by John Brooks
“I’ll bet you want a big drink, after all that,” Lasker said to the Texan.
“You bet I do!” Perot replied, in heartfelt tones; and commanded the hovering proprietor, “Bring me the biggest ginger ale in the house!”
Matters came to a head in mid-April; there were daily and nightly sessions in Dallas, at the Stock Exchange, at Lasker’s suite, finally at the S.E.C. offices in Washington. Perot did not carry out his threat to withdraw; the negotiations succeeded. In the last week of April an agreement was reached that would stick: Perot and his colleagues to lend $55 million, in exchange this time for at least 80 percent control of F. I. du Pont; and the Stock Exchange, through assessment of its members, to indemnify Perot against resulting losses up to the sum of $15 million.
For the reader who has been numbed by the size of the sums tossed around, and the surrealistic ease with which they escalated, let a single figure serve as summary and conclusion: over two years, it would eventually appear, the errors and miscalculations in the account books of F. I. du Pont had amounted to somewhere in the neighborhood of $100 million.
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How had it all come about? Why hadn’t it been prevented? Why, for example, had the required capital-to-debt ratio not been set lower than 1:20, and why was the ruinous ninety-day capital withdrawal rule allowed to stand? As a matter of fact, the Stock Exchange had required 1:15 until 1953, and had relaxed the requirement that year to ease the need for new capital brought about by vast postwar expansion of the national securities business. When the 1970 crisis came, it was too late for reform. Tightening the requirement then was out of the question because such a move would simply have thrown many additional firms into violation. As to the ninety-day withdrawal rule, it was there because it had always been there—because it had the powerful sanction of tradition, backed by the shared assumption that the gentlemen who provided the money for Wall Street’s passage would not, in a crisis, choose to play the role of rats leaving a fleet of sinking ships. (The term for withdrawal notice was finally changed to six months in October 1970; in 1972, it was made eighteen months.) In sum, the problem was that the spirit abroad in the land at the time, the spirit that allowed conglomerates to buy profits with convenient mergers and mutual funds to write false assets with letter stock, spread to the core institutions of Wall Street, the huge old brokerage houses; and so the old rules that had been intended to govern men of caution, probity, and responsibility were suddenly failing to govern men caught in an obsession with greed.
But Wall Street was saved now, and the go-go years were about over. The Perot deal went through, and F.I. du Pont continued operations under the briskly competent management of Morton H. Meyerson, a young Perot lieutenant. “My objective is for du Pont to become the most respected firm in the securities business,” said Perot, in the sober pear-shaped tones of many Wall Streeters before him, and it was at least possible that he would reach his objective. Lasker, Rohatyn, and their colleagues could begin to catch up on their sleep, and on their private business affairs. Albert H. Gordon, chairman of Kidder, Peabody, wrote to Lasker, “If you had once lost your nerve, we would have gone down with all hands lost.” Surely no one could deny that Lasker had kept his nerve, done what of all things in the world he could do best: as a conservative, he had superbly filled the role of conservator.
Perot had come out probably the largest single investor in Wall Street and certainly the biggest man in its looming automated future; for all his outback ways a man of complexity and paradox: an idealist and yet a pragmatist, a passionate believer and yet conceivably a bit of a faker, and in Wall Street an Early American—such a leader as Wall Street might have had in 1870—called to answer a Late American problem in 1970. In the nineteen sixties, finance capitalism as practiced in America had once again, through its own folly, dug itself an almost inescapable grave and then dug itself right out—had once again survived, but just barely. The architects of its survival, men like Lasker, Rohatyn, and Perot, had shown courage, persistence, and self-sacrifice amounting almost to heroism. The question remained, Was the heroism in a good cause? Was the old system that could produce “creative” accounting, manipulation of stock prices, victimization of naive investors, and mind-boggling messes in brokerage firms really worth saving? There are those, a few of them in Wall Street itself, who thought and still think not—who believe that Hayden, Stone, Goodbody, and du Pont should have been allowed to go under so that the resulting bloodbath would cleanse Wall Street and bring about a government takeover to humble Wall Street’s pride and set it on the path of righteousness. It goes without saying that those people do not include Lasker, Rohatyn, or Perot—and that, when all was said and done, in the 1970 crisis it was they rather than their opponents who had the vitality and the faith to win the day. How long the day would remain won was another matter.
