The next morning, January 8, 1986, as soon as the market opened, Freeman unloaded his entire option position. Shortly after, Morris “Bunny” Lasker, a well-known member of the New York Stock Exchange, and yet another member of the “club,” called Freeman to report that there was trouble with KKR’s bid. Freeman, in turn, called Siegel to confirm the information. Siegel couldn’t—because the first he knew of it was from Freeman.
Siegel was astonished. There truly were no secrets these days on Wall Street. Here he was the investment banker and advisor to Kravis, and he didn’t even know the financing had run into trouble. It only confirmed his darkest suspicions that his own breaches of confidentiality were hardly isolated examples: the exchange of inside information on Wall Street was becoming an epidemic. Siegel called KKR to get details of the problem.
Soon after, Siegel called Freeman back. “Your bunny has a good nose,” Siegel said, amused by his own play on words. It was all the confirmation Freeman needed. That afternoon, Freeman sold 100,000 Beatrice shares and 3,000 calls (which represented the right to buy an additional 300,000 shares), all at enormous profits.
The terms of the KKR bid were soon modified along the lines Siegel had confirmed. Though the terms were less favorable to shareholders—the cash portion was reduced from $43 to $40—Beatrice had little choice but to accept the revised offer, and did so. Beatrice stock declined accordingly. Freeman would have made large profits on his massive Beatrice stake in any event, but Siegel’s confirmation saved him an enormous sum, boosting his earnings on that deal into the stratosphere.
Because of Siegel’s role in the deal, Kidder, Peabody’s arbitrage operation didn’t participate in the Beatrice windfall. Still, 1985 had been another amazingly successful year for Wigton and Tabor. The department’s total profit, even after deducting a disproportionate share of the firm’s overhead and expenses, was more than $7 million. Now that they had repeated their first year’s success, some of the skepticism within the firm had worn off. Although estimates of Wigton and Tabor’s innate skills remained low, the plethora of deals that year had made it seem as though anybody could make money in arbitrage simply by throwing money at any takeover announcement that came across the ticker tape. And, in truth, they probably could.
But Siegel knew the truth about Kidder, Peabody’s arbitrage prowess. Like a drug habit, the thrill of arbitrage success always carried with it the immediate craving for and anxiety over the next “fix,” the next takeover bid, and the need for inside information to provide the “edge.” The thrill of the sure bets was fading even as the pressure to perform rose. Siegel knew he had rescued the firm for another year—but could he start all over again, with the same renewed pressure, simply because the calendar turned over to 1986? Increasingly, he dreaded the prospect.
Early in 1985, while awaiting the birth of his twins, Siegel had picked up a copy of The New York Times and seen the huge tombstone ad Drexel took out when it completed the Coastal/ANR deal. “They’re a power if they can raise this kind of money,” Siegel had thought to himself. Now he could see it happening. He could see the powerhouses arrayed against him: especially Drexel, with its amazing ability to raise billions almost overnight, a feat Kidder, Peabody could never duplicate. It was no wonder that, on deals like Storer and Beatrice, where it had been Siegel’s imagination and resourcefulness that persuaded Kravis to go forward, Drexel got the lucrative financing assignments, leaving Siegel to collect only the investment banking advisory fee. In Storer, for example, Kidder, Peabody earned $7 million, while Drexel got $50 million. Other rivals, like Goldman and Morgan Stanley, were building their capital bases and clout even as Kidder, Peabody struggled with its still-unprofitable brokerage operations. Siegel felt like he was carrying the entire firm on his own shoulders, and he didn’t know how much longer he could go on before something in him broke.
Late in 1985, about bonus time, he went in to see DeNunzio. His own compensation wasn’t the issue. For 1985, DeNunzio recognized Siegel’s contribution to the firm—including the arbitrage profits—by awarding him a cash bonus of $2.1 million, nearly double what he’d made before. But Siegel wasn’t elated; he was despairing. A negative article in Institutional Investor had only reinforced his fears that Kidder, Peabody, as an institution, was drifting toward crisis. He pleaded with DeNunzio. “Ralph, I can’t keep this up,” he said. “I can’t be the only engine for this firm. I only have so many hours in the day. I’m bringing in all the profits and revenues.” Siegel told DeNunzio he’d reached the conclusion that Kidder, Peabody could only survive by merging with another firm. DeNunzio looked stunned and depressed by the mere notion of Kidder, Peabody’s loss of independence. He hadn’t reached the pinnacle of his professional career to preside over the firm’s demise. Siegel despaired that he’d ever make DeNunzio face reality.
