Boesky was different. Mulheren shared information with Boesky to an extent he would allow with few other market professionals. The two of them spoke nearly every day, and Mulheren always returned Boesky’s calls. Almost from the time they’d first met, Mulheren had wanted Boesky to like him. Beneath his rebelliousness, Mulheren had always wanted to be liked by most people. It made him feel good to give Boesky information. Over time, Mulheren had become a major trader for large blocks of stock, so he often knew the identity of major buyers and sellers. This was invaluable arbitrage information, since the identity of buyers often suggested whether a hostile bid might be in the works or whether it was a staid purchaser, like a state retirement fund, unlikely to provoke any action. And Boesky still relied on Mulheren for options expertise. Boesky rewarded Mulheren, in turn, by steering much of his trading through Mulheren’s firm, which therefore earned the commissions on the trades. Boesky became the firm’s largest customer.
Yet their conversations were rarely about personal matters. Boesky thought everyone was motivated by one thing: money. Occasionally Boesky mentioned his children—his youngest, twins, had learning disabilities like some of Mulheren’s children—but he never discussed what he really cared about in life. He didn’t even discuss his sex life. That was unusual. In Mulheren’s experience, everyone on Wall Street talked about their sex lives. Once, after a new water amusement park had opened near Mulheren’s home in New Jersey, he told Boesky, “Ivan, I’m going to come kidnap you and take you down a water slide.” There was dead silence.
Still, Boesky could be considerate. One Friday, with his wife in Florida with the kids, Mulheren was talking to Boesky on the phone, and Boesky insisted on having a car pick him up and drive him to Mt. Kisco for dinner. The other guests were Manhattan politician Andrew Stein, composer Jule Stein, comedian Alan King, and their wives. Boesky took Mulheren, a car buff, out to the garage to show him his new Rolls Royce Silver Cloud convertible, parked alongside his vintage Rolls Royce Phantom Five limousine.
On another occasion, Mulheren was having serious problems in his marriage, and confided in Boesky that he was contemplating divorce. “Don’t,” Boesky said. “Why don’t you talk to my lifelong friend, Hushang Wekili? I’ve known him since I was fourteen. We went to school together. It’s a very close relationship.” Mulheren and Wekili met in the Palm Court of the Plaza Hotel. Wekili was slender, well-mannered, European-looking. He quizzed Mulheren about his marriage and personal life. “There are always conflicts,” he said soothingly. “There are better solutions than divorce.” Mulheren took his advice.
In May 1982, T. Boone Pickens, one of the first of the big-time raiders, launched a hostile tender offer for Cities Service, another huge oil company, and it seemed like Conoco all over again. Several weeks later, Gulf Oil launched its own friendly bid of $63 a share as a “white knight” rescuer for Cities Service, which agreed to be taken over to escape the clutches of Pickens. Boesky plowed an amount equal to all his firm’s capital—$70 million, 90% of it borrowed—into Cities Service stock, and confidently settled back for the bidding frenzy and profits he’d experienced in Conoco. Lance Lessman, handling the research, thought it was a deal “I’d put my grandmother in.”
Late on Friday, August 6, Lessman saw Boesky stride out of his office, a look of alarm on his face. He told Lessman he’d just heard a rumor that Gulf, citing antitrust concerns, was withdrawing from the Cities Service deal. The New York Stock Exchange had just closed, but trading in Cities Service stock on the Pacific Stock Exchange (which stays open until 4:30 P.M. Eastern time) and on the so-called private “third market” was ominous; the stock was plunging, dropping $4 to $8 a share.
The microphones around the office came to life. “Put all engines on max,” Boesky shouted. The traders rolled into action, frantically calling West Coast market-makers such as Jefferies & Co. to try to find buyers for some of the huge Boesky position or to try to hedge the position. Then an announcement came clattering over the ticker, confirming the worst: Gulf was pulling out! All buying interest evaporated. Boesky was stuck with a huge stake that had just plummeted in value. Worse, margin calls were already pouring in, demanding full repayment of the money borrowed to buy the shares.
