Money and Power Page 17
As would be expected from a good client, after their success trading the Missouri Pacific bonds, the Murchison brothers stayed in touch with Levy and Goldman Sachs. Soon, they had teamed up again in the quest of a bigger prize: the Murchisons wanted to get control of Allegheny Corporation, and they asked Levy to help them pull it off. There was nothing the slightest bit friendly about the Murchisons’ proxy battle for control of Allegheny, and Levy and Goldman were right in the middle of it. (A decade or so later, in the early 1970s, Goldman would often proclaim that it would never get involved in a hostile takeover. “We’ve got a policy that we don’t participate in unfriendly takeovers, as either a manager or as a consultant,” Levy told Institutional Investor in November 1973, as if the Allegheny battle had never happened. Or as if Levy had never been elected to the board of Hunt Foods in August 1963 and then advised its chairman, Norton Simon, on his 1964 unfriendly effort to get a seat for Levy on the board of ABC, the television network, after Simon bought one hundred thousand shares of ABC stock.)
Allegheny was owned by two financiers, Robert R. Young and Allan P. Kirby, who wrested control of the company from the Ball family in 1942. The Times described Allegheny as “a heap of du——, with a jewel or two hidden in the debris.”
Young and Kirby had used proceeds from asset sales to diversify Allegheny’s holdings, including buying control of the New York Central Railroad, the nation’s second largest, and Investors Diversified Services, Inc. (IDS), the Minneapolis-based mutual fund business. Allegheny also owned 51 percent of Missouri Pacific’s Class B stock—postreorganization—and had a $20 million investment in Webb & Knapp, Inc., a real-estate company. “The Murchison-Kirby relationship,” the Times noted, “began on a note of hearty common interest” during Kirby’s proxy battle, in 1954, against the Vanderbilt family for control of the New York Central Railroad. Young and Kirby asked Clint Murchison Sr. and his longtime partner, Sid Richardson, to buy eight hundred thousand shares of New York Central and vote them in favor of the Young and Kirby takeover. Murchison and Richardson complied. In return for their support, or so it seemed, in 1955 the two Murchison brothers “obtained control” of IDS through a stock deal with Allegheny engineered by Young and Kirby.
But in January 1958, using a 20-gauge shotgun in the billiard room of his twenty-five-room oceanfront Palm Beach mansion, the “flamboyant” Young committed suicide. He was sixty years old and said to be suffering from “melancholy and depression” brought on by the recession of 1957, which had hurt Allegheny’s businesses. Holding the shotgun with his knees, he had fired both barrels at his head at around 10:00 a.m., two hours after eating his normal breakfast. The mansion’s staff, which had not heard any shots fired, became concerned about Young’s whereabouts after he failed to show up for an appointment. Five days later, Kirby took control of Allegheny. In 1959, Allegheny’s public shareholders filed suit, arguing that control of IDS had been given to the Murchison brothers “for the favors rendered by their father to Mr. Young and Mr. Kirby.”
To settle the lawsuit, the Murchisons agreed to return control—through a 47.5 percent stake—of IDS to Allegheny. The Murchisons retained a 17 percent stake in IDS. The Murchisons, Kirby, and the Young estate paid another $3 million together to Allegheny. But, after the settlement, the Murchisons found themselves suddenly “frozen out” of the affairs of IDS, and they were not pleased. In an effort to strengthen their hand, the Murchisons paid Young’s widow $10.2 million for the estate’s stake in Allegheny. The Murchisons thought owning a large stake in Allegheny would get them more influence on IDS. But Kirby, resentful of the Murchisons’ hostile act, started an investigation into the way they had managed IDS and asked for their cooperation in the investigation. When the Murchisons refused to help, Kirby kicked them off the IDS board.
Incensed, the Murchisons with Levy’s help began a hugely public and hostile proxy fight in September 1960 to seize control of Allegheny from Kirby. According to the Times’s account of the nine-month proxy battle, Levy was the Murchisons’ “principal banker-adviser” and played a “quiet, powerful role” in the fight. In the end, despite the Murchisons’ owning only 2 million of the 9.8 million Allegheny shares outstanding—and Kirby owning 3 million shares—the Murchisons were able to get other shareholders, including no doubt Goldman Sachs, to vote in their favor in sufficient numbers to get an 855,000-vote majority. In May 1961, the Murchisons took control of Allegheny after getting five shareholder votes for every four votes received by Kirby and his supporters. The fight was believed to be one of the largest and most contentious to have occurred to that time.