For the first time, Siegel had begun to contemplate the once unthinkable: He would escape, fleeing Kidder, Peabody for a strong, healthy, progressive firm. He had to get out of arbitrage; he knew his involvement was wrong. Yet he knew he couldn’t extricate himself at Kidder, Peabody as long as Wigton and Tabor were the only alternatives.
Feeling furtive, Siegel agreed to meet Michel David-Weill, the courtly head of Lazard Frères, for breakfast at the elegant Carlyle Hotel on Manhattan’s Upper East Side. He settled into a comfortable banquette, shielded from view by a sumptuous arrangement of fresh flowers, and David-Weill talked of the virtues of a firm like Lazard for an investment banker with Siegel’s star status, mentioning how Felix Rohatyn had thrived there.
Suddenly Siegel remembered the day, years before, when as a young investment banker he’d been assigned to a deal with Rohatyn. That day, he’d believed for the first time that he had it in himself to become another Rohatyn. Instead, he was leading a secret life of crime.
But now the vision came back to him. He’d leave Kidder, Peabody for a new life, one without Boesky, Freeman, Wigton, or DeNunzio dragging him back into the mire. With his reputation and celebrity within the world of takeovers, he could go anywhere. When the history of the eighties on Wall Street was written, Siegel wanted to be at its center: in the role of a statesman.
7.
John Mulheren pulled on his sweat socks, tied his shoelaces, and headed out onto the exercise floor of the HEAR Institute, a sports fitness clinic in Red Hook, N.J., not far from his home in Rumson. Mulheren was determined to get himself back into shape. He hated the idea of sinking into a middle-aged bloat.
Beside him, rock singer Bruce Springsteen was doing a bench press. Springsteen looked great, Mulheren thought. The last time he’d seen him, Springsteen had looked like any other 35-year-old guy, fairly slender and a little paunchy. Now he looked like a trimmer Rocky Balboa. Mulheren didn’t know Springsteen very well, but seeing the transformation made Mulheren even more disgusted with himself.
Like Marty Siegel, Mulheren had been feeling under pressure to generate big profits for his firm, Spear Leeds. So far, 1984 had been a roller coaster year; he’d done well at the start, with the Gulf deal, then he’d had a terrible spring, and he’d surged ahead again during the summer. But Mulheren felt himself slipping toward a dark state of mind. It had taken years for him to face it, but he knew he was a clinical manic-depressive. He was almost always “high.” His energy was tremendous, he needed little sleep, and he did many things—from drinking to partying to stock speculating—to excess. The drug lithium helped control his moods but, in what he’d come to recognize as four-year cycles, he sometimes plunged into black, self-destructive moods that lasted several days. At those times, he constantly contemplated suicide. That summer, he felt such a mood approaching. Increasingly, he was losing interest in showing up for work at Spear Leeds.
Then, one August afternoon, he heard his wife Nancy scream. He rushed out to her and saw in the pool the submerged body of his 18-month-old adopted son. When Mulheren, who had once worked as a lifeguard, pulled the child from the water, he wasn’t breathing. He applied mouth-to-mouth resusc
itation, gently, taking care to avoid collapsing the infant’s lungs. He succeeded in removing the blockage, and the Mulherens rushed the child to the hospital. In four days he was back to normal.
The harrowing rescue had a profound impact on Mulheren. He felt that if he hadn’t been at home that day, his son would have died. The next day he went into Spear Leeds’s offices and told his partners, “I’m not going back to work.”
With time suddenly on his hands, Mulheren plunged into his fitness campaign, and discovered that he and Springsteen had a good deal in common. For one thing, they were among the few 35-year-old men in Rumson who could spend most of the day in the gym. They didn’t have to get up early, either. Springsteen liked to stay up late, and Mulheren hardly slept at all. Mulheren loves music; he had been a fan of Springsteen long before the singer-songwriter became a national sensation. Mulheren was even an early champion of rap music. Like Mulheren, Springsteen threw himself into activities with enthusiasm. He, too, considered anything worth doing worth doing to excess. So they took up jet skiing in the Atlantic Ocean, just offshore from the beach club Mulheren had bought as an investment. They took their families and went skiing in the Rockies. Soon Mulheren considered Springsteen his best friend.
