by John Brooks
The Go-Go Years
The Drama and Crashing Finale of Wall Street’s Bullish 60s
John Brooks
Contents
FOREWORD
Michael Lewis
I CLIMAX
The Day Henry Ross Perot Lost $450 Million
II FAIR EXCHANGE
The Year the Amex Delisted the Old Guard Romans
III THE LAST GATSBY
Recessional for Edward M. Gilbert
IV PALMY DAYS AND LOW RUMBLINGS
Early Warnings Along Wall Street
V NORTHERN EXPOSURE
Early Warnings Along Bay Street
VI THE BIRTH OF GO-GO
The Rise of a Proper Chinese Bostonian
VII THE CONGLOMERATEURS
Corporate Chutzpah and Creative Accounting
VIII THE ENORMOUS BACK ROOM
Drugs, Fails, and Chaos Among the Clerks
IX GO-GO AT HIGH NOON
The View from Trinity Church
X CONFRONTATION
Steinberg/Leasco vs. Renchard/Chemical Bank
XI REVELRY BEFORE WATERLOO
The Time of the Great Garbage Market
XII THE 1970 CRASH
To the Edge of the Abyss
XIII SAVING GRACES
The Invisible Samaritans of Wall Street
XIV THE GO-GO YEARS
Notes on Sources
Index
About the Author
Foreword
“This may be, conceivably, one of the last books to be written about ‘Wall Street’ in its own time.” Thus John Brooks concludes his famous portrait of Wall Street in the 1960s. Well, we all know what happened to that prediction. Books about Wall Street in its own time went forth and multiplied. You could fill a small library with the books about Wall Street that have been published since The Go-Go Years first appeared in 1973. In the past few years alone I have seen manuscripts, or outlines, or proposals, for books about Goldman Sachs, Morgan Stanley, Merrill Lynch, Bear Stearns, George Soros, Michael Steinhardt, and Michael Milkin. These days, no book about money is considered too trivial, or ill conceived, to publish.
Brooks himself is partly to blame for this state of affairs. He was one of the first journalists to prove that an outsider could walk into Wall Street and emerge with a long and detailed story that a generally educated but specifically ignorant outsider could read with pleasure. The Go-Go Years is such a story.
The tendency with books about Wall Street is to put them down with a reassuring sigh and say, the more things change, the more they stay the same. (Or as Brooks would no doubt put it to his old New Yorker audience, plus ça change, plus ça la même chose.) This book contains plenty in it to justify that response. As the stock market chart races to the roof, a cast of characters familiar to observers of the financial 1990s takes the stage. In 1960s Fidelity-mutual-fund-guru Gerald Tsai there are echoes of 1990s Fidelity-mutual-fund-guru Jeff Vinik. In the detached aloofness of the original hedge fund manager, A. W. Jones, there is at least a trace of the detached aloofness of his successor, George Soros. In the money grubbing of 1960s Market Man there is an echo of the money grubbing of the 1990s Market Man. “In America,” writes Brooks, “with its deeply imprinted business ethic, no inherent stabilizer, moral or practical, is sufficiently strong in and of itself to support the turning away of new business when competitors are taking it in. As a people we would rather face chaos making potsfull of short term money than maintain order and sanity by profiting less.”
But what is mainly interesting today for readers of John Brooks is how different the market of the 1990s feels from the market of the 1960s. There is no real equivalent in Brooks’s account to the technology stocks of today, for instance. There are no foreign markets, no bonds, almost no computers. On the other hand, all those Great White Institutions that these days barely merit a mention in today’s books on Wall Street—the SEC, the NYSE, the Establishment—loom large in Brooks’s account.
Then there is the moral of the story, or stories. The Go-Go Years reduces fairly neatly to a series of morality tales about the most outlandish events of the 1960s: Ross Perot dropping $450 million in one day; Saul Steinberg having the nerve to consider—much less to attempt—a takeover of Chemical Bank; Eddie Gilbert seducing some rich people into investing in his ill-starred ventures before vanishing into Brazil with the other stock market losers. How tame they now all seem! At least to this reader they have lost their ability to shock. The author clearly considers his subjects engaged in an endless cycle of falls and redemptions. But the modern reader is constantly having to remind himself who has fallen, and why he needs to be redeemed. These are moralist tales in which the moral has at least in part been lost.
This may help to explain the most curious thing about The Go-Go Years: its tone of voice. Those lovely, long, multipartite sentences, the glorious arch of the authorial eyebrow, Brooks’s palpable feeling that you, gentle reader, are a broadly educated person who instinctively disapproves of these … speculators.… Brooks’s voice is, above all, the voice of the Old Establishment. The reader Brooks imagines himself to be speaking to is the same shockable character who has vanished from the financial world over the past thirty years. Who on Wall Street these days thinks twice about speculation? Who disapproves of large corporate takeovers? No such person exists, or if he does he’s living on some island so remote that no word of the market will ever reach him.