After taking control of Allegheny, the Murchisons relieved Kirby of his duties as the company’s chairman and CEO. Kirby left with a fortune estimated at $300 million, making him one of the wealthiest men in America.
Kirby, then sixty-nine years old, could have simply retired to his twenty-seven-room mansion in Harding Township, New Jersey, or to his “chateau” in Easton, Pennsylvania, or to “any of his other three homes,” but instead he set about trying to regain control of Allegheny. After all, he still owned 31 percent of the company. Two years and another $10.5 million spent buying up more Allegheny shares, Kirby succeeded in getting back control of the company from the Murchisons with the help of well-placed allies. Of the then 6.7 million outstanding Allegheny shares, Kirby had control of 5.9 million after the votes in another proxy fight had been tallied. When asked why he had bothered, he told a reporter for the New York Times, “Pride. Family pride. As nearly as I can remember until the proxy fight with the Murchisons in 1961, I never got licked. I was very upset.”
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EDGAR BARUC—Levy’s original mentor in the arbitrage business at Goldman—had died suddenly in 1952, leaving Levy on his own to run the group. By then, though, Levy had more than surpassed Baruc as a revenue generator and in importance to the Goldman partnership. Over time, Baruc had become Levy’s assistant. When Baruc died, Levy quickly concluded he needed new help and set about hiring someone from the outside to work with him.
Around that time, Levy was playing golf in Boca Raton, Florida, with Harry Tenenbaum, who along with Paul Peltason had started Peltason Tenenbaum Company, a small brokerage in St. Louis, and Levy told Tenenbaum that he needed an assistant. “I offered the job to John Weinberg, Sidney’s son, but he turned me down,” Levy told Tenenbaum. “He wants to stay in his dad’s end of the business, in investment banking.” Tenenbaum asked Levy if he would be interested in hiring his son, L. Jay.
“Don’t you want him?” Levy asked.
“Not if he can work for you,” Tenenbaum said.
“Send him in,” Levy replied.
L. Jay Tenenbaum studied mechanical engineering at Vanderbilt, but in 1943 he enlisted in the army and went through infantry school. He became a second lieutenant, was sent immediately overseas, and served with the Tenth Mountain Division, which was comprised of soldiers with expertise in skiing and surviving in winter terrain. Tenenbaum became a leader and had, at one point, forty men reporting to him. He was twenty-one years old. At the beginning of 1945, he saw action but soon the war was over. “I was in combat for six, seven months,” he said. “I ended up with two Purple Hearts, a Bronze Star and a Silver Star.”
When he got out of the army, he was stationed at Fort Ord, California, on the Monterey Peninsula. At that time, Tenenbaum was a scratch golfer—Fort Ord had one beautiful eighteen-hole course—and was playing the Pebble Beach course nearby. It was Christmastime and his parents were visiting him. After a round of nearly flawless golf, Tenenbaum told his father he wanted to join the PGA Tour. “He said, ‘You damn fool. You can’t beat anybody, all those guys, Snead, Demeret, Nelson, Hogan. You’re going to go to work.’ ”
Tenenbaum had no idea what to do at Goldman Sachs, and Levy had neither the patience nor the interest in suggesting things for him to do, let alone teaching him the arbitrage business, Goldman Sachs style. “I joined him April 1, 1953,” Tenenbaum said. “I found out I’m g
oing to be his assistant. Well, I’d say, ‘Gus, what could I do for you?’ He said, ‘L. Jay, leave me alone. I’m busy.’ Then I didn’t know what to do with myself.” At one point, early on, Tenenbaum asked Levy if he could write a letter for him and Levy suggested that he “give a letter”—as they used to say in the old days—to his secretary, Charlotte Kamp. Tenenbaum took Levy’s advice. “Charlotte, will you take a letter?” he asked her. “She said, ‘Will you take a walk?’ ”
Tenenbaum’s first break came when he ran into one of his parents’ friends from Palm Beach at the Parke-Bernet Gallery, in New York. They talked for a bit and Tenenbaum said he was in the arbitrage department at Goldman. After a few more conversations, the friend agreed to give Tenenbaum $3 million to invest for him. He also introduced Tenenbaum to other wealthy Jewish refugees who were looking for a safe place to keep their money. “Instead of assisting Gus, I became a salesman because he gave me nothing to do,” he said. “The reason was Gus absolutely had no what you’d call ‘managerial experience.’ He was a guy who could do things himself, and do them well, but no managerial experience.” Tenenbaum became the second-best salesman at Goldman Sachs after Jerry McNamara, whose best client was the Catholic Archdiocese of New York. “I had all my Jewish refugees and I couldn’t top him,” he explained. “But, I was doing quite well. I was taking home two hundred and fifty, three hundred thousand dollars a year. I had a percentage of the arbitrage department.”
