Money and Power

by William D. Cohan

  For instance, Tenenbaum explained, soon after a merger was announced, he needed to figure out whether it would be reviewed by the Justice Department, which had the power to block a deal on antitrust grounds, or the Federal Trade Commission, which did not have injunctive power. If an arb found out that the FTC was going to get the deal, he knew the deal would not get blocked and he could make money on the spread between where the price of the company being bought would trade for in the market and where it would trade—generally higher—when the deal ultimately closed. If the arb found out that the Justice Department would be reviewing the deal—raising the possibility it could be terminated on antitrust grounds—an arb would trade the stocks a different way. “If you found out that Federal Trade is going to get it”—and here Tenenbaum clapped his hands together—“it was a goddamn good spread there hanging over the market,” he said.

  In an effort to improve the quality of the information he was getting, Tenenbaum decided to hire a Washington law firm, Jacobs & Rowley, consisting of two attorneys, Heath Jacobs and Worth Rowley, who used to work in the antitrust division of the Justice Department. “I don’t know how I found them, but I found them,” he said. “They both had been with the Justice Department as agents, so they knew all the people in the department. They went to the right cocktail parties.” After an announcement of a merger, Tenenbaum would call up the law firm. “Boys, is this a Federal Trade thing or is it Justice?” he’d want to know. Soon enough, the lawyers would call him back and share their opinion. “We think it’s going to be Federal Trade,” they would tell Tenenbaum and then would explain why they thought the way they did. “Fine,” he would reply, “and I got it going.” Was this inside information? “Well, inside information, call it whatever the hell you want,” but he would get what he needed to know to make the trade more profitable for Goldman.

  On tax matters, always a big part of mergers, he relied on tax lawyers he hired who also used to work in the Justice Department. “If there were tax cases, I wanted to know whether they were serious or not serious,” he said. “I didn’t use Sullivan & Cromwell, our lawyers, because they never thought there should be any antitrust. They were too right wing. I needed guys who knew the players, the line guys. I had good tax lawyers. I had good antitrust lawyers. I also was pretty good at talking to management and treasurers.”

  Tenenbaum thought nothing of calling up a company’s executives and peppering them with questions about an announced deal. “When do you think you’ll sign the agreement?” he would ask them. They would answer things like, “Well, we’re about a month out.” Tenenbaum said, “I kept a good calendar and called them in a month.” The executives didn’t mind the calls, Tenenbaum said. “I’d say, ‘Did all the directors agree to it? Was it unanimous?’ They were pretty happy to answer me. I didn’t have any problem.” He did draw the line, though, he said, and did not execute a trade when he would make a call and find out the merger agreement was going to be signed the next day. “I didn’t buy a thing,” he said. “That’s shooting fish in a barrel. That was the way I designated. I never shot fish in a barrel.”

  That would be inside information, he believed, not seeing that perhaps also getting lawyers in Washington to provide nonpublic information about mergers could also be perceived as inside information. “The question is what is inside information?” Tenenbaum asked. “What is it? It’s something that is special and is going to be an announcement. Now, if some guy says, ‘We’re signing the merger agreement in a month,’ that’s not inside information. It could be a month. It could be six weeks. It could never happen.” He kept close tabs on what they told him, though, and if someone told him a merger would be announced in a few weeks, he would check back with them and ask how it was coming along. Making these kinds of calls were his “own instinct,” he said, and were not done at the suggestion of Levy.

  Levy also supported Tenenbaum’s effort to hire more analysts and traders to grow the arbitrage business. Robert Lenzner was one of the more unusual people Goldman hired, as was the way in which Levy hired him. Lenzner’s father was Levy’s dentist, in New York, and one day he simply asked Levy if he would give his son a job. Bob Lenzner was highly credentialed but, unlike Tenenbaum, had no relevant experience in Wall Street, let alone in arbitrage. He graduated from Exeter in 1953, Harvard College in 1957, and attended Oxford University for a year after Harvard. In his senior year at Harvard, Lenzner was the business manager of the Harvard Crimson. He graduated from Columbia University’s Graduate School of Business in 1961.