The day after Mulheren quit Spear Leeds, he had gotten a call at home from Boesky. “What did you do that for?” Boesky asked gruffly. He didn’t seem sympathetic to Mulheren’s explanation; he must have been anxious over the loss of a source of market intelligence, just at the time Siegel was beginning to pull away. Mulheren didn’t hear from Boesky again until rumors surfaced that a Pickens deal was in trouble. Boesky called Mulheren, convinced that Mulheren was talking to his friend Pickens. “What’s going on?” Boesky demanded. “I don’t have any idea,” Mulheren replied, the deal far from his mind. Boesky yelled, insisting that Mulheren was in contact with Pickens.
Other Wall Streeters called Mulheren regularly, urging him to return to work. Alan C. (“Ace”) Greenberg, the head of Bear, Stearns & Co., made a strenuous effort to hire Mulheren. But Mulheren turned them all down, preferring to dabble in real estate and cavort with Springsteen. When Springsteen started to prepare for his 1985 “Born in the U.S.A.” tour, however, Mulheren started getting restless. Springsteen would soon be out of town and unavailable. Mulheren started to miss the highs of his old business.
The wealthy Belzberg family offered to set him up in his own partnership, and Mulheren couldn’t resist. He began raising money for his return, eventually amassing $65 million in capital for a new firm, Jamie Securities—an acronym for John A. Mulheren and his partner, Israel Englander. He contacted Boesky, who gave him some fund-raising suggestions. Mulheren kept Boesky informed about who his new limited partners would be. Boesky was suddenly his friend again, and the ingenuous Mulheren was as eager to please him as ever.
When Jamie Securities opened for business in July 1985, Mulheren immediately heard from Boesky, who knew that his friend had a big pile of fresh capital that he hadn’t yet put to work in the market. Boesky told Mulheren he was “raising cash” and wanted to sell Mulheren some stock. Would Mulheren take some, and if so, how much? Mulheren, eager to oblige, said he’d buy $10 million worth.
So Boesky had his head trader, Michael Davidoff, follow up with a call. “Ivan said you’d do us a favor,” Davidoff began, then asked Mulheren to buy 330,000 shares of Unocal from Boesky. He agreed.
“Okay,” Davidoff continued. “I’m going to sell it to you and I might want to buy it back. And you’ll be held harmless. You won’t lose any money.” Suddenly Mulheren got the picture: Boesky wanted to “park” his Unocal position with him, making it look as if Mulheren owned it. Boesky, however, would continue to bear the risk of any losses and would realize any profits. Mulheren didn’t like the smell of this.
“You can stop right there,” Mulheren said. “I don’t do those trades. If I’m not at risk of the market, I will not do the trade.”
“Okay, thanks a lot, let’s do the trade,” Davidoff replied, eager for the transaction. Later, as Unocal stock sagged and Mulheren showed a loss of hundreds of thousands of dollars on the position, one of his colleagues asked why he kept it. “It’s a favor for Ivan,” Mulheren replied. “Don’t worry about it.”
Despite such requests, Mulheren didn’t really feel used by Boesky. In his view, Wall Street was one big network of interlocking favors. Services were routinely paid for with what were dubbed “soft dollars”—the exchange of mutual favors. If Mulheren wanted to repay Boesky for a useful tip, he steered more business through Seemala, Boesky’s broker-dealer operation that traded on the New York Stock Exchange.
When Boesky asked for favors, Mulheren didn’t worry unduly about Boesky’s motivation. But it was no secret that Boesky, given the enormous size of his positions and his insatiable quest for greater leverage, was constantly in danger of violating the regulatory net capital requirements.
Boesky and many arbitrageurs had always viewed the net capital requirements with thinly veiled contempt. His colleagues Conway and especially Mooradian, who had nearly lost his career after being disciplined for net capital violations, took the law much more seriously and tried to keep Boesky in compliance. They even went so far as to build in what they termed a “fudge factor” that overstated Boesky’s actual leverage in order to try to keep him in bounds.
