by John Brooks
And all the while individual people, as well as corporations, were being profoundly affected. The executives, particularly the top executives, of the captured companies were subjected at worst to summary dismissal and at best to reshuffling and serious loss of morale. Occasionally a takeover was followed swiftly and grimly by mass firings among the victim’s management, but even when, as more often happened, the victim was left to operate as a more or less autonomous division of the merged company with generally the same personnel, the executives were likely to be overtaken by apprehension and anomie. Each man’s place in the company hierarchy, perhaps painfully won over many years, became meaningless if his new super boss, the conglomerator, didn’t see things his way. Robert Metz told in The New York Times about an executive of an acquired company who observed that he and his colleagues had been given what he called the “mushroom treatment”: “Right after the acquisition, we were kept in the dark. Then they covered us with manure. Later they cultivated us. After that, they let us stew for a while. And, finally, they canned us.”
The economy and amour propre of whole communities became disrupted. Conglomerates’ headquarters were mostly on the two coasts, and often enough their corporate victims resided in the cities in between. The result was the repeated reduction of mid-American cities’ oldest established industries from independent ventures to subsidiaries of conglomerate spiderwebs based in New York or Los Angeles. Pittsburgh, for one, lost about a dozen important corporations through conglomerate mergers. To Andrew Carnegie’s city, cradle of the steel industry, the conglomerate phenomenon was like a tornado that left it battered and shaken; it is unlikely to think of itself in quite the old way ever again.
Finally, there is the profound question of the vast social and political power that conglomerates might derive, if they so wished, from their huge concentrations of wealth—and of how they might choose to exercise such power. For the most part, to all appearances, they chose not to try to exercise it at all. Preoccupied with further growth, internal organization, and raising profits, they stuck strictly to business and seldom sought to alter the social order or to usurp the functions of government. The looseness of their structures, just possibly the liberalism of their bosses, certainly their sheer busyness, all seemed to militate against such activity. Or so it appeared until the largest of them all, International Telephone and Telegraph, began to emerge as a monstrous exception.
Founded in 1920 as a communications service company operating outside the United States, I.T.T. in 1960 was still essentially that, its business overwhelmingly overseas, its assets just under the $1-billion mark and its net annual income around $30 million. That year its new president—Harold S. Geneen, flinty, British-born but naturalized an American in childhood, then just fifty and already spoken of as one of the most brilliant executives in the nation—began remolding it into a conglomerate giant. Nine years and more than one hundred mergers later, I.T.T. had amassed assets of $4 billion; its net income, running at an annual rate of $180 million, had gone up for forty-one consecutive quarters; and it had become the eleventh largest American corporation. Because of the breadth and importance of its acquisitions, its hand seemed to be everywhere in the American marketplace. As Time pointed out in 1972, a consumer who became annoyed with I.T.T. would have a hard time boycotting it: “He could not rent an Avis car, buy a Levitt house, sleep in a Sheraton hotel, park in an APCOA garage, use Scott’s fertilizer or seed, eat Wonder Bread or Morton’s frozen foods.… He could not have watched any televised reports of President Nixon’s visit to China. … [He] would have had to refuse listing in Who’s Who: I.T.T. owns that, too.”
Through the years of its growth under Geneen, I.T.T. had been generally thought of in the conservative business community as an atypical “good” conglomerate, its emphasis on real growth, its takeovers nonhostile, its resorts to accounting tricks few. Even its stock-market performance was moderate by conglomerate standards; between the 1962 low and the 1968 high, its price hardly more than tripled. Even the style of its managers appealed to business conservatives. Taking their cue from the hard-driving and colorless Geneen, they refrained from building mansions or amassing art collections and devoted themselves with fierce dedication to unmitigated work. I.T.T. embodied the old Protestant ethic clad in new conglomerate clothes. It was the Establishment’s conglomerate.
