by John Brooks
The whole thing almost fell through in what for the Crisis Committee was a hair-raising sequence of events on September 2 and 3. On the afternoon of the second, the Chicago Board of Trade, the nation’s largest commodity exchange, suddenly announced that it planned to suspend Hayden, Stone for insolvency. Such a suspension would force the New York Stock Exchange to take similar action the next day, and that would be the ball game. Haack, Rohatyn, and Lasker pleaded with the Chicago authorities by telephone late into the night, and again early in the morning; at the last miniute, the suspension order was revoked in consideration of Hayden, Stone’s putting up a half a million dollars in escrow. And that crisis was surmounted. But there remained a single crucial detail to be carried out—that of getting approval of the merger from every last one of Hayden, Stone’s 108 subordinated lenders. It was, indeed, a delicate situation. Since they all apparently stood to lose most of their money anyway, their egos could have free play, unfettered by financial considerations. Meanwhile, they found themselves in the satisfying position of being able to hold up the Wall Street Establishment—for revenge, for publicity, or for principle—by simply refusing to sign and thus forcing Hayden, Stone out of business.
All the persuasive powers of the Stock Exchange authorities were brought to bear. Haack flew to London to get one lender’s signature, and got it. Others at first refused to sign, then allowed themselves to be persuaded. But time was running out; the Exchange could not go on ignoring its capital rule forever, and at last, under S.E.C. pressure, a deadline had to be set: the deal would be consummated by 10:00 A.M. on Friday, September 11 or Hayden, Stone would go into suspension, its 90,000 customers would be left out in the cold, and public confidence in Wall Street would end, possibly forever. By the morning of September 10, all of the subordinated lenders had signed except Golsen.
He stood firmly on principle. Why, he wanted to know, should he sign and thus help preserve the hopelessly and shamefully inefficient and slipshod business methods of the city slickers in Wall Street? “I’m interested in justice being done,” he said. “I want an example made. The only way to make it is to go to a liquidation and let the Exchange lose twenty-five million or so. I want this crime to be brought to the attention of the public.”
So for a day Golsen, in Oklahoma, held Hayden, Stone’s and perhaps Wall Street’s fate in his hand, while Lasker, from his office at the Exchange and his suite uptown at the Carlyle, pleaded repeatedly by phone. Lasker finally, at almost literally the last minute, won. It has been said that his clincher, delivered in the middle of the night of September 10, was a suggestion—or a threat—to have Richard Nixon himself call Golsen. Lasker vehemently denies that he went any further than to tell Golsen in general terms that he knew the President was very much concerned about the Wall Street situation and its effect on the national economy. Rather, Lasker attributes his success with Golsen to a homely coincidence. On the evening of September 10, Lasker says, an old friend and Wall Street colleague of his—Alan C. Greenberg, of Bear, Stearns and Company—called him unexpectedly and said, “Bunny, I hear you want a favor from Jack Golsen. I’ve known Golsen all my life. We were kids together in Oklahoma and, before we were both married, I used to date his wife and he used to date mine. You want me to call him?”
Reflecting that God must be on the side of the Stock Exchange, Lasker said yes. Greenberg called Golsen and said, “Bunny Lasker is an honest man and a good friend of mine, and I want you to do what he wants because I ask you.”
