Typical was an ad that ran in 1925, captioned “The Little Grey Lady.” It showed a sad picture of an elderly woman, looking forlornly out of a closed window as she worked at a seamstress table.
“Toil—toil—a merciless cycle of toil is all she knows,” the ad read. “Daily, those slender, needle-scarred fingers tremble more and more. Someone is responsible for this—glaringly responsible. A husband, a brother, a son has failed in his imperative duty.” The duty, the ad said, was to purchase life insurance. With it, the old lady would have been allowed to live her final years in comfort.
By the time of the Great Depression, the company’s advertising was reshaped as many policyholders, strapped for cash, allowed their policies to lapse. It was a potentially devastating trend for any insurance company, one that the ads tried to stanch.
One ad in late 1929 featured a middle-aged woman with her young daughter, sitting anxiously in a darkened room. Hanging over their heads was a newspaper announcing a mortgagee’s sale. “The life insurance policy that would have saved their home was permitted to lapse,” the copy read. Similar ads were used to raise policyholders’ concerns about their children’s education, all with great success.
The subtext of these messages reinforced the image of trust: By doing business with Prudential, your mother won’t have to work in her old age, your family home will be protected, and your children will be educated. It was all the more comforting because, for many, the message was true.
By 1946, Prudential had become fat, cautious, and unimaginative. Risk taking was shunned. Its executives were comfortable, pampered, and prissy. But in that year, everything changed when the board elected Carrol Shanks as the company’s seventh president. Unlike his predecessors, Shanks was not a dyed-in-the-wool insurance man; he made his reputation in the wilder, more aggressive world of Wall Street. Shanks stirred mixed emotions among his followers; some saw him as cold and calculating, but he engendered excitement and inspiration in others. Everyone knew him as tough, decisive, and, when he needed to be, ruthless.
Shanks moved quickly to bust up Prudential’s lazy, parochial ways. He forced out the deadwood at the top, a shock in a culture that had not seen a high-level dismissal in decades. Ignoring seniority, he brought in his own team of managers loyal to him. Within months, Prudential had a new general counsel and new heads of several departments. The moves shot fear through Prudential’s executive workforce, but they also served as a wake-up call throughout the ranks of the lumbering insurance giant.
In 1948, after shattering the cozy relationships in the executive suites, Shanks turned his eye to the rest of the company. He worried that by keeping all the senior management talent in Newark, Prudential wasn’t going to find and develop talent around the country. So Shanks broke Prudential into pieces, scattering essentially separate companies, known as regional home offices, throughout the United States and Canada. He established the first regional home office in Los Angeles in 1948, quickly following in Toronto, Houston, Jacksonville, and across the country. Decentralization sped up sales coverage, built local prestige, and quickened service. It proved an enormous success.
Shanks then shook up the company’s investment strategy. Until then, Prudential had been happy to sink its money only into huge blocks of blue-chip stocks and bonds. Instead, Shanks wanted Prudential to embrace risk. He pushed the investing department to loan money to strong, growing companies that might have trouble finding bank credit. That way, Prudential could charge higher rates. He developed the company’s group health insurance program, convinced that if the private insurance companies didn’t start offering such products, the federal government would. Prudential was no longer just an insurance company. It was a powerhouse, expanding rapidly into every aspect of the financial services world.
The Pru, as reshaped by Shanks, was a stronger, more aggressive company than it had been at any time in its history. Shanks could have left with the reputation as the company’s greatest leader since Dryden. Then Shanks got tripped up by a tax shelter.
In 1960, the Wall Street Journal reported on its front page that Shanks had personally borrowed money to set up a tax shelter that purchased a lumber company. An hour after closing on the deal, Shanks sold 13,000 acres of timber to a subsidiary of Georgia-Pacific, the paper company. That sale gave Shanks enough money to repay his loans and saved him close to $400,000 in taxes. The Journal article pointed out a few facts that made the deal seem smarmy: Shanks served on Georgia-Pacific’s board of directors, while Owen Cheatham, the chairman of Georgia-Pacific, was a director of Prudential. At the time of the deal, Georgia-Pacific owed close to $65 million to Prudential. The Journal article heavily implied that the timber transactions were unethical sweetheart deals.