In 1959, Sidney Weinberg decided unilaterally to make partners a number of men, including Tenenbaum, who had been assistants. Other firms weren’t poaching them. They weren’t producing huge amounts of revenue. One day they were assistants; the next day they were partners. “It was a Weinberg decision, I guess because he was the guy,” Tenenbaum said. “It wasn’t Gus … I was never told, ‘L. Jay, you’ve earned it.’ I wasn’t even made a partner to do what I was doing. I was a salesman.” By this time, Tenenbaum lived at 983 Park Avenue and had joined the Century Country Club, in Purchase, New York, a favorite of Levy and Weinberg’s.
While Tenenbaum was no longer a scratch golfer—“I didn’t carry scratch,” he said—he was still very good. “I won the club championship a couple of times and was in the finals for about four or five times,” he said. But given the way the economics worked—which was typical of Wall Street partnerships at the time—it turned out that making these men partners was a smart decision for the firm because Goldman was able to pay them less, as partners getting a slice of the profits, than as nonpartners getting a slice of the revenue they generated. “Now I become partner,” Tenenbaum explained. “What was the deal? I got a salary of forty thousand dollars a year. I got one point five percent of Goldman’s bottom line profits, which were what, ten million dollars? So, one point five percent is one hundred and fifty thousand dollars”—which had to be kept in the firm’s capital account—“and forty thousand dollars to live on. And I’m making two hundred fifty, three hundred thousand dollars as a salesman. What kind of deal was that?” Levy once explained the Goldman partnership economics: “We’ve got a hard and fast rule. We pay salaries—modest by today’s salary levels. On top of that, we pay six percent interest on capital. On the profit at the end of the year, we pay partners’ taxes. The balance stays in the firm. That’s been the success secret of the firm. It enabled us to go along without feeling a capital pinch, even after all the Sachses got out or died.”
When asked about the apparent dichotomy between the “modest” salary and supposed glamour of Wall Street, and the perception that everyone there was—on a relative basis anyway—getting rich, Levy said, “But don’t forget, the partners do have capital in the firm. They get their interest on that. So let’s say a guy gets forty thousand dollars salary and has half a million in capital. On that he gets thirty thousand dollars interest. And the firm pays his taxes … that’s money really net to him.” He said Goldman partners were not allowed to trade securities on margin or sign for a loan and were not allowed to borrow money, except with the express permission of the firm’s Management Committee and then only to buy a house or to buy insurance. “You cannot borrow money to buy stocks or for any other purpose,” he said.
Tenenbaum was part of a group of five young men that included Jim Robertson, Chuck Grannin, Jim Callahan, and Arthur Altschul who were made partner seemingly overnight but saw their compensation cut. “I’m living on forty thousand dollars and borrowing money at 983 Park and borrowing money from my dad to live on,” Tenenbaum said. “That went on for two years because at the end of two years they redo the partnership percentages.”