Not to save Wall Street or the economy, then, or to obey the President of the United States, but for the sake of friendship. Whatever the case, something prevailed on Golsen, the Oklahoma outsider with a loaded gun pointed directly at Wall Street’s head. After waiting melodramatically until ten minutes before deadline time on Friday the eleventh, Golsen signed; at ten o’clock sharp the CBWL-Hayden, Stone merger was announced, and the Hayden, Stone crisis was over. Golsen telegraphed his friend Greenberg that afternoon,
YOUR TELEPHONE CALL WAS INSTRUMENTAL IN MY AGREEING TO GO ALONG WITH BUNNY LASKER’S REQUEST THIS MORNING YOU MAY AS WELL GET ALL THE BROWNIE POINTS YOU CAN BECAUSE THAT’S ALL THAT WILL EVER COME OUT OF THIS DEAL. …
4
“Hayden, Stone blooded us,” Rohatyn says. “After that, the Crisis Committee had some idea what it was up against.” The case accomplished something else, perhaps more important: it welded Rohatyn and Lasker, both of whom would spend the rest of 1970 devoting themselves virtually full-time to Crisis Committee work, into a team. An odd team, to be sure. The two men, who had had no more than a nodding boardroom acquaintance before the formation of the committee, were a study in contrasts. Where Lasker was tall, tough, aggressive of manner, Rohatyn was small, wiry, and soft-spoken. Where Lasker was a bluff man of action if there ever was one, Rohatyn had the style of an intellectual. Where Lasker was, as we have seen, a fanatical Republican, Rohatyn was a middle-of-the-road or even slightly-left-of-center Democrat, an active supporter of the Presidential candidacy of Senator Muskie. Yet, on the Wall Street crisis, they closed ranks. Not without occasional difficulties. “But he’s a Democrat!” Lasker would sometimes howl, when Rohatyn mentioned the name of someone he thought might be helpful in one crisis or another. “Well, so am I!” Rohatyn would shout back. Lasker would simply pretend not to hear, and the dialogue about the matter at hand would resume. In fact, Rohatyn’s professional background in corporate reorganization made him far better qualified than Lasker to deal with the specifics of the situation. Nothing about Lasker’s lifelong work—as an arbitrageur, making a living out of trading stocks with other professionals—prepared him for dealing with the gigantic problems of brokerage firms collapsing en masse as if struck down by a plague. So all through the crisis, Lasker was traveling a good deal on Rohatyn’s professional judgment; and Rohatyn, for his part, on Lasker’s brash leadership and government contacts. Sometimes, between them, they made two hundred telephone calls a day. It is easy to imagine that, if they had been lesser or less dedicated men, the collaboration might have foundered on political ideology alone. But Lasker, for all his Republican solemnity, possessed a quality on which liberals often think they have a patent, that is, the willingness to throw oneself into causes larger than and not necessarily consistent with one’s own material benefit; as such, he was a living reproach to those who see all conservatives as one-dimensional monsters or single-minded clowns. And Rohatyn, happily for Wall Street, was not that kind of liberal.
Thus these two highly diverse, imperfect men made common cause. They were together, for example, in being highly dissatisfied with the Exchange’s staff work on member-firm finances. Right after the resolution of the Hayden, Stone crisis, Cunningham, as the Exchange’s executive vice president, assured a meeting of the board of governors that this was the end—no more such problems with member firms’ finances could be expected. Rohatyn, appalled, jumped up to say that Cunningham was crazy—it was nowhere near the end. And in fact, only about a week later the next problem, long smoldering, burst into flame.
The new crisis involved Goodbody and Company, for decades a pillar of the brokerage community—its co-founder in 1891 had been the legendary Charles H. Dow himself—far larger than Hayden, Stone with 225,000 customer accounts, and ranking as the nation’s fifth largest investment enterprise. Like almost all of the firms that were now falling apart, Goodbody had been in capital trouble for more than a year. A September 1969 audit on behalf of the Stock Exchange had revealed the frightening facts that the company had (presumably by accident) pledged $34 million of its customers’ fully owned securities, which were legally required to be carefully segregated, as collateral for loans, and had simply lost track of not less than $18 million worth of other securities. Nevertheless, Goodbody at that time had apparently been in technical capital compliance, it was said to be operating profitably, and 225,000 customers reposed their financial hopes in it; as of September 1969, both the Stock Exchange and the S.E.C. had apparently chosen to look the
other way and hope for the best.
The best was not to be. In July and August 1970, the Crisis Committee was getting what Rohatyn called “the numbers” on the affairs of Goodbody. These “numbers”—unaudited and un-checkable figures emanating from within Goodbody itself—were, in Rohatyn’s later judgment, “worthless.” With hindsight it can be seen that the firm, by August, was suffering from a monumental snarl in its extensive commodity accounts, and that, moreover, so many of its investors had prudently withdrawn their money that the company was in flagrant violation of the 1:20 net capital rule. However, this information could not be known for certain at the time, since Goodbody’s routine annual audit would not begin until the end of that month. In mid-September, when the audit was in progress, the accountants’ preliminary report showed conclusively that the firm was in violation and had been for many months. The Crisis Committee had its work cut out for it once again.
