Eagle on the Street

by Coll, Steve; Vise, David A. ;

  On a Saturday night in July 1981, Jack Shad sat quietly reading in his Georgetown hotel room while the bars and restaurants on Wisconsin Avenue teemed with well-dressed bureaucrats, lawyers, and students hungry for action in the wealthiest quadrant of the nation’s capital city. The move to Washington had been a wondrous adventure, a rare opportunity for renewal. Shad was digging into the office, making his mark in cases like the one proposed against Mobil. The house in Kalorama was nearly ready and they were about to buy it.

  But that night in Georgetown, everything changed.

  Shad had decided to stay in to catch up on some reading. Pat Shad had dined with an old friend. When she got back, she said that she had dropped her fork several times during the meal and couldn’t figure out why. She asked him to fix her a drink, and he did.

  Then she slumped over in a chair. Thinking she had merely fallen asleep, Shad cradled his wife’s body and carried her to bed.

  “I can’t walk,” Pat told him the next morning when she awoke.

  The hurried 7:00 A.M. phone call to the family doctor in New York, the call for an ambulance, the ride together to nearby Georgetown University hospital, the CAT scan—all of it was like a nightmare, and cruelly timed. Shad had been at the commission only weeks. They were supposed to close on their new house the next day.

  It was a stroke, the doctors said, and a serious one. Pat’s recovery from paralysis would be long and slow and would require the most sophisticated rehabilitation facilities. There were no guarantees she would ever walk again.

  In general, Shad was not a terribly emotional man. On Wall Street his rationalism had served him well professionally. But this was different. This was Pat. He couldn’t believe this was happening to her—it wasn’t fair—Pat was so good, everyone liked her. He sat by her bed. She looked frighteningly close to death as she lay there with tubes and wires and electronic beepers attached everywhere. There was something eerily other-worldly about it. He felt himself starting to lose control. He excused himself from the room, leaving his daughter, Leslie, who had come to help, alone with Pat.

  He walked down the hall toward a hospital supply closet. The door was open. He stepped inside, closed the door, and sat down on a box. Then the man who had declared himself agnostic on a ship nearly forty years earlier began to pray. He asked God to save Pat’s life. He began to cry.

  “Cancel everything,” Shad told his aides when he called over to the SEC on Monday.

  Later he found out that his blanket order derailed an important reception welcoming the Shads to Washington, involving several members of the president’s new cabinet. It was to have been the Shads’ social and political introduction to Washington. But Shad didn’t have time for that now. He worked the phones, trying to be sure Pat was getting the best medical care possible and exploring where she could get the best rehabilitation treatment. How could he balance the demands of his new job at the SEC with the demands of her recovery? He called the real estate agent and killed the plans to buy the Kalorama house. It needed some work, including new air conditioning, and he didn’t have time to deal with that. Pat was to have taken care of those things. Anyway, Shad thought, the house had stairs everywhere and she would never be able to get around in a wheelchair.

  In the end, Shad decided that the right thing was to get Pat back to New York, where the rehabilitation facilities were more advanced, in his estimation, and where she would be more comfortable. Though the waiting list was long, Shad gained admission for his wife to New York University’s Rusk Institute—he did it with the help of his friend Laurence A. Tisch, the wealthy New York financier who would eventually become chief executive of CBS Inc. Shad knew that by moving Pat back to New York he was setting himself up for a two-city commute between Manhattan and the capital that would make him an outsider to the political and social mainstream in Washington. But what mattered most was getting Pat the best care possible.

  Shad continued to live at the Georgetown Inn hotel in Washington, returning to New York on weekends and on certain days during the week to spend time with Pat. It was a commute he would continue for six years. SEC aides remembered him as unusually quiet during this early period. Soon after Pat became ill, he began working long hours during the week, sometimes remaining at the SEC past midnight before returning alone in a cab to his hotel room, where his dinner would often consist of a bowl of Campbell’s soup heated on a hotplate.

  It was during this strained and difficult period, a redoubled transition, that some of the senior staff at the SEC on North Capitol Street learned about their new SEC chairman. Not all of them knew the extent or significance of Pat’s illness or how the new chairman felt about it. It was primarily to old friends from Wall Street or the Harvard Business School that Shad opened up. He asked his Harvard classmate James E. Burke, chairman of giant Johnson & Johnson, for advice about what the SEC should be doing. In their talks Shad said he felt torn over how much time he should be spending at his new job in the aftermath of Pat’s stroke. “He talked about it enough so I remember how deeply he felt about it and how heavy that burden was,” Burke recalled.

  There were moments when Pat’s stroke made Shad feel as though a heavyweight boxer had just landed a punch to his mid-section. Still, he pressed ahead at the SEC. He was determined to carry on, but he was struggling—the SEC bureaucracy at times seemed so large and there was much that was new and strange.…

  Until the Monocle. That was something the new SEC chairman knew how to do—he knew how to meet a man for lunch and make a deal.

