed securities this way and invested with the expectation of holding for a long time. If he sold a stock after only a few years, it indicated that something had gone wrong, or that the stock had risen so much as to be highly overvalued.

  Today I believe even more strongly that this is the only sensible approach to investing in stocks. You should analyze the economic value of a share of stock the same way you would think about the economic value of the whole business. A stock, whether in a steel plant or in a high-tech firm, is worth the present value of the company’s expected future earnings, adjusted for risk and for other fundamental factors such as hidden assets on the balance sheet. Over the long run, the price of a stock will reflect this economic value, although the price can deviate dramatically from it for an extended period. Investors seem to lose sight of this reality periodically, with predictable results. Most recently, a large number of people incurred huge losses by following fashion, rather than valuation, in the period leading up to the dot-com and telecom collapses of 2000 and 2001. A separate but related point is that the greatest opportunities often lie in going against trends.

  As a way of thinking about the market, the Graham-Dodd approach also played to my Harvard skepticism. To look at the market and try to find securities whose prices didn’t reflect prevailing views appealed to me. A well-established academic doctrine argues that markets are efficient, meaning that the price of a stock fully incorporates all known information and judgments about that stock. A corollary to this Efficient Market Theory is that nobody can outperform the market over time. But everything I’ve seen in my years on Wall Street—and a lot of more current thinking on finance theory—says that that is simply not so. By definition, most investors, even most professionals, are not going to be able to outperform the market. But a few will be able to, through some combination of better analysis, better judgment, and greater discipline.

  All this interested me far more than the practice of law, so I sent my résumé to several investment firms. But I didn’t receive a single response, not even a note. Back then, a law degree didn’t mean much in the financial world. The dominant traders on Wall Street had gotten where they were on the basis of street smarts and savvy, while the investment bankers mostly came f
rom society backgrounds or business schools. Moving from a law firm to an investment bank was a strange choice in those days. Although it was a step up in income—when I eventually found a job, my compensation went from less than $13,000 to $14,400 a year—some people told me that it was a step down on the social scale.

  A month or so after my applications vanished into the void of Wall Street’s leading firms, my father was in town and I had lunch with him and a stockbroker he knew. The stockbroker mentioned that he had a friend at Goldman Sachs who was looking for a junior associate. That turned out to be L. Jay Tenenbaum, the partner who ran Goldman’s arbitrage department. So I went to meet L. Jay. Since I wanted to learn more about investing in companies, I told him that I was interested in either Goldman’s research department or its corporate finance department. He very accommodatingly sent me over to both departments. But as I later learned, he told the people who interviewed me there to discourage me from those areas because he wanted to hire me for arbitrage.

  Through another friend of my father’s, I received a second introduction, which led to an offer from Lazard Frères to work in its arbitrage department. So by sheer coincidence, two firms offered me jobs doing something I’d never heard of. I had some doubts about whether I’d be suited to arbitrage. My understanding was that an arbitrageur, like a securities analyst, had to get on the phone and interview executives at companies about transactions. I wasn’t sure I could be so audacious. But those were the two offers I had, and I wanted to try something new. I chose Goldman over Lazard mostly because Goldman was considered the top firm in the arbitrage field—Goldman’s renowned partner, Gus Levy, had built the department—and also because the pay was slightly better.

  In arbitrage, you might end up learning about subjects that a week before you’d known nothing about, such as political unrest in Libya, if that affected the prospects of a transaction involving one of the big oil companies. One deal we analyzed was the proposed liquidation of a holding company called the Roan Selection Trust. When you bought the stock, you were due to get about five or six different securities if the deal went through. You got cash, a warrant on stock in an American mining company, common stock in a Botswana mining company, and a Zambian 6 percent bond. We had to calculate not only the odds of the deal going through but what value to attach to each of those pieces, and how to hedge them to the fullest extent possible. When we first heard about the liquidation, we didn’t even know where Zambia was—because until a couple of years earlier it had been called by its colonial name, Northern Rhodesia. So one of the fellows on the trading desk called the consulate and asked, “Where are you?”

  “Fifty-seventh and Madison,” came the reply.

  And our trader said, “No, I mean where is your country?”

  L. Jay Tenenbaum, who taught me the business, wasn’t intending to stay at Goldman Sachs forever. He was trying to clear the way for his own eventual retirement, even though he was only forty-four when he hired me. And his deputy, Bob Lenzner, who went on to a distinguished career in financial journalism, left shortly after I came. So everything sort of fell into place for me. If L. Jay had wanted all the credit for himself, he could have hidden me under a bushel. Instead, L. Jay looked out for my interests, and took every opportunity to promote my career with his partners at the firm until he retired in 1976. L. Jay took great pride in helping younger people he respected advance in the firm. Later, I felt exactly the same way when I had the opportunity to help talented people who worked with me at Goldman and in Washington.

  L. Jay had learned the arbitrage trade as a gofer working for Gus Levy, who was an almost mythical figure by the time I joined the firm. Gus had grown up in New Orleans and had had to drop out of Tulane to help support his family when his mother could no longer pay the tuition. He’d made his way from being a Wall Street messenger to a job in the bond department at Goldman Sachs during the Depression. From those humble origins, he became the heir apparent to Sidney Weinberg, the legendary figure who had steered Goldman Sachs since the 1930s. Gus became a legend in his own right—senior partner of Goldman Sachs, chairman of the New York Stock Exchange, a major Republican fund-raiser, and a pillar of many New York civic institutions. What his list of accomplishments doesn’t fully explain is that from the mid-1960s until his death in 1976, Gus was almost surely the single most important person on Wall Street.

