Money and Power

by William D. Cohan

  At the same time that Levy’s ascension at Goldman Sachs was looking increasingly inevitable, he was becoming more prominent around New York City, thanks in large part to his friend, Cy Lewis. Not only had Lewis managed Levy’s money during the war, making him wealthier than he already had been, but he was also introducing Levy to important New York charities, where Jewish Wall Street could primp and preen while supporting a good cause. In 1954 and 1955, for instance, Levy served as chairman of the annual Federation of Jewish Philanthropies of New York campaign and was a vice president of the federation itself. (Cy Lewis was the federation’s president.)

  In 1955, Levy was honored at the benefit dinner, at the Plaza Hotel, where the federation announced it intended to raise $18.1 million for the year, of which $2.5 million had been raised at the dinner. In the quirky way that prominent New Yorkers agree to be “honored” at such dinners—and where expectations of a sizable donation are de rigueur as a result—the federation gave Levy an antique silver tankard and a book of testimonials, including one from Herbert Lehman, the former governor and then current senator from New York (and uncle of Goldman partner Arthur Altschul). According to the Times, the gifts were “in recognition of Mr. Levy’s services to [the] federation and to local religious and nonsectarian causes.” Cy Lewis spoke of the fact that “too many of our neighbors … were forced to wait too long for help from the time they first applied for services until the required help and treatment started.” (Levy and Lewis weren’t all business, though. In June 1956, they won the Candee Cup for Low Net golf tournament at the Bond Club of New York’s annual field day at Sleepy Hollow Country Club.)

  In April 1957, Levy succeeded Lewis as the president of the Federation of Jewish Philanthropies, for a three-year term. The funny thing was that Levy was not the slightest bit religious. He was agnostic, and his wife, Janet, was an atheist. “My mother never got me involved in anything religious, neither did my father,” Peter Levy said. “My mother never believed in any kind of celebration of anything. No Christmas. No Hanukkah, nothing. No Passover, nothing, no God. No bar mitzvahs, no nothing.”

  Levy may not have been at all religious, but he was a prodigious fund-raiser, settling upon a technique of doing so through public peer pressure known as “calling the cards.” The idea had originated with Cy Lewis, who decided the best way to raise money from his fellow Jewish bankers was to have a dinner and by going seriatim—out loud—through all the names of the attendees and asking them to make a donation for the year of more than they had made the year before. The problem was that Lewis did not like performing this public theater, so he got Levy to do it instead. “Hey you, you,” Levy would stand up and say, with three-by-five note cards in hand, “You gave five thousand dollars last year. You’ve had a really good year this year, Joe. I know because I’ve talked to your partners and I know you’re doing just fantastic. So what can we count on you for this year?” This went on hour after hour and was surprisingly effective both as entertainment and as fund-raising.

  Even though Levy was a trader, not an investment banker, he was elected to numerous boards of directors, including for Diebold, Inc., the bank vault manufacturer; the Pacific Uranium Mine Company, in Beverly Hills, California; Witco Chemical Corporation, Inc.; and the New York Telephone Company. His board positions were in keeping with Goldman’s philosophy—pioneered by Weinberg, of course—of seeking positions on the corporate boards as a way to give Goldman a better chance of winning banking and trading business.

  In 1960, five of Goldman’s partners, including both Weinberg and Levy, penned articles for the Christian Science Monitor about different aspects of the firm’s business. The series, which amounted to free advertising, was highly unusual for both the fact that the newspaper ran the articles, uncritically, and that Goldman would choose to participate at all, thereby revealing a few kernels about its business. “Marcus Goldman could not have imagined the size, diversity, and leadership his investment banking firm would achieve by 1960 when he came to New York from Philadelphia in 1869 to buy and sell merchants’ bills receivable,” Weinberg wrote in the first installment. He explained that Goldman had more than five hundred employees in 1960, in nine separate U.S. offices—including Albany and Buffalo, of all places—and that the firm had “bought and sold” commercial paper worth in excess of $2 billion in 1959, making Goldman the “leading dealer” in the country. He also boasted about the $350 million bond issue for Sears in 1958 and the $637 million IPO for Ford in 1956.

