In an Uncertain World (10 page)

George sympathized with an approach to legal analysis called legal realism, which was very influential in shaping the ethos of Yale at that time. Legal realism held that the language of statutes or prior decisions didn't dictate outcomes because it could be interpreted in different ways. Judges' decisions were a product of policy views, beliefs, biases, and all sorts of subjective influences—the famous formulation being that decisions were dictated by what the judge had eaten for breakfast that morning. With this approach, you'd consider the statute, the facts of the case, and a judicial decision. When you asked whether the language of the statute had dictated the decision the judge had made, the answer would almost always be no. The words of the statute could fit two or more different conclusions. Legal realism was another way of challenging certainties and reexamining assumptions, and the atmosphere at Yale furthered my own intellectual development along these lines.

At Yale, I made a group of lasting friends who also enjoyed lengthy discussions of the issues of the world. Leon Brittan, for example, had a much more nuanced view of the earliest stages of the Vietnam War than anyone else I knew. He believed that the United States should stand up to communism but was afraid that our involvement would be so divisive as to create serious social disruptions at home, and that the negatives of American involvement might outweigh the positives. That was a remarkably astute analysis, especially in 1962.

Toward the end of my year at LSE, I had briefly met a junior at Wellesley named Judy Oxenberg, who was passing through London with a girl I'd been dating back at Harvard. They were on their way to spend a summer in France. When I arrived at their boardinghouse to take her friend out to dinner, Judy answered the door and I thought to myself,
My God, she's beautiful.
The next evening I fixed her up with a friend from Canada, and the four of us went out.

When Judy arrived at Yale to do graduate work in French, at the beginning of my second year at the law school, I invited her to dinner. Judy's real passion was for the performing arts, and, in addition to her French studies, she was taking classical voice lessons at the Yale School of Music. I decided that holding on to such an accomplished and attractive woman in the graduate environment of Yale—which in those days had few women—was unlikely. So I decided to fix Judy up with friends of mine, on the theory that they would return the favor by fixing me up with women more on my own level.

Luckily, that plan never went into effect and we ended up seeing each other exclusively. Judy had different interests from mine; she was immersed in theater, music, and literature, and in that context I was a bit of a heathen. But both of us shared something more important—a sense of curiosity about everything around us, from the people we knew to world affairs to the books the other person had read. We also tended to have the same reactions to people and shared a somewhat irreverent sense of humor. People's interests often evolve in unexpected ways. Over the years, Judy developed a good sense of politics and spent four years as New York City mayor David Dinkins's commissioner for protocol and friendly confidante. Meanwhile, I became a bit of a theatergoer. And there is something else we have in common: while both of us have led active civic lives, we are both relatively private people and have not taken much part in the social whirl.

By November, Judy and I were engaged. We were married that March, at the end of Easter break, in Branford Chapel at Yale. There were fourteen people at the wedding, including both sets of parents. We took a one-day honeymoon—borrowing a car from my law school classmate Steve Umin, whose devotion to music and theater matched Judy's and who has become a lifelong friend. The next day I was back in the library, preparing for exams.

   

I ENTERED LAW SCHOOL not really intending to practice law but feeling that it would be good training for whatever I might do and would help to keep open a broad array of options. I didn't have any career path in mind, but I had a vague sense of wanting to do something financial and entrepreneurial. In the back of my mind was the idea that I might eventually return home to Miami and go into the real estate business, perhaps drawing on my father's knowledge in some way. But I felt I should go to a big law firm for a time, to see what it was like. Lots of our friends were headed to New York, and Judy and I never really considered moving to any place else.

I interviewed at several firms, and decided to go to Cleary, Gottlieb, Steen & Hamilton because it had a more comfortable environment and was somewhat smaller than most major firms, but with an establishment practice. I thought the hours would be a little shorter, and Cleary had a reputation for paying higher bonuses in addition to the starting salary—that year, $7,200—that was uniform across the major law firms, antitrust laws notwithstanding.

That wasn't much to live on, even in those days. Judy and I had to get help from my parents to pay the rent on what our landlady called a “garden” apartment—in reality a basement in Brooklyn Heights. But living in the city suited us. We spent a lot of time wandering around, going to restaurants and attending theater. Judy had some parts in musicals. The job at Cleary worked out well for me. I liked the people and the atmosphere, which did turn out to be relatively collegial and less formal than those of its counterparts. Working at such a firm also had a certain cachet; I liked being part of an establishment organization—a predilection that coexisted, for the most part peacefully, with my sporadic countercultural inclinations.

I worked as an associate at Cleary for two years, doing research for big litigation, tax analysis on an estate issue, and background work on some corporate matters. I saw how this type of law could be highly engaging, but it wasn't for me. Also, realistically or not, I figured my odds of making partner weren't great. I still wanted to do something more entrepreneurial and have the possibility of major financial reward. When I look back, I'm surprised that I wasn't more involved in the larger social and political issues of that time. In law school, I had engaged in endless discussions about Vietnam, civil rights, and problems of poverty. But it would be a few more years before I would become actively involved.

My career epiphany came while I was working, at a junior level, on behalf of a client called Hayden Stone, a Wall Street investment firm that no longer exists. Hayden Stone was the lead underwriter helping to take public a company called COMSAT. In meetings, the investment bankers were the ones figuring out how to do a big deal.
When I'm forty,
I thought,
I want to be doing what those guys are doing, not what we're doing.

I had also begun to pay more attention to the stock market, applying in a limited way my father's highly analytical approach to investing. It was based on the method laid out by Benjamin Graham—probably best known for his disciple Warren Buffett—in
Security Analysis,
the classic book Graham wrote with David Dodd in 1934.

