The Billionaire's Apprentice: The Rise of the Indian-American Elite and the Fall of the Galleon Hedge Fund

by Anita Raghavan

  Gupta was an amiable young man, even tempered and usually upbeat. Some of Salmon’s colleagues considered Gupta quiet and reserved, but Salmon, a professor of retailing, did not share that impression. During the course of the semester, Salmon was struck by the quality of Gupta’s insights in the elective class on retail marketing that he taught second-year students. He knew enough about him to tell that Gupta was not himself that day.

  “What’s going on?” Salmon asked Gupta as they stowed their notes and materials.

  By the early 1970s, Salmon, a youthful red-haired professor with a penchant for chewing on rubber bands while in his office, was one of HBS’s most influential faculty members. After getting his MBA from the school, he went into the Army for two years before returning to HBS as a research assistant in 1956. Three years later, in September 1959, he had his baptism at the front of the classroom. Since then, he had gained a reputation within and outside Harvard for his work in better understanding the profitability of particular lines of business and finding effective ways of motivating and compensating the management of retail organizations. Like many HBS professors, he matched academic research with experience in the real world. He didn’t offer freelance consulting services because he preferred a more steady income stream, but he did sit on a number of corporate boards, among them Hannaford Brothers, a Scarborough, Maine, supermarket chain; and Stride Rite, a shoemaker.

  Salmon was astonished by Gupta’s news that he’d not received any “ask backs.”

  Recruiting at Harvard Business School is an important ritual whose structure is much like that of a senior prom. Every fall, America’s biggest and most prestigious companies—Procter & Gamble, Goldman Sachs, McKinsey, and scores of others—appear on the Allston, Massachusetts, campus of HBS to interview the sharpest new business minds in the country. After one or two on-campus interviews, students jockey for “ask backs”—invitations to visit companies at their headquarters, all expenses paid. “Ask backs” are the equivalent of getting asked to the prom—a sign that firms are serious about hiring a student, so serious they are even willing to pay for a visit to their offices. Some students game the system. They accept “ask backs” from companies they are not particularly interested in joining simply because their headquarters are in a fun city—San Francisco or Los Angeles. Perhaps to reduce the risk of trips to New York by frivolous recruits, it was common in the 1970s for savvy Wall Street investment banks to take a small coterie of prospective hires to a fancy dinner at a then popular Boston eatery like Maison Robert. It was not quite an invitation to go steady, but it was an overture to start dating.

  Back then, jobs on Main Street (manufacturing, retailing, energy), not Wall Street (trading and banking), were the traditional path to prosperity for MBAs. The markets wheezed and sputtered in the late 1960s, so much so that by mid-1973, when Gupta’s Harvard class was set to graduate, the risk to stock investors of the three I’s—interest rates, inflation, and the impeachment of President Richard Nixon—had risen exponentially. Harvard MBAs angled to land “residencies,” much like medical residencies, at big, prestigious companies such as US Steel, 3M, Procter & Gamble, and General Mills. The traditional career path for the men—mostly white men and very few women or men of color—who came of MBA age in the 1970s was to start at the bottom of the corporate ladder and work to the top. Getting an MBA from Harvard allowed one to skip a slew of steps and offered the possibility of a country-club lifestyle after graduation.

  At the same time, American business culture was in the throes of a quiet but seismic shift—the emergence of a kind of Harvard-after-Harvard career landing zone made up of business experts and advisers. Big, visible, brand-name companies were being usurped at the top of the “ask back” hierarchy by a new class of companies that were not in the business of selling goods. Rather, they sold advice. In the decades to come, the stock market and the companies that serviced it would mint a new class of wealthy individuals and become the most sought-after path to American success. The service industry to corporate America would emerge as the new driver of economic growth, drawing not just America’s but the world’s best and brightest with the allure of unimaginable wealth. Among the arrivistes on the American corporate scene were consulting companies, and there was no firm better known than McKinsey & Co.

