Reckoning

by David Halberstam

  There were two problems with this scheme, as it went into effect after Ford’s death. The first was that since the old man had not in any sense been a charitable person, he had created a foundation with a lot of stock and virtually no function. Little about its actual operation suggested generosity. This bothered congressional authorities, who saw the foundation for what it was, a shameless tax dodge. The other problem was the family itself. The various Ford heirs and heiresses had not been amused to find, upon the death of the founder, that they owned only 5 percent of their own company. The surprise was particularly unpleasant because in the postwar years the family had come on what, for it, seemed like hard times. Fords were accustomed to a very grand style. In the new egalitarian and meritocratic America, few families lived like the Grosse Pointe Fords. Some of the households had as many as sixteen servants. Unfortunately, the company was not generating nearly enough money for them to continue this lavish existence. Ernie Breech was certainly bringing the company back to life, and it might again become very successful, but the overhead required for the company’s regeneration was heavy, and in the meantime there was little in the way of dividends for the family. Henry, Bill, and Benson all had jobs at the company and drew salaries that were considerable but not so large that, by themselves, they were sufficient to cover their families’ colossal expenditures. At every family financial meeting there was urgent talk about doing something to relieve the dividends crisis. There was a lot of elegant poor-mouthing at these sessions, as the servants moved among the family members and their advisers, serving drinks and coffee. What the family wanted was cash. What they had instead was an extraordinarily valuable piece of property from which very little in the way of money was coming.

  The obvious solution was to take the company public—to sell its stock on the open market. Not only did the family’s needs mandate this; the needs of the company itself, the enormous expenses involved in building new factories and keeping the existing operation healthy, meant that it could not be run as it had been in the founder’s day, like a small grocery store, out of its own cash-box. There had to be additional sources of revenue, and the best one was the booming new equity market. Taking Ford public, however, was easier said than done. Its size and prestige demanded that it be listed on the New York Stock Exchange. Anything less would be embarrassing. But the NYSE would not list a nonvoting stock. That was just one of the difficulties. Somehow there would have to be a plan that would satisfy not only the New York Stock Exchange but also the Ford family, the Ford Foundation, and the ever watchful IRS. Secrecy was critical, for this was the touchiest deal imaginable, and if word slipped out, there might be considerable opposition to what the Ford family was trying to do.

  The offering was three years in preparation, and all that time, security was extremely tight. During the long, delicate discussions, Sidney Weinberg, the senior partner at the New York investment banking firm of Goldman Sachs, who put the deal together, was careful not to maintain a file in his office with accumulated Ford data. To make sure no briefcase with Ford papers in it could be misplaced or stolen, he gave up carrying a briefcase. After all, he knew what no other banker and no ordinary citizen had ever known before, the intimate details of the Ford family’s finances. Most of it he kept in his head. The rest, the essential numbers, was written on several pages that he kept with him at all times, in an old brown envelope. Once he almost blew the whole thing. Upon his arrival at the Detroit airport on a trip to meet with the Ford family, he stopped at a newsstand to buy; a local paper. He put down the brown envelope containing the Ford family’s intimate financial information, bought the paper, and walked away, leaving the envelope behind him. Thirty minutes later, approaching Eleanor Ford’s home, he realized what he had done, had his driver turn around, and raced desperately back to the airport. The envelope was still there, in the hands of the man who ran the newsstand. The Ford secrets were still secret; Weinberg had not betrayed his trust. When Henry Ford II went to Europe during a crucial stage, he and Weinberg used a homemade code to keep in touch. Young Henry Ford was Alice, his brothers were Ann and Audrey, the company was Agnes, the family lawyer was Meg, the Ford Foundation was Grace, Weinberg was Edith, Gloria was the new limited common stock, and Florence was the market value. Someone reading the cables, the writer E. J. Kahn later noted, would have thought he was reading passages from Little Women.

  Weinberg’s efforts with the New York Stock Exchange were helped by the fact that the head of the exchange, Keith Funston, was a protégé of Weinberg’s and that Weinberg had pushed him for the stock-exchange job. Satisfying the other parties was a little harder, but Weinberg kept plugging away, and at last, after three years of convoluted negotiations, of endless meetings, of stalemates, of monkey wrenches thrown and retrieved, of moments when the whole thing seemed impossible, a deal was done. The company would be recapitalized. The family share would rise from 5 to 12.1 percent. The family would retain 40 percent of the vote for its class of stock, regardless of what percentage of the shares it owned. (The original figure had been 30 percent, which the Ford family and Weinberg had decided would permit the family to retain working control. On the day the final arrangements were being worked out, however, Bill Ford had walked into his older brother’s office and said, “I don’t know about you, Henry, but I like owning this company. Let’s be a little more on the safe side and make it forty.” Forty, then, it was.) The Ford Foundation would get some votes to go with its stock; the family would give up some of its voting shares but would gain back a larger share in the equity of the company. As for the company, it would now be free to offer its stock to the public in future issues. The New York Stock Exchange agreed to list the stock, and the IRS gave its approval.