  In the 1950s, Gus was one of the inventors not only of risk arbitrage, but also of block trading for institutional clients. Before that, an institutional investor who wanted to sell 50,000 shares of Coca-Cola—a small block by today’s standards—would sell them piecemeal on the open market, putting downward pressure on the price of the stock. Gus’s innovation was for Goldman to buy a whole block of shares, which might cost $10 million or $20 million, with customer commitments to buy some of the block and the rest taken into inventory for subsequent resale. The firm would take more risk by actually owning some of the stock on its books for a time. Per-share profit may have turned out to be lower, but Goldman’s trading volume and market share increased tremendously.

  L. Jay and Gus were both men with tempers, which was pretty normal for trading rooms in those days, when most of the familiar Wall Street names were private, a large firm had a few hundred people at most, and few traders had college degrees. The environment was highly entrepreneurial and often seat-of-the-pants. For Gus, management was accomplished by yelling—all day long. The legend was that a decade earlier, he would regularly fire everyone in his office at the end of the day—but they’d all be back at work the next morning.

  By the time I got to know him, Gus had calmed down somewhat, but he was still quite a challenge. He had a sliding glass window in his office that looked out onto the trading floor at the old Goldman office at 20 Broad Street. Gus would slam open the window and bark out orders—or abuse, if he found out that Salomon Brothers had done more block trades than we had that day. Then the window would slam shut again. I once started explaining something to Gus with the words “I assume . . .” “Don’t assume anything!” he barked at me. “Find out!” Or he’d snap, “Do it now, you may not be able to later!” Of course, anyone might make such a comment. But coming from Gus, with his enormous intensity, such admonitions burned themselves into my soul, and I cite them to this day. Another time, soon after I’d arrived at Goldman, Gus called me into his office to discuss a memo I’d written proposing an arbitrage transaction. He dismissed it with a one-sentence remark that I didn’t understand. When I asked him what he meant, he snapped back, “We don’t have time for on-the-job training here.”

  Gus also had enormous charm, which he would employ with the firm’s clients. One of the few times I was invited to a dinner at his apartment, he was hosting the visiting chairman of a major corporation. To hear Gus talk, you would think the chairman was the greatest genius in the history of American business and Gus’s best friend. But I’d heard Gus heap similar accolades on other CEOs. In a taxi on the way home, I asked Ray Young, one of the firm’s senior partners, “Ray, do you think Gus will remember those comments the next time he says the same thing to another big client?” Ray answered that Gus was being absolutely sincere—he meant everything he said when he was saying it. For that evening, the CEO in question was the center of his universe. That’s why Gus’s charm was so effective. Many years later, I met another person who had that kind of ability to focus his attention completely on someone without being insincere. That other person, even more persuasive in such moments, was Bill Clinton.

  Despite his temper, Gus was a great leader who was truly supportive when times were tough. About individual transactions he could go absolutely crazy, as he did when we lost more than half a million dollars on the Becton Dickinson–Univis deal. “Anybody could have seen that was going to happen!” he’d shout. But those of us in the trading room knew that at the end of the day he would be fair about compensation and promotions. Gus understood that we were in a risk-reward, probability-based business and that a trader woul
d do badly at times, either because the dice came up wrong or because people make mistakes. That made Goldman Sachs an environment where you could take rational risks. With all the ranting and raving—and there was a lot of it—in the final analysis, Gus supported risk taking and assessed people fairly based on their overall performance.

  Gus himself was famously superstitious. You could hear him coming on the trading floor because of the “lucky” coins jangling in his pocket. Although one of his mantras was “It’s better to be lucky than smart,” Gus didn’t rely on luck. He began his workday at 5:00 in the morning and got to the office before 7:30, well ahead of everyone else—a point he was kind enough to remind us of from time to time—and then went to client dinners or charitable events every night. After Gus died, I always regretted that I’d never asked him what he, driving himself all day long every day, thought life was all about. I don’t know if he would have had an answer, but one answer I don’t think he would have given was money. By the time I knew him, he didn’t need more for practical purposes, and I don’t think his sense of self resided there. In fact, he gave away much of what he made.

  The big crisis in those years was the Penn Central bankruptcy, which hit in 1970, the year after Sidney Weinberg died and Gus’s first year as senior partner. Goldman had sold commercial paper—short-term debt instruments—on behalf of the Penn Central railroad. When the railroad surprised everyone by declaring bankruptcy, investors who had bought Penn Central’s paper accused us of inadequate disclosure—because of negligence or intentional failure—about the company’s financial condition. The bondholders sued us for an amount that exceeded our capital. The claims may have been weak but they were not frivolous, and the partners’ entire net worth was at stake. I was not yet a partner, but I had ideas about how to respond to this crisis and told Gus, though this may have been presumptuous given my limited experience, that I thought we should consider whether our regular outside counsel was well suited to the rough-and-tumble of a jury trial. He decided to stay with our regular counsel, but to use a different lead litigating partner than would ordinarily have done our work, someone who was better suited to this situation. Thereafter, he used me occasionally as something of an unofficial adviser. That was my first experience dealing with a critical institutional crisis. Since then I’ve had to help manage through a number of these events, not just at Goldman Sachs but later in Washington and at Citigroup.