  The Monocle was the right setting, too. It was a favorite watering hole for congressmen, lobbyists, and regulatory officials, just a few hundred yards down the north slope of Capitol Hill. It was one of those Washington restaurants that had evolved into oppressive, if casually appointed, citadels of power—where a regular could count on getting his favorite table and a congressman could count on getting his favorite lobbyist to pick up the tab. It was said but never proven that, when certain members of Congress dined alone at the Monocle, their bill was routinely but quietly added to the tab of prominent Washington lobbying groups.

  That summer of 1981, Shad and Philip Johnson sat down to lunch in a rear booth at the Monocle. The high-backed booths, rust-colored wallpaper, and red brick arches gave the dimly lit restaurant the feeling of an old-world club. Johnson was a topflight commodities lawyer who had left his practice in Chicago in part to heed the call of the Reagan Revolution and in part to escape a messy divorce situation. He was named to head the Commodity Futures Trading Commission, or CFTC, a kind of sister agency to the SEC. The CFTC had jurisdiction over the freewheeling Chicago futures markets, where pork bellies, grains, silver, and other commodities were traded.

  During the briefings he received from the SEC staff in preparation for his Senate confirmation hearings, Shad had learned all about Phil Johnson and the CFTC problem. The SEC and the CFTC had been embroiled in an emotional courtroom fight over bureaucratic turf and politics. At the heart of the battle was a proposal for a new kind of financial instrument called a stock index future, a cross between a stock and a commodity. The product had the potential to cause enormous changes in the way the country’s stock markets functioned. The problem was that nobody was quite sure what a stock index future was or who should regulate it. The futures product would give investors the opportunity to bet on the future value of broad stock market averages. Shad saw the legal battle as a fight over jurisdiction—which agency would regulate the new futures—rather than a battle over the merits of stock index futures. Though no one understood the new product all that well, Shad believed the futures could help the stock market work more efficiently, in part by increasing the volume of trading. It was up to investors, not regulators, to decide whether they liked these new instruments—that was a tenet of Reagan’s conservative ideology. Doubters and Democrats thought the new stock futures would encourage gambling in the stock markets. But rather than dealing with such substantive questions, the debate between the
SEC and the CFTC had grown less and less elevated, sinking into an open squabble over regulatory turf. The SEC staff, with a proud fifty-year tradition and powerful sense of self-importance, had been unwilling to allow the upstart CFTC, which it viewed as relatively incompetent, the chance to get its regulatory paws on any product having to do with stocks. While the agencies fought in court, stock index futures remained in limbo—nobody could trade them until Washington decided who would regulate them.

  Shad thought he had the answer. Let’s cut a deal, he told Phil Johnson that August afternoon at the Monocle.

  Both of them thought the turf fight between their staffs was unseemly. They were Reagan men, outsiders to their bureaucracies. They had market experience, Shad in New York, Johnson in Chicago, and they were committed to the administration’s free market ideology—here was something they could actually do about it. Over lunch Shad and Johnson agreed to agree, and within weeks they had put their staffs to work drafting the specifics of a peace treaty between the SEC and the CFTC.

  To Shad, it was a simple deal. It reminded him of two kids sorting marbles. You take the red ones and I’ll take the green ones, he thought. You take the futures and I’ll take the options. The peace treaty, which came to be known as the Accord, clarified who should regulate stock futures—the CFTC, and who should regulate stocks and stock options—the SEC. Options were a lot like futures, but the SEC already regulated them and there was no question of giving them over to the CFTC. Whatever the limits of its logic, Shad’s deal allowed the new futures to begin trading after years of delay.

  What neither Shad nor Johnson realized at lunch, in their haste to get government regulators out of the way of a new financial product, was that the deal they cut would unleash forces that would fundamentally transform the character of the stock market during the 1980s. It was a deal, in some of its aspects, that Shad would later have reason to regret.

  The senior staff at the SEC who worked to implement Shad’s deal with Johnson—general counsel Ed Greene, Shad’s executive assistant, Dan Goelzer, and others—saw in the Accord the outline of Shad’s basic ideas about what the Securities and Exchange Commission should be doing. What Shad cared about more than anything else was the impact of the SEC on shareholders, the people and institutions who bought, sold, and held shares of stock issued by the nation’s public corporations. This approach went beyond futures. Shad enthusiastically embraced a major project he believed could save shareholders billions of dollars by eliminating redundant corporate filings with the SEC. And at his first news conference, Shad, when asked about corporate takeovers, said they produced a “net economic gain” because they made stockholders richer.

  With stock futures and corporate takeovers, as with virtually every other issue on his desk—enforcement, what disclosures corporations should make to the public, regulation of the stock market—Shad seemed to regard himself as the king of the country’s stockholders. It was a far cry from the earnest Nader-like public interest mission pursued by the commission under Stanley Sporkin. Explicitly and implicitly Shad’s priorities seemed to some of the senior staff to be an attack on the proud traditions of independence and moral leadership that the SEC had come to project under Sporkin’s leadership. They feared above all that the era of high-profile enforcement cases against major corporations and investment houses was yielding to some sort of veiled Wall Street boosterism.