  The announcement that Ford was going public, which came in November 1955, was stunning news. Ford was the last of the great American companies still privately owned, and the Ford name was at once mighty and universally recognizable. Average citizens who had always thought of Wall Street as a distant and alien place belonging to the very rich felt they could participate, and they did. Later John Whitehead of Goldman Sachs, who helped midwife the public issue, talked of it as not only a landmark deal but one that launched the era of what came to be called people’s capitalism. It made ordinary citizens believe that buying stock—owning part of a giant company—was a real possibility in their lives. By purchasing this stock they became participants in American capitalism, owners as well as workers, junior partners of Henry Ford II. In an era when the market was still based on blue-chip stocks with no hot new high-technology companies to rival them, the magnetism of the Ford name, Whitehead thought, was strong. It was as if in a different era, some thirty years later, IBM had been a private company and announced it was going public.

  The news generated excitement rarely seen on Wall Street. Everyone wanted in on the issue. Weinberg was besieged by people, both famous and not so famous, who claimed to know him and demanded that they be allowed to buy a hundred shares of Ford stock. There simply was not enough to go around. Early in the negotiations the principals had agreed that $50 per share would be satisfactory. But the fever kept building. The actual price turned out to be $64.50. Some ten million shares were sold, and it took 722 underwriters to handle them. At a time when $100 million was considered a handsome result from a public offering, this one brought $640 million—the sheer scale of it was staggering. The fever continued, greatly inflating the stock, but though it briefly surged up near $70 it soon hit a plateau near $50. The Ford family had been joined by some 300,000 new co-owners of their company. It was, said Keith Funston of the New York Stock Exchange, “a landmark in the history of public ownership.” It was a landmark in tax avoidance too; estimates were that Eleanor Clay Ford and her four children saved some $300 million in taxes while keeping control of the company.

  It also marked the beginning of a historic shift in American capitalism, a major increase in the influence of Wall Street in companies like Ford. The Street was a partner of
the family now, and the family had to respond to its norms. In the old days, the Street did not demand too much of the companies whose stock it sold. But the stock market was changing now. Before the war only a small number of Americans held stocks, and they were to a large degree of the same class as the owners of the old-line companies. The market was a kind of gentleman’s club, virtually off limits to the rest of the society. People owned stocks because their families had always owned stocks. They invested not so much to gain but to protect. The one exception to this was the period from 1926 to 1929, when the market turned speculative; then, instead of one million Americans owning stocks—the usual number—the number swelled to four or five million. Even then, though there were speculators, they were the exception; they did not set the market’s values. There was no real pressure on the part of those who invested money to make the owners of the companies produce anything more than a healthy long-term gain. Those who were in the market were generally rich and were in for the long haul. The men who went to work on Wall Street were from what were called good families. They were not pushy, and they patiently waited to rise to the top in the good investment-banking houses. Breeding was often more important than talent. Certain of the old-line firms were very Waspy indeed, and some were German Jewish—“Our Crowd,” as they spoke of themselves—and in manner they were sometimes even Waspier than the Wasps.

  World War II altered all that. Affluence spread, and merit came to count for more. The great elite universities of America, under the pressure of the war and the GI Bill, had opened their doors to people who never would have been permitted to attend a decade before. The merit standard invaded Wall Street too. The old families were squeezed by inheritance taxes, and their wealth and their position began to diminish. The investment houses could less readily support themselves in their accustomed handsome style by simply doing the bidding of the old families, who were, of course, connected to the old companies. The investment houses saw that they were going to have to become more aggressive.

  The old order of American capitalism was beginning to give way. At the same time a new order was appearing. Millions and millions of people who had never owned stock before were now buying in, and in many ways that was healthy for the country; the economy was more democratic, more broadly based, and more balanced. There was more scrutiny and more pressure to perform, and generally that too was a good thing. The New Deal had made the labor unions rich and powerful, and those unions had pension-fund money to invest; other groups began to emerge as potentially powerful institutional investors. New industries were on the horizon, and a new breed of stockbroker was taking his place on Wall Street. While the old breed had been born to it, heirs to a class and a culture, comfortable and protected and with no burning need to conquer, the new breed was different. The typical new stockbroker had made it on his own to one of the better Eastern schools and then had gone to Harvard Business School or Wharton. He was young and ambitious and did not share the values or observe the restraints of those who had once dominated the Street. Above all he was not about to wait around for seniority to grant its slow reward. He was looking for hot stocks that would provide an immediate reward. He was not interested in protecting an existing investment in an established world; he wanted to be a winner, and he wanted action.

  The new capitalism was not only more intense, it was explosive. Suddenly millions of Americans whose parents had never been in the stock market but had put their limited savings in banks for the nice little 4 percent interest they earned (and whose closest acquaintanceship with a bond had been their careful and dutiful buying of war bonds—$18.75 for a bond worth $25 after ten years) were buying stocks. Keith Funston began to talk about his plan to make every American a shareholder. Middle-class Americans began to read in their newspapers of brilliant young men in their twenties and thirties who took a small amount of money, perhaps no more than $2000 or so, and in one year doubled or tripled it through a magical device called a mutual fund. The mutual fund hedged the bet, for the brilliant young broker was investing in enough different and terrific companies to offset the effect of the failure of one. Most of the companies seemed to have sexy names like Tritex or Ultratonix. Almost overnight, mutual funds, which had been a completely neglected field of action, became the vogue.

