by John Brooks
Through the Hayden, Stone and Goodbody crises, the du Pont situation simmered. It could not simmer forever, and it began to boil, by coincidence, at the start of November. Lasker would say later that the Crisis Committee did not have a single day to breathe between the resolution of the Goodbody mess and the full-scale appearance of this new and even larger one. Early in November, the du Ponts realized not only that a time had come when their brokerage firm definitely needed new capital to stay in business, but that they were no longer able to raise that capital within the family. They further realized that they had on their payroll a man with both the motive and the ready cash to be the new investor they so desperately needed. In July, in a resolute attempt to straighten out their tangled back office, they had commissioned Electronic Data Systems, of Dallas, to handle all of their electronic data processing requirements at a cost that was expected to average around $8 million a year. The head of E.D.S., as the reader will recall, was the quixotic Texan, Henry Ross Perot, whose well-publicized financial situation was such that a few million dollars would apparently be hardly more than a drop in the bucket.
By taking on the du Pont computer contract, Perot had put E.D.S. into the Wall Street crisis perhaps more deeply than he realized or intended. The contract made du Pont one of E.D.S.’s largest customers; a du Pont failure now would mean not only lost revenue to E.D.S. but a severe blow to its reputation, and possibly a severe drop in the price of its stock, the source of Perot’s immense wealth. So to some extent the du Ponts had already tangled Perot in their web; it might be cheaper for him to lend them a few millions than for him not to do so. Realizing the leverage that this handed them, the du Ponts went to Perot in early November and asked him for a $5 million loan to keep F. I. du Pont-Glore, Forgan and Company afloat.
Broadly speaking, it was Hayden, Stone all over again: another faltering old-line Wall Street firm going to the back country to find a rough and ready rescuer, with the Stock Exchange doing what it could to make the rescue possible in the interest of the innocent investors and, ultimately, of its own skin. But this time, there was a new element that changed the human equation. That factor was the du Ponts, and the fact that they were du Ponts: no parochial Wall Street bigwigs like the partners of Hayden, Stone and Goodbody, but—du Ponts! Why, after all, should they, wearers of the Wilmington purple, give quarter to a moralizing Texan or to the minions of the Stock Exchange? Used to getting their way, accustomed to living and having their business in a state that they ruled like a barony, these worthies seemed on occasion to the Stock Exchange representatives during the negotiations to treat the securities industry itself as a far-flung part of their personal preserve.
Dozens of du Ponts were investors in F.I. du Pont—some of them female relatives who had never seen Wall Street and never would see it—but two of the most august and imperturbable conducted most of the negotiations with Perot’s group and with the Stock Exchange. The chief representative in the early stages was Edmond du Pont. In his middle sixties, a Princeton and Oxford man, a yachtsman and leading Episcopal layman, he was of commanding bearing, often spoken of as the handsome du Pont, just as his cousin Henry Francis, founder of the Winterthur Museum, was spoken of as the artistic one. Later on, Edmond would fade out entirely, and actually disappear quite mysteriously for several months, to be supplanted in the negotiations by his son Anthony, thirty years younger but no more compromising when it came to making terms with Perot. Time after time over the months ahead, the du Ponts would meet with Rohatyn, Lasker, and DeNunzio of the Crisis Committee, along with Perot and his group of Texas associates. Sometimes the meetings would be at the Stock Exchange; sometimes in Lasker’s fifth-floor suite at the Carlyle, overlooking Madison Avenue and Parke-Bernet, where Anthony du Pont and his lawyer would invariably plant themselves in the same corner, opposite a chair that contained a pillow decorated with a picture of a rabbit and bearing the legend “Bunny”; and, on one occasion, at Rohatyn’s country place in Mount Kisco. Whatever the venue, Rohatyn and Lasker would say later, they generally found the du Pont family representatives inclined to be hard to deal with. Perot, horse trader that he was by training and instinct, strove to drive a hard bargain for his money; in exchange for a loan to