by John Brooks
Of such cloth was cut the man who, by early 1970—and by methods that we shall soon see—had beaten every one of the city slickers on their home ground, and become the single biggest winner in what the writer “Adam Smith” called “the money game,” emerging with paper assets to his name of almost $1.5 billion. His personal relations with Wall Street and its slickers began early in 1968, when the market was going through the roof and the hungry investment bankers had suddenly realized that Perot’s little clutch of refugees from the fur-lined trap of I.B.M. was now ripe for a public sale that might be a bonanza all around. Seventeen investment bankers visited Perot in rapid succession and urged him to put his stock on the market. At first he said, as he had always said previously, that he never would.
He didn’t want outside interference in his company’s affairs, he just wanted to be left alone to do a job. But the seventeenth banker got to Perot. He was Kenneth Langone of R.W. Pressprich and Company, a respectable enough Wall Street firm. Langone was a youngish, sympathetic, fast-talking stock peddler of urban Italian extraction. In character, temperament, and background he and Perot presented a study in contrasts—in almost everything except that great binding tie, a shared respect for money. Other investment bankers had offered to sell Perot’s stock at thirty times current annual earnings, then at fifty times, then at seventy times. Langone, however, offered one hundred times, possibly somewhat more. Perot hesitated for several weeks, during which he conducted a series of windy seminars within his company on the abstract moral question of whether or not a company like theirs ought to go public. Predictably, the seminars turned out to be largely a grotesque exercise in middle-management men trying to guess which way the cat would jump. But as to Perot, was all this soul-searching merely self-deception? Did his principles, like so many principles, have their price? Was his mind made up? Whatever the case, Perot said yes to Langone.
Then began Perot’s education in the ways of the slickers, and he proved to be an astute pupil indeed. First of all, Langone wanted to know, who were the company’s directors? His wife, his mother, and his sister, Perot reported. Langone said that wouldn’t do. So Perot wrote himself a more acceptable board, consisting of Hart, Marquez, and other principal employees. Next, the company would have to be recapitalized: say, 11.5 million shares. A preposterous capitalization for a company that earned only $1.5 million a year? Necessary, Langone explained, if you wanted that high earnings multiple and also a reasonable stock price. E.D.S., then, would be the seller of 325,000 shares of stock; Perot himself would be the seller of another 325,000. The rest would be kept by Perot and the E.D.S. employees— around 1.5 million shares for the employees (he had issued it to them by way of bonuses), and not quite 9.5 million for Perot himself. Wasn’t 650,000 shares for public trading a dangerously small float, likely to make for a highly volatile market in which small investors might possibly get hurt? Langone told Perot it was plenty. After all, he pointed out, R. W. Pressprich itself would make the market, and could be counted on to maintain a fair and orderly one. The offering price finally agreed upon was $16.50 a share—118 times current E.D.S. earnings, and an infinite number times current dividends, since there were none.
Through all the negotiations Perot played barefoot boy to the hilt, pretending to be baffled by Wall Street’s baroque rituals while actually learning to turn them to his own advantage. Was this a way to do business, he demanded of Langone, letting natural market forces be flouted by a local social pecking order that often required higher-ranking investment bankers to abstain from participation in offerings headed by lesser ones? Langone, scarcely a lover of Morgans or Lehmans or their kind, just smiled and shrugged. Perot made outlandish suggestions such as that the original buyers of his stock be offered a ninety-day money-back guarantee—surely knowing well enough that such an arrangement would be both legally and practically impossible—and tried to write his own prospectus in Frank Merriwell language (“All alone, against overwhelming odds, with little money. …”), only to see it rewritten in the usual legalese. He indulged in classic frontiersmanship with the underwriters’ legal counsel, the proper firm of Winthrop, Stimson, Putnam, and Roberts: in New York one of the lawyers invited Perot to lunch at a distinguished Wall Street club, and then when the lawyer came to Dallas, Perot insisted on returning the favor at a local greasy spoon. But when, on September 12, 1968, the E.D.S. stock was publicly offered and was quickly subscribed for in one of the most sensationally successful new-issue promotions of the whole headlong era, the bumpkin came out overnight with $5 million in personal cash and more than $200 million in stock equity at market value. All the tolerant Wall Street smiles faded abruptly.
Had the bumpkin, then, really been a superslicker all along, even though he pronounced head as “haid” and yes as “yais”? Perhaps; but surely not consciously. In fact, Perot could legitimately claim to be by his own lights a pure-hearted moral idealist. His code embodied the early American virtues—thrift, early rising, work, competition, individualism—and it worked for him. He had the useful, if to many people annoying, ability of finding a moral homily to support whatever he did. Wall Street had made him rich, so Wall Street might not be so bad—maybe, at bottom, a simpleminded, paper-tiger sort of villain. In the months following the stock offering, Perot’s fascination with the place grew. He talked to Langone by telephone from Dallas every working day, and visited in person whenever he could. On his visits, he would frequent the Pressprich trading room where the E.D.S. market was made. The stock took off. Institutions began buying it. Strange orders came in from places like Geneva and Lebanon, and this made the xenophobic Perot uneasy. Sometimes he would protest: “Don’t sell my stock to him! I don’t want him for a stockholder!” But the traders would laugh and sell the stock anyhow at ever-rising prices. At last, early in 1970, E.D.S. sold at 160. Perot, with his 9-million-plus shares, was now worth on paper almost $1.5 billion—which, it happens, is about 40 percent of the whole United States federal budget for 1930, the year he was born.
