The Go-Go Years (48 page)

Raider and helper both, perhaps; in Wall Street, as elsewhere, Perot—true to the utilitarian philosophers who conceived the nation he loved so much and identified with so closely—most likely wanted to have it both ways, to be rich and right at the same time, with a little extra thrown in: to become, in the bargain, the proprietor of a key piece of Wall Street formerly occupied by, and still named after, the most celebrated commercial family in the land.

7

At the start of December, Wall Street hung by its fingertips. Roughly one hundred Stock Exchange firms had vanished over the past two years through merger or liquidation. Forty thousand customer accounts were involved in the thirteen cases of liquidation, and most of them were still tied up, the customers unable to get their cash or securities. Commitments to the Stock Exchange's trust fund from its member firms were approaching the $100-million mark, and some member firms had had about enough; a
sauve qui peut
sentiment was beginning to spread. Legislation to create a federal Securities Investor Protection Corporation, on the model of the Federal Deposit Insurance Corporation to protect bank depositors, was before Congress; it had no chance of passage until the present mess in Wall Street was cleared up, and thus, while it might help in future crises, it was powerless in this one. Worst of all, the Goodbody and du Pont deals were interrelated. In its contract to take over Goodbody, Merrill Lynch had insisted on a provision to the effect that, should any other major firm fail before the Merrill Lynch-Goodbody merger became final several months later, then the Merrill Lynch-Goodbody merger would automatically be cancelled.

So a du Pont failure would mean a Goodbody failure; the arch deprived of its keystone would fall, more than half a million customer accounts would be tied up, many perhaps never to be redeemed, and public confidence in Wall Street would end for years to come, if not forever. In the retrospective opinion of those best situated to know, the fall of the arch would have meant much more than that. Haack said at the time that the consequence of Goodbody's failure alone would be “a panic the likes of which we have never seen.” Lasker said later: “If du Pont and Goodbody had gone down, a market crash would have occurred, but that would have been only the beginning. There would have been a run on the resources of brokerage firms—partners wanting their capital, customers wanting their cash and securities—causing many new failures. There would have been no federal investor-protection legislation. Mutual fund redemptions would have been suspended, putting fund investors in the same situation as customers of bankrupt brokerage houses. Undoubtedly the Stock Exchange would have been forced to close. All in all, millions of investors would have been wiped out, and as for Wall Street, it would have marked the end of self-regulation. The government would have moved in and taken over.”

It did not happen. Three times round—Hayden, Stone; Goodbody; du Pont—went the more or less gallant, more or less decrepit ship of Wall Street, and it did not sink to the bottom of the sea. Through the early days of December the negotiations continued, and at last, on December 16, a deal was announced. Two of Perot's associates hand-carried to Lasker a certified check for $10 million, payable to F.I. du Pont and Company; in exchange, the Perot group would get the right to convert part of their loan into 51 percent of du Pont stock, thus taking control out of du Pont hands for the first time in the company's history. Edmond du Pont would resign as managing partner, and the firm's remaining partners would undertake to raise promptly an additional $15 million in capital.

Wall Street seemed to be saved. It wasn't, really, because the arrangement soon came apart, and the last phase of the rescue stands as a kind of gigantic, grotesque footnote. Far from putt
ing up or raising more capital, in the early months of 1971 the F.I. du Pont partners and investors took millions more of their previously committed capital
out.
A group of the firm's investors, led by Anthony du Pont, showed that they had no taste for the original accommodation in any case, and set about trying to salvage what they could for themselves, whether at the cost of the firm's liquidation or not. Meanwhile, further errors in the du Pont books were found. By February 1, 1971, it appeared that the amount needed from the Perot group was not $5 million, or $10 million, but considerably more. At last, on April 23, the appalling fact came to light: the rescue would require somewhat in excess of $50 million.