Graham and Dodd believed that, in the short term, the stock market is a “voting machine,” reflecting emotion and fashion more than rationality, but over the long term, the stock market is a “weighing machine,” valuing securities based on earnings prospects, assets, risks, and other fundamentals. They argue that you should invest only for the long term, and then only when the price is below the fundamental value calculated on the basis of these factors. My father analyzed securities this way and invested with the expectation of holding for a long time. If he sold a stock after only a few years, it indicated that something had gone wrong, or that the stock had risen so much as to be highly overvalued.

Today I believe even more strongly that this is the only sensible approach to investing in stocks. You should analyze the economic value of a share of stock the same way you would think about the economic value of the whole business. A stock, whether in a steel plant or in a high-tech firm, is worth the present value of the company's expected future earnings, adjusted for risk and for other fundamental factors such as hidden assets on the balance sheet. Over the long run, the price of a stock will reflect this economic value, although the price can deviate dramatically from it for an extended period. Investors seem to lose sight of this reality periodically, with predictable results. Most recently, a large number of people incurred huge losses by following fashion, rather than valuation, in the period leading up to the dot-com and telecom collapses of 2000 and 2001. A separate but related point is that the greatest opportunities often lie in going against trends.

As a way of thinking about the market, the Graham-Dodd approach also played to my Harvard skepticism. To look at the market and try to find securities whose prices didn't reflect prevailing views appealed to me. A well-established academic doctrine argues that markets are efficient, meaning that the price of a stock fully incorporates all known information and judgments about that stock. A corollary to this Efficient Market Theory is that nobody can outperform the market over time. But everything I've seen in my years on Wall Street—and a lot of more current thinking on finance theory—says that that is simply not so. By definition, most investors, even most professionals, are not going to be able to outperform the market. But a few will be able to, through some combination of better analysis, better judgment, and greater discipline.

All this interested me far more than the practice of law, so I sent my résumé to several investment firms. But I didn't receive a single response, not even a note. Back then, a law degree didn't mean much in the financial world. The dominant traders on Wall Street had gotten where they were on the basis of street smarts and savvy, while the investment bankers mostly came from society backgrounds or business schools. Moving from a law firm to an investment bank was a strange choice in those days. Although it was a step up in income—when I eventually found a job, my compensation went from less than $13,000 to $14,400 a year—some people told me that it was a step down on the social scale.

A month or so after my applications vanished into the void of Wall Street's leading firms, my father was in town and I had lunch with him and a stockbroker he knew. The stockbroker mentioned that he had a friend at Goldman Sachs who was looking for a junior associate. That turned out to be L. Jay Tenenbaum, the partner who ran Goldman's arbitrage department. So I went to meet L. Jay. Since I wanted to learn more about investing in companies, I told him that I was interested in either Goldman's research department or its corporate finance department. He very accommodatingly sent me over to both departments. But as I later learned, he told the people who interviewed me there to discourage me from those areas because he wanted to hire me for arbitrage.

Through another friend of my father's, I received a second introduction, which led to an offer from Lazard Frères to work in its arbitrage department. So by sheer coincidence, two firms offered me jobs doing something I'd never heard of. I had some doubts about whether I'd be suited to arbitrage. My understanding was that an arbitrageur, like a securities analyst, had to get on the phone and interview executives at companies about transactions. I wasn't sure I could be so audacious. But those were the two offers I had, and I wanted to try something new. I chose Goldman over Lazard mostly because Goldman was considered the top firm in the arbitrage field—Goldman's renowned partner, Gus Levy, had built the department—and also because the pay was slightly better.

In arbitrage, you might end up learning about subjects that a week before you'd known nothing about, such as political unrest in Libya, if that affected the prospects of a transaction involving one of the big oil companies. One deal we analyzed was the proposed liquidation of a holding company called the Roan Selection Trust. When you bought the stock, you were due to get about five or six different securities if the deal went through. You got cash, a warrant on stock in an American mining company, common stock in a Botswana mining company, and a Zambian 6 percent bond. We had to calculate not only the odds of the deal going through but what value to attach to each of those pieces, and how to hedge them to the fullest extent possible. When we first heard about the liquidation, we didn't even know where Zambia was—because until a couple of years earlier it had been called by its colonial name, Northern Rhodesia. So one of the fellows on the trading desk called the consulate and asked, “Where are you?”

“Fifty-seventh and Madison,” came the reply.

And our trader said, “No, I mean where is your country?”

L. Jay Tenenbaum, who taught me the business, wasn't intending to stay at Goldman Sachs forever. He was trying to clear the way for his own eventual retirement, even though he was only forty-four when he hired me. And his deputy, Bob Lenzner, who went on to a distinguished career in financial journalism, left shortly after I came. So everything sort of fell into place for me. If L. Jay had wanted all the credit for himself, he could have hidden me under a bushel. Instead, L. Jay looked out for my interests, and took every opportunity to promote my career with his partners at the firm until he retired in 1976. L. Jay took great pride in helping younger people he respected advance in the firm. Later, I felt exactly the same way when I had the opportunity to help talented people who worked with me at Goldman and in Washington.

L. Jay had learned the arbitrage trade as a gofer working for Gus Levy, who was an almost mythical figure by the time I joined the firm. Gus had grown up in New Orleans and had had to drop out of Tulane to help support his family when his mother could no longer pay the tuition. He'd made his way from being a Wall Street messenger to a job in the bond department at Goldman Sachs during the Depression. From those humble origins, he became the heir apparent to Sidney Weinberg, the legendary figure who had steered Goldman Sachs since the 1930s. Gus became a legend in his own right—senior partner of Goldman Sachs, chairman of the New York Stock Exchange, a major Republican fund-raiser, and a pillar of many New York civic institutions. What his list of accomplishments doesn't fully explain is that from the mid-1960s until his death in 1976, Gus was almost surely the single most important person on Wall Street.