Boesky Corporation was in dire straits. It had nowhere near the cash to meet the margin calls, even if it liquidated all its other stock holdings. Worse, Boesky had $20 million in unsecured loans from banks: $5 million each from Chase Manhattan and Chemical banks, and $10 million from two European banks. The loans were callable, for any reason, and the banks would almost certainly get wind of Boesky’s crisis. Then there was the New York Stock Exchange and the SEC. While much would depend on the price of Gulf stock when trading resumed on Monday, in all likelihood Boesky would be insolvent and in violation of regulatory capital requirements. The firm might be liquidated.
When he left the office that night for emergency meetings with the lawyers and accountants, Boesky was pale but calm and uncharacteristically quiet. His mood worried Lessman, who called him at home in Mt. Kisco that night. Surprisingly, he seemed collected, even dignified in defeat. “That’s the game,” he said. “That’s how it goes.” Lessman, trying to make him feel better, pointed out that the investment had been a sound one: Gulf’s antitrust problem was insignificant, clearly just a pretext for a change of its mind. Lessman said, “It’s like you decided to cross the street. The light was green, you walked—and then a building collapsed on you.” Boesky seemed to like the analogy. He had Seema get on an extension and Lessman repeated it.
On Monday morning, Cities Service stock didn’t open for trading because of an “order imbalance”; there were too many sellers and no buyers. The New York Stock Exchange specialists, who make markets in the listed stocks, weren’t going to open trading until they knew they had a price that would attract buyers. That price depended, in large part, on what Boesky would do. Would margin calls force a massive liquidation of his position, driving the ultimate price even lower? At Boesky’s offices, the suspense was palpable. Every position except for Cities Service was liquidated. Then everyone hovered around the ticker and watched their computer screens, waiting for an opening price. Opening price “indications” dropped steadily, from $50 to $45, then even lower. Anything below $30 a share, they knew, would probably wipe them out.
With his own and his firm’s fate hanging in the balance, Boesky embarked on a diplomatic offensive. Accompanied by his top lawyer, Fraidin, his outside accountant, Steven Oppenheim, and Setrag Mooradian, he called first on the four banks, urging—begging—them not to call in their loans. It was a delicate mission, since he didn’t want to unduly alarm them by noting that calling the loans would render him insolvent. But Boesky was at his best, calm, articulate, confident that the investment in Cities Service stock would ultimately pay off. He managed to buy time.
Then the group traveled to the stock exchange to meet with regulators.
“What if the stock opens at $45?” an exchange official asked.
Mooradian did some hasty calculations. “We’re OK,” he replied.
“What about $40?”
“It’s tight,” Mooradian conceded.
“How about $30?”
Mooradian could see that Boesky was annoyed by the official’s highhanded tone and 20-questions approach. “Look,” Mooradian said, exasperated, “if the stock opens at zero, we will be out of business. And so will everyone else on the Street.” The official curtly told them that they would be expected to meet the exchange’s capital requirements and would get no special dispensation.
The group returned to Boesky’s offices to wait. Finally, with only a half hour of trading left in the day, Cities Service stock opened—at $30, less than half of what Gulf had offered! At that price, no one knew for sure whether Boesky was insolvent, but the situation was dire. Boesky had to unload stock. Like so many times before, he was on the brink of failure.
There was only one person he thought he could turn to: John Mulheren. Like mo
st arbitrageurs, Mulheren had a big position in Cities Service, but he had had the foresight to hedge much of it through options trading, so he was in nowhere near the straits that Boesky was in. Boesky called Mulheren midafternoon that Monday.
“We have a major problem here,” Boesky said, sounding grim. “Can you help us?”
“Well, what’s the problem? I know you have a loss,” Mulheren replied. Even though Boesky did most of his trading through Spear Leeds—Boesky was the firm’s largest customer—Mulheren didn’t have access to Boesky’s positions, which were kept in confidence within the firm.
“I have to sell stock,” Boesky said, without explaining the depth of the problem. Mulheren thought that Cities Service looked attractive at the new levels, so after consulting the firm’s position, he said he’d take a million shares. Boesky balked, hesitating to sell once he realized Muheren wanted that much, but then agreed out of necessity to sell a block of 400,000 shares at just below $30 a share.