F. I. du Pont he wanted the guarantee of as large an equity in the brokerage firm as he could obtain. The du Ponts, in turn, seemed to regard Perot as a hip-shooting high-binder with his eye on the main chance, attempting to get the best of them by threatening to let their firm fail and its customers lose their money—using Wall Street itself as a hostage. Seeing Perot as the prototypical nouveau riche—and accurately, since he was certainly one of the newest-richest persons in all history—the du Ponts père et fils bitterly resented the necessity of being rescued by him at all. But there it was; perhaps they could hold their noses and take his money. Perot, for his part, regarded the du Ponts as pompous ingrates. The Stock Exchange men were in the middle. When they would point out to the du Ponts that their firm was all but insolvent, they would talk about its “going concern value” and yield little or nothing to Perot. To hear Rohatyn tell it, all through the negotiations the du Pont representatives were inclined to be cocky and intransigent, apparently unwilling to acknowledge any responsibility for the welfare of Wall Street, the national economy, or even the customers of their firm. He said later, “The du Ponts are a great and public-minded family, but most of them seem to have been essentially in the dark as to what was at stake in the troubles of their brokerage firm. We had to sort of rap their representatives’ knuckles all the time. The representatives seemed to be arrogant without having much to be arrogant about. There was an air of sullen defiance, in marked contrast to the Goodbody people, who had obviously had a genuine feeling of letting down the Stock Exchange and their own customers. I never felt that with the du Pont representatives. They seemed to have no conception of what it meant, in terms of responsibility, to have over three hundred thousand customers’ money in your hands. As a result, some of the meetings were nightmarish. Of course, Tony du Pont had a hard problem—he had been the firm’s chief capital-raiser for the past couple of years, scraping up additional funds from the various relatives. And now he was faced with the distasteful prospect of having to tell his relatives that the money he had wheedled out of them was down the drain.”
6
Three highly diverse factions, then: a hard-trading Texan motivated by goodwill, or the hope of profit, or perhaps something of each; bred-in-the-bone Wall Streeters struggling to save the club; and a group of Delaware aristocrats whose noblesse seemed unwilling to oblige. And while they thrashed things out and Wall Street’s fate hung, once again, in the balance, Robert Haack very nearly blew everything apart.
Later he would say that his timing had been bad; there is little question that his motives were good. At all events, he chose November 17, at the height of the du Pont crisis, to make a speech at a dinner of the Economic Club of New York in which he called for prompt abolition of the Stock Exchange’s age-old system of fixed commissions on brokerage transactions and its replacement with a system of freely negotiated rates. He added, as if to be certain to enrage all Stock Exchange conservatives, “Whatever vestiges of a private-club atmosphere remain at the New York Stock Exchange must be discarded.” “Private club”: the classic red cape to the old bulls (and for that matter the old bears) of Wall Street, the expression used previously to goad them by William Douglas in 1937 and William Cary in 1962. But this time there was a crucial difference; while Douglas and Cary had been chairmen of Wall Street’s official antagonist, the S.E.C., the speaker now was president of the New York Stock Exchange itself. Most unforgivable, in the view of traditionalists, Haack made his remarks without first clearing them with any member of the board of governors whose paid employee he was. If rage was what Haack had wanted, he got it. A few key Wall Streeters like Regan and Salomon appeared to take his side, but the overwhelming reaction was one of shock and outrage. “I’m for fixed commissions,” said Gustave Levy, speaking as a
former Exchange chairman and a present governor. “Bob is a close friend of mine. He’s entitled to his opinion, but I happen to disagree with him,” he went on, in the gentle and measured tones of the irritated if not outraged Olympian. Lasker issued a tight-lipped public statement: “Under the constitution of the New York Stock Exchange, policy is made by the board of governors and not by the president, who is responsible for the administration.” Rohatyn pointedly criticized Haack for speaking without first consulting the governors.