Not surprisingly, in view of these attitudes, I.T.T. was also the most Republican-oriented of conglomerates. And when, in 1969, after years of coexisting with Democratic regimes, it found itself with friends in power in Washington, I.T.T.—like so many earlier business enterprises that had found themselves in similar circumstances—seems to have lost its head and its Protestant ethic. Whether or not in 1971 it offered a contribution to the Republicans in exchange for a favorable settlement of a government antitrust suit remains in dispute (although the company’s use of its now-famous paper shredder to destroy documents scarcely suggests a clear conscience). Most persuasive, however, is the clear evidence that in 1970 the company maneuvered—and offered to contribute $1 million—to block the election as president of Chile, where I.T.T. controlled the Chilean Telephone Company, of the Socialist Salvador Allende; or the evidence that, having failed to prevent Allende’s election, I.T.T.’s self-designated proconsuls negotiated with the United States government at the White House level with a detailed plan, involving economic sabotage and the use of the Central Intelligence Agency, to bring about the overthrow of the Allende government.
The plan was turned down, but the damage was done. Here were shades of Manifest Destiny and gunboat diplomacy; here, naked and unashamed, was immense power without a sense of place, proportion, or responsibility, a planned attempt to enlist public officials to tamper with another nation’s affairs in the cause of private profit. With the revelations, made in 1972 and 1973, I.T.T. came, with one stroke, to win the gold from General Motors as the ordinary man’s prize symbol of consummate corporate arrogance and insensitivity. The sinister possibilities of conglomerates, including the multinational ones, for the first time exposed themselves to the public in a manner to cause not-soon-to-be-forgotten comment and concern.
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Revitalizers of the moribund and modernizers of the obsolescent, or wreckers of lives, plunderers of cities, and meddlers in the affairs of nations, the conglomerates for a time made American boardrooms and executive suites into a takeover jungle where there were only the hunter and the hunted, and where fear and aggression dominated the world’s greatest marketplace. But only for a time. It could not last, because—perhaps happily—the aggressors, sleek beasts of prey during the years of plenty, would in due course be revealed for the most part as stuffed and toothless tigers.
The start of the decline of conglomerates can be dated. By 1967 Litton Industries had become a gray eminence among conglomerates, its reputation impeccable, its stock soaring, its earnings rising steadily as they had been doing for a decade, its self-image so assured that it could decorate its annual report for that year with pictures of medieval stained glass “so that we may signify our respect and responsibility toward the achievements of the past.” No market expert on Litton, whether in Wall Street or in the company itself, seems to have dared dream that profits might not continue to rise in 1968. But that January, when Litton’s top officers met at the company’s Beverly Hills headquarters, a totally unanticipated state of affairs was revealed. Several of the divisions were discovered, apparently for the first time, to be in serious trouble; as a result, profits for the quarter ending January 31 would, it now became clear, fail to rise at all, and in fact were headed substantially down. In simple words, business was decidedly off, and top management—so vast and various was the empire—hadn’t seen it coming. Management control had been lost.
When the public earnings announcement was made—21 cents profit a share against 63 cents for the same quarter the previous year—in the stock market it was, as a Wall Street pundit put it, the day the cake of Ivory soap sank. Litton sto
ck dropped 18 points in a week, and within a month or so it had lost almost half of its peak 1967 value. Gulf and Western and Ling-Temco-Vought slumped in apparent sympathy, and the first tremors of panic shook the whole conglomerate world.
It wasn’t all over by any means; there would be some wild conglomerate maneuvers and some soaring conglomerate shares in the two years ahead. But the era was on its way to its end when, in January of 1968, it was shown for the first time that conglomerate management—even the best of it—could lose track entirely of the progress or regress of the far-flung enterprises it ostensibly controlled and thus fail utterly of its function. In short, the root theory of conglomeration might simply be wrong, its temporary success founded chiefly on the gullibility of the stock-buying public and its professional advisers.