  By the early sixties the market was taking off, as if the Street, once so staid and prim, had a fever. There was even a name for it, the go-go market, which implied not merely action but a break with the past. One did not think, after all, of the older generation, the men from Louis Auchincloss’s novels, as go-go investors. Theirs had been a world of deliberate decorum. Now decorum was out the window. For the new investors it was a time when all the old unwritten rules were being broken, when everyone was becoming rich and doing it quickly, and no one was a loser (although there seemed to be winners and superwinners). Wall Street, which in the past had produced men whose culture was distilled in a Bachrach photograph emphasizing quiet distinction, was now producing something quite different, stars. The stars were the portfolio managers, and they were the darlings of the Street and the media. They could pick the hot stocks before they were hot and get rid of them just as they began to cool. They loved the new at the expense of the old. Of these stars, the exemplar was a man named Gerry Tsai.

  Nothing reflected the madness of the market so much as the fascination with Tsai. He was the first of the high rollers created by the postwar changes. In those days everyone wanted to know what Tsai, or the Chinaman, as he became known on the Street, was doing. Rumors about what he was buying and selling seemed to dominate the shop talk of the Street. The Chinaman had a hot hand. Born in Shanghai, where his father, a graduate of the University of Michigan, was a Ford district manager (“Everyone there wanted to buy a Ford,” Tsai once said. “It was a great sign of status”), he had come to America at nineteen as the Chiang government was falling. He later said that one of the advantages he had had was that he brought with him no connections, no family ties. He was not locked into the preconception that the world consisted of blue-chip stocks. Not tied to the past, he was free to delve into the future, to concentrate on what might happen next. The best thing about the new era, Tsai liked to say, was that there was no penalty for being a foreigner. All you had to do was perform. “If you buy General Motors at forty and it goes to fifty,” he said, “whether you are an Oriental or a Buddhist or an Italian doesn’t make a difference.”

  Tsai got his big break in Boston in 1952 when he went to work for a man named Edward Johnson, who headed the Fidelity Fund. Johnson himself was something of a maverick. When he had taken over the fund, nine years before, he decided not just to sit there quietly and politely and let things accrue on their own. He intended to speculate. He did not, he explained, feel married to a stock. Rather, he said, it was more like a “companionate marriage” and occasionally a mere liaison. The misnamed Fidelity Fund was the perfect place for Tsai. He had a boss who encouraged him, he was bright, a mathematical whiz, and he intuitively understood the changing economy.

  At first he worked as an analyst for Johnson, and he was good from the start. Because it was a small firm, he had to cover thirteen different industries, including auto, textile, steel, and machine tools. Working much as a reporter would, he visited the companies, listening to their best young people. He soon had a sense of foreboding about the traditional smokestack industries. They were mature, beset by high labor costs and the beginnings of serious foreign competition. Looking at them, all he could see was problems. They might or might not be able to continue their essential industrial success in the next twenty-five years, he thought, but there was no way, given their burdens, that they would be growth stocks. What he was looking for and what he soon discovered was the vital new companies, many of which were founded on recent technology and employed few workers. He heard that a company named AMF had developed a way to automate the process of setting up pins in bowling alleys. Though installing them might be expensive for the alley owners, soon their onl
y cost would be the electricity involved. Tsai called on AMF, was impressed by the pin-setting machines, did a rough calculation of how many bowling alleys there were in the United States, figured that almost all of them would buy the equipment, and decided to buy the stock. It was a big winner.

  After several years of working for Johnson, he decided to follow his intuition in a major way. He had observed that because of postwar affluence, all sorts of new investors were coming into the market. The average amount invested was ranging between $2000 and $3000. No self-respecting portfolio manager wanted to handle sums as small as that, and so these investors had to go without good professional advice. Tsai saw an answer for them—mutual funds, in which the risks were spread and the small investor could benefit from the investment wisdom of the fund’s managers. Tsai wrote Johnson a two-page memo asking for permission to start his own growth fund. Johnson called him in.

  “How much will it take to start it?” he asked.

  “Two hundred and fifty thousand dollars,” Tsai answered.

  “Go ahead,” said Johnson. “Here’s your rope.” He would give Tsai what he needed to hang himself with. Tsai did not hang himself. He knew exactly what he wanted—stocks in the high-technology field or the service industry. The stocks he chose for his first list in 1958 later came to be blue-chips, but at the time almost all of them were speculative: Polaroid, Xerox, Texas Instruments, Avon, IBM. His touch, colleagues soon realized, was awesome. It was as if he had a sixth sense about where the market was going to go. “What grace, what timing—glorious,” Johnson told writer John Brooks of The New Yorker.