Eagle on the Street

  Shad could remember having been inside the SEC building only once before, but the agency didn’t seem completely foreign to him because he had worked with SEC documents and abided by commission regulations on a regular basis. He had never known a Wall Street without the SEC, and in his day-to-day work there, he relied heavily on the documents the commission required companies to file. As a young stock market analyst, he studied corporate account statements filed with the SEC to determine which stocks were good buys. He enjoyed crunching numbers and actually felt, in an indirect sort of way, indebted to the SEC for pushing companies to disclose the information he needed to do financial analysis. Though he had a strong free market bias, Shad also believed that the SEC’s presence as a watchdog had made the markets and the economy stronger.

  More than anything else, Shad wanted the SEC to protect the interests of stockholders in America’s public companies. He was less interested in supporting adventuresome law enforcement work than in determining the impact on stockholders of any new rule, regulation, policy, or enforcement case. Insisting on a high level of corporate morality may have enlivened the SEC enforcement staff, but Shad wondered whether it did any good for shareholders—they were the constituents he worried about. Shad was convinced that broad ownership of stock by the public was what made the American political and economic system work better than any other, and he wanted to make the system stronger. During the 1970s, the SEC had gained an international reputation by defining its mission broadly—Stanley Sporkin’s commission was concerned about the public interest, rather than the interests of shareholders. From what Shad read and heard, it seemed the agency had been overzealous and too undisciplined in its enforcement program. He wanted the SEC to start focusing on the impact that its actions had on stock prices and shareholders and the economy.

  Shad was impressed by departing SEC chairman Harold Williams, a Carter appointee and a Democrat, who warned him about what a tough time he had had taking charge on arrival in 1976 because of the power then wielded by the SEC’s staff, particularly Stanley Sporkin. Williams tried to convince Shad that he should push public companies to have mostly outside experts on their boards of directors to keep top management honest and performing at a high level. Shad listened, but he had other priorities. He thought most businessmen were honest and did a good job for their stockholders, and didn’t need more outsiders looking over their shoulders. But one thing Williams told him left an indelible impression. At the conclusion of dinner one night, Williams pulled out his wallet and mentioned that he was paying for the meal out of his own pocket. The SEC had only a small budget for entertaining, even for the chairman, Williams explained. Shad was stunned. This isn’t going to be like Wall Street, he thought.

  Like anyone starting a new job, Shad had much to learn. As an investment banker on Wall Street who helped corporations raise money to build new factories and make acquisitions, he had a working knowledge of many important SEC rules. But as chairman of the agency, he needed to have a much more detailed understanding. What powers and restrictions were there on the agency? What could the SEC do on its own and what did it need permission from Congress to do? Why did the SEC have a bunch of lawyers running its division of market regulation instead of bringing in people with direct experience in the markets? What were the names of the key SEC staff members and what authority did he have to replace them? What vacancies needed to be filled immediately? Where was the fat in the agency that could be cut? Which members of the staff could he trust to give him objective advice, and which had their own private agendas? Where did people eat lunch around here?

  Then there were the lawyers, lawyers, lawyers. To Shad, who had lived in a world of numbers and financial facts on Wall Street, there seemed to be lawyers everywhere he turned at the SEC. Why, he wondered, were there so damn many lawyers making all the decisions in this place—instead of economists who knew how to look at the financial impact of decisions and to assess their costs and benefits for stockholders?

  Shad brought intensity to his new job, pushing virtually everything else aside to work the long hours he needed to master the details. Though they didn’t know whether they could trust him, staff members found him charming and perplexing initially. His blue eyes and occasional smiles conveyed a sense of warmth that seemed at odds with his gruff, businesslike exterior. This much was clear: He was engaged and committed.

  He concentrated and worked as if he were a new recruit at his first job. One night early on, around 10:00 P.M., while Shad, typically, was still at the SEC, an exterminator came to spray his spacious office. Those few aides who were still around evacuated the building. The foul odor was too much and they didn’t think it was healthy to be around poison. Shad, though, didn’t budge. He had been sitting at his big wooden desk working when the exterminator came in, he remained there while the office was sprayed, and he went right on reading after the exterminator and the others had gone.