  Levy hired Lenzner as his assistant in 1962. “Gus brought him in just like he brought me in for my dad,” Tenenbaum said. “After Lenzner was in Gus’s office as his assistant for six months, he says, ‘You get that guy out of here.’ ” (Another version of the story has Levy telling Tenenbaum to get rid of Lenzner after one day.) The combination of the imperious Levy and the nervous Lenzner was not a good match. Levy did not want him around any longer. To appease Levy, Tenenbaum took Lenzner as his assistant. One of the first deals Tenenbaum and Lenzner worked on together involved Sinclair Oil’s September 1963 agreement to buy Texas Gulf Producing Company for $252 million. Texas Gulf, which had oil and gas properties in Texas and Louisiana as well as production operations in Libya and Peru, had put itself up for sale the previous April. Texas Gulf’s shareholders approved the sale to Sinclair in May 1964 but the deal could not close until the Libyan government signed off on the transfer of Texas Gulf’s production facility in the country to Sinclair. Whether Libya would sign off was becoming a greater and greater threat to the deal’s closing and for Goldman’s arbitrage department a greater and greater concern. The firm had a bunch of money tied up in a bet the deal would close, but without the Libyan’s government’s sign-off it could not happen. Nerves were starting to fray on Broad Street.

  In typical fashion, Tenenbaum had been in regular communication with Joe Dowler, the treasurer of Sinclair Oil. At one point, Lenzner asked Tenenbaum to let him help. “L. Jay, I know you’re working with Dowler, but let me follow this thing,” Lenzner told Tenenbaum. “I know all the stringers for the New York Times that are out in Libya. I can get us a lot of information because there’s a feast of Ramadan, where nobody did anything, and I know what they’re doing during Ramadan,” which is the ninth month of the Islamic calendar and usually in the late summer. Lenzner spoke with the Times stringers in Libya and from them received “wonderful information,” Tenenbaum said, which he then shared with Dowler. “I was able to feed it to Dowler and get into Dowler’s good graces,” he said. “This is what you did. You formed a friendship [based on] the fact that you were valuable to them. And you got stuff back from them. ‘Joe, everything okay with this merger?’ I would ask. He would reply, ‘Fine.’ ”

  Another important link in Goldman’s information chain about pending deals—in addition to bankers, lawyers, and corporate executives—was other Wall Street arbitrageurs, the most prominent among them being Harold Cohen and Dicky Bear, at L. F. Rothschild, and George Soros and Arthur Klingenstein, at Wertheim & Company. For reasons not entirely clear—beyond allowing Goldman to make sure valuable information about deals was shared—Goldman had joint-account relationships with both L. F. Rothschild and Wertheim during this time, meaning that the firms would jointly arb certain deals together, sharing ratably in the profits and losses. Goldman and L. F. Rothschild were “joint account” on the Texas Gulf deal, for instance.

  Having access to the intelligence Lenzner was uncovering in Libya was very helpful to Goldman, L. F. Rothschild, and Sinclair. “Lenzner’s doing a beautiful job getting us information,” Tenenbaum said. “One day he comes to me, very excited. He says, ‘L. Jay, L. Jay, we’ve got a problem in Libya. I just heard that there may be an uprising in Libya, civil war, something in Libya. It’s terrible.’ I said, ‘Oh, my God!’ ” It turned out there was some early uprising involving Libyan colonel Mu‘ammar al-Gaddafi. Tenenbaum suggested to Lenzner that he call the Libyan ambassador to the United Stat
es and “check the story and see what it’s about.” Lenzner thought that was a great idea. “So, he goes away,” Tenenbaum said. “An hour later, he comes back to me. He said, ‘Oh, my god. We’re in trouble. We’re in trouble.’ I said, ‘Bob, what’s wrong? What’s wrong?’ He says, ‘The Goldman Sachs’s operator attached me to the Liberian ambassador, instead of the Libyan ambassador.” Lenzner told the Liberian ambassador to the United States that there was “a revolution going on in your country.” The ambassador said to Lenzner, “What are you talking about?” Lenzner said, “Well, I heard about it.”