The long-simmering differences between Lasker and Haack were now out in the open. Lasker has since said that Haack might have been summarily dismissed as president but for the fact that such an action, at a time when the Exchange badly needed public and government support, would surely have been interpreted as meaning that the governors were against reform. Much later, in 1972, Lasker and Haack would shake hands and make their peace. “I’ll say this for Bob Haack,” Lasker would comment, in retrospect. “He wasn’t trying to sell us down the river. In his own way, he was fighting for the Stock Exchange.” But in the dark days of November 1970, what Haack’s speech and the reactions to it meant was that in the midst of storm the Exchange’s captain and its first mate were all but sworn enemies.
It also meant that the du Pont-Perot accommodation was in trouble. Freely negotiated commissions, if they meant anything, meant lower commissions and thus meant that investment in brokerage firms would be less attractive; so Haack seemed to be attacking Wall Street’s profitability at the very moment when it was dying for lack of profits. The Crisis Committee was terrified that Perot would be so upset by the reduced prospects for brokerage profits, and disgusted by this unseemly squabbling within Wall Street, that he would simply pull out and leave F.I. du Pont to fail.
Then, on November 23, came further reason for Perot to be upset. Distressing new information was forthcoming as to the state of F. I. du Pont’s finances. The figures on the annual outside audit were coming through, and what they showed was that the sum needed to keep the firm operating was apparently $10 million—double the $5 million over which the dickering had been conducted. Perot was furious, and understandably so. Having been asked for one sum with protestations that it was needed, in effect, to save Wall Street and the national economy from disaster, he was now being told that there had been a small, regrettable error in the figures and that, ah, twice as much was, you might say, required. For many men it would have been the last straw. But not Perot. Patriot that he was, he saw that development as a new call to arms; horse-trader that he was, he saw the greater weakness on the other side as a chance to strike a better bargain. As he put the matter in his best country-boy manner, “My father always used to say, ‘If you can’t give me cash, give me chickens.’” And so, after recovering from his initial fit of anger at the apparently casual treatment Wall Street was giving him, he coolly set about seeing how many chickens he could get out of F.I. du Pont and the Stock Exchange for $10 million.
It was in this particular endeavor that he fell afoul not only of the du Ponts but of much of Wall Street as well. By the end of November, when news of the du Pont negotiations had begun leaking out in Wall Street, Perot had replaced Haack as the chief center of controversy. What was the true character of the Texan? Was he a ruthless bounty hunter and scalper taking advantage of well-mannered gentlefolk in temporary distress, as he was now regarded by the du Ponts, many of the Stock Exchange staff, and perhaps a majority of the investment community at large? Or was he an almost unbelievably long-suffering and public-spirited citizen willing to endure appalling financial sloppiness, and to put huge sums of his own money at risk for the good of the country? In truth, it was a perfect Perot moral situation, of precisely the sort he had been drawn into, or perhaps created for himself, for years, in which he could make what he did a virtue and a virtue of what he did. He was characteristically outraged when people suggested that he was interested in the du Pont deal chiefly for what it might bring him. “From a businessman’s point of view, I just don’t want to invest!” he raged, complaining bitterly that the ungrateful du Ponts, facing the prospect of annihilation, were accusing him of trying to “steal” their firm. “I’m being treated like a raider when I’m trying to help!”
Raider and helper both, perhaps; in Wall Street, as elsewhere, Perot—true to the utilitarian philosophers who conceived the nation he loved so much and identified with so closely—most likely wanted to have it both ways, to be rich and right at the same time, with a little extra thrown in: to become, in the bargain, the proprietor of a key piece of Wall Street formerly occupied by, and still named after, the most celebrated commercial family in the land.