And so this chronicle ends, as it began, with Henry Ross Perot, the extraordinary man who, metaphorically speaking, won the money game and used his winnings to buy Wall Street.
CHAPTER XIV
The Go-Go Years
1
Some epitaphs for the go-go years:
In mid-October 1970, the week before Gramco Management suspended redemptions and sales of its collapsed offshore-fund, Director Pierre Salinger sat perched on the desk in his London office and said amiably to a reporter, “The offshore business is a dead duck.” Gramco stock, which had once sold at 38, was then available for 1½.
In June 1972, a block of preferred shares of Bernie Cornfeld’s (more properly, formerly Bernie Cornfeld’s) Investors Overseas Services changed hands in Geneva at one cent a share.
Between the end of 1968 and October 1, 1970, the assets of the twenty-eight largest hedge funds declined by 70 percent, or about $750 million. (Theoretically, hedge funds alone among financial institutions were ideally structured to survive a market crash or even to profit from one. But only theoretically. Structure is not genius; even for the exclusive hedge funds, genius turned out to have been a rising market. In practice, their managers, as carried away by the go-go spirit as anyone else, had simply forgotten to hedge in time. One of the most heralded of them had had the spectacular bad luck—or bad judgment—to begin large-scale short selling on May 27, 1970, the very day the market turned around and made a record gain.) Among the heavy losers in one such fund, which closed down in 1971, were Laurence Tisch, head of Loews Corporation; Leon Levy, partner in Oppenheimer and Company; Eliot Hyman, former boss of Warner Brothers Seven Arts; and Dan Lufkin, co-founder of Donaldson, Lufkin and Jenrette. The dumb money could take bitter comfort in the company it had among the smartest of the smart money—or former money.
A study of mutual funds by Irwin Friend, Jean Crockett, and Marshall Blume of the faculty of the Wharton School of Finance and Commerce, published in August 1970 by the Twentieth Century Fund, resulted in the startling conclusion that “equally weighted or unweighted investment in New York Stock Exchange stocks would have resulted in a higher rate of return than that achieved by mutual funds in the 1960-1968 period as a whole.” More simply stated, the pin-the-tail-on-the-donkey system of stock selection would, according to the authors’ figures, have worked better than the system of putting one’s trust in expert portfolio management.
If that conclusion suggested that gunslinger performance had been a fantasy born of mass hysteria, an item in Forbes magazine in early 1971 suggested that corporate profit performance—presumably the bedrock beneath the boom—had been another. By Forbes’s method of reckoning, Saul Steinberg’s Leasco, the king of all the go-go stocks, over the years of its stock-market glory had not earned any aggregate net profit at all.
2
Reform follows public crises as remorse follows private ones. Before the dust had settled on the 1969-1970 Wall Street crisis—indeed, before its last phase was over—reform began. In December 1970, Congress passed and President Nixon signed into law a bill creating a Securities Investor Protection Corporation, “Sipic” for short—a federally
chartered membership corporation, its funds provided by the securities business, which would henceforth protect customers against losses when their brokers went broke, up to $50,000 per customer. Every customer hurt by a brokerage failure over the years 1969-1970 was eventually going to end up whole again, the Stock Exchange now announced—even the unlucky clients of Plohn, First Devonshire, and Robinson, apparently left to their fate back in August. The Exchange’s temporary abandonment of them now appeared to have been part of the bargaining to get the Sipic bill passed. But what with lawsuits and the law’s delays, it would take time. In midsummer, 1971, some eighteen thousand customers of liquidated firms were still waiting for their securities and money. By the end of 1972, virtually everyone had been made whole.