  “My god,” the ambassador said. “You’re telling me there’s a revolution in Liberia.”

  Lenzner replied, plenty flustered, “No, Libya. I don’t know what … Oh, my god …” That’s when Lenzner got off the phone and told Tenenbaum what happened. He realized quickly he had screwed up.

  Tenenbaum called Dicky Bear, at Rothschild. “I said, ‘You know what my nut’s done now?’ ” Tenenbaum said. “I tell him the story.”

  After getting off the phone with Tenenbaum, Bear decided he was going to play a joke on Lenzner. He waited thirty minutes and went back to his office, where his private phone was, and called Lenzner. “Lenzner,” Bear said, officiously, “John K. Smith with the U.S. State Department. We’ve just had a complaint from the Liberian people that you’re spreading rumors of revolution in their country.”

  “Well, Lenzner goes bananas,” Tenenbaum said. “Comes back and tells me.”

  Tenenbaum told Lenzner that the call was actually from Dicky Bear, who was pulling Lenzner’s leg. “He grabbed everything on his desk and he swept the whole thing right off the desk,” he said. “He says, ‘God damn it.’ He left the office and didn’t come back for three days.” In the end, the Libyan government approved the Texas Gulf deal in November 1964. The deal closed three weeks later, and Goldman made plenty of money.

  Another time, David Henkel, a distinguished and very Waspy partner at Sullivan & Cromwell, came to Goldman to meet with Levy and Lenzner to discuss a legal concept related to arbitraging a deal. The three men met together in a small conference room. After about three minutes of listening to Henkel, Levy had had enough. “Gus suddenly becomes furious,” Lenzner recalled. “In his inimitable New Orleans accent, he barks: ‘I don’t wanna hear what I CAN’T DO; I wanna hear WHAT I CAN DO!’ And he bolts the room leaving me there to clean up. That’s what I learned from six years under Gus Levy: ‘I DON’T WANNA HEAH WHAT I CAN’T DO. I WANNA HEAH WHAT I CAN DO!’ ”

  Around this time, Albert Feldman, Goldman’s trader devoted to arbitrage, quit because Robert Mnuchin made partner and he didn’t. Bruce Mayers, then an arb at a small Wall Street firm, had done some trading with Mnuchin at Goldman, and when Feldman quit, Mnuchin called up Mayers to see if he wanted to take the job that Feldman had vacated. Mayers, a graduate of Erasmus High in Brooklyn and the Wharton School in Philadelphia, had been content to make around thirty thousand dollars a year at Gregory & Sons, a small brokerage, doing little deals. “Which was really good money in those years,” he remembered. Mayers was doing well at Gregory & Sons and had done well at his previous firm by making bits of money here and there, taking advantage of differences in the pricing of various securities. “I did some really very big deals which kind of made a name for myself, which is not meant in any way other than the fact that I was growing by devoting my time to one thing while the Goldman Sachses and the L. F. Rothschilds and Salomon Brothers of the world, which were the bigger names in arbitrage, had different parameters,” he said.

  He really did want to work at Goldman but felt an obligation to stay at Gregory & Sons because he had not been there very long. But in the wake of Feldman’s departure, Tenenbaum and Mnuchin were increasingly anxious to find a trader to replace Feldman. “It got to the point one night where L. Jay said, ‘Will no amount of money buy you?’ ” Mayers recalled. “Well, jeez, I had never heard that expression before.” Goldman ratcheted up the pressure further on Mayers. “How would you like to make a hundred thousand dollars a year?” they asked him. “Jesus, that was absolutely mind-boggling to me,” he remembered. “And I said, ‘It’s not the money. It’s the fact that I have this obligation, a moral obligation, legal if you want but nothing in writing, to spend a year with Gregory & Sons.’ ” Tenenbaum told Mayers Goldman could not wait, and if he wanted the job he needed to decide sooner rather than later. Mayers went to see Hamilton W. Gregory III, the head of the firm, and told him he had an offer to go to Goldman. “Jesus, that’s the Yankees of Wall Street,” Gregory told him. They resolved that if he could find his own replacement—which he soon did—Gregory would release him from his moral obligation to stay at his firm.