  Nearly every self-made man traces his fortune to principles allegedly learned in youth, and Jack Shad was no exception. He subscribed as an adult to the usual rhetoric culled from the Horatio Alger stories so popular in the days of his childhood—hard work, fair dealing, and perseverance. It was hard to say where truth yielded to myth, but certainly Shad was exceptionally independent, enterprising, and competitive while growing up. His drive was tempered by a good-natured manner and by a virtuous streak inspired by his grandmother, Sarah Johnson Rees.

  He was born in 1923, in the same adobe house in Brigham City, Utah, where his mother, Lillie Mae, was born. The place was just two blocks from the colossal Brigham City Tabernacle, the Gothic landmark church with sixteen pinnacles that overlooks Box Elder County. It was in the heart of the Mormon colony, and when Shad was a child the place had changed little from the days of its founding decades earlier, when the Mormons fled west to live by the tenets of their God’s revelations. The family of Shad’s mother played a central role in the building of Brigham City. The Mormons were an austere people—smoking, drinking, and gambling were all proscribed. Yet there was a vitality, too, a sense of community that arose not only from the strict adherence to scripture but also from the colony’s isolation.

  Shad’s lineage was divided—his father, after whom he was named, was a quick-tempered, nonobservant Catholic from Florida who enjoyed drinking, smoking, and playing cards. He was domineering and a boaster, slick by Brigham City standards, and there was tension between him and his only son. His father did things that upset him; one time in his youth, John Shad became infuriated when his father bragged that he had charmed the hostess of a party the family had attended.

  When Shad was two, his father took them west from Brigham City to Los Angeles, then a small and dusty place in a basin by the sea. As a lad, Shad often returned to Brigham City, where he found the companionship that he at times lacked as an only child in Los Angeles. They struggled in Los Angeles, first living in the back of a Laundromat his father ran. Through all of it, Shad’s mother played the peacemaker. In Brigham they remembered her as a lovely, gentle woman who drew pictures in her spare time. She died after a brief illness in 1942, two days before her forty-sixth birthday, when Shad was only nineteen. It was an enormous shock. In Brigham City, Lillie Mae was buried beneath a pink marble headstone marked SWEETHEART. John Shad the elder later remarried, and by the time he died, he and his son had little to do with one another. In contrast, Jack Shad clung to the memory of his mother and remained deeply sentimental about her throughout his life.

  He was determined to be more financially successful than his father—the erstwhile Laundromat owner who lost everything when his business burned down late in the 1930s—and to make a bigger contribution to society as well. John Shad—his friends called him Jack—worked at dozens of jobs: as a caddy, a pinsetter in a bowling alley, an ice cream vendor, a newspaper boy. There were few things he liked better than making money.

  There was a tension visible in him that seemed to reflect the contrast between his father and his mothe
r, and there was a playful, mischievous streak. On visits to his relatives’ ranch in Utah, Shad stole fruit and drove trucks through the mud with his cousins. Once they shot out the giant bulb lights that illuminated the Brigham City Tabernacle; when someone called the police, they fled. Another time they had to run for cover when an angry farmer caught them stealing pumpkins and fired shots into the air.

  Yet Shad worked and pushed and competed to get ahead. The Great Depression taught an unavoidable lesson about hard work, but Shad’s competitiveness seemed to run deeper than that. No one could work harder than he did. After graduating from Hollywood High, where his yearbook declared “America Forever,” he worked as an aircraft riveter at Lockheed from midnight until 8:00 A.M., and attended college during the day. His education was interrupted when he joined the Navy during World War II, and was sent to the Pacific and China.

  There was, however, a pull in him between the spiritual and the material. While serving at sea Shad read books about religion and grappled earnestly with whether he believed in God. He unsuccessfully tried to induce a religious experience by fasting for days. On another occasion he climbed onto the deck of his ship, looked to the heavens, and declared that unless God showed him a sign, he was going to become an agnostic. When no sign was forthcoming he made it official, vowing for the rest of his life never to change his mind again. When the war ended he finished college and then, with the financial aid of the GI bill, went to the Harvard Business School to get a master’s degree in business administration.