“I want out!” Perot shouted over the telephone from Dallas; now he had been pushed too far. But the Crisis Committee would not let him out; all through the two previous months, with Rohatyn placating the Perot group, Ralph DeNunzio hand-holding the du Ponts, and Lasker serving as go-between, the negotiations had somehow been kept alive. Rohatyn would later call it a game of chicken, with each side, the du Ponts and the Perot group, using the threat of the firm's failure and the terrible social and economic consequences as a lever to improve its bargaining position. Through it all, despite the gravity of the matter, humor of a sort, in the form of the slicker-and-bumpkin joke, seems to have survived. Once, after many hours of hot-and-heavy negotiations, Lasker took Perot to dinner at the posh Côte Basque restaurant.

“I'll bet you want a big drink, after all that,” Lasker said to the Texan.

“You bet I do!” Perot replied, in heartfelt tones; and commanded the hovering proprietor, “Bring me the biggest ginger ale in the house!”

Matters came to a head in mid-April; there were daily and nightly sessions in Dallas, at the Stock Exchange, at Lasker's suite, finally at the S.E.C. offices in Washington. Perot did not carry out his threat to withdraw; the negotiations succeeded. In the last week of April an agreement was reached that would stick: Perot and his colleagues to lend $55 million, in exchange
this time for at least 80 percent control of F. I. du Pont; and the Stock Exchange, through assessment of its members, to indemnify Perot against resulting losses up to the sum of $15 million.

For the reader who has been numbed by the size of the sums tossed around, and the surrealistic ease with which they escalated, let a single figure serve as summary and conclusion: over two years, it would eventually appear, the errors and miscalculations in the account books of F. I. du Pont had amounted to somewhere in the neighborhood of $100 million.

8

How had it all come about? Why hadn't it been prevented? Why, for example, had the required capital-to-debt ratio not been set lower than 1:20, and why was the ruinous ninety-day capital withdrawal rule allowed to stand? As a matter of fact, the Stock Exchange had required 1:15 until 1953, and had relaxed the requirement that year to ease the need for new capital brought about by vast postwar expansion of the national securities business. When the 1970 crisis came, it was too late for reform. Tightening the requirement then was out of the question because such a move would simply have thrown many additional firms into violation. As to the ninety-day withdrawal rule, it was there because it had always been there—because it had the powerful sanction of tradition, backed by the shared assumption that the gentlemen who provided the money for Wall Street's passage would not, in a crisis, choose to play the role of rats leaving a fleet of sinking ships. (The term for withdrawal notice was finally changed to six months in October 1970; in 1972, it was made eighteen months.) In sum, the problem was that the spirit abroad in the land at the time, the spirit that allowed conglomerates to buy profits with convenient mergers and mutual funds to write false assets with letter stock, spread to the core institutions of Wall Street, the huge old brokerage houses; and so the
old rules that had been intended to govern men of caution, probity, and responsibility were suddenly failing to govern men caught in an obsession with greed.

But Wall Street was saved now, and the go-go years were about over. The Perot deal went through, and F.I. du Pont continued operations under the briskly competent management of Morton H. Meyerson, a young Perot lieutenant. “My objective is for du Pont to become the most respected firm in the securities business,” said Perot, in the sober pear-shaped tones of many Wall Streeters before him, and it was at least possible that he would reach his objective. Lasker, Rohatyn, and their colleagues could begin to catch up on their sleep, and on their private business affairs. Albert H. Gordon, chairman of Kidder, Peabody, wrote to Lasker, “If you had once lost your nerve, we would have gone down with all hands lost.” Surely no one could deny that Lasker had kept his nerve, done what of all things in the world he could do best: as a conservative, he had superbly filled the role of conservator.

Perot had come out probably the largest single investor in Wall Street and certainly the biggest man in its looming automated future; for all his outback ways a man of complexity and paradox: an idealist and yet a pragmatist, a passionate believer and yet conceivably a bit of a faker, and in Wall Street an Early American—such a leader as Wall Street might have had in 1870—called to answer a Late American problem in 1970. In the nineteen sixties, finance capitalism as practiced in America had once again, through its own folly, dug itself an almost inescapable grave and then dug itself right out—had once again survived, but just barely. The architects of its survival, men like Lasker, Rohatyn, and Perot, had shown courage, persistence, and self-sacrifice amounting almost to heroism. The question remained, Was the heroism in a good cause? Was the old system that could produce “creative” accounting, manipulation of stock prices, victimization of naive investors, and mind-boggling messes in brokerage firms really worth saving? There are those, a few of them in Wall Street itself, who thought and still think
not—who believe that Hayden, Stone, Goodbody, and du Pont should have been allowed to go under so that the resulting bloodbath would cleanse Wall Street and bring about a government takeover to humble Wall Street's pride and set it on the path of righteousness. It goes without saying that those people do not include Lasker, Rohatyn, or Perot—and that, when all was said and done, in the 1970 crisis it was they rather than their opponents who had the vitality and the faith to win the day. How long the day would remain won was another matter.