In the end, The Go-Go Years is not to be read in the usual manner of Wall Street classics. You do not read this book to see our present situations reenacted in the past, with only the names changed. You read it because it is a wonderful description of the way things were in a different time and place. If Brooks’s sense that the end of the Old Establishment would mean the end of Wall Street led him occasionally to get things wrong, at least he got them wrong in an interesting way. “Wall Street as a social context is apparently doomed not by reform but by mechanization,” he wrote toward the end of the book. “Already in the early nineteen seventies, a significant proportion of stock trading is being conducted not face to face on the floor under a skylight but between men sitting in front of closed circuit television screens in offices hundreds or thousands of miles apart.… Wall Street (is heading) toward transforming itself into an impersonal national slot machine—presumably fairer to the investor but of much less interest as a microcosm of America.”
The description was dead-on, but the forecast could not have been more wrong. In a mere twenty-five years, Wall Street has become the largest microcosm on earth.
MICHAEL LEWIS
CHAPTER I
Climax
1
On April 22, 1970, Henry Ross Perot of Dallas, Texas, one of the half-dozen richest men in the United States, was so new to wealth, at forty, that he was not listed in Poor’s Register and had just appeared for the first time in Who’s Who in America. Only a small fraction of his fellow countrymen had ever heard of him. Many who had met him by happening to sit next to him on airliners had not found him particularly impressive or interesting. Barely five and a half feet tall, with a naïve, straightforward gaze, an unamused smile, a crooked nose, a hillbilly East Texas accent, and a short crewcut tended like a tennis lawn, he was inclined to talk at length and with enthusiasm about things like patriotism and the Boy Scouts of America. More than anything else, he seemed to be a nice, promising young man who was probably selling something.
Yet that day Perot made a landmark in the financial history of the United States and perhaps of the Western world. It was hardly a landmark to be envied, but it was certainly one to be remembered. That day, he suffered a paper stock-market loss of about $450 million. He still had, on paper, almost a billion dollars left afterward, but that wasn
’t the point. The point was that his one-day loss amounted to more than the total assets of any charitable foundation in the country after the top five; more than the annual welfare budget of any city except New York; and more—not just in figures, but in actual purchasing power—than J. Pierpont Morgan was known to be worth at the time of his death in 1913. It was also quite possibly more in actual purchasing power than any man had ever lost in a single day since the Industrial Revolution brought large private accumulations of money into being.
2
It was Earth Day; the environment had recently become a national mania, especially among the young, and a group of conservationist leaders headed by Senator Gaylord Nelson of Wisconsin had picked April 22 as a day of national dedication to the cause of eliminating pollution in all its forms. (Were preposterously large paper stock-market profits such as Ross Perot had made to be considered a form of pollution? Quite possibly.) In Washington, in front of the Department of the Interior Building, twelve hundred young people milled around shouting “Off the oil!” and “Stop the muck!” to protest government leases to oil producers whose operations were thought to cause pollution. There were antipollution rallies of twenty-five thousand or more (watched by the F.B.I., it became known later) in New York, Chicago, and Philadelphia. In Bloomington, Minnesota, former Vice President Humphrey urged the United Nations to establish an environmental agency to combat pollution around the world, and at Georgetown University in Washington, Senator Birch Bayh of Indiana called for a national agency “to conquer pollution as we have conquered space.” Interior Secretary Walter Hickel—an authentic hero of environmentalism, since he was a convert soon to be martyred professionally for his views—was in his home state of Alaska, getting a hero’s welcome. In New York City, children rode bicycles to school; huge, lighthearted crowds gamboled on an automobile-free Fifth Avenue; at Seventeenth Street people were offered the opportunity to breath “pure air” from the nozzle of a blocklong polyethylene bubble; and so on, as all the artillery of promotion and public relations was turned, momentarily, in an unfamiliar and uncharacteristic direction. The same day, the novelist Kurt Vonnegut, after alluding to President Nixon’s statement that he did not propose to be the first American President to lose a war, commented, “He may be the first American President to lose a planet.”
All this resolution and high spirits fought upstream against one of the deepest moods of gloom to darken any American April since the Civil War. The first My Lai revelations were five months old; the dangerous and disturbing New Haven strike in support of the Black Panthers, which would spread quickly to campuses all over the Northeast, was to begin that same day, April 22; the stunningly unpopular invasion of Cambodia was eight days off, the Kent State University killings of students by National Guardsmen twelve days off. The gloom, compounded by signs of an approaching national economic recession, had caused a stock-market panic that, though far from over, was already comparable in a remarkable number of ways to that of October 1929. The Dow-Jones industrial average of common stocks had sunk relentlessly through almost all of 1969; then, after holding fairly firm through the first three months of the new year, it had gone into a sickening collapse that had carried it, by April 22, to a level some 235 points below where it had been at its peak sixteen months earlier. Much worse, the Dow did not begin to tell the whole story. Interest rates were at near-record highs, strangling new housing construction and making most industrial expansion impractical. The dollar was in bad trouble in the international markets, with foreigners holding American currency worth many billions more than the national gold hoard. One hundred or more Wall Street broker age firms were near failure. As for the Dow, made up as it was of the old blue chips that had long since been deposed as sensitive and accurate market leaders, it was a pale, watered-down reflection of the real stock-market situation. A better indication is to be found in the fact that in May 1970, a portfolio consisting of one share of every stock listed on the Big Board was worth just about half of what it would have been worth at the start of 1969. The high flyers that had led the market of 1967 and 1968—conglomerates, computer leasers, far-out electronics companies, franchisers—were precipitously down from their peaks. Nor were they down 25 percent, like the Dow, but 80, 90, or 95 percent. This was vintage 1929 stuff, and the prospect of another great depression, this one induced as much by despair as by economic factors as such, was a very real one.