Just as in the nineteen thirties, the Stock Exchange set about reforming itself internally. In March 1972, its members voted to reorganize its governing structure along more democratic lines by replacing the old thirty-three-man heavily insider-dominated board with a new board comprising twenty-one members, ten of them from outside Wall Street, and a new salaried chairman to supercede the traditionally unpaid, nominally part-time chairman of the past, such as Lasker. In the spirit of reform, the new board, at its maiden meeting in July, selected as its first paid chairman James J. Needham, not a Wall Streeter but an accountant and S.E.C. man. The first new “public” representatives to be elected to the board were mostly rich industrialists scarcely likely to share the point of view of the small investor, suggesting that the job of reform was not done yet. Still, the change unmistakably represented progress.
And whose recommendations served as model for the new, more democratic structure at 11 Wall Street? None other than those of William McChesney Martin, Jr., the very same man who in 1937, as a precocious, serious-minded young broker just past thirty, had served as secretary of the committee proposing democratizing reform of the Stock Exchange structure, and the following year had become the Exchange’s first president under the new structure, in the wake of the Whitney scandal. It must have been with a weird sense of experiencing a recurring dream that Martin, called out of retirement at Lasker’s urgent request in December 1970, for the second time in his life spent half a year studying the question of how to transform the New York Stock Exchange from a club serving its members to a marketplace serving the public.
The final irony, then: history repeating itself not only as to pattern of events but, in one crucial instance, as to identity of protagonist. But if Wall Street’s nineteen sixties were in many ways a replay of its nineteen twenties—refuting the optimism of those who believe that reform can make social history into a permanent growth situation rather than a cyclical stock—its go-go years were also utterly characteristic of the larger trends of their own time, reflecting and projecting all the lights and shadows of a troubled, confused, frightening decade the precise like of which had never been seen before and surely will not be seen again. Consider, for example, the subtle shift in the aspirations of the moneymakers who have dominated the various stages of this chronicle. Edward M. Gilbert, at the beginning of the decade, was a throwback to the vanished American style, originally canonized in the nineteen twenties, of personal and social irresponsibility elevated to the status of principle. Gerald Tsai—reaching his apogee in 1964 and 1965, the period of calm between the storms of John Kennedy’s assassination and the upheavals of 1967 and after—aspired to and largely achieved a more rational American dream dating back to more stable times, that of the poor immigrant using his wits to make good in the land of the free. Saul Steinberg in 1968 and 1969 was the financial world’s version of a figure familiar in the larger national scene at that moment, the young and brash outsider setting out to join the insiders by overthrowing them—and, like other contemporaneous American rebels, ending up largely gaining his objective by the ironical means of being defeated and then admitting his mistake. Bernard Cornfeld, typifying a conflicting and simultaneous national tendency, wrote satire with his life instead of his pen, made his life an exaggerated version of the manners and morals of his society; not deigning to aspire to join the Establishment, he aspired to thumb his nose at it as conspicuously as possible—as indeed he did. Finally, the two figures who dominated Wall Street at the decade’s end, Lasker and Perot, dutifully reflected a national turn toward the more conservative and conventional forms of social responsibility. Unabashedly loving their country because it had provided such a complaisant arena for their personal ambitions, they set out to do what they could to reciprocate—Lasker by throwing his heart and soul and mind into the saving of the New York Stock Exchange, Perot by throwing huge sums of his own money into the same enterprise, and, in his futile attempt to rescue American prisoners in North Vietnam, riding off in all directions like a modern Don Quixote with a Boeing 707 as his Rosinante.
Manners and fashions change, but the wish to become rich remains constant; and the styles and motives of the greatest money-seekers reflect those changes as delicately as do those of great lovers.