  Shad only vaguely apprehended these resentments and he tried to ignore them. Once Pat was ensconced in New York, he settled into a routine. He would leave the SEC headquarters building on Friday afternoons and ride to National Airport across the Potomac in Virginia, where he would catch a plane to New York for the weekend. Reports filtered down to some of the staff that Shad sometimes dined on Saturday nights with old friends from Wall Street’s elite corps of lawyers and investment bankers—whom he was now regulating. Those who opposed Shad’s agenda saw this weekly commute as a disquieting metaphor: He had ushered in a new era of shuttle diplomacy aimed at bringing Wall Street and the SEC closer together.

  3

  A Giant of the Opera

  To and from the racetrack, John Fedders slept. It was no easy feat for a man of his ungainly height to squeeze into the bus seat. He was six feet ten inches tall, much of it seemingly in his long, jointed legs. Standing up, wearing one of his well-pressed business suits, Fedders gave the fearsome impression of a neatly tailored human insect. In addition, he was often visibly tense, and his bald head was overlarge and egg-shaped. The tortoiseshell glasses he wore only emphasized the bulge of his eyes. But when he was sitting down and scrunched up, asleep on a bus rumbling through the Maryland countryside, it was possible to see another, less threatening image of Fedders: the awkward and solitary child trapped in an uncomfortable frame. As a young adolescent, Fedders had ridden back and forth over rural Kentucky roads to school, crammed into the back of a bus, studying and sleeping. His parents had pushed him to skip grades, so he was younger and taller than his classmates, isolated and excluded, and he had learned in the back of the school bus to block everything out, to sleep, study, or read despite all the noise and chatter, and despite his acute physical discomfort. He had learned, Fedders told those few who gained his trust, an almost meditative skill of concentration and a nearly obsessive determination. Those qualities—admirable to some, intimidating to others—would define Fedders’s tenure as enforcement chief at the Securities and Exchange Commission and would reshape the culture on the fourth floor left behind by Stanley Sporkin.

  It was John Shad who had arranged the day at the races. That fall of 1981 he invited the senior staff who constituted his new management team at the SEC—general counsel Ed Greene, market regulation division director Doug Scarff, and enforcement chief Fedders—to gamble on the horses at the harness track in Charles Town, West Virginia, sixty miles or so northwest of Washington. They met at one of the many elitist clubs Shad belonged to, the Chevy Chase Country Club, an establishment bastion hidden behind ivied walls on Connecticut Avenue. From there the bus took them north to Frederick and west to Harpers Ferry, where the Potomac and Shenandoah rivers join, and finally across the water to shabby Charles Town.

  At the track, Shad volunteered to be the house, to play the bank.

  No need to traipse back and forth to the betting windows, he said. Just give your money to me—I’ll pay off whatever odds are posted on the tote board.

  Fedders and the others said that would be all right.

  So the crowd cheered the trotters to the wire and the chairman of the SEC changed money like a teller, doling out cash to the winners and taking profits from the losers. Shad thought he was doing his guests a favor, saving them from the walk to the windows and the long, smoky lines. It wasn’t as if he was trying to bilk his staff. Money rarely seemed to be the point in Shad’s wagering—he had plenty of money. It was the thrill, the competition, the numbers. It seemed to many of the SEC staff that Shad and Fedders both were gunning to establish some new culture of competitive edges at the commission, some attitude toward gaming and winning imported from Wall Street and the cutthroat world of corporate lawyering.

  That trend was most visible in the enforcement division, the commission’s most distinguished section, where Fedders had been brought in from outside to shake things up. The significance Shad attached to his selection of Fedders reflected the singular importance of the enforcement division itself, an autonomous and secretive domain within the SEC that had secured a worldwide reputation and had come to define the public character of the commission. The commission was organized into a number of major divisions, some larger than others, all nominally equal in bureaucratic importance. There was a corporation finance division, which reviewed the stock and bond issues of public companies in the United States. There was an investment management division, which tried to keep track of people who made a living dispensing financial advice. There was the market regulation division, which monitored the technical operation of the country’s financial markets. An
d there was enforcement, whose power overshadowed the other divisions’ entirely.

  Fedders and Shad had much in common professionally, and their budding collaboration appeared to define where the SEC was headed in the early Reagan years. Shad had been determined to look outside the commission for an enforcement chief, to get away from the entrenched attitudes in the bureaucracy he had inherited. As the search began, Irwin Schneiderman, a New York securities lawyer and old friend of Shad’s from Wall Street, agreed to advise Shad. Schneiderman was the first to talk with Fedders.

  Hiring a new enforcement chief wasn’t like searching for a new corporate vice president—you couldn’t advertise in the newspapers or retain an executive-search firm. The game was subtle. Political and ideological credentials were critical. Republican fund-raisers and party stalwarts forwarded names or sent along résumés under cover letters of endorsement. Friends called upon friends. Rumors traveled freely in the circles of political conservatives who considered themselves the beneficiaries of Reagan’s triumph at the polls.