In 1985, however, with the pace of merger deals quickening, and the resulting increase in arbitrage opportunities, it was getting harder and harder to keep Boesky in compliance. Finally, that summer, Conway wrote Boesky an angry memo: “You have continued to show very small regard for our net capital position or the debt covenants under our loan agreements. . . . We are on a self-destruct course that will, in the extreme, make it impossible to raise new equity or debt capital. . . . You are risking everything and your reputation on a business strategy which can only be characterized as reckless. We must ratchet down the size of the portfolio as soon as possible. We must maintain minimum net capital at $15 million. . . . We are sitting on a time bomb that has only 18 days to go before the default provisions of the debt covenants come into effect. You must take action immediately.”
Boesky could, of course, have solved the problem immediately by selling some of his positions. That, however, was anathema when the stocks were, he thought, still rising in value. So he had Davidoff call Mulheren again.
“We need a favor,” Davidoff said.
“What’s it in?” Mulheren replied.
“Well, I got a lot of stocks. You can take your pick.” Mulheren settled on large positions in three stocks: Storer Communications, then in the later stages of its battle with KKR, Boise Cascade, an oft-rumored takeover target, and Warner Communications. It was understood that Boesky would buy them back sometime later. “We’ll take the risk,” Davidoff said, as he had with the Unocal position. “I told you before,” Mulheren interjected, “I don’t do those kinds of transactions. I’m a big boy and I take the risk because it’s not legal if you do it that way.”
Now Boesky’s books, minus the positions taken by Mulheren, showed him to be in compliance with his regulatory and debt requirements. But Boesky still deemed the stocks parked with Mulheren to be “his,” and he was particularly elated because Warner kept going up. When profits on Mulheren’s Warner position reached $500,000, Davidoff called again. “This is really getting to be a problem,” he said.
“Oh no,” Mulheren replied. “It’s getting to be a problem for you. It’s a profit for me.”
Davidoff was getting anxious. “You’re not going to do anything for us on this?”
“I didn’t say that,” Mulheren replied. “I’m just telling you whose positions they are and I decide what happens here.” When Mulheren finally sold the Warner position back to Boesky, he realized a profit of $1.7 million, which meant, in Boesky’s view, that Mulheren owed him money.
Later in the year, after similar incidents with other stocks, Boesky called. Despite Mulheren’s earlier claim that he owned the positio
ns, the two were soon enmeshed in a discussion of how Mulheren would pay Boesky back.
“You know, you made all this money on these things. What’s going to be worked out here? Michael [Davidoff]’s been talking to you.”
“I know.”
“Don’t you think you owe us something?”
“I don’t know. I don’t know what I’m going to do,” Mulheren replied.
“Well, would you write me a check?” Boesky asked.
“Under no circumstances,” Mulheren shot back. “And I won’t give you any money. I won’t give you cash.”
“Well, what do you mean?” Boesky asked.
“I’ll do other things for you. I’ll give you ideas. I’ll do more brokerage for you. I’ll do all kinds of soft things, normal return-of-favor things.”
Boesky agreed, and over time, Mulheren was as good as his word. When Boesky sent brokerage bills to Mulheren for trading through Seemala, Mulheren had him inflate the invoices by a factor of ten. Other times he’d just add a lot of money to the payment. Eventually, Boesky was satisfied. The inflated payments stopped, though not the exchange of mutual “favors.”
Not long after taking the Unocal position, Boesky called Mulheren asking for another kind of favor. “Born in the U.S.A.” had vaulted Springsteen to superstardom. His tour had become the rock music event of the year, and his concert at Giants Stadium in the New Jersey Meadowlands had sold out instantly. Boesky wanted tickets for his kids. Even though they were now close friends, Mulheren had never asked Springsteen for free tickets to his concerts. He would not ever try to take advantage of Springsteen’s celebrity.
“Ivan, I’m not going to Springsteen for tickets,” Mulheren said. “That’s not the kind of thing I’d ever do. But if you want tickets, I can get them through a scalper, and you’ll have to pay. They’ll be expensive.”
“Just get them,” Boesky said. “I don’t care what they cost.”
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