  Levy’s article—about Goldman’s over-the-counter trading and arbitrage departments—was the most revealing of all, mostly because one gets the sense he actually wrote it himself. He clearly was proud of the new trading desks—then three years old—and the nearly two thousand private telephone lines that traders could use. But he positively crowed about the firm’s arbitrage department, “by far the most active of any in the country.” After a quick description of what arbitrage entailed, he then shared two examples of recent profitable arbitrage opportunities, one involving the securities of AT&T and the other involving the convertible preferred stock of the Studebaker-Packard Company.

  The Studebaker trade was the more complicated one. In that situation, Levy wrote, Goldman and three other firms formed a syndicate to buy 30,165 shares of the Studebaker convertible preferred stock for $11 million and in the process obtained around 1 million rights to buy Studebaker’s “when issued” common stock at $11 per share. The Goldman syndicate then sold short 600,000 of the “when issued” shares at $12.75 a share and sold short the balance of 400,000 shares at a higher price, thus locking in around a $2 per share profit, or $2 million. “The arbitrage will be completed in January 1961, when the syndicate will convert its preferred shares and deliver the common against its short position,” Levy wrote. While it would be hard to imagine the typical Christian Science Monitor reader comprehending Levy’s trade—let alone wondering what it was doing in the paper at all—the fact that Goldman could make its share of $2 million in less than a year from that single trade showed why Levy was so important to the firm’s finances. Whereas Weinberg worked for years on the Ford IPO to make the firm $1 million, Levy was able to make almost twice as much in far less time.

  ——

  IN THE EARLY 1960s, Levy vastly increased his civic responsibilities. In August 1961, the B’nai B’rith Foundation named him the chairman of its 1961 fund-raising campaign. A few weeks later, New York governor Nelson Rockefeller—a close friend of Levy’s—named him a member of a special investigating commission to study public welfare in the state. He was a member of the board of visitors at Tulane University and was the treasurer of Lincoln Center for the Performing Arts, in New York.

  In October 1961, the American Stock Exchange named him chairman of a committee to study and investigate what changes the exchange needed to make following the expulsion of two members—a father and son—from both the exchange and from the securities business after having “willfully violated” securities laws, resulting in “millions of dollars of harm to unsuspecting investors.” Soon enough, the SEC found that the American Stock Exchange had permitted “manifold and prolonged abuses” of trading rules by its members. As a result, the so-called Levy Committee, composed of a group of Wall Street executives led by Levy, took on added importance. During the five months ending in February 1962, Levy’s committee issued three separate reports about how the rules governing the American Stock Exchange needed to be changed, and the exchange enacted many of them in April 1962.

  Also that month, having just completed his three-year term as president of the Federation of Jewish Philanthropies, Levy was chosen to be the sixteenth president of Mount Sinai Hospital. He remained involved in a leadership role at Mount Sinai for the rest of his life and oversaw the establishment of the Mount Sinai School of Medicine, the achievement of a university affiliation, the $154 million fund-raising effort for the medical school building and endowment, and the planning and erection of the Annenberg Building, which contains
the Gustave L. and Janet W. Levy Library, on One Gustave L. Levy Place in New York City.

  In May 1963, he was elected a member of the New York Stock Exchange Board of Governors. (In 1950, Weinberg’s seat on the New York Stock Exchange had been transferred to Levy.) Two years later, Levy was elected vice chairman of the stock exchange, becoming the first nonfloor governor in twenty-five years to take a leadership post. His election stirred conjecture that he would soon become chairman of the “33-man group ranking as the most powerful policymaking body on Wall Street.” There was also some concern that the election of an office partner, working off the floor of the exchange as Levy did, would be the beginning of a shift of power at the exchange away from those people who actually worked on the floor and who had run the exchange for years. But one floor trader told the Times about Levy’s appointment, “To be perfectly honest about it, the best managerial talent in this business is found not on the trading floors but in the offices. The office partners of the brokerage houses are the ones with the most organizational ability.”