When the two years was up, Sidney Weinberg called Tenenbaum to come see him in his office. “Sidney Weinberg was the omnipotent,” he said. When Tenenbaum walked into the office, Weinberg had on his pince-nez glasses and, looking over them, told Tenenbaum that—thanks to Weinberg—he and his gang of five were going to have their partnership percentages increased to 2 percent, from 1.5 percent, a 33 percent increase. “What do you think of that?” Weinberg wanted to know. “Mr. Weinberg, I don’t like it,” Tenenbaum told him. “I’m either better than those four guys or I’m worse, but I ain’t the same, and I don’t like it.” Understandably, Weinberg was taken aback. Nobody talked to him that way. But, to Weinberg’s credit, he did not fire Tenenbaum on the spot. “He said to me, ‘Keep your nose clean and see me in two years,’ ” Tenenbaum recalled. “In two years, I jumped all four of them.”
Part of the way Tenenbaum was able to get ahead at Goldman was to be a self-starter and to make it up as he went along. Levy, as he certainly knew well by this point, was not going to give him any direction—certainly not on any consistent basis—leaving him to be opportunistic about getting his own clients and building a business, even though technically he was Levy’s bag carrier in the arbitrage department. Occasionally, Levy would bark an order at him. “Gus says to me one day: ‘We need an insurance stock trader.’ ” Tenenbaum recalled. “I said, ‘We do?’ He says, ‘We do. What are you doing about it?’ I said, ‘Gus, I’m supposed to do something?’ He said, ‘What the hell am I paying you for?’ So I went out and hired Rudy Russo. I got an insurance stock trader.”
Another day, quite randomly, Levy asked Tenenbaum if he had seen the news about two companies that had agreed to merge. Levy wanted to know if Tenenbaum had figured out a way to make money arbitraging the deal, something he had never done to that point even though—again—he worked for Levy in the arbitrage department. “You usually do it,” he told Levy.
“Can’t you see I’m busy?” Levy barked. “I’m doing all these other things.”
“You want me to do the arb?” Tenenbaum asked.
“Certainly I do,” Levy replied.
“So now I find out I’m an arbitrageur guy,” Tenenbaum said.
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WHETHER TENENBAUM COULD see the bigger picture or not, clearly what was happening at Goldman in the late 1950s and early 1960s was that Weinberg was slowly coming to terms with his own mortality—which he never quite did, actually—and with the need to create a new generation of leaders at the firm. As much as Weinberg was reluctant to allow Levy’s business of committing the firm’s valuable capital to arbitrage deals, or for trading with clients, or for its own account, he was growing increasingly powerless to prevent Levy not only from pursuing that business but also from taking increasing charge of the firm. The truth was that Levy was making the firm good money by “guessing” correctly time and time again, and Weinberg’s investment banking clients were not generating as much money for the firm as they once had done. Increasingly, Weinberg could not deny Levy, as painful as it was for him to admit. This same scenario has played itself out all over Wall Street, especially after World War II as firms started making more and more money and the generation that steered them through the Great Depression and the war began to think about retiring. Obviously if Levy was to be the firm’s senior partner after Weinberg’s departure, a group of younger men had to be put in place to carry on the b
usiness on a day-to-day basis. Hence, the Gang of Five’s unexpected promotion to become Goldman partners.
Levy was a force of nature. “He was smart, quick, and extremely intuitive,” Roy Smith explained. “He was the most intense man most intense men had ever met.” Smith noted that Levy could not sit still—or stand still, for that matter—or listen to others. The coins jangling in his pocket announced his arrival around the office, which was rarely welcomed. Levy “was extremely tough on his subordinates,” Smith noted, and “two or three quit the firm not long after becoming partners because of the incredible pressure they felt working under his constant gaze.” He always wanted to know what everyone was working on but grew very impatient when the answers took longer than his short attention span could tolerate. “[W]e used to write out whatever we wanted to tell him as succinctly as we could,” Smith continued, “with no excess words, and read it aloud to him. He always grasped everything immediately, even the complex parts. He was intimidating and frightened most of us as no one else did.” Levy kept a frenetic pace at the office, “pacing back and forth, usually on the phone, in his cramped, glassed-in office in the center of the trading room, where he could watch the tape and yell at people for missing trades, without interrupting his telephone conversations.” His two secretaries would simultaneously field an incoming call from a client while placing outgoing calls to others. There was very little wasted time. “If you had to see him about something, you just went down and stood around in his office until he noticed you,” Smith observed, “and you made your ten-second report and then left after it was clear you were no longer being noticed.”