  Mayers started at Goldman on Valentine’s Day 1966, and for the balance of the year, he received his pro rata for the time that year he worked at Goldman, or $87,500. As much as he loved working at Goldman, he noticed a few things right from the start that were troubling to him. First, even though some block trades were not particularly profitable, Levy wanted him to trade them anyway. “He would put his two cents in,” Mayers remembered, “and he would say, ‘I saw Morgan Stanley put this block of stock on. Did you have a chance to bid that?’ I said, ‘Yes, I got the call, it was from such-and-such a fund, but I didn’t think the price was right. They wanted to sell it at thirty-two and that clearly wasn’t worth taking on that.’ And he would say, ‘Brooth’—he had this lisp—‘Brooth, that’s a client of the firm’s. You’ve gotta lift a leg a little bit to take care of what they want.’ ” Mayers said he learned to show a little leg. “It was not necessarily in my best interest as a trader,” he said. “But in the long run, it was in the best interest of the firm to be identified with constantly doing the right thing. I understood that. But I was still personally motivated. I mean, I was motivated for Goldman, obviously, but I said, ‘Jeez, why should I end up taking the loss and at the end of the year they’re gonna say you lost a lot of money on this or whatever?’ But I learned how to do that, [and] that was the whole basis of block trading. That was never a moneymaker.”

  Mayers also was uncomfortable with Levy’s arrangements with L. F. Rothschild and Wertheim. “One of the things that really gripped me the wrong way at Goldman is that we did a lot of business, joint account, with Rothschild,” he said, “so the relationship between Levy and Cohen was obviously a strong one.” Mayers said he “fought it from day one” but soon enough decided, “What’s the point?” since Levy was the boss and Levy liked the relationship the way it was and had no interest in changing it. Mayers remembered one arbitrage he did, in 1970, in some AT&T bonds where the issue of the joint accounts—in this instance, the issue involved Wertheim—“came to a head” with Levy. When he had the trade on, he discovered that when it came to AT&T arbitrage trades, Goldman was always joint account with Wertheim. This particular trade involved bonds that AT&T had issued with five-year warrants. Mayers called it the “spotted zebra” trade because it was “a unit of two totally diverse things” that lent itself to “terrific trading opportunities.” He made $200,000 on the trade on the first day, which certainly caught Levy’s attention.

  During the few weeks the trade was on, though, Mayers knew that Wertheim had traded none of the units. Half of Goldman’s profit went to Wertheim anyway. “That’s great,” Mayers told Levy. “I’m the arbitrageur and I’m stuck with doing business with Wertheim, who didn’t do one trade during the three-week period, nothing.” At Mayers’s urging, Goldman ended the deal with Wertheim. “I said, ‘As long as we’re doing this why don’t you review what we’re doing with L. F. Rothschild, too,’ ” he recalled. “And we did that and we parted amicably.” Mayers got a plaque and a dinner from Goldman for creating one of the best arbitrage trades of the year.

  Before receiving that modest accolade, though, Mayers had a major dispute with Levy about a trade he had made on the AT&T bonds. He had sold $4 million of the bonds, plus the attached warrants, to a very big trading account Goldman had. �
�I wouldn’t want to use the name,” he said. “But one of the largest accounts.” He had offered the bonds at 947⁄8 to 95, a very tight spread. But the client came back and said he wanted to buy them even tighter, at 9415⁄16. Mayers was slightly perturbed that the guy was cutting it so close but he agreed to the deal. That was the end of the trade. Three hours later, Mayers got a call from an intermediary saying that the client wanted to cancel the trade. It turned out the price of the bonds had fallen to around 94½ in those few hours and the client wanted out. “It was an absolute idiotic reason,” Mayers said. Mayers told the intermediary “a deal’s a deal” and he would not rescind it. He hung up the phone. The ostensible reason he wanted to cancel the trade, Mayers was told, was because the client had “an obligation to trade with Morgan Stanley.” Of course, Mayers knew that he had offered a better price than Morgan Stanley had. “I’m not canceling the trade,” he said. “Click.”