My mistake was that I had given him carte blanche because I was busy with other projects like RKO. However, I trusted Jack and we got along well. Unlike me, he was a man who knew how to ingratiate himself. He spent a great deal of time in Washington – although our head offices were located in Kansas City – entertaining and making friends with politicians. He was an influential man in Washington by the time the trouble started in 1948. He had a place in Chevy Chase, near Washington – I’ve never owned a house like that in my life. He had an estate on about eighty acres of parkland.
To explain how Jack operated in TWA’s interests, I have to remind you that I had contributed $25,000 to President Truman’s campaign when he was running against Dewey. Perhaps that doesn’t sound like a substantial sum to you, but Truman wasn’t a rich man – sometimes these guys take whatever they can get, and they can be damned grateful for it.
As it turned out, it wasn’t enough. Shortly thereafter, TWA had some overseas route applications pending with the CAB, and Juan Trippe was trying to stop them from going through. He had friends in Washington too. So I told Jack Frye to have a talk to Truman about the routes, and push them through. And if he had to, he could remind the President that I’d personally contributed a substantial sum to his campaign, shoved it right in his hand in the Biltmore Hotel in Los Angeles.
Jack got himself invited out on the President’s yacht, in the Potomac. Clark Clifford was on board that yacht. He’d been a naval captain during the war and he handled the yacht, made sure Harry Truman didn’t fall overboard without a life preserver. Clark told me later he didn’t really like Truman. Truman wasn’t classy enough for him. Also, Clark Clifford liked shrimps and Truman hated them. Truman said, ‘That’s rich man’s food,’ and he wouldn’t eat them. Clark worked for me later on – he was my lawyer in Washington, but he was really a lobbyist for TWA. He was paid $50,000 a year to see that things went right for TWA, but I can honestly say – and I’m not being vindictive – he earned about fifty cents of that money.
Anyway, while Jack Frye was with Truman on the Potomac he reminded him about the money. Jack said, ‘I was lucky I didn’t have to swim home. The President almost kicked me off the yacht.’
That was one time I felt I didn’t get my money’s worth. Perhaps the mistake I made was I should have given him four hundred thousand, as I did later to Dick Nixon.
I tell you all this background to show you that Jack Frye, although he didn’t make any headway with Harry Truman, was a well-placed man. At least he could get on the yacht. He knew everyone who was anyone in Washington, which was an advantage to me at one time, and proved a terrible disadvantage at another.
Then TWA stock just fell over the precipice after the war, crashing down to nine dollars a share. The airline was on the verge of bankruptcy. Lee Tallman, the treasurer of TWA, said they needed $17 million to get it off the ground again. I disagreed. I think they were afraid to deal in large numbers. My estimate was that we needed forty million.
That’s when Noah Dietrich came into the picture, and I want to give Noah all the credit that’s due him, despite our later differences.
‘Go to New York,’ I told Noah. ‘Go to the largest and most powerful brokerage house – Merrill Lynch, Pierce, Fenner and Smith. Talk to Maury Bent, because he’s the man who swings the weight up there.’
Noah talked to Maury Bent, and Maury talked to a man named Parkinson, head of Equitable Life Assurance Company. It turned out, by sheer coincidence, that Equitable Life at the time was keen to make a major investment in one of the airlines. They had liquidity, and they were looking for a growth-oriented situation in a progressive company. TWA filled the bill. Equitable, within three days of Maury Bent’s approaching them, came up with a guarantee of $30 million cash on a debenture, with a reserve of ten million.
There was a little hook on it, though, which played an important role later on. None of the money was to go for deficit financing. It all had to be pumped into capital assets.
So we had what we needed. And Jack Frye pissed it away. Most of the money went toward salaries and operating costs, but some of it found its way into deficit financing, which was Jack’s mistake. I can’t call it a misinterpretation of the terms of the loan. It was dire necessity, and that thirty million vanished like sweat from your forehead in the desert. That year we lost $20 million.