The visible parallels to 1929, in the business and financial spheres, were enough to make a man agree not merely with Santayana, who said that those who forget history are condemned to repeat it, but with Proust, whose whole great book, read one way, seems to say that man’s apparent capacity to learn from experience is an illusion.
Before the crash in 1929 the financial sages had insisted repeatedly that there couldn’t be another panic like that of 1907 because of the protective role of the Federal Reserve System; before the crash of 1969–70 a later generation observed repeatedly that there couldn’t be another panic like that of 1929 because of the protective role of the Federal Reserve System and the Securities and Exchange Commission. In each case a severe market break had taken place about eight years earlier (in 1921 and 1962, respectively), followed by a period of progressively more unfettered speculation. In each case huge, shaky financial pyramids, built on a minimum of cash base, had been erected by financiers eager to take maximum advantage of the public’s insatiable appetite for common stocks. Before 1929 they had been called investment trusts and holding companies; now they were called conglomerates. In each case there had been a single market operator to whom the public assigned the star role of official seer. In the 1920s the man to whom the public ascribed almost supernatural power to divine the future prices of stocks had been Jesse L. Livermore. In the middle 1960s, it was Gerald Tsai.
In each case, certain insiders contrived to use privileged information and superior market technique to manipulate stock prices and thus deceive the public; in the 1920s the manipulators had been called pool operators, in the 1960s they were called portfolio managers. (It is curious to note that, while the operations of both the pools of the 1920s and the high-performance funds of the 1960s were obviously unfair if not illegal, there was no public disapproval of either so long as people were making money on them.) In each case, the practice of slack ethics started in the untended underbrush on the fringes of Wall Street and moved, sooner or later, to the very centers of power and respectability. In 1926 (although it wasn’t known publicly until over a decade later), the future president of the New York Stock Exchange committed the first of a series of embezzlements of funds entrusted to his care; in 1929 the president of the Chase National Bank made a personal profit of $4 million by selling short the shares of his own bank. No wrongdoing so melodramatic occurred among the Wall Street leaders of the 1960s—or, at least, none has so far been uncovered. But in 1926 a partner of J.P. Morgan and Company shocked the financial world, which believed the Morgans sat on the right hand of God, by openly touting a stock, General Motors, in which his firm was substantially interested; and forty years later, in 1966, a not dissimilar shudder went through the Street when it became known that two years earlier a key vice president of J.P. Morgan and Company’s successor firm, Morgan Guaranty Trust Company, had bought or caused to be bought ten thousand shares of Texas Gulf Sulphur in less than half an hour, apparently on the basis of privileged information of a great ore strike in Ontario.
The parallels go down to certain curious details. In each case, the market collapse occurred under a Republican President who had been elected on the crest of the preceding boom, and who had a strong pro-business orientation. In each case, the crisis was marked by carefully planned and publicized Presidential meetings at the White House with Wall Street leaders. Finally, in each case the crash gave rise to an orgy of recrimination and finger-pointing.
Of course, there were tremendous differences, too—not just the fact that the more recent crash did not lead to a catastrophic national depression
(though it did lead to a severe one), but differences in style and nuance and social implication that will be the main subject of this chronicle. One might, in comparing 1929 with 1969–70, even find a certain appositeness in Karl Marx’s famous observation that history repeats itself the first time as tragedy, the second time as farce.
3
Wall Street, in the geographical sense, was to become an actual battleground that spring, less than three weeks after Earth Day and Ross Perot’s Down-to-Earth Day. By Wednesday, May 6, 1970, a week after the Cambodia announcement and two days after the Kent State incident, eighty colleges across the country were closed entirely as a result of student and faculty strikes, and students were boycotting classes at over three hundred more. Most New York City schools and colleges were scheduled to be closed that Friday, May 8, in a gesture of protest, and among the student antiwar demonstrations being planned was one to be held in Wall Street. On Wednesday the sixth, a small group of white-coated students and faculty members from several medical and nursing schools in the city came to Wall Street to demonstrate for peace on their own. There they were greeted warmly by the vigorous, youth-oriented, peace-crusading vicar of Trinity Church, Donald R. Woodward. In the course of the ensuing conversations, the medical people suggested that it might be a good idea, considering the vast daytime population of the Wall Street area, to establish a noon-hour first-aid center at Trinity Church, which, standing as it has since colonial times right at the head of Wall Street, is at the very heart of the financial district in the physical—though scarcely, it often seems, in the spiritual—sense. If Trinity would provide space, the medical people said, they would undertake to set up and man the first-aid center on a volunteer basis. The vicar gratefully and enthusiastically accepted the offer. The first day that the center was in operation was Friday, May 8—a circumstance that in retrospect seems little less than providential.
