The Billionaire's Apprentice: The Rise of the Indian-American Elite and the Fall of the Galleon Hedge Fund

by Anita Raghavan

One day while he was mulling it all and pacing along the corridor deep in thought, a partner called him into his office. Gupta was toying with signing up for a study that the partner was about to launch. But it was clear to the seasoned partner that Gupta was swamped by the choices before him and could not decide which to pursue. He gave him some advice.

  “You should just not worry about what is going to be good because you will never be able to tell,” the partner told him. “I have been in consulting a long time, and whenever I try to figure out what is good for me, it always turns out differently.” Projects you expect to learn the most from, the partner explained, often turn out to be disappointing, and assignments that have seemingly little promise can often turn out to be invaluable, offering a consultant a new insight or expertise. The important thing is to have “a learning mind-set” so that you learn from anything you do and everything you do, the partner advised.

  The insight resonated with Gupta, a man who grew up in a land where deferring gratification was a way of life. While others jockeyed to get on teams that worked on what seemed like the most promising consulting projects, Gupta took a Zen-like approach to getting new assignments. Whenever he visited Miles, he would say, “Bud, I don’t want to know what’s available. Just tell me what I should do and that’s fine with me.”

  One of the first big clients he worked for was the phone giant AT&T Corp., a relationship McKinsey owned because of a formidable consultant, Frederick W. Gluck. An electrical engineer by training, Gluck arrived at the firm in 1967 after a stint at Bell Labs, where he was program manager for the Spartan missile.

  It was an era before people owned their phones. Rather, customers picked phones of their choice out of a catalog and paid AT&T a monthly fee to rent them. A persistent problem came with that system: disappearing phones. When people moved, they took the phones that AT&T provided. In one of its less glamorous assignments for AT&T, McKinsey was hired to figure out how to prevent AT&T from losing so many phones to its customers.

  Gupta dived into the project, going on field visits with low-level AT&T employees to get a grasp of the issues. During one visit, Gupta got stuck with more than he gambled for. When he removed a phone from the wall, a swarm of cockroaches crawled out. “The whole place moved,” says Chatterjee, Gupta’s IIT friend and McKinsey colleague. The consulting firm’s prescription was classic McKinsey: AT&T had defined the problem incorrectly. In many cases, it was spending more money to recover the phones than they were worth.

  Despite its genteel bearing and ivory tower reputation, McKinsey is a notoriously competitive place. Gupta was keenly aware of its legendary “up or out” employment philosophy—either you moved up in the organization or you were asked to leave. Though McKinsey partners loathe describing the underpinnings of the company’s philosophy this way, “up or out” is an intrinsic part of the firm’s business model, a key ingredient to the profitability of the partnership. It allows the firm to stick to the bedrock of keeping the pay of its directors, or senior partners, as steady as its principles.

  Every six months during Gupta’s early years at McKinsey, a body called the Principal Candidate Evaluation Committee met to elect new partners. On average, it took about six years in the seventies for associates to make it to principal, the term McKinsey gives its junior partners. Some stars made it to principal far earlier; in the case of former head of McKinsey Germany Herbert Henzler, in just four and a half years.

  As with almost everything in his early days at McKinsey, Gupta was characteristically late in being named a principal. Every time the partner elections took place, Gupta’s friends would ask, “Oh, what happened? You didn’t get elected.” Gupta would try to shrug it off, saying, “I don’t know.” He watched as others in his class made principal before he did. It was a nerve-racking time, though Gupta didn’t let on to anyone. In January 1980, after almost seven years at the firm, he was elected a junior partner.

  Even as Gupta struggled to find his footing at work in the 1970s, home provided comfort. Gupta and Anita married in New Delhi in the summer of 1973. The newly wedded couple rented a studio apartment near Columbia University, where Anita had been accepted to study for her PhD. Gupta’s annual salary of $25,000 was generous, but household finances were still tight. Like many immigrants from India at the time, Gupta scrimped and saved so that he could help support his brother and sister back home. He bought $2 shirts at Filene’s Basement; he had only two, one to wash and one to iron for the next day. Within a year, he’d sent enough money to his siblings so they could build their own house.