There was no question in my mind as to who was responsible. Jack was down in Washington entertaining politicians and screwing Russian ballet dancers, and he didn’t have his finger on the button. Some people, like me, are able to control a large corporation from a distance. Jack couldn’t.
There was only one solution: Jack had to go. This pained me deeply, because I knew Jack and I knew his wife, Helen – a lady in every sense of the word. She had married one of the Vanderbilts, and then she married Jack, and I was very fond of her. I think I worried even more about what this would do to Helen than to Jack.
The problem was, Jack didn’t want to go. He had fought like a gladiator when the board of directors of TWA tried to get rid of him in 1938. I had bailed him out then. Now I was playing the role of the board of directors, and Jack put up the same kind of fight that he had in 1938 – only tougher. And this is where Jack’s contacts in Washington worked against me.
The airlines, even today, are in the grip of the government. The airlines carry the mail, and that mail is awarded on contract. The way you get those contracts is to have friends on Capitol Hill. Jack had those friends. He’d done a lot of favors for them. Not just cash – other things too, like call girls, and even call boys. When the crunch came, and it was Jack Frye against Howard Hughes, Jack Frye had his allies. They didn’t want to offend him, because he knew too much. As soon as I realized that he wasn’t going to step down meekly, I decided I had to fight this as best I could, and with whatever weapons I had at hand.
The major weapon I had at hand, as usual, was money.
So I went to Mr. Parkinson at Equitable Life and said, ‘TWA is in trouble – therefore your forty million is in jeopardy. I’ll bail out the operation, personally, through Hughes Tool. And I’ll pump another ten million into the airline. I have one condition. I want Jack Frye out.’
Parkinson didn’t know whether he could arrange that, but Noah came up with an idea. Because Jack had used some of that money for deficit financing, Equitable could throw the loans into default, which would force Jack out.
Again we faced a problem, which was that until Equitable received the next quarterly financial report from TWA they couldn’t legally default the loan.
Time was of the essence, because Jack and I were already at loggerheads. Christ knows what he would have done in the remaining three months of his tenure. I didn’t wait until that next report came in. I wouldn’t put in my ten million until Jack Frye was out on his ass. This, you understand was to save the airline, because I loved the airline. I believed in the airline. There was nothing personal in it. Jack Frye was a friend.
Parkinson made a tactical mistake, which you can’t blame him for. He put the proposition to Jack and tried to talk him into leaving for the good of the airline. Next thing we knew, practically all of Washington was lined up against us. The Tong wars in Chinatown are like snowball fights compared to what happened next. This is one of those inside battles that never gets into the headlines, because it demonstrates the possibility of corruption in the government, which of course, as you know, is nonexistent.
The postmaster-general himself, Bob Hannigan, was a friend of Jack’s, and he called Parkinson and TWA.
He didn’t mince words. ‘If Jack Frye goes, your airmail contracts go too.’
Once again the solution was to fight fire with fire. Parkinson, at my instruction, sat down and wrote letters to every member of the board of directors of TWA. He said to them, in effect, that if they turned down my offer of ten million, which meant that Equitable would fall on its ass with their forty million, he was going to pillory every single one of them, hold them responsi
ble, and run them out of American business.
You understand that all this time the airline was losing a fortune every day under Jack Frye’s mismanagement. A few more months and TWA could have gone on the Canadian Stock Exchange, where they trade penny stocks.
Then we got the biggest break we could possibly have had. The pilot’s union decided to strike against us. They didn’t know what was going on behind the scenes, and neither did the newspapers. We couldn’t even meet the payroll of TWA at that time, and then the pilots came along and threatened to strike, which would have shut down the airline.
Naturally I gave it out to the newspapers at the time that I was extremely upset about it – you can’t very well tell the newspapers that the strike is sent from heaven. I think if the head of any large American corporation ever told the truth to the newspapers he should be given the Congressional Medal of Honor by the government and thrown into a mental home by the stockholders. It’s the First Commandment of business: ‘Thou shalt not tell the truth to the public, ever.’