And so this chronicle ends, as it began, with Henry Ross Perot, the extraordinary man who, metaphorically speaking, won the money game and used his winnings to buy Wall Street.

CHAPTER XIV

The Go-Go Years

1

Some epitaphs for the go-go years:

In mid-October 1970, the week before Gramco Management suspended redemptions and sales of its collapsed offshore-fund, Director Pierre Salinger sat perched on the desk in his London office and said amiably to a reporter, “The offshore business is a dead duck.” Gramco stock, which had once sold at 38, was then available for 1½.

In June 1972, a block of preferred shares of Bernie Cornfeld's (more properly, formerly Bernie Cornfeld's) Investors Overseas Services changed hands in Geneva at one cent a share.

Between the end of 1968 and October 1, 1970, the assets of the twenty-eight largest hedge funds declined by 70 percent, or about $750 million. (Theoretically, hedge funds alone among financial institutions were ideally structured to survive a market crash or even to profit from one. But only theoretically. Structure is not genius; even for the exclusive hedge funds, genius
turned out to have been a rising market. In practice, their managers, as carried away by the go-go spirit as anyone else, had simply forgotten to hedge in time. One of the most heralded of them had had the spectacular bad luck—or bad judgment—to begin large-scale short selling on May 27, 1970, the very day the market turned around and made a record gain.) Among the heavy losers in one such fund, which closed down in 1971, were Laurence Tisch, head of Loews Corporation; Leon Levy, partner in Oppenheimer and Company; Eliot Hyman, former boss of Warner Brothers Seven Arts; and Dan Lufkin, co-founder of Donaldson, Lufkin and Jenrette. The dumb money could take bitter comfort in the company it had among the smartest of the smart money—or former money.

A study of mutual funds by Irwin Friend, Jean Crockett, and Marshall Blume of the faculty of the Wharton School of Finance and Commerce, published in August 1970 by the Twentieth Century Fund, resulted in the startling conclusion that “equally weighted or unweighted investment in New York Stock Exchange stocks would have resulted in a higher rate of return than that achieved by mutual funds in the 1960-1968 period as a whole.” More simply stated, the pin-the-tail-on-the-donkey system of stock selection would, according to the authors' figures, have worked better than the system of putting one's trust in expert portfolio management.

If that conclusion suggested that gunslinger performance had been a fantasy born of mass hysteria, an item in
Forbes
magazine in early 1971 suggested that corporate profit performance—presumably the bedrock beneath the boom—had been another. By
Forbes's
method of reckoning, Saul Steinberg's Leasco, the king of all the go-go stocks, over the years of its stock-market glory had not earned any aggregate net profit at all.

2

Reform follows public crises as remorse follows private ones. Before the dust had settled on the 1969-1970 Wall Street crisis—indeed, before its last phase was over—reform began. In December 1970, Congress passed and President Nixon signed into law a bill creating a Securities Investor Protection Corporation, “Sipic” for short—a federally chartered membership corporation, its funds provided by the securities business, which would henceforth protect customers against losses when their brokers went broke, up to $50,000 per customer. Every customer hurt by a brokerage failure over the years 1969-1970 was eventually going to end up whole again, the Stock Exchange now announced—even the unlucky clients of Plohn, First Devonshire, and Robinson, apparently left to their fate back in August. The Exchange's temporary abandonment of them now appeared to have been part of the bargaining to get the Sipic bill passed. But what with lawsuits and the law's delays, it would take time. In midsummer, 1971, some eighteen thousand customers of liquidated firms were still waiting for their securities and money. By the end of 1972, virtually everyone had been made whole.