Within an hour, Boesky was back on the phone. “We are having major problems here,” he said, asking to meet with Mulheren and his partners at Spear Leeds after the close of trading. “Think of some way I can get out of this position I have and meet requirements, because they tell me I’m having requirement problems.” Boesky was beginning to sound desperate.
“Okay,” Mulheren agreed. “I’ll see what I can do.”
Mulheren met with his partners, who were concerned for several reasons. The collapse of Boesky, given his huge positions, might trigger a selling panic that could damage Spear Leeds. And Boesky was the firm’s largest client, so they had an interest in keeping him solvent.
At about 4:30 P.M., Boesky, Oppenheim, Fraidin, and Mooradian arrived, along with a stock exchange official.
“Can’t you straighten this out?” Oppenheim asked Mulheren.
“I don’t know any way out of this,” Mulheren replied.
“Well, I’ve got a way to straighten it out,” Oppenheim continued, turning to Boesky. “I’ve got the solution in my briefcase.”
Oppenheim opened his briefcase, took out a Japanese ritual suicide knife, and handed it to Boesky. Boesky didn’t laugh.
Three intense hours later, however, they had crafted a solution. Mulheren worked out a complicated series of options trades that had the effect of shifting any losses on further declines in Cities Service stock to Spear Leeds. That way, Boesky didn’t need to liquidate the remainder of his position, sparing the market further selling pressure. In return, Mulheren gained the right to over half the profits from any gains in Boesky’s Cities Service position. The stock exchange official agreed that the exchange would keep Boesky from being forced into liquidation, and that the arrangement should satisfy capital requirements.
Mulheren’s and Boesky’s faith in the underlying value of Cities Service stock proved correct. Despite the Gulf withdrawal, the Pickens bid had put the company “in play”—as Wall Street described companies that, once targeted, had little recourse but to capitulate or find a rescuer. Just two weeks later, Occidental Petroleum stepped in with a $58-a-share bid for Cities Service, and the stock price soared. Mulheren and Spear Leeds eventually made nearly $10 million from their Boesky rescue mission; Mulheren was hailed at the firm as a hero. The crisis cost Boesky an estimated $24 million in losses, or about a third of the firm’s assets.
Boesky seemed briefly chastened by the brush with disaster. “You know,” he told Mooradian as they were going over the books at the end of the month, “months like this teach you to be humble.” He had Mooradian assemble some records relating to the deal and put them in a file to be labeled “Chartreuse.” He told Mooradian to tell no one of the file’s existence. He never mentioned it again, however, and eventually Mooradian threw it away.
The Cities Service debacle, however, did have a profound impact on Boesky. He felt strongly indebted to Mulheren; in Boesky’s view, a favor of such magnitude was the true measure of friendship. He called Mulheren after the deal, and said, “I can’t believe you did this for me.” Soon after, he asked Mulheren if he would act as a co-trustee for his children’s trust funds. Mulheren accepted; it was clear that, given the store Boesky set in his children, the offer was a tribute. Mulheren felt good about it. He was proud of being, as he put it, a “standup guy.”
But Boesky had come, once again, to the brink of failure. He must have sensed that his nine lives were running out; not even his wife’s family would tolerate yet another debacle, particularly at their expense. What maddened Boesky was that he was not at fault. No one could have predicted Gulf’s about-face. Boesky’s reasoning had been correct throughout, yet he had nearly been destroyed by events beyond his control.
The Friday night that Cities Service stock collapsed, the Boeskys had had a previously scheduled dinner party at the Mt. Kisco estate for Mulheren and several of his partners at Spear Leeds and their wives. Over cocktails in the pool house, the talk had turned to the debacle in the market, and Mulheren had said, “I hope this market doesn’t break. It might kill us all.” Seema had cut off the conversation. “As far as I’m concerned, this is never going to happen again.” She repeated emphatically, “Never again.”
Mulheren, knowing that much of the capital in Boesky’s company was Seema’s, had assumed that she meant she wasn’t going to let Boesky risk so much money on a single deal.