What to do? It was a dilemma, of a sort now becoming familiar, for both the Exchange and the S.E.C. Where did the public interest lie—in imposing justice on a firm that clearly deserved liquidation, or in letting such a firm get away with managerial murder in order to preserve justice for its innocent and unwary customers? After shilly-shallying for weeks, the S.E.C. finally took action. On October 26, it ruled that Good body must come up with substantial new capital by November 5 or be suspended. The Crisis Committee, which for a month had been devoting itself chiefly to a frantic search for new capital for Goodbody, now intensified its efforts. But exactly how much outside capital was needed? Despite the audit, some of the figures were still what Rohatyn euphemistically called “soft.”
The Crisis Committee called Goodbody’s partners on the carpet, one by one. The climax of this interrogation came in a dramatic confrontation between Rohatyn and James Hogle, a Salt Lake City investment banker who was Goodbody’s largest investor. Hogle was a Goodbody man in the classic mold: dignified and respected at sixty; adorned with honorary degrees and directorships, trusteeships of private schools and chairmanships of charity fund drives—clearly a man, as Americans judge these things, of character and probity. But he was also a man, like others of character and probity before him, exposed by a market crash as a full participant in greedy and slipshod practices; a man caught, presumably as a result of negligence, in a web of self-serving deceptions.
Rohatyn said to Hogle, “We understand that your own auditors have given a preliminary estimate of the amount of your capital shortage. We’d like to know that number.”
Hogle hesitated. Rohatyn was right about the auditors, and Hogle knew the figure. However, he evidently believed that if he were to give it over, the Stock Exchange would shut down Goodbody on the spot. In desperation, he stalled for time “Give me twenty-four hours,” he pleaded.
Rohatyn did not feel that he could comply. “We’re not trying to crucify you, but I have a fiduciary responsibility in this matter,” he said. “I can’t let you leave the room until you’ve given me the number.”
After a brief pause, Hogle replied, “Eighteen million dollars”—and tears rolled down his cheeks.
“I felt great sympathy for him,” Rohatyn said later; presumably his sympathy lessened after Hogle mounted a huge lawsuit against the Stock Exchange in 1972. In any case, the Exchange did not shut down Goodbody. With the key figure in hand, the committee moved forward; a tentative arrangement was soon made whereby the necessary capital would be put up by a group of investors headed by Utilities and Industries Corporation, a financial holding company. The deal was ready to be closed on an evening the week before the S.E.C.’s deadline. On that evening, Lasker called the offices of Utilities and Industries to get reaffirmation that all was ready for the signing. Instead, he got a rude shock. Not only had Utilities and Industries decided to walk away from the transaction, but its executives had walked away from their offices. They were, Lasker was informed, at the fights at Madison Square Garden.
Back to the drawing board again. The next day, Lasker called an emergency meeting of the top officials of the thirty leading Exchange member firms. There was a single-item agenda: how to bail out Goodbody? It was a tense and depressing session at which everyone agreed to what they might have been expected to agree to—that Goodbody had to be rescued, and that someone else had to do it. After much haggling, a generally satisfactory understanding was reached: the biggest brokerage firm was Merrill Lynch, so Merrill Lynch ought to take on Goodbody. Lasker was authorized to approach Merrill Lynch privately to ask how they felt about it, and everyone left the meeting satisfied. The only trouble was, Merrill Lynch might say no.
It was Lasker’s job to see that Merrill Lynch didn’t. “I walked across the street and saw Don Regan,” he says. With extreme reluctance, the Merrill Lynch chairman told Lasker that he agreed the rescue of Goodbody was necessary, and that he would discuss the matter with his board of directors. Subsequently, Regan reported that his directors were amenable—provided the terms were right. Merrill Lynch, after all, held most of the cards. The Stock Exchange was going to have to buy itself another accommodation. Two days of virtually round-the-clock negotiations followed, and finally—on Thursday, October 29, with the S.E.C. deadline seven days off—Regan called Lasker to say that Merrill Lynch was satisfied and ready to proceed. A look at the terms suggests why. Merrill Lynch would supply $15 million to Goodbody, in exchange for which it would subsequently acquire all Goodbody assets and would be indemnified by the Stock Exchange to the extent of $20 million on possible securities losses and another $10 million to cover possible litigation coming out of the arrangement. Of course, the Exchange didn’t have the $30 million. So that very afternoon the board of governors met and, with as much gravity as haste permitted, voted an amendment to the Exchange constitution authorizing the board to impose charges on the membership, as necessary, for special assessments—that is, to make the Special Trust Fund open-ended with the sky the limit. The money to save Goodbody, then, would probably end up coming from not just Merrill Lynch but the member firms as a group, after all.