  The oldest consulting firm in the world, McKinsey had its roots in a company founded in 1926 by James O. McKinsey, a certified public accountant and University of Chicago professor. McKinsey saw an opportunity to counsel managers when he worked in the Army Ordnance Department and dealt with suppliers during World War I. After the war, he started his eponymous firm, specializing in accounting and in what was then known as “management engineering.”

  The name McKinsey would probably have been relegated to a footnote in history had it not been for the arrival in 1933 of a young Harvard Business School graduate named Marvin Bower. Over a career that spanned six decades, Bower single-handedly built a profession out of McKinsey and spawned what we now call management consulting or corporate problem solving. Initially, consultants helped CEOs chart out their companies’ strategic course, but over time they have come to work with firms on more picayune problems, such as devising ways to cut costs and boost sales. One of Bower’s first projects was a prototype of the kind of work consultants would routinely come to practice. In 1935, big Chicago department store Marshall Field & Co. hired McKinsey to perform a study of its entire business.

  Bower and McKinsey recommended that Marshall Field focus on its department store business and jettison other assets. After the study, Marshall Field’s board was so impressed that it offered James McKinsey the job of chief executive. Not only did McKinsey’s acceptance secure Bower’s control of the consulting concern; it was the beginning of a one-way revolving door that would become common among McKinsey consultants in later years.

  During the course of sixty years at the firm, Bower saw consulting as an above-the-fray profession, not a profit-above-all-else enterprise. A career dedicated to helping companies solve problems for a fee would and did provide a comfortable living, but Bower firmly believed that to exploit a client was contemptible. As a graduate of Brown University, Harvard Law School, and Harvard Business School, Bower sought to find other men like himself to staff his company.

  At the time Gupta was looking for a job, McKinsey was a bastion of Waspy, Ivy League–educated young men with lines into America’s dominant families and businesses. A firm handshake and entrée into New York’s Social Register set were more important than academic achievement. “BCG and Bain hired the ‘best and the brightest’ while McKinsey focused more on hale fellows well met,” says Jeffrey Skilling, who joined McKinsey’s Dallas office directly out of HBS in 1979.

  As Skilling notes, McKinsey was not the only place an MBA from Harvard could find consulting work. Spurred by Bower’s success, Bruce D. Henderson, a onetime Bible salesman and Harvard Business School graduate, founded the Boston Consulting Group in 1963. It started with just two consultants and in its first month racked up just $500 in billings. Unlike McKinsey, which built a local-office-based model of client relationships, which amounted to spending considerable time at the country club, the Boston Consulting Group competed by offering “thought leadership”—consultant-speak for developing new and innovative ideas to win clients. It was known for its “fly in, fly out” expert-based consulting, which ate into McKinsey’s market share.

  By 1973, Boston Consulting had grown to 142 consultants, and like McKinsey, it had offices in London and Paris. Management consulting was so promising a profession that in that same year Bill Bain and a coterie of others quit BCG to found Bain & Co. The last of what came to be known as the big three, Bain relied on consultant star power and competed with the behemoths by cultivating big-name talent. It recruited the top 5 percent of the graduating Harvard Business School class, so-called Baker Scholars such as unsuccessful presidential candidate Mitt Romney. (Despite stellar grades in his first year, Gupta was not a Bak
er Scholar.)

  Besides being intellectually challenging, consulting appealed to young HBS graduates like Rajat Gupta because it forestalled the important decision of what to do in life. As James McKinsey had demonstrated forty years earlier, it was a back door to jobs in corporate America. It allowed young men to mingle with corporate chiefs and forge close ties that they could later parlay into employment. A number of consultants at McKinsey—Harvey Golub, Michael Jordan, and Louis V. Gerstner Jr.—would leave over the course of the 1970s and 1980s and ultimately land top jobs at prestigious companies such as American Express, Westinghouse Electric, and IBM. In the years that followed, countless other McKinsey consultants trod similar paths, among them Jeffrey Skilling, who ran Enron; and James Gorman, a native of Melbourne, Australia, who succeeded the charismatic John Mack as the chief executive of Morgan Stanley. In 2008, a USA Today study calculated that the odds of a McKinsey employee becoming CEO at a public company were the best in the world, at 1 in 690. In 1973, for the young and undecided like Gupta, it was a great way of keeping one’s options open.

