King of Capital: The Remarkable Rise, Fall, and Rise Again of Steve Schwarzman and Blackstone
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His rise up the corporate ladder had been swift. The son of Greek immigrants who ran a twenty-four-hour coffee shop in the railroad town of Kearney, Nebraska, Peterson graduated summa cum laude from Northwestern University and earned an MBA at night from the University of Chicago. He excelled in the corporate world as a young man, first in marketing. By his midtwenties, on the strength of his market research work, he was put in charge of the Chicago office of the McCann-Erickson advertising agency. His first big break came when he was befriended by Charles Percy, a neighbor and tennis partner who ran Bell & Howell, a home movie equipment company in Chicago. At Percy’s urging, Peterson joined Bell & Howell as its top marketing executive, and in 1961 at age thirty-four, he was elevated to president. In 1966, after Percy was elected to the U.S. Senate, Peterson took over as CEO.
Through an old Chicago contact, George Shultz (later treasury secretary and then secretary of state), Peterson landed a position in early 1971 as an adviser to President Richard Nixon on international economics. Though Peterson had allies in the White House, most notably Henry Kissinger, the powerful national security adviser and future secretary of state, he wasn’t temperamentally or intellectually suited to the brutal intramural fighting and stifling partisan atmosphere of the Nixon White House. He lacked the brawler’s gene. At one point Nixon’s chief of staff, H. R. Haldeman, offered Peterson an office in the West Wing of the White House, nearer the president. But the move would have displaced another official, Donald Rumsfeld (later George W. Bush’s defense secretary), who fought ferociously to preserve his favored spot. Peterson knew Rumsfeld from Chicago and didn’t want to pick a fight or bruise his friend’s ego, so he turned down Haldeman’s offer. Kissinger later told Peterson that it was the worst mistake he made in Washington.
Peterson soon found himself in the crosshairs of another headstrong figure: treasury secretary John Connally, the silver-maned, charismatic former Texas Democratic governor who was riding with President Kennedy when Kennedy was assassinated and took a bullet himself. Connally felt that Peterson’s role as an economics adviser intruded on Connally’s turf and conspired to squelch his influence.
A year after joining the White House staff, Peterson was named commerce secretary, which removed him from Connally’s bailiwick. In his new post, Peterson pulled off one splashy initiative, supervising talks that yielded a comprehensive trade pact with the Soviets. But he soon fell out of favor with Nixon and Haldeman, the president’s steely-eyed, brush-cut enforcer, in part because he loved to hobnob and swap opinions with pillars of the liberal and media establishments such as Washington Post publisher Katharine Graham, New York Times columnist James Reston, and Robert Kennedy’s widow, Ethel. The White House saw Peterson’s socializing as fraternizing with the enemy.
Nixon dumped Peterson after the 1972 presidential race, less than a year after naming him to the cabinet. Before leaving town, Peterson delivered a memorable parting gibe at a dinner party, joking that Haldeman had called him in to take a loyalty test. He flunked, he said, because “my calves are so fat that I couldn’t click my heels”—a tart quip that caused a stir after it turned up in the Washington Post.
Peterson soon moved to New York, seeking a more lucrative living. Wooed by several Wall Street banks, he settled on Lehman, drawn to its long history in merchant banking. But two months after being recruited as a rainmaker and vice chairman, his role abruptly altered when an internal audit led to the horrifying discovery that the firm’s traders were sitting quietly on a multimillion-dollar unrealized loss. Securities on its books were now worth far less than Lehman had paid and Lehman was teetering on the edge of collapse. A shaken board fired Fred Ehrman, Lehman’s chairman, and turned to Peterson—the ex-CEO and cabinet member—to take charge, hoping he could lend his management know-how and his prestige to salvage the bank.
The man responsible for the trades that nearly sank the firm was its trading department chief, Lewis Glucksman, a portly bond trader known for his combustible temper, who walked the floor with shirt flaps flying, spewing cigar smoke. There were some, particularly on the banking side of the firm, who wanted Glucksman’s head over the losses. But Warren Hellman, an investment banker who took over as Lehman’s president shortly before Peterson was tapped as chairman and chief executive, thought Lehman needed Glucksman. The trader was the one who understood why Lehman had bought the securities and what went wrong. “I argued that the guy who created the mess in the first place was in the best position to fix it,” Hellman says. Peterson concurred, believing, he says, that “everyone is entitled to one big mistake.” Glucksman made good on his second chance and, under Peterson, Lehman rebounded. In 1975 BusinessWeek put Peterson’s granite-jawed visage on its cover and heralded his achievement with the headline “Back from the Brink Comes Lehman Bros.”
Despite his role in righting the firm, Peterson never fit easily into Lehman’s bare-knuckled culture, particularly not with its traders. His cluelessness about the jargon, if not the substance, of trading and finance amazed his new partners. “He kept calling basis points ‘basing points,’ ” says a former high-ranking Lehman banker. (A basis point is Wall Street parlance for one one-hundredth of a percentage point, a fractional difference that can translate into big gains and losses on large trades or loans. Thus, 100 basis points equals 1 percent of interest).
Peterson was appealing in many ways. He was honest and principled, and he could be an engaging conversationalist with a dry, often mordant, wit. He wasn’t obsessed with money, at least not by Wall Street’s fanatical norm. But with colleagues he was often aloof, imperious, and even pompous. In the office, he’d expect secretaries, aides, and even fellow partners to pick up after him. Rushing to the elevator on his way to a meeting, he would scribble notes to himself on a pad and toss them over his shoulder, expecting others to stoop down and gather them up for his later perusal.
At times, he seemed to inhabit his own world. He would arrive at meetings with yellow Post-it notes adorning his suit jacket, placed there by his secretary to remind him to attend some charity ball or to call a CEO the next morning. The off-in-the clouds quality carried over into his years at Blackstone, too. Howard Lipson, a longtime Blackstone partner, remembers seeing Peterson one blustery night sporting a bulky winter hat. Affixed to its crown was a note: “Pete—don’t forget your hat.” Lipson recalls, too, the terror and helplessness Peterson would express when his secretary stepped away and he was faced with having to answer his own phone. “Patty! Patty!” he’d yowl.
Peterson enjoyed the attention and ribbing that his absentmindedness provoked from others. In his conference room, he would later showcase a plaque from the Council on Foreign Relations given out of appreciation for, among other things, “his unending search for his briefcase.”
“This was endearing stuff,” says Lipson. “Some people said he was losing it, but Pete wasn’t that old. I think it was a sign he had many things going on in his mind.” David Batten, a Blackstone partner in the early 1990s who admires Peterson, has the same take: “Pete was probably thinking great thoughts,” he says, alluding to the fact that Peterson often was preoccupied with big-picture policy issues. During his Lehman years, he was a trustee of the Brookings Institution, a well-known think tank, and occasionally served on ad hoc government advisory committees. Later, at Blackstone, he authored several essays and books on U.S. fiscal policy.
If he sometimes seemed oblivious to underlings, he was assiduous in cultivating celebrities in the media, the arts, and government—Barbara Walters, David Rockefeller, Henry Kissinger, Mike Nichols, and Diane Sawyer, among others—and was relentless in his name-dropping.
Far outweighing his shortcomings was his feat of managing Lehman through a decade of prosperity. This was no small achievement at an institution racked by vicious rivalries. Since the death in 1969 of its longtime dominant leader, Bobbie Lehman, who’d kept a lid on internal clashes, Lehman had devolved into a snake pit. Partners plotted to one-up each other and to capture mor
e bonus money. One Lehman partner was rumored to have coaxed another into selling him his stock in a mining company when the first partner knew, which the seller did not, that the company was