7
At the start of December, Wall Street hung by its fingertips. Roughly one hundred Stock Exchange firms had vanished over the past two years through merger or liquidation. Forty thousand customer accounts were involved in the thirteen cases of liquidation, and most of them were still tied up, the customers unable to get their cash or securities. Commitments to the Stock Exchange’s trust fund from its member firms were approaching the $100-million mark, and some member firms had had about enough; a sauve qui peut sentiment was beginning to spread. Legislation to create a federal Securities Investor Protection Corporation, on the model of the Federal Deposit Insurance Corporation to protect bank depositors, was before Congress; it had no chance of passage until the present mess in Wall Street was cleared up, and thus, while it might help in future crises, it was powerless in this one. Worst of all, the Goodbody and du Pont deals were interrelated. In its contract to take over Goodbody, Merrill Lynch had insisted on a provision to the effect that, should any other major firm fail before the Merrill Lynch-Goodbody merger became final several months later, then the Merrill Lynch-Goodbody merger would automatically be cancelled.
So a du Pont failure would mean a Goodbody failure; the arch deprived of its keystone would fall, more than half a million customer accounts would be tied up, many perhaps never to be redeemed, and public confidence in Wall Street would end for years to come, if not forever. In the retrospective opinion of those best situated to know, the fall of the arch would have meant much more than that. Haack said at the time that the consequence of Goodbody’s failure alone would be “a panic the likes of which we have never seen.” Lasker said later: “If du Pont and Goodbody had gone down, a market crash would have occurred, but that would have been only the beginning. There would have been a run on the resources of brokerage firms—partners wanting their capital, customers wanting their cash and securities—causing many new failures. There would have been no federal investor-protection legislation. Mutual fund redemptions would have been suspended, putting fund investors in the same situation as customers of bankrupt brokerage houses. Undoubtedly the Stock Exchange would have been forced to close. All in all, millions of investors would have been wiped out, and as for Wall Street, it would have marked the end of self-regulation. The government would have moved in and taken over.”
It did not happen. Three times round—Hayden, Stone; Goodbody; du Pont—went the more or less gallant, more or less decrepit ship of Wall Street, and it did not sink to the bottom of the sea. Through the early days of December the negotiations continued, and at last, on December 16, a deal was announced. Two of Perot’s associates hand-carried to Lasker a certified check for $10 million, payable to F.I. du Pont and Company; in exchange, the Perot group would get the right to convert part of their loan into 51 percent of du Pont stock, thus taking control out of du Pont hands for the first time in the company’s history. Edmond du Pont would resign as managing partner, and the firm’s remaining partners would undertake to raise promptly an additional $15 million in capital.
Wall Street seemed to be saved. It wasn’t, really, because the arrangement soon came apart, and the last phase of the rescue stands as a kind of gigantic, grotesque footnote. Far from putting up or raising more capital, in the early months of 1971 the F.I. du Pont partners and investors took millions more of their previously co
mmitted capital out. A group of the firm’s investors, led by Anthony du Pont, showed that they had no taste for the original accommodation in any case, and set about trying to salvage what they could for themselves, whether at the cost of the firm’s liquidation or not. Meanwhile, further errors in the du Pont books were found. By February 1, 1971, it appeared that the amount needed from the Perot group was not $5 million, or $10 million, but considerably more. At last, on April 23, the appalling fact came to light: the rescue would require somewhat in excess of $50 million.
“I want out!” Perot shouted over the telephone from Dallas; now he had been pushed too far. But the Crisis Committee would not let him out; all through the two previous months, with Rohatyn placating the Perot group, Ralph DeNunzio hand-holding the du Ponts, and Lasker serving as go-between, the negotiations had somehow been kept alive. Rohatyn would later call it a game of chicken, with each side, the du Ponts and the Perot group, using the threat of the firm’s failure and the terrible social and economic consequences as a lever to improve its bargaining position. Through it all, despite the gravity of the matter, humor of a sort, in the form of the slicker-and-bumpkin joke, seems to have survived. Once, after many hours of hot-and-heavy negotiations, Lasker took Perot to dinner at the posh Côte Basque restaurant.