The board of directors was incensed. In all its years, neither the company nor any of its senior officers had ever been singled out with an accusation of an ethical lapse. The stench of scandal was new to Prudential, and the board of directors didn’t like it. By December, Shanks resigned under pressure, so angry that he refused to even visit the company for more than a decade.
By 1973, the Prudential had again fallen into another rut of complacency. Little had changed at the company since Shanks’s resignation, even though the 1960s had been a decade of enormous transformation in the financial world. Although the company had become the largest insurance company in the world in 1966, it had reached the goal by plodding along without much innovation.
Then, that year, the company named Robert Beck as president. Beck was the first man since John Dryden to rise from the job of insurance agent to Prudential president. He started his career working as a financial analyst for the Ford Motor Company, as one of Robert McNamara’s famous “Whiz Kids.” But Beck was restless. He wanted to get into sales. In college, he had worked part-time with Prudential, and he loved insurance. He spoke of it with the fervor and earnestness of a crusader. So he left the automobile industry and took a job as a Prudential insurance agent, working his way up over the years.
As the youngest president ever to work at Prudential, Beck felt in close contact with the trends of the time, particularly the focus on consumerism that was sweeping the nation. Consumers wanted their worlds easier and services more readily accessible. To Beck, it made perfect sense for a financial company the size of Prudential to offer its customers the full range of financial services, from insurance to stocks to tax shelters.
The idea took hold in the mid-1970s when Donald Regan, then the chairman of Merrill Lynch, pushed his company into offering “womb-to-tomb” financial services. Merrill established the Cash Management Account, which allowed customers to write checks against their investment portfolios, and pushed its franchise in stocks and bonds into everything from insurance to credit cards. Beck felt sure that this was the future of the industry, with brokerage firms providing the cash management and lending services of banks. He wanted his insurance company on the cutting edge.
So Beck, after taking over the newly powerful position of chairman of Prudential, adopted long-range plans of transforming the insurance company into the nation’s first financial supermarket. He wanted to wade into the business slowly—he knew that another insurance company, INA of Philadelphia, had stumbled badly when it invested in Blyth Eastman Dillon and lost a lot of money. Beck’s team looked first at smaller, regional brokerage firms and mutual fund families. The right property at the right price didn’t seem to be available.
Then, on March 5, 1981, Beck was vacationing at Ocean Reef, Florida, when he received a telephone call from David Sherwood, the president of Prudential. Sherwood said he had heard from First Boston that Bache had put itself up for sale. The firm seemed to fit perfectly into Prudential’s plans. Its planning group had already begun sizing up Bache months earlier. Sherwood asked Beck what he thought the company should do.
Tell the planning group to start digging deeper, Beck replied. In a few days, he would return to Newark to be briefed on the matter. Maybe, Beck thought, Prudential’s searc
h was over.
MARCH 17, 1981, was the kind of day that couldn’t make up its mind. It was gray. It was sunny. It was windy. Then the snow flurries fell. Despite the lousy weather, more than 100,000 people packed Fifth Avenue to watch the marching bands play in the city’s 219th annual St. Patrick’s Day parade. Manhattan was virtually transformed into an urban canyon of green, as revelers laughed and drank, in a celebration not so much of Ireland’s patron saint as of themselves.
Downtown, few in the offices of Bache took notice of the merrymaking. Burned out and exhausted, Bache executives had been struggling for eight days and nights to finalize a merger deal with Prudential. A team of executives from the insurance company had effectively commandeered the senior management of Bache, demanding information to help them analyze everything about the brokerage firm. When Beck returned from Florida, he called in specialists with knowledge in computers, law, and marketing and ordered them to dig into the bowels of the Bache ship to make sure there were no leaks.