The new billionaire saw himself, characteristically, not as a grandee but as an example to the nation’s youth: “Somewhere in the United States there’s a young man or woman who will break every financial record I’ve set! That’s the amount of opportunity that exists in this country.” Again characteristically—and in marked defiance of recent practice among other newly rich Texans—he set about being a moral billionaire. He decided to will only modest sums to his five children, “so they’ll have the same opportunities I’ve had.” Substantially all of his fortune would go, sooner or later, to “the improvement of American life.” For a starter, he gave a million dollars to the Boy Scouts in the Dallas area. He gave over two million to the Dallas public school system to finance a pilot elementary school in a black ghetto area. He refused to avail himself of his legal right to take personal income-tax deductions on his charitable contributions on the ground that morally he owed the tax money to a country that had done so well by him. In 1969, he became obsessed with the plight of United States prisoners of war in North Vietnam, and that December he attempted personally to intervene with the North Vietnamese authorities in their behalf. (His efforts, which included two excursions to Indochina in chartered airliners, failed, but they seem to have been not without rewards in personal satisfaction—in serving to convince people, perhaps including himself, that one man alone is not powerless in the modern world, and that Americans, particularly capitalist Americans, are a force for good no matter what anyone says.) By instinct he involved himself in moral confrontations in which, in his terms, he was always the winner. Once in 1969 a group of young West Coast radicals came to ask him—with tongues fairly protruding from their cheeks, it may be guessed—to finance “the revolution.” Did Perot avoid them or send them away? Indeed not; rather he took the opportunity to give them an object lesson. In his most businesslike manner he asked, “How long will it take and what will it cost?” The radicals, with no ready answer, were speechless.
He made what
he did a virtue, and a virtue of what he did. But was Perot a hypocrite? Hypocrisy in common morals, like fraud in common law, is an offense that requires an element of “scienter”—knowledge of the offender that he is committing the offense. Viewed in that light, Perot, without scienter, was innocent.
6
The way Perot received the news of his monumental setback on April 22 was casual to the point of comedy. All that morning he was closeted in his Dallas office with executives of a potential client company to which E.D.S. was making its sales pitch. On emerging around one o’clock, he picked up a phone and called down the hall to Tom Marquez.
“What’s new?” Perot asked.
“Well,” Marquez said, “the stock is down fifty or sixty points.”
Later Perot was to say that he had felt nothing at all. The event, he would add, had been “purely abstract.” Despite a certain liking for history, insofar as history fitted in with his preconceived ideas, Perot did not immediately put in it a historical context. As we have seen, he had philosophical inclinations of a sort, too, but these, like those of most businessmen, tended to be of the ad hoc rather than the gratia artis sort. What did occur to him was that the whole thing didn’t really matter much, since the $1.5 billion he had made in eight years wasn’t quite real money anyway because it was not quickly or readily convertible into cash. It also probably occurred to him that he wasn’t exactly left destitute by the sudden crash, since he still had (on paper) that residual billion or so dollars. He had, he was to say later, the sense that nothing much had really happened.
Exactly what happened to the market in E.D.S. on the morning of April 22 is not known and may never be known in detail. What is certain, however, is the fact that its collapse was not based on any bad news about the company’s operations. To the contrary, the news was all spectacularly good; per-share earnings for 1969 were more than double those for 1968, and even for the first quarter of 1970—a time of fast-deepening general business recession—E.D.S. showed a 70 percent profits increase over the same period for 1969. Quite evidently, there had to be some other cause.
E.D.S. was traded in the over-the-counter market. Less than a year later the operation of that long-notorious thicket of rumor, confusion, and secrecy would be revolutionized by the introduction of an electronic marvel called NASDAQ—a computer system that makes it possible for an over-the-counter trader, by merely punching some buttons and looking at a screen on his desk, to see precisely which firm is making the best current bid and the best current offer in any of several thousand stocks not listed on the stock exchanges. In effect, NASDAQ would bring the over-the-counter market up from under the counter, a nether region it still inhabited to a marked extent in April 1970. At that time, there was no such screen on the trader’s desk; to get the best price on a thinly traded stock like E.D.S., he might have to telephone a dozen other firms to get their quotes, engage in shouted conversations with other traders in his own firm to find out what kind of bids and offers they were getting, and finally agree to a price that would never be reported to the public at all. In such a market, the opportunities for manipulation were endless. Conducted in windowless back rooms by excitable hagglers, many with a full measure of larceny in their blood, and policed only negligently by the overworked and understaffed S.E.C., the over-the-counter market in the nineteen sixties was the perfect arena for the feeding of lions and the ingestion of Christians.