One more detail had to be wrapped up. Lasker got on the phone to Washington to seek assurance from the Justice Department, headed by his friend John Mitchell, that it did not plan to throw a wrench in the machinery by taking the view that a merger of the largest brokerage firm with the fifth-largest would constitute a violation of the antitrust laws. The Justice Department obligingly indicated that, in consideration of the failing-firm doctrine that permits antitrust leniency in cases where one firm’s survival is at stake, it did not expect to take such a view.
5
When would it end? Was it, possibly, over now? Lasker and Rohatyn were pushed to the edge of their physical and mental endurance. Later, Rohatyn would say that he felt that autumn as if he and Lasker had lived in a foxhole together, and that, different as the two were in so many ways, he had come out of the experience thinking of Lasker as “a true friend, a man who reached beyond himself when he was under pressure.” Emphatically, it was not over; and the last and in some respects most harrowing phase of the crisis was to be complicated by an acrimonious controversy within the ranks of the Stock Exchange itself.
The last act concerned the Wall Street investment firm of Francis I. du Pont and Company, and it marked the point when the crisis involved not just the New York financial Establishment but the national one. F. I. du Pont was a part of the fief of America’s oldest and perhaps most powerful business barony. More than a century and a half had passed since Eleuthère Irénée du Pont had come with his family to America from France on an erratically wandering clipper ship and had begun setting up a gunpowder works on the Brandywine near Wilmington, Delaware. In the early years of the twentieth century, Eleuthére du Pont’s great grandson, Francis I. du Pont, had been a brilliant maverick within the family, generally regarded as the most talented chemist the company had ever had, and, more surprisingly, also well known at one time as a single-tax radical. But Francis I. was restless in Wilmington and environs. Fascinated by
the gyrations of the stock market during and after the 1929 crash, he embarked in middle life on a whole new career. In 1931, at the age of fifty-eight, he started his own Stock Exchange firm, first handling the investments of a few relatives, and then branching out to deal with the public as well. By the early nineteen sixties—by which time Francis I. du Pont was dead, but his firm was still solidly controlled by members of his family and was managed by his son, Edmond—F. I. du Pont and Company was, as to retail business, the second-largest brokerage house in the country.
By 1969 it had dropped to third, after Merrill Lynch and Bache; it operated ninety-five branch offices. Like other such ventures, it had fallen upon a time of trouble. Its 1968 audit had shown that its capital-to-debt ratio was somewhere between 1:15 and 1:24, depending on how you calculated (and, incidentally, showing very graphically the imprecise nature of such calculations). The Stock Exchange had chosen 1:19 as the approved figure, thereby conveniently keeping F.I. du Pont within the bounds of Rule 325. The 1969 audit, completed in September of that year, disclosed an undeniably impermissible ratio of 1:32, representing a capital shortage of some $6.8 million. But the Exchange was prevailed upon by the du Pont partners to take no precipitate action and, by the time the report reached the S.E.C. in December, the partners had found enough new capital to restore the firm to compliance. So F. I. du Pont staggered through the year 1969, but not without incurring an operating deficit, before tax recoveries, of $7.7 million.
Knowing that the firm was sick and probably getting sicker, the Stock Exchange early in 1970 urged it to strengthen itself through a merger. It did, at least, make a merger. On July 1, it joined forces with two other brokerage houses, Glore, Forgan and Staats and Hirsch and Company, to form a new organization to be called F. I. du Pont-Glore, Forgan and Company. Making the announcement, Edmond du Pont commented ebulliently, “This is what I would call a true case of synergism in which the resulting entity should add up to a lot more than the sum of the parts.” Or so he hoped. In truth, it was a case of the drowning trying to rescue the drowning, since at the time of the merger Glore, Forgan and Staats was itself out of control. Some members of the Crisis Committee, Rohatyn among them, were appalled that the merger was effected without an accompanying audit. By mid-summer, Haack went to Wilmington to plead with various members of the du Pont clan—among them Lammot du Pont Copeland, then chairman of the board of E. I. du Pont de Nemours, but soon to resign in the aftermath of his son’s spectacular personal bankruptcy—that they buttress their floundering brokerage firm with an infusion of $15 million in new capital. Haack’s request was refused; moreover, by some later accounts, the du Ponts seemed to be affronted that the request had even been made.