  Though he was one of two students in his class who was awarded perfect grades after his first term, Gupta struck out during his second interview with McKinsey—a setback that carried greater weight for him than for many of his peers. After graduating, Gupta planned to marry his IIT sweetheart, Anita. She thought when Gupta left India, that was the last she would see of him. Well-meaning friends had told her that people change when they go to America. But Gupta didn’t forget her. He wrote long letters to her every day and waited for her missives back. In his wallet, he kept a five-rupee note that she had signed and a small photograph of her.

  Anita’s academic concentration was electrical engineering. She was a brilliant student who received the coveted director’s gold medal at IIT, and Gupta liked to say that Anita was the smarter of the two. As modest and self-effacing as Gupta appeared to be, those who knew the couple tended to agree that in terms of raw intelligence, Anita Mattoo outshone Rajat Gupta.

  To stay in the United States and to bring Anita over, Gupta needed a job. Straight out of the gate, Gupta hit a roadblock. Many corporations would not even contemplate interviewing job candidates on student visas. They told the HBS placement office that foreigners need not apply—no exceptions, not even standout students with stellar work experience.

  The previous summer, Gupta had worked at a food-processing company in upstate New York. He got the summer job because his former suite mate David Manly’s father was a senior executive at the company. During his summer stint, Gupta devised an innovative production planning system for jam and jelly making that is used even today at the company and is known as the “Rajat system.” “It was a very professional piece of work for a young man,” said Doug Manly forty years later.

  But as Gupta prepared to graduate in 1973, none of that seemed to matter.

  “If you didn’t have a US citizenship or a green card you never got an interview,” Gupta said years later. The one exception was the plum positions to be had at the big three consulting firms. In their gusto to expand overseas and outflank one another, they were keen to attract the right kind of foreign consultant.

  Gupta had two back-to-back interviews with McKinsey. After the second interview, Bill Clemens, then head of recruiting at McKinsey, told Gupta that he had terrific credentials. But then with a subtle, yet time-honored, between-the-lines message, Clemens told him, “You’re obviously very smart, but you need to go and work somewhere else for three or four years before we’ll consider you.”

  “Nobody else is interviewing me so how would I go and work anywhere else?” Gupta asked pointedly. Clemens was unmoved. Gupta’s rejection was curious, especially as both McKinsey and its archrival, Boston Consulting, vied every year to land the most Harvard B-schoolers. At one point, more than a third of McKinsey’s consultants held a Harvard MBA. The consulting giant historically rolled out the welcome mat to top students like Gupta. When word got around the class that Gupta had been rejected by McKinsey, some students suspected an undercurrent of discrimination at play. Out of necessity, universities and hospitals had started integrating Indian intellectual manpower in the late sixties and early seventies. But opportunities for nonwhite immigrants in the clubby, largely Waspy world of corporate America and Wall Street were rare. When he was recruited to McKinsey in 1979, Anjan Chatterjee recalls meeting with a partner who said to Chatterjee: “You guys do great work and you are terrific consultants. The question is will our senior clients ever relate to you.”

  * * *

  HBS professor Walter Salmon listened intently to Gupta’s story of getting rejected by McKinsey because of his lack of experience.

  “That surprises me given your work in my class,” Salmon said. He was seasoned enough to know that Gupta was one of those very bright students who were few and far between. He also was acquainted with a number of McKinsey partners and had a good sense of the caliber of people the firm hired. In his view, Gupta fit the McKinsey mold perfectly. He was quick at figuring out the core issues of an HBS case and was effective at delivering his analysis.