  He had traded make-believe stock portfolios as a boy, and at Harvard his hobby became a profession. The school became enormously important to him, mainly because of the people he met there, but also as a symbol of what he and the country could accomplish. Shad founded the business school’s finance club, which later became its most popular student organization. At West Point, the class that graduated the most generals is remembered as “The Class the Stars Fell On.” Shad’s Harvard Business School class of 1949 accomplished so much in business and finance that it was dubbed “The Class the Dollars Fell On.” While many of his classmates went off to work in manufacturing operations as the country revved up its postwar economic engine, Shad borrowed $500 from a school fund and headed for the far less fashionable quarters of Wall Street. Utilizing his exceptional mathematical skills, Shad began working sixteen-hour days analyzing stocks for an investment firm that hired him at $3,500 a year.

  In background and inclination, Shad was an outsider to the self-consciously aristocratic culture of Protestant Wall Street. Though he enjoyed analyzing the finances of companies, he grew disillusioned with his first job, especially after attending a conference at a New York hotel where he watched stuffy men wearing frock coats brag about their stock-picking prowess. This was not the future Shad imagined for himself.

  A series of events took Shad to the executive suite at E. F. Hutton. In 1952, he married Patricia Pratt, a conservative-minded and well-to-do woman from Arkansas. With his wife’s support, Shad changed jobs several times; the third time when he was passed over for a promotion at Shearson, Hamill & Company. He joined E. F. Hutton, well-known for its extensive retail brokerage operation, in 1963. But Shad’s job wasn’t to sell stocks. He made his career at Hutton by building a corporate-finance department that would provide financial advice and funding to small and medium-sized companies, as well as a few large ones.

  As at every Wall Street firm, office politics on Hutton’s executive floor was treacherous. But as the head of his own department, one outside the mainstream of the firm’s brokerage operations, Shad was able to build his own loyal team—and a base of power.

  He recruited almost exclusively from the Harvard Business School. One of his first hires was Fred Joseph, the aggressive son of a Boston cab driver. Joseph was cut from Shad’s cloth—he was a former boxer, a climber, a worker. He became Shad’s protégé and their relationship lasted decades. Shad was a disciplined, fact-driven, methodical manager, and he tried to instill his approach in Joseph. “Reorganize the form, beef-up the facts and boil down the size to five to eight single-spaced, fact-packed pages that conform to the firm’s format,” Shad scrawled to Joseph in a 1965 memo that rejected a corporate report Joseph had submitted. “Assume the reader is a well-informed, skeptical investor. Use layman’s terminology and explanations.… Say the cup is half full, rather than half empty, but do not overstate affirmatives or ignore material negatives.” So impressed was Joseph by Shad’s precepts that two decades later, when both of them were gone from Hutton, Joseph framed the memo and hung it on his office wall. By then the relationship between them had grown enormously complex and the memo had acquired an ironic resonance: Shad was chairman of the SEC while Joseph was the chief executive officer of Drexel Burnham Lambert, the target during the late 1980s of the most sweeping fraud and corruption investigation in Securities and Exchange Commission history.

  On Wall Street, Shad was curious, adventurous, and tenacious. He traveled to the Soviet Union to observe a centrally planned economy firsthand, long before détente made such trips popular among Americans. The trip reinforced his faith in capitalism. He broke ranks with Wall Street by raising money for Caesars World Resorts, the casino company, in the days when organized crime’s grip on Las Vegas was just beginning to loosen. The deal was credited with making casino financings acceptable on Wall Street. And Shad made his mark by advising midsized, growing companies whose credit was not as sound and whose banking needs were not as predictable as the giant blue-chip corporations. He distinguished himself as a negotiator with an insatiable, utilitarian thirst for facts and a high level of integrity. He was a little rough around the edges; he won over clients more through logic and persistence than through the Brahmin charm common on Wall Street.