  Still, Rajat and Anita’s first few years in Manhattan were among their happiest. Their apartment, while small, was perfect for the young couple to get to know each other. On weekends, the two took to the streets of New York, exploring the city together for the first time. Friends from India, who had also come to the United States to study, often visited on weekends, cramming into the Guptas’ spartan accommodations. “I spent my first night in the US in that apartment,” says Anjan Chatterjee, Gupta’s IIT Delhi pal. When Chatterjee settled in Washington, DC, he and his roommate would often drive up on weekends to visit the Guptas. By day, the visiting friends toured New York City landmarks such as the Empire State Building and the Statue of Liberty. At night they camped on the Guptas’ floor. Often they would while away the evenings smoking and playing bridge or Scrabble. It was a simple life among trusted companions, much like the one Gupta observed growing up in New Delhi among his parents and their friends.

  When Gupta was first approached about going to work for McKinsey in Scandinavia, the assignment was billed as a single study. The hope, however, was that Gupta would find enough to like in Scandinavia that he would want to decamp for a while. Since McKinsey had opened its fledgling Copenhagen office in January 1972, it had lost money—not unlike most of McKinsey’s overseas offices in the early years—but unlike the other outposts it hadn’t entirely righted itself. Gupta worried that if he were sent overseas, he would be too far from New York, the center of McKinsey power. It was well known that McKinsey partners toiled in the hinterlands for years in the hope of getting to New York from the consulting firm’s satellite offices.

  Gupta was already in New York. Why would he take on a job that would move him away? It didn’t make any sense. Nevertheless, Gupta said he would consider the Scandinavian opportunity, but, like the others before him, he had every intention of rejecting the overture, suspecting that his wife, Anita, would give him the corporate cover to turn down the job.

  After finishing her graduate studies at Columbia, Anita took a job working at prestigious Bell Labs doing research at its Holmdel, New Jersey, complex. To make things easier on her, the Guptas bought a house and moved to New Jersey in March 1977. The $75,000 purchase in Middletown, New Jersey, was about five minutes away from her new place of work. When he wasn’t at a client’s offices, Gupta took the train every day into New York, commuting an hour and a half each way. A year after they moved, the Guptas had their first daughter, Geetanjali. In a nod to his Bengali heritage, they named her after the Nobel Prize–winning epic Gitanjali, written by the Bengali poet Rabindranath Tagore. After a short break, Anita returned to work. Her career was flourishing, but like many working women, she was having a tough time juggling it all, balancing the demands of her professional life with raising a child.

  To his surprise, when Gupta told Anita about the opportunity to go to Scandinavia, she jumped at it. Since starting her job and having their first child, she felt tugged from all sides. It would be difficult for Anita to leave her job voluntarily; after all, she would be leaving a good company where she had a promising future. But when Gupta was offered the chance to go to Scandinavia, she thought it was an elegant way to quit Bell Labs.

  Though he dreaded the transition at first, the more Gupta thought about it, the more he realized he had little to lose by going to Scandinavia. When his IIT friend Chatterjee, who by now had joined McKinsey too, asked if he had any choice about moving, Gupta replie
d, “I don’t think I do.” Then he said he thought it would be much harder climbing the ladder at McKinsey in New York. “Let’s see what Copenhagen gives,” he told Chatterjee.

  Gupta approached his first big move since coming to the United States with little fuss or fanfare. McKinsey offered Gupta the chance to visit its Copenhagen office before committing. Gupta was amused. Why would he need to go see a McKinsey office? He knew what people at McKinsey looked like and what their backgrounds were. Visiting was an indulgence he didn’t need or want. Why waste company money?

  Just before the Guptas were about to move, though, he and Anita took up the firm on a house-hunting trip. They couldn’t go for long because their daughter was still a toddler. After spending a day looking at a dozen houses, they realized they weren’t going to be able to settle on anything before they left. In a move worthy of a seasoned psychologist—build trust by empowering others with a personal decision—Gupta asked his new colleagues in the office to make the final decision. “Here are the three best ones we like. You could get us either one of these or anything that is similar.” One of his colleagues chose his house and, in 1981, the Guptas headed to Copenhagen to live in it.