I made the usual statements, that we were willing to arbitrate and we were immediately going to make an effort toward negotiations, and I convinced the media people that the strike was going to cripple us and we wouldn’t recover for another five years.
This was unadulterated crap, because behind the scenes we were thanking God and the pilots’ union. And we shut down the airline. We furloughed all TWA employees for the entire duration of the strike.
That convinced the Board of Directors of TWA that they had to accept my offer or the whole goddamn airline would go up the creek without a paddle. And they booted Frye out, took my ten million, and enlarged the board of directors with a number of my people on it – and from that time on I was the undisputed boss.
But that was not quite the end of it. Because it bothered me all the time that Jack, who was one of the few friends I’ve ever had, and poor Helen, should have to bear the brunt of all this. He’d made mistakes, but it just didn’t seem fair that a man like that should be thrown out on the streets like a common bum. This is where I made what I consider to be my first major management mistake.
Jack called me, and we sat down in one of my cars on a side street in Kansas City. I said to him, ‘Jack, this is killing me, that you’re out.’ He said, ‘Howard, it’s killing me too.’
I came up with the idea that Jack would still work for me. Because of his influence in Washington, he was an invaluable man. We didn’t have anyone in Washington at the time who was what you might call a lobbyist, and I figured Jack would fill the bill perfectly. But he wanted a salary of $100,000 a year, and a plane at his disposal, and an expense account – which Noah quickly pointed out to me, when you figured that Jack would undoubtedly run the expense account up to the sky, came close to three hundred thousand. I didn’t care. Money was not the important thing. The important thing was to do right by Jack. Because Jack had done his best. It wasn’t good enough, in fact it was awful, but it was his best.
Then came the moment of truth. With Noah it was always our money; probably deep down he figured his money. He was older than I was, but I think he believed that one of these days I was going to kill myself in an airplane crash and he would take over and run the whole business, and so he was saving the nickels and dimes. Three hundred thousand dollars a year was a lot of nickel and dimes.
Noah hadn’t liked the idea of my hiring Jack to do this job in Washington. He sent me a telegram: ‘It’s me or Jack Frye. You can’t have us both.’
I mulled it over, made my decision, and my decision was my mistake. I chose Noah Dietrich over Jack Frye. I called Jack and said, ‘It’s no good, Jack, it won’t work.’ I turned down a good man, a friend, for Noah Dietrich, who was nothing more than a glorified bookkeeper. And that’s one of my deepest regrets. I thought at the time I needed Noah more. I made an unsentimental business decision and it was the wrong thing to do. Business decisions are to make money or save money. But why did I need to make more money or save more money? I was rich beyond most people’s understanding. Money was already beginning to corrupt me and I was too blind, or too stubborn, or already too corrupted, to see it. Jack Frye never spoke to me after that.
The $10 million that I then put into TWA was one of the best investments I ever made. That gave me total and absolute control of the company. Not just through my owning more than half the stock, but also through the fact that more than half the guys on the board of directors worked for me. There was one little hook in it – which didn’t seem important then, but made its impact felt years later – and that was an indication that if for any reason TWA got into financial trouble due to my control, Equitable Life could ask me to appoint them as trustees of my stock.
But the big problem at the time was that my $10 million wasn’t a straight loan. There was a clause in the agreement that gave me the right to convert the money into TWA stock at any time I wanted – that is to say, during a specified period, at the current market price. In other words, I had a three-year option, similar to a warrant, to convert $10 million into stock at average closing market price the ten days before my actual conversion. When TWA was selling for nine dollars a share, my ten million would have brought me well over a million shares of the stock. But I didn’t buy. Like an idiot, I waited.