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What of the customer, the little investor, Wall Street’s “consumer”? Was he fleeced as calculatedly and ruthlessly in the nineteen sixties as he had been in the nineteen twenties? Did the conglomerates and the performance funds treat him with no more consideration than had the market pools and investment trusts of old? Or did he, like the victim of a confidence game, have largely himself to blame?
To begin with, there can be little question that, by and large, he was a big loser in the nineteen sixties market. The Stock Exchange had the bad luck to release the results of its latest national stockholder census in July 1970, right at the bottom of the market collapse. As we have seen, the count came to about 31 million, more than one in every four of the nation’s adults. This represented a 53.3 percent increase since 1965, when the census figure had been just over 20 million. The conclusion is inescapable that almost 11 million persons invested in the stock market for the first time between 1965, when the Dow stood just under 1,000, and mid-1970, when it stood at around 650. Exactly how much of the $300 billion overall paper loss in the 1969-1970 crash was suffered by those 11 million new investors is incalculable, but it may safely be assumed that as of July 1970, when the Exchange distributed its newest evidence of the arrival of people’s capitalism, people’s capitalism had left at least 10 million American investors, or one-third of all American investors, poorer than it had found them, and poorer by an aggregate sum of many billions of dollars.
The man or woman of the nineteen sixties who—in quest of a third car or a Caribbean vacation, or to pay a private-school bill, or merely to try to stay even with inflation—invested in Ling-Temco-Vought, or Leasco, or the Mates Fund, or even National Student Marketing Corporation, had one measurable advantage over the unfortunate who in 1929 had taken an equally disastrous flyer in Radio or Shenandoah or Alleghany. Thanks to the Securities Acts and the S.E.C., the nineteen sixties investor was technically protected from corporate deception by federal requirements of full disclosure. But the key word, of course, is “technically.” If he had fully understood the abstruse implications of merger accounting, he might not have invested in Ling-Temco-Vought or Leasco; if he had grasped the significance of up-valuation of letter stock in a fund portfolio, he would probably not have invested in the Mates Fund; if he had read and understood the footnotes to the 1969 annual report of National Student Marketing, he would almost certainly not have entrusted his savings to that particular venture. The question, then, is whether or not an amateur investor, with affairs of his own to attend to and limited time and attention to give to the ins and outs of the stock market, might reasonably be expected to have had such understanding. Was he not entitled to rely on the investment skill and integrity of his broker and his mutual-fund manager—especially when their judgment was so often confirmed by that of the greatest professional investing institutions, the national banks, the huge mutual and pension funds, the insurance companies and foundations? In sum, had the game of stock investing real
ly been made fair for the amateur as against the professional?
Indeed it had not—not when the nation’s most sophisticated corporate financiers and their accountants were constantly at work finding new instruments of deception barely within the law; not when supposedly cool-headed fund managers had become fanatical votaries at the altar of instant performance; not when brokers’ devotion to their customers’ interest was constantly being compromised by private professional deals or the pressure to produce commissions; and not when the style-setting leaders of professional investing were plunging as greedily and recklessly as any amateur. Full disclosure in the nineteen sixties market was largely a failure, giving the small investor the semblance of protection without the substance. And that failure raised the question of just how much full disclosure can ever accomplish. Rules can be tightened, as many were during the decade and more will be in the future; but as surely as night follows day, the tricksters of Wall Street and its financial tributaries will be ever busy topping the new rules with new tricks, and there is no reason to doubt that the respectable institutions will again play Pied Piper by catching the quick-money fever the next time it is epidemic. As Lasker said in 1972, “I can feel it coming, S.E.C. or not, a whole new round of disastrous speculation, with all the familiar stages in order—blue-chip boom, then a fad for secondary issues, then an over-the-counter play, then another garbage market in new issues, and finally the inevitable crash. I don’t know when it will come, but I can feel it coming, and, damn it, I don’t know what to do about it.”