  Scandinavia was “a very homogeneous environment,” Gupta would say years later. “When I went there, they had never seen anybody with dark skin and dark eyes, I don’t think. It was a very closed environment.”

  In Copenhagen, the quiet Gupta finally got the chance to show his superiors his promise as a leader. For years, there were whispers about the head of McKinsey’s Copenhagen office and his penchant for excessive drinking, but Gupta appreciated the seriousness of the problem only a year after arriving in Scandinavia.

  “He was a brilliant guy but an alcoholic,” said Gupta years later. “It was beginning to impact his work, and his relationships with clients and colleagues.” At first Gupta and two of his peers in the office tried to cover for him and back him up at client meetings to make sure he was not an embarrassment. But “at some point in time, it became a very, very impossible situation,” said Gupta. “And there were some very embarrassing incidents and client situations.”

  Gupta and his colleagues wrestled with the problem for weeks, offering different solutions and discarding them almost as soon as they came up with them. If Gupta raised the matter with New York, his boss would feel that it was a personal betrayal. It could also jeopardize his career. But the man needed help. “Office managers had a lot of power, and no one had the gumption to take him on,” says Gupta’s IIT friend Chatterjee. What Gupta did was to unite the other partners in the office and convince them that they had to take up the matter with Daniel, McKinsey’s then managing director. Gupta built a coalition and then he led it.

  Daniel happened to be in Paris for the firm’s executive committee meetings when Gupta and two colleagues, a Swede and a Dane, visited him.

  “We’re having a big professional issue,” Gupta told Daniel, and then he went on to explain the problem in the office. The next day, Daniel summoned the Copenhagen office manager to Paris, relieved him of his duties, and had him check into the Betty Ford Center, which treats individuals with drug and alcohol dependencies.

  As Gupta expected, his boss was livid because he felt he’d been sold out. But only two years after the partner sought professional help, the two men reconciled. When he returned to Scandinavia after treatment, he invited Gupta and his two colleagues to dinner. They went with some trepidation, knowing that their last meeting had been filled with rancor. The partner, now a recovering alcoholic, was grateful to the consultants for what they had done.

  “He had realized that we had saved his life,” said Gupta years later, “and he came to thank us…because if he had gone on in the way he had gone on, he probably would not have lived for very long.”

  Some at McKinsey interpreted Gupta’s humility and quiet manner as a sign of weakness. But McKinsey head Ron Daniel knew from his own experience that Gupta was every bit as much the go-getter as the next consultant. Daniel tapped Gupta, then age thirty-two, to run the Scandinavian business, making him one of the youngest consultants at McKinsey to hold the position of office manager.

  Gupta turned his taciturn style into a powerful tool with clients. Christian Caspar, a McKinsey colleague, remembers Gupta’s presentation of a change-management program for a large corporation. At a pivotal point, when the client wondered if the inevitable disruption was worth it, Gupta, rather than offering his opinion to the client, said nothing. “He just looked them right in the eyes,” says Caspar. “A minute must have passed in silence. It was quite effective, because the client had to make the decision. It wasn’t ours to make.”

  Gupta’s rise coincided with Daniel’s makeover of McKinsey. Daniel recognized that McKinsey needed to innovate and offer clients much more than a nearby regional office. Strategic, organizational, and operational expertise was required. McKinsey’s best consultants were put in charge of developing new thinking in each area: Fred Gluck in strategy, Tom Peters and Bob Waterman in organization, and other stars from Cleveland and Germany in operations. “What a change,” exults Skilling. “In Search of Excellence was researched and developed and the strategy effort came up with world-beating, actually BCG-beating ideas. Even the operations guys developed some powerful tools. Suddenly McKinsey was leading the thinking.”