Once I was in control, TWA began to improve. We captured more of the passenger and freight traffic, expanded our routes, pioneered in research, and we made money. Well, when that happens, what happens to your stock? It goes up. By the time it got to fifteen dollars a share, if I wanted to convert my loan then, I wouldn’t have gotten more than six or seven hundred thousand shares of stock. I suddenly found myself caught in a bind. The better the airline did and the more money we made, the more intelligence I applied to improving it, the less my loan was worth in terms of stock and a percentage of ownership. Every time I got them a new route, I was cutting my own throat – not financially, but managerially, which to me amounted to the same thing. My mistake was that I didn’t cover immediately when the stock was at nine dollars.
I want to tell the truth about things even if they put me in a bad light, because truth and not self-glorification is my goal. There I was, in a bind. The stock was moving up on the New York Stock Exchange. I hadn’t looked at the financial pages since 1929, but now every day I grabbed the paper – TWA plus an eighth, TWA plus a half, TWA up a quarter, and every eighth of a point meant that I was losing potential control of my airline. I got gloomier and gloomier about the whole thing, and nobody could understand why.
I conferred with one of my top financial wizards about it and we came up with a time-honored solution – I suppose you can say, reminiscent of Jay Gould and J.P. Morgan. Jesse Livermore would have been proud of it. Jesse Livermore was the king of the Wall Street pirates – they would hire Jesse to drive the price of a stock down so they could buy it cheap, then Jesse would turn around and manipulate the price of the stock up and they would sell it dear.
That’s precisely what was under consideration in 1948. We thought we might open some brokerage accounts in the East, in New York, Washington and Philadelphia – in other names, of course – and then begin to sell the stock short. That is, sell what we had at below the market price and sell other shares short, the purpose being to drive the price down so that I could convert my ten million at a reasonable price.
The price of the stock had gone to twenty-three by then. I finally realized that if we followed this procedure and got the stock down a few points, for every point we got that stock down, I would have had to sell shares, and suddenly I realized I would be robbing Peter to pay Paul. And I was Peter and I was Paul. So I got together with my financial wizard who put me in this predicament, and we came up with another plan, based on some precedents that had recently been set by some other company that offered a new issue, a secondary issue of stock, and had given the rights to certain stockholders to buy that stock at a few dollars under the market price. What I wanted then was to convert my loan at fifteen dol
lars a share.
I talked to Maury Bent about it. Maury said he thought it might work, except that my conversion rights would be so enormous that the stock issue might have a hard time finding an underwriter, and he tried to press me into converting right then and there.
We were eighteen and a quarter at that time. It had dropped that far. Of course I had an ace up my sleeve – actually, a full house. And that was that those guys on the board, the board of directors of TWA, were Toolco people on my payroll. We’d done just about all the cute maneuvering we could. That had served its purpose, but in the end it came down to simple old-fashioned muscle.
A few telephone calls were placed. Maury went to the board of directors and the proposition was put before them. A little lobbying took place and, lo and behold, it came time to vote and they said, ‘Howard Hughes is our benefactor! Without Howard Hughes we’d have no airline! We’re going to give this man the right to convert his $10 million, that saved our necks, at ten dollars a share.’
You mean you managed to get it for what you could have got it originally?
No, I could have gotten it originally for nine and a half. I had to pay ten. But I’m not complaining. And I didn’t waste any time, I converted and I got over a million shares, because of course there was interest on the loan. I got an extra 40,000 shares in interest. Since I sold that stock eventually – which is another story – at over $80 a share, those million shares had cost me ten million and I made a profit of seventy-three million. That’s not what I call chopped chicken liver.
* * *
In many ways 1948 was a critical year. Apart from that Jack Frye business, Hughes Aircraft got into serious difficulties. Several of my employees, high-ranking people, were indicted on fraud counts by the United States government. One of them was Glen Odekirk, who was assistant then to the president of Toolco, about as high as I could get him up there, and he made a damned fool of himself in this operation.
Howard Hughes Page 27