Jacobs had told Bache’s board of Prudential’s interest about a week earlier and had assigned Clark Clifford part of the responsibility for negotiating a deal. The Bache directors had asked few questions, but Jacobs had told them that Prudential seemed serious. “I think everybody needs to be standing by,” he said.
So far, Jacobs liked what he saw. On March 9, he and Virgil Sherrill met with Sherwood, Prudential’s president, and Frank Hoenemeyer, its top investment strategist. The Prudential executives clearly had already done a lot of homework. They said that Prudential wanted to tap into a wealthier customer base. Although Bache was at the lower end of that scale for Wall Street, its customers still had a higher average income than Prudential’s customers. They knocked aside Jacob’s original concerns that a mutual company couldn’t purchase a securities firm, saying that Prudential lawyers had already thoroughly researched the issue and that it presented no problem. They wanted a deal wrapped up quickly. Speed and secrecy were of the essence.
By St. Patrick’s Day, everything was in high gear. That morning, personnel reports on senior Bache executives were delivered to Prudential. The reports, ranging in length from two to four pages, included a full biographical sketch and a picture of each executive. They were reviewed both by senior executives of Prudential and its board. A report on Jim Darr, the man who would play the most significant role in Prudential’s investment, was not included in the stack.
After an eight-hour summit meeting, Beck and a group of Prudential executives voted to recommend the purchase of Bache to the insurance company’s directors. The next morning, after a two-and-a-half-hour meeting, the board voted unanimously in favor of purchasing Bache at a price of $32 a share, or about $385 million.
Given the green light, a retinue of Prudential executives trooped over to the offices of Sullivan & Cromwell to meet with Jacobs and his advisers. The deal was approved, they said, at $32 a share. Jacobs felt a little shocked—that price was only slightly above the market value. The $385 million equaled Bache’s cash flow for only about three weeks. He conferred with Clifford for a moment, and the lawyer then approached the Prudential executives. Everyone was pleased with Prudential’s offer, Clifford said, but Bache was interested in a higher price.
Beck cut the suggestion down instantly. “Listen,” he said. “If you don’t want this deal to fall apart, you’d better take what we’re giving you.” The price was $32 a share, and no more.
Clifford backed down, and within a matter of minutes, there were handshakes and smiles all around. Jacobs called an emergency meeting of Bache senior executives at 4:00 P.M. to let them know about the deal. That evening, Beck and Hoenemeyer arrived at Bache headquarters to meet with the firm’s directors. After a short and friendly introduction, the two men left the room for a few minutes. The proposed offer sailed through Bache’s board with unanimous approval. Beck and Jacobs, starving after their nonstop work, celebrated the victory with salami sandwiches.
About that time, Sam Belzberg was on a plane landing in the Edmonton airport. He was flying with his wife to London, and the only available flight from Vancouver required the short stopover. Belzberg expected the stop to be uneventful. Because the time on the ground was so short, none of the passengers was permitted to get off the plane.
So it surprised Belzberg when a Canadian Mountie boarded the plane in Edmonton and walked directly toward him.
“Mr. Belzberg?” the Mountie said after reaching Belzberg’s seat. “You have a telephone call.”
Belzberg was told he could get off the plane as long as he was accompanied by the Mountie. Within a few minutes, he was in the airport, speaking with one of his close aides. They had heard some critical information: Bache was being sold to Prudential Insurance.
Belzberg stood in the airport for several minutes, almost speechless. His quarry of several years had suddenly slipped his grasp. The whole ugly battle was coming to an end.
Harry Jacobs bounded out to a helicopter pad in downtown Manhattan and scrambled aboard for the short flight to Newark. It was early in the day on March 19. Already, midlevel executives and brokers at Bache were learning about the merger, although they had heard nothing yet from their chairman. The front page of that morning’s New York Times carried an article headlined “A Prudential Offer for Bache Accepted” that provided numerous details of the deal.