What was “wrong” with E.D.S. was that the price of its stock had not dropped at all while the rest of the market had been going through a panic. By way of comparison, University Computing, a leading company in E.D.S.’s very industry, was selling on April 22 at a price 80 percent below its peak of the previous year; meanwhile, E.D.S. was selling almost at its peak. Good earnings record or not, E.D.S. stock at around 150 was, from a technical standpoint, in an almost freakishly exposed position. At the same time, much of the available supply of stock was in the hands of fast-performance mutual funds that, at any sign of decline, would quickly unload. This is a condition known to market players as “weakly held.” Such facts do not go unnoticed, nor did they on April 22. Presumably some big punter or a group of them—perhaps in Geneva, perhaps in Lebanon, perhaps right in New York—saw a golden opportunity to recoup the drastic losses they had suffered over the previous days in other stocks. So they mounted a bear raid on E.D.S., probing its strength with testing short sales. As it gave way under the pressure and dropped a few points (it may be presumed), they increased the sales. The suddenly lower price then came to the attention of the itchy-fingered portfolio managers of the fast-performance funds that held E.D.S. With their celebrated speed and dexterity, the portfolio managers began unloading. Down and down the bid went—to 145, 135, 120—and the panic was on. The men in the back rooms decide fast and move instantly, and in their market a selling panic can blacken the sky as quickly as an August afternoon’s thunderstorm.
Toward noon, with E.D.S. down in the 80-90 range, it firmed; presumably the bears who had started the slide felt that their killing was made and were beginning, leisurely, to consume their prey.
That, at least, is the scenario that may be reasonably deduced from the circumstances and events that are known. Langone of Pressprich, who was in the thick of the entire collapse, professes ignorance of what happened. He does say, cautiously, “The roof fell in. It was a terrible market, and E.D.S. at such a high price was vulnerable. No one can prove it, but it certainly appears that there was an organized raid of some kind on the stock.” Certainly, no one can logically accuse Pressprich of complicity. With a substantial inventory of E.D.S. stock on hand before the selling storm struck, and thus a vested interest in keeping the price up, the brokerage firm had a bad morning that would not soon be forgotten. Some say it barely survived. But it did survive, and so, needless to say, did Ross Perot.
7
Thus the greatest one-day fall of a titan ever. But what of the investing public? The tens of thousands who, either directly or through the investments of their mutual funds, had put some of their savings into E.D.S., were far more than bemused spectators at a landmark event in financial history. In a word, they were losers, perhaps of a college fund or a vacation fund or part of a retirement nest egg. Few of them were so fortunate as to have bought their E.D.S. stock at or near its original offering price of $16.50. As is usual with hot new issues, particularly in such manic markets as that of 1968, most of the original issue had soon found its way into the hands of professional traders. Many small investors had come in later, buying from the professionals after the stock had been talked about in brokerage offices and mentioned in the market letters and pushed by the eager commission producers—and, of course, after its price had shot up almost out of sight. In the familiar pattern, the investing public, with its thousands rather than billions, had suddenly become interested in hot stocks at the very height of the boom, and had bought E.D.S. near its top. For an investor who had bought it at 150, the $15,000 he had risked had in a single day become $10,000, or the $1,500 he had risked became $1,000. To him, whatever had gone on in Lebanon or Geneva or in Wall Street or Perot’s Down-to-Earth Day was emphatically not abstract. In human terms, the real and necessary hundreds or thousands that he lost were more important than the abstract millions that Perot lost.
Had the small investor, then, been gulled? The evidence is that, as such things go, he had not. E.D.S., in issuing such a small number of shares to the public, had indeed, it appears in retrospect, subjected the public to a considerable degree of risk. But the expert advice Perot had received from the seventeen investment bankers he had consulted had been that the number of shares necessary to make an orderly national market was between 300,000 and 500,000—and he had actually issued 650,000. So the error had apparently been Wall Street’s rather than Perot’s. Moreover, E.D.S., unlike many new companies of the era, was not known for any special tendency to mislead investors with high-pressure salesmanship of its shares or with accounting tricks to pretty up its balanc
e sheets. It was a sound, profitable operation, and the market’s madness in its shares was the market’s own. And as a matter of fact, even after the big April 22 collapse investors in E.D.S. were better off than those who had plunged in many better-known issues, including most of the favorites of the boom years. As of April 22, their investment in Ling-Temco-Vought at 170 was worth 15; in Four Seasons Nursing Centers at 91 was worth 33 (and would shortly be all but worthless); in Data Processing at 92 was worth 11; in Parvin-Dohrmann at 142 was worth 19; and in Resorts International at 62 was worth 7. And unlike Perot, those whose bad judgment, or that of their advisers, had led them to make such investments, did not still have a billion dollars left.
The very fact that E.D.S. was a relatively sound, respectable young company emphasizes the larger importance of its sudden stock collapse, so abstract to a lofty general like Perot and so concrete to the foot soldiers of finance. If E.D.S. stockholders had been gulled, so, that April, had tens of millions of other small investors.