But Boesky had other ideas. It was never going to happen again, all right. There were ways to control, even eliminate, the risk. There was no referee hovering over him to enforce the rules, as there had been in wrestling. He’d bounce back again, this time for good.
The very next week, even before the Occidental Petroleum bid rescued the arbitrage community from the Cities Service trauma, Boesky picked up the phone and called Martin Siegel.
“Hi, Marty,” Boesky said, sounding casual and relaxed, giving no hint that he had just barely saved his firm from collapse, or that he was issuing an invitation that would change their lives irrevocable. “It’s time you thought about joining the Harvard Club. Why don’t we meet there for a drink?”
Earlier that year, in June 1982, Siegel had invited Boesky to play tennis at the recently completed house that had been built to his and Jane Day’s plans in the exclusive enclave called Greens Farms. It was modern, fitted with gray wood vertical siding, with huge two-story plate-glass windows framing views of the pool and the sound behind it, where Siegel had recently taken up jet-skiing. Off to one side was something Siegel had always wanted, his own tennis courts nestled in some pine trees just off the beach.
A pink Rolls Royce turned into the driveway. It pulled quietly into the parking area, and a smiling Boesky emerged carrying his tennis racket and, Siegel noticed with some curiosity, a leather pocketbook, the kind some European men carry. The purse wasn’t to his taste at all, but Siegel complimented Boesky on his shiny new car. “Seema gave it to me,” he said.
Siegel had arranged a tennis outing for Boesky, Samuel Heyman, a former prosecutor turned successful real estate developer who was eyeing the burgeoning mergers-and-acquisitions arena, and another businessman. Heyman also lived in Greens Farms, practically next door to Siegel, in an enormous stone Georgian mansion. Heyman used his lawn for helicopter landings, and often gave Siegel rides into Manhattan.
That afternoon, the four played a series of round-robin singles matches. Heyman won. Boesky, though a gracious loser, was far and away the worst, which surprised Siegel because Boesky seemed obsessed with turning his sons into tennis champions. He had hired a coach.
After lunch, the others left and Siegel walked Boesky back to his car. There were things to discuss. Siegel was worried about the financial health of Kidder, Peabody and, more specifically, about his own merger practice. The deals on the street were getting bigger and bigger. Kidder, Peabody’s client base of midsize companies was getting left behind. In 1981, Siegel had heard reports that United Technologies was about to make a bid for Carrier Corporation, but when he had pitched a defense to Carrier, the com
pany chose to honor its long-term relationship with Morgan Stanley, a firm it believed had more muscle than Kidder, Peabody.
Worse, Siegel felt he was being gradually eased out of the lucrative M&A club led by lawyers Marty Lipton and Joe Flom. Lipton was still steering clients his way, and he sent clients to Lipton, but none were really big deals. Flom, Siegel feared, was definitely cutting him out of the loop in favor of firms like First Boston and Morgan Stanley. Siegel had asked Flom what the problem was. “They want to stick with their traditional investment bankers,” Flom said. Siegel told Boesky about his anxieties.
“Why don’t you come work with me?” Boesky asked. “Think about it.”
Even as he complained to Boesky, Siegel was the undisputed young star of Kidder, Peabody. He was made the centerpiece of the firm’s efforts to recruit top business school graduates. In what became an annual event, business students working at Kidder, Peabody for the summer spent a full day at the new Siegel spread in Connecticut, swimming, windsurfing in the sound, and playing round-robin tennis matches, all followed by a lavish catered dinner.
His wife had given birth that spring to their first child, a girl. With his attractive wife, adorable baby, and a house and grounds that were practically a self-contained country club, the none-too-subtle message was “Come to Kidder, Peabody and the life of Marty Siegel can be yours.” Siegel was 34.
On the firm’s organization chart, he was still officially assigned to the firm’s corporate finance department, but in truth, Siegel had eclipsed them all and now dealt directly with DeNunzio. DeNunzio seemed to prefer the arrangement; it kept everyone else off balance. At the end of 1981, DeNunzio had called in Siegel for his bonus review. Siegel’s salary was $80,000, so bonus was the bulk of his compensation. “What do you want?” DeNunzio asked. “What do you think you deserve?”
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