After arriving at Prudential’s headquarters, Jacobs was whisked to Beck’s office, where he was presented with piles of documents to review. Then, with little fanfare, the executives signed the contract, agreeing to convert Bache into a private subsidiary of the Prudential.
Later that day, the news was officially announced to the wire services. As Bache brokers watched the headline cross the tape, the mood at the firm became one of absolute delight. After months of scandal and stumbling, Bache had found a parent with pockets so deep that they seemed to reach down into Fort Knox. Calculators appeared on Bache desktops across the country as the employees with stakes in the firm counted the money they would make from the deal. Not only were their futures more secure, but many of them stood to receive a financial windfall.
Prudential managers began touring the firm almost immediately. In New York, Beck, Sherwood, and Garnett Keith, the executive vice-president responsible for overseeing Prudential’s newest acquisition, arrived at Bache for a walk-around. Meeting with groups at a time, Beck extended his hand to as many of the employees as possible.
“We’re looking forward to working with all of you,” Beck said repeatedly. “We think that this is a great match.” Prudential was committed to the firm’s success, Beck said. They planned to do whatever it took to make Bache into the finest brokerage firm in the world.
Over the coming weeks, despite all of the excitement, little changed in the day-to-day business of the brokerage firm. Beck paid little attention to the goings-on at Bache, handing off responsibilities for direct oversight to Garnett Keith. The only significant change seemed to be that, for the first time in years, Harry Jacobs felt safe again. “We have a feeling of relief,” Jacobs told a reporter shortly after the deal was completed. “After the Prudential merger, we felt more secure in our jobs.”
With huge capital and a rock-solid reputation standing behind the firm, Bache was ready to expand its business across America. Soon every division of the firm, including tax shelters, would be able to reach millions of potential new customers.
CHAPTER 5
“PITTMAN, PICK UP, GODDAMNIT!” Darr screamed into the office intercom. “Pick up! Pittman! Don’t you hurt her!”
It was a Friday night in 1981. The sounds of Bill Pittman screaming and cursing at Kathy Eastwick, a compliance administrator, were thundering through the fifth-floor hallways in Bache’s tax shelter department. He sounded frighteningly close to beating her.
Pittman was already well known in the department as a man with an irrational temper. At times, he would look up in the middle of a meeting and inexplicably threaten a colleague. He frightened coworkers by walki
ng the hallways with a baseball bat, periodically smacking it into his palm. It was the kind of behavior, colleagues whispered, that, combined with Pittman’s relative lack of talent or education, would get him bounced out of almost any Wall Street firm.
But not Bache. Since the Futon Five debacle, when Pittman threw his complete support behind Darr, his career had taken off. No one had shown Darr more unquestioning loyalty. As an apparent reward, Darr greatly increased Pittman’s influence. His responsibilities as a product manager grew, he was included in more top-level meetings, and he gained greater access to Darr than almost anyone else. But even as Pittman’s authority increased, the job stress seemed to dig at him more and more. His blowups became more frequent. This time, as members of the department listened to Pittman scream at Eastwick, some wondered whether he was losing his mind.
The run-in started because of demands Pittman had made of a secretary an hour or so earlier. He had told her that he wanted some marketing materials for a new partnership printed up that night. The secretary had gone to the firm’s print shop to ask if they could do an emergency rush job, but as soon as the printers found out it was for Pittman, they had refused. They weren’t going to put themselves out for a man they disliked. As the joke went at Bache, with his temper tantrums, Bill Pittman had burned more bridges than the atomic bomb at Hiroshima.
When the secretary told Pittman he would have to wait, he screamed at her and threw a cup of coffee on her desk. The secretary burst into tears and ran away. Eastwick, who supervised the secretaries, found the woman crying a few minutes later and tried to calm her down. Eastwick couldn’t believe how nasty Pittman had been. A few minutes later, she stormed into Pittman’s office.
“What have you done to this poor woman?” she asked. “Look, Bill, there’s no reason to get so upset. I’ll make sure the printing gets done by early next week.”
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