  Unlike its rivals BCG and Bain, which had office scale, McKinsey’s average office size was small, making it imperative that its managers embrace an office-to-office esprit de corps. Some of the old guard, the entrenched office managers protecting their power base, resisted the shift. But Gupta embraced it.

  Skilling remembers being invited to speak to two of Gupta’s clients. In one instance, in his role as head of McKinsey’s natural gas practice, he talked to a Scandinavian energy company about the impact of deregulation. Another time, in his role as head of McKinsey’s North American chemical practice, Skilling discussed the microeconomics of commodity chemical prices so that the client could figure out how to better model the economics of an acquisition. During the meetings, Skilling was struck by the “low-key, comfortable relationship” that Gupta had with the client executive. “He didn’t ever try to show that he ‘knew everything,’” Skilling says. “There was a lot of question asking and Rajat would ask a lot of questions—he was amazingly willing to show his lack of knowledge and uncertainty. He felt no need to be all knowing, something that a lot of partners had a tough time with.”

  The meetings Skilling had in Scandinavia with Gupta’s clients were different from others he had with other offices. In those meetings, the local manager would act as a go-between, not a colleague. The office chiefs would dissociate themselves from their visiting McKinsey colleague until it was clear that their client was on board with the advice. “I could understand this posture since it gave the local people a second shot if something went wrong, but it was a bit cowardly,” says Skilling. “Rajat didn’t play that game. He was up front and transparent. The term ‘trustworthy’ often came to mind.”

  By the time Gupta was ready to leave Scandinavia in 1986, he had grown the McKinsey practice from 15 to 125 professionals, expanding its reach into Norway, and he had made it profitable. “To this day, our competitors find it hard to compete with us in that region,” Daniel says of the historic strength of McKinsey’s practice in Scandinavia. Skilling believes that Gupta’s achievements there were profound and that his approach “probably foreshadowed McKinsey’s phenomenal worldwide success in the late 80s and early 90s.”

  Gupta made plans to leave Scandinavia during the Christmas holiday. To say good-bye and mark his time in the office, Christian Caspar, his successor, hosted a farewell party, to which he invited all the partners in Scandinavia. Caspar arranged for children to sing Christmas carols. He even organized a Santa Claus for the occasion.

  When Santa appeared, Caspar told Gupta that it fell to him to guess who Santa was. As hard as Gupta tried, he couldn’t fathom the identity of Santa, who stayed mute. Gup
ta was about to give up when Santa finally spoke. The conscience of the company had flown four thousand miles to personally thank him.

  Santa Claus was Marvin Bower.

  Chapter Eleven

  The Camera Never Lies

  In the spring of 1998, Intel Corporation did something extraordinary. It installed a hidden video camera above a new fax machine at its Santa Clara, California, offices. By design, the fax feeder required that documents be laid faceup on the machine so that the overhead camera would capture an image of the document being faxed. Intel also installed a camera in a fabric divider panel to record the face of the faxer. And without the specific employee’s knowledge, the semiconductor giant fixed a hidden camera above her desk and recorded her comings and goings. The time clock on the digital camera was synchronized with the clock on the fax so that there would be no dispute over when a specific document caught on camera was actually faxed.

  After complaints two years earlier from investors, Intel resorted to these unprecedented measures to plug internal leaks of sensitive corporate information. Early investigations of its phone records turned the company’s suspicions to a junior employee working in Intel’s product-marketing area. The worker raised a red flag herself when she told a colleague that she had access to important data on computer chip sales. “If you sell this information, you can get real money for it,” she remarked.

  In the mid-1990s big institutional investors noticed that some of Intel’s most sensitive financial data was leaking into the market before it was publicly released. Institutional investors—mutual funds, insurance companies, banks, hedge funds, and pension funds—invest large pools of money. They buy and sell hundreds of millions of dollars of stock in companies like Intel every day. They live and die on quarterly profit figures (publicly traded companies are required to report earnings or losses every three months) and make large bets in the stock market in anticipation of a company’s earnings. If earnings exceed analyst expectations, a company’s stock usually rises. If a company misses projections, the stock usually declines.