CHAPTER VIII
The Enormous Back Room
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It has become a commonplace for social commentators to say that 1968 was the year when the fabric of American life unravelled—when the moral ground shifted and quaked under American feet; when the political far left turned violent and took on ominous fieldmarks of the far right; when the democratic idealism and optimism of the mass of Americans seemed to become a delusion. In January, the U.S.S. Pueblo, on a mission of espionage, was seized in the Sea of Japan with its eighty-three-man crew by North Koreans, and so the mightiest nation in the world was humiliated both morally and physically by one of the smallest and weakest. In February, the Kerner commission on civil disorders, a formally constituted government body, affirmed what many Americans had uneasily come to suspect—that the black violence and riots of the previous year had been caused chiefly by a profound racism on the part of the white majority. In March—although it was not known until much later—American soldiers murdered hundreds of unarmed women and children at My Lai. At the end of that month, the then President made a personal confession of failure by withdrawing from candidacy for re-election. In April, Martin Luther King, Jr., was murdered; in June, Senator Robert Kennedy. In May at Columbia University, students made a public mockery of parental and educational authority while parents and teachers stood by and let them. In August, there was disheartening police violence attending the national convention of the Democratic Party in Chicago. In December, when the United States astronauts Borman, Loveli, and Anders became the first men to see the far side of the moon, there were many of their countrymen too stunned by the year’s events to feel properly proud.
And while this systemic eruption of sores covered the body politic, Wall Street, an organ of barometric sensitivity, had its own convulsions and its own loss of grip and tone. The loss amounted, indeed, to perhaps the single most dramatic technical failure of the free-enterprise system on record anywhere.
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It was the year Wall Street nearly committed suicide by swallowing too much business, and by compounding its own near-fatal folly by simultaneously encouraging more of the same. The pace of trading had been picking up in the latter months of 1967 as a new speculative binge—the second in the decade—began to take shape. The average daily trading volume for 1967 on the New York Stock Exchange came to 10,080,000 shares, an all-time record by a wide margin. But not one destined to stand. Nineteen sixty-eight was to be the year when speculation spread like a prairie fire—when the nation, sick and disgusted with itself, seemed to try to drown its guilt in a frenetic quest for quick and easy money. “The great garbage market,” Richard Jenrette called it—a market in which the “leaders” were neither old blue chips like General Motors and American Telephone nor newer solid stars like Polaroid and Xerox, but stocks with names like Four Seasons Nursing Centers, Kentucky Fried Chicken, United Convalescent Homes, and Applied Logic. The fad, as in 1961, was for taking short, profitable rides on hot new issues. Charles Plohn, an underwriter known as “Two-a-Week Charlie” for the number of new low-priced issues he brought out, described his philosophy by saying, “I give people the kind of merchandise they want. I sell stock cheap. I bring out risky deals that most firms wouldn’t touch.” The public paid the astronomical amount of $3.9 billion for new stock issues alone during the twelve-month period.
Trading volume was such as had never figured in any broker’s wildest dreams of avarice. During the week after the Johnson withdrawal, which the market considered highly bullish, the Stock Exchange set new volume records almost every day. April 10, 1968, was the first day in history when Exchange trading exceeded 20 million shares; before the year was out there had been five more 20-million-share days, with a peak of 21.35 million on June 13. New investors and new money were coming into the market in torrents. During the first five months of the year, Merrill Lynch opened up over 200,000 new accounts; in other words, that winter and spring one American in every thousand—counting men, women, and children—opened a new brokerage account with a single firm. Brokers, of course, were reaping the harvest in commissions. Some of them had personal commission incomes for the year running to more than $1 million.
One million dollars income in a year, with no capital at risk—merely for writing orders for stock! It was enough to convince anyone that the Stock Exchange had indeed become Golconda revisited, that ancient city within whose portals all, according to legend, became rich, and so desirable was membership in the Exchange that the price of a seat rose from $450,000 in January to reach an all-time record in December of $515,000, topping even the peak prices of 1929.