  In April 1967, Levy was nominated to become the chairman of the New York Stock Exchange. “He was a very ardent, hardworking businessman,” explained Walter Frank, his predecessor at the NYSE. “[A] good leader, respected for his ability rather than his school tie or clubs.” Not only was he the first office partner to serve as chairman of the stock exchange in a generation, he was also the first Jewish chairman ever. “Gus was very proud” of becoming the first Jewish chairman of the exchange, his friend Tubby Burnham told Ellis; he added that he did not think Levy was a very good leader. “[H]e couldn’t separate his thinking from what was in his firm’s own interests,” Burnham said. “He was always favoring Goldman Sachs.” In a 1973 interview, though, Levy objected to the suggestion that he had ever put Goldman’s interest ahead of the NYSE’s interests. “As long as I am a governor of the stock exchange, I’ve got to speak as a governor of the stock exchange,” he said. “I take the position that I cannot take any other point of view than that adopted by the board. But if I were to speak as a partner of Goldman, Sachs that would be a different matter.” Indeed, he said he found his views and the exchange’s views to be in sync. “It happens that none of the stock exchange’s points of view so far support anything that would be harmful to Goldman, Sachs or the industry,” he said. “If they did, I guess I would have to resign.” In an oft-repeated pattern on Wall Street, someone in a position to benefit from a conflict of interest averred that being tempted by unethical behavior was impossible, since his own virtue was impeccable.

  ——

  LEVY WAS PERIPATETIC. His day began—every day—at 5:30 a.m. with a fifteen-minute jog, and after getting cleaned up and dressed, “I say my prayers,” he explained once to an interviewer. “I say prayers every day.” (This despite his son’s insistence he was an agnostic.) He never asked for anything in his prayers. “I just read a little book called the Daily Word.” His breakfast was usually fruit or a glass of juice, although sometimes he would eat leftovers. “I had crab meat for breakfast this morning,” he once said. After reading the Times and the Wall Street Journal, he “got downtown” to Goldman’s offices by 7:50 a.m. Once there, “I look over the trading sheets, transaction sheets, any mail that’s left over from the last day and finish reading what’s in my briefcase. Then I start making calls—at 8:30, or as soon as I can find somebody in.”

  He explained that he had some “early-bird clients” that he often called at home. “They’re used to it by now,” he said. “And then the boys start dribbling in about quarter to nine.” Twice a week—on Tuesday and Thursday—his team came to his office for a meeting about “trends in the bond or the stock market,” he said. Every Monday morning, there was a Management Committee meeting. “[T]hey were kept short, usually only fifteen minutes, and there was minimal discussion, no agenda, no minutes—and no chairs …,” Charles Ellis wrote. “Levy often took phone calls during the meetings to show how little importance he really gave to the committee.” He also had a pocketful of coins and carried around worry beads, which he would rub constantly. The noise of the coins in his pocket would give him away when he started walking around the trading floor, looking for answers. Traders braced themselves for the Levy verbal assault.

  He also became manic if he thought the firm had missed an arbitrage opportunity or a block trade, which was a business that Lewis and Levy had pioneered, whereby Goldman or Bear Stearns would buy large blocks of stock—as principals—from the selling institutions, with the intention of breaking them up and selling them off to other investors in the market. Block trading was a great service to Goldman’s clients, of course, because they could make a large sale in one fell swoop, but it meant that Goldman began taking increasing amounts of principal risk, although they generally made increasing amounts of profit doing so. That—and Levy’s innate competitive spirit—made him nearly impossible to be around if he thought a block trade had been missed or that Goldman had lost a piece of business. “Gus was always 100% committed,” explained Bob Menschel, an equity trader at the firm, “and that commitment could unnerve people or it could bring out the best in each person. He was so intent on doing every trade that he could get catatonic if he felt we’d missed one. Gus would be storming around, bemoaning our failures: ‘We’re losing out! We’re not in the market anymore! We’ve lost it! We’re not competitive anymore!’ To build the business, we had to find ways to keep Gus calm—or at least at bay.… [O]riginating a trade is a lot like fly-fishing: Both take patience and quiet persistence to land the really big ones.”