  “He was exceptionally able and a very nice person,” says Salmon today. Salmon told Gupta that D. Ronald Daniel, the head of McKinsey’s New York office, was an old classmate of his. The two had been in the same section at HBS. Salmon would call him and suggest McKinsey reconsider its decision. It wasn’t a step Salmon ordinarily took. In fact, Salmon says some forty years later that he doesn’t recall ever making an overture like that before or since. “It rarely happened, if at all,” he says.

  When Salmon got a hold of Daniel, he didn’t have to say very much. Salmon was a rising star at Harvard Business School; he was chairman of the marketing department, and in a year he would be elevated to the powerful position of associate dean of faculty affairs. Daniel knew that Salmon wouldn’t be calling on just anyone’s behalf. For Salmon to get in touch with him, he must have believed that the student McKinsey had just rejected for a job was extraordinary. “This is a bright student,” Salmon told Daniel. “I think you should take a second look.” Salmon spoke with characteristic understatement, but his message was clear. Shortly after the call, Gupta received a coveted “ask back.” He was invited to McKinsey’s New York office for a full day of interviews and then he was offered a job.

  Chapter Nine

  “The Tamil Tiger”of Wall Street

  In the fall of 1983, a heavyset young man flashing a big white smile strode into Chase Manhattan Plaza to report for his first day of work. With his MBA ticket recently punched from the University of Pennsylvania’s Wharton School of business, Raj Rajaratnam arrived on Wall Street with impeccable timing. He was selected from more than two thousand applicants to be one of fifty analysts in Chase Manhattan Bank’s coveted credit program. After finishing it, many analysts left to take up enviable jobs at investment banks like Goldman Sachs and Morgan Stanley. The only Sri Lankan in his class, Rajaratnam would play the expected role of reserved math whiz. He started at a salary of $34,000.

  After limping through the seventies, Wall Street got its swagger back thanks to President Ronald Reagan’s personal and corporate tax cuts and his push to deregulate the American economy. In 1981 the markets began a long rally that except for one interruption, a terrifying one-day crash in October 1987, would rage almost unabated for nearly two decades. The boom and its unprecedented demand for people—brokers to sell stocks, bankers to help raise capital, traders to make money on all the dizzying market moves—transformed Wall Street, changing its complexion from a bastion of all-white men to a colorful mosaic of women, South Asians, and, to a lesser extent, African-Americans. The new arrivals added color and helped break down the barriers that had persisted for most of Wall Street’s history, segregating Jewish banks like Goldman Sachs and Lehman Brothers from Wasp banks like Morgan Stanley and First Boston. The South Asians also formed tribes of their own.

  For decades, long-standing client relationships had driven business to Wal
l Street securities firms. Investment bankers were men who had the talent and the social connections required to nurture and keep Wall Street’s best clients. But the opening of the capital markets in the early eighties and the advent of technology that powered the way to the growth of complex mathematically driven trading strategies changed Wall Street. What securities firms needed most were financial wizards who actually had the brains to dream up newfangled products—derivatives and junk bonds—and sell them to an ever-increasing number of clients, savings and loans, pension funds, and high-net-worth individuals. It needed analysts who could understand the sophisticated products and technologies of the corporations they analyzed—and not simply swallow the spoon-fed and curdled explanations that companies served them. With their highly quantitative backgrounds, the new emigrants from South Asia were perfect for the job.

  Men like Indian native Vikram Pandit, the former CEO of Citigroup, and Sri Lankan Raj Rajaratnam heeded the call. Others followed. Anshu Jain, today the co-chief of Deutsche Bank AG, joined Kidder, Peabody & Co. in 1985 as a research analyst after earning an MBA at the University of Massachusetts at Amherst. Arshad Zakaria, brother of journalist Fareed, started at Merrill Lynch & Co. in 1987, straight out of Harvard Business School, and rose to become the firm’s powerful head of global markets and investment banking. Though the new recruits from South Asia were appreciated for their mastery of math and finance, there was little sign at the time that they would ever be respected for anything more.