  Shad thrived on stress, and he maintained a state of controlled ferment around him. He hated the time it took to get from one place to another, calling it purgatory. He drove his own cars fast and ordered cabdrivers to do the same. Once Shad drove a cab to La Guardia Airport himself after a cabdriver tired of his orders and relinquished the wheel. He worked long, smoked his Viceroy filter tips unceasingly, grew overweight, and paid little attention to his health. He seasoned his foods heavily, saying he couldn’t taste much because of an operation years earlier. He put Tabasco in soup, on grilled-cheese sandwiches, and on just about anything else. Before elegant meals in the Hutton dining room, Shad would sometimes pile butter high between two Triscuits and then add pepper, making a sandwich that ruined the appetites of his guests.

  He played with reckless abandon. He shot white water rapids on the Colorado River. At his summer home on a lake in Massachusetts, one of his favorite games was to drive his boat at high speed while friends tried to stay up on water skis. With one friend he bet on his weight and with another he went skydiving. On occasional trips to Las Vegas he played blackjack, where his talent for math helped him count cards. At Hutton, he got on well with many of his colleagues and would join them after work in a back room at Christ Cella, a New York steak house, for dinner and games of Liar’s Poker, where bets were made from the serial numbers on dollar bills. It wasn’t the money that seemed to excite Shad most of all in such gaming, but rather the risk, the mathematical challenge, and the competition.

  Though he worked long hours at Hutton, Shad sometimes got home in time for dinner with Pat and their two children, Leslie Anne and Rees. They would eat in the dining room of their comfortable two-story apartment at 535 Park Avenue, where the family had moved after outgrowing an apartment in Brooklyn Heights. The dining room had old hardwood floors, high ceilings, and brightly colored wallpaper on one wall depicting a scene at West Point. They were living in one of Manhattan’s most prestigious locations—61st and Park Avenue across from the Regency Hotel. After dinner, Shad would often go to the small bedroom / office upstairs he called the cockpit. In this crowded room, he had a desk, a small refrigerator, a telephone, a television, extra packs of cigarettes, and a cot. Late into the night
, Shad would sit in the cockpit, working and smoking, reading through documents and papers that affected the financing activities of major corporations, or studying the private proposals of companies on whose boards of directors he served. Sometimes, after hours of working, Shad would fall asleep on the cot in the cockpit and spend the night alone. Other times he would walk across the short hallway into the master bedroom and crawl into bed with Pat, where they would talk about many things, including the law; the Shads found time to attend night law school together at New York University, where Pat did most of the schoolwork and prepared her husband for exams since he often missed classes due to his hectic Wall Street schedule.

  All this energy and ambition eventually took a direction: Shad wanted to run E. F. Hutton, to win the firm’s top job. Though he was not a gifted politician, he took his shot in 1970, in a hectic contest involving many of Hutton’s top executives. The firm’s chief executive was retiring and the job was thrown open. Shad jumped in, but despite vigorous support from Fred Joseph and others on his team in the corporate-finance department, he ended up in a dead heat with an opposing candidate from another department. After days of deadlock, a compromise candidate from the firm’s West Coast office, Robert Fomon, won the job. Shad was given the title of vice chairman, but it was a consolation prize at best. His career seemed to have peaked. He had built Hutton’s corporate-finance department into a solid second-tier performer. But there was little chance he would become chief executive at Hutton or any other firm on Wall Street.

  Jack and Pat Shad sometimes talked about what it would be like to try something new, to start over fresh. Shad still thought about his grandmother’s credo to spend one-third of his life serving, and he could afford to follow through, given the hundreds of thousands of dollars in salary he earned each year at Hutton and the valuable Hutton stock he owned. Shad had been offered several government jobs in Washington over the years, but in each instance the timing had been bad or the offer not attractive enough. The SEC chairmanship was the right job at the right time. They found a Georgian home with high ceilings in northwest Washington’s fashionable Kalorama neighborhood, near the embassies and the old estates that would become the nexus of social Washington in the Reagan years, a swirl into which the Shads expected to emerse themselves, at least when Shad wasn’t working. For the first time in twenty-nine years of married life, they prepared to move out of Manhattan. After so much struggle, after so much energy, John Shad had what he wanted.