  After Levy had lunch—usually at his desk—he spent the afternoon in “meetings, meetings, meetings” at his various philanthropic or civic organizations. “I normally get home at around 7:00,” he said. “I love three or four drinks in the evening but I never drink during the day, so I am not an alcoholic.” When he drank, though, his lisp and his southern accent became more pronounced and he would get silly. He had business meetings “practically every evening,” he said, “every evening, September through May, I have business of one kind or another. I’m either taking out a client—usually to [the] ‘21’ [Club, on West Fifty-second Street]—or going to one of those damn testimonial dinners, most of them philanthropic, where some guy’s being honored or one of the banks is giving a dinner for some prominent citizen. My wife is very understanding.”

  “I can’t say I ever really got to know him,” Betty Levy said of her father. “We didn’t spend that much time together. He tried to be a good father, but he didn’t know how.” She said he was either working or playing golf and didn’t have much time for his children. She and Peter used to wish they had more in common with their father. “But we didn’t have much to talk about,” she said. “It was hard to talk to him.” Every year, he and Cy Lewis, as well as Levy’s friends Ray Kravis, a highly sought after Tulsa, Oklahoma, oil and gas consultant, and George Buchanan, another oil executive from Cody, Wyoming, would go off together for golf vacations in Scotland and other places around the world.

  Levy expected Goldman’s employees to share his devotion to the firm. When asked about the fact that many at Goldman felt the pressure Levy put on them was too much, he replied, “Well, we do demand a full day. But I think we’ve got as low a turnover as any place in the Street—certainly in key personnel. We think the secret of the business is not only to be bright but to be consistent. And the only way to be consistent is to make your calls and do your job and be constantly on the doorstep of your current and prospective customers. But I think we are a pretty happy firm and I’ve never heard of anyone complain of overwork here.” How about Goldman’s high divorce rates? “I don’t know about that,” Levy replied. “But it is true that someone who works here is married to Goldman, Sachs as well as his wife. We have a real spirit. We love to do business. We get a kick out of it and it’s fun. And while none of us wants to deprive a guy of a family life and a home, we want to make Goldman, Sachs a close second to his wife and family. A very clos
e second.”

  Tenenbaum seemed to echo this sentiment, although soon enough he would burn out at Goldman and leave the firm in his early fifties. “Gus Levy ruined my first marriage,” he would tell people when explaining why he left. “I wasn’t going to let him ruin my second.” Before then, though, he spoke of the firm like a family. “The thing about Goldman Sachs, it was not only a place where you work with people,” he said. “They became your lifelong friends. This was much more of a social type situation. Guys go into a factory and work in an office, and they have their own lives. That isn’t the way it was. We were all very close.”

  ——

  AS LEVY SPENT more and more of his time running the firm and managing his extracurricular activities, Tenenbaum began to take on more responsibility and more initiative in building Goldman’s arbitrage business.

  One way that the arbitrage business became more complex was that as the M&A business began to pick up in the 1960s, Goldman would “arb” the deals by buying and selling stock in the companies involved in a deal—usually after the deal had been announced publicly. In this new frontier of merger arbitrage—known among arbitrageurs as “event driven” arbitrage—information was power and could mean the difference between making a lot of money or losing a lot of money. The people with the information about M&A deals were, of course, the people responsible for putting the deals together in the first place—the corporate executives, the investment bankers, and the lawyers—and arbitrageurs would think nothing of “making the call”—as arbs referred to the practice—to these groups of insiders to try to glean whatever bits of information they could that would give them a trading advantage. Since there were often months between when a deal was announced and when it closed—the time that was needed for regulatory approvals, either by the Justice Department or the Federal Trade Commission or the SEC, and to file proxy statements and obtain shareholder votes—and the stocks of the companies involved in a deal continued to trade during this period of uncertainty, arbs put themselves in the position of either making or losing vast amounts of money based on subtle or not-so-subtle changes in the deal along the way. For instance, if an arb knew that the Justice Department was going to block an announced merger on antitrust grounds before it was announced publicly, he stood to make money based on that information that others in the market did not have. And so, in the event-driven arbitrage business, the ethos became all about making the calls to get information others did not have. (While the rules about insider trading were in their infancy during the 1960s—and not nearly as black and white as they are today—it was a good bet that trading the stock of a company involved in a merger before the deal was announced based on nonpublic material information was an easy way to court regulatory scrutiny.)