As early as January, there began to be high cirrus cloud warnings that the back offices, the paper-handling departments of the brokerage firms, were in for a storm of trouble—that, as constituted, they were simply unable to process the new business, and that therefore, as Hurd Baruch of the S.E.C. would put it later, the best of times for Wall Street were in danger of becoming the worst of times. That month, January, the S.E.C. wrote to the two leading exchanges and the National Association of Securities Dealers, guardian of the over-the-counter market, expressing concern about “accounting, record-keeping and back-office problems and their effects on the prompt transfer and delivery of securities.” The main barometric measuring device for the seriousness of back-office trouble was the amount of what Wall Street calls “fails.” A fail, which might more bluntly be called a default, occurs when on the normal settlement date for any stock trade—five days after the transaction itself—the seller’s broker for some reason does not physically deliver the actual sold stock certificates to the buyer’s broker, or the buyer’s broker for some reason fails to receive it. The reasons for fails in most cases are exactly what one might expect: either the selling broker in his confusion can’t find the certificates being sold on the designated date, or the buying broker receives them but in his confusion immediately misplaces them, or someone on one side or the other fouls up the record-keeping so that the certificates appear not to have been delivered when in fact they have been. Of course, not all fails—in 1968 or other years—are the result of innocent mistakes. In a certain number of cases, one brokerage firm or the other intentionally misappropriates the certificates to an improper purpose, or an employee of one firm or the other steals them. There is another problem related to that of the fail. Often, in times of back-office confusion, deliveries of certificates by brokers—particularly deliveries to banks—are rejected by the recipient with the notation, in effect, “I don’t know anything of the transaction.” This confession of nescience is officially and rather charmingly designated a “Don’t Know,” or “D.K.” Incredible as it may seem, a subsequent RAND study indicated that in 1968 between 25 percent and 40 percent of all brokers’ deliveries of stock to banks were thus rejected.
As to fails, which are a more important indicator than D.K.’s of the degree of paperwork chaos in the securities business, the rule of thumb in Wall Street in 1968 held that an acceptable level of fails on New York Stock Exchange transactions at any given time (“acceptable,” the bemused observer must conclude, in relative terms) amounted to one billion dollars’ worth. Let a mere billion dollars of the customers’
money be more or less missing in Wall Street, the conventional wisdom went, and things were still within the ball park. Late in January, the fail level rose well above that figure, and the exchanges took action. Starting January 22, they and the over-the-counter market cut back daily trading hours by an hour and a half; closing time for an indefinite period became 2 P.M. instead of 3:30. The move—in retrospect an extremely timid one—was nevertheless made over loud opposition from a minority of the exchanges’ governors. (The governors were brokers, and brokers, to say it right out, make money on heavy trading.)
In February, the opposition continued. And so did the rise in both trading volume and the level of fails. The early closings appeared to be having little if any effect, and in March they were quietly abandoned, and not replaced by any other restraining action. Would the problem, just possibly, go away? It would not. In April, N.Y.S.E. fails were up to a level of $2.67 billion; in May, to $3.47 billion. All over Wall Street, committees were formed and recommendations made on the back-office problem, but nothing substantive was done. By June, the old, established firm of Lehman Brothers was in such total confusion that its customers’ securities were in clear jeopardy. Back in April, Lehman had converted to a fully automated accounting system, and, as is so often the case, the new system at first simply didn’t work. Stock record discrepancies at the firm, by the end of May, ran into hundreds of millions of dollars. Lehman reacted by eliminating a few accounts, ceasing to make markets in over-the-counter stocks, and refusing further orders for low-priced securities; it did not augment these comparatively mild measures with drastic ones—the institution of a crash program costing half a million dollars to eliminate stock record errors—until August, when the S.E.C. threatened to suspend Lehman’s registration as a broker-dealer and thus effectively put it out of business. Lehman’s reluctance to act promptly to save its customers’ skins, and ultimately its own, was all too characteristic of Wall Street’s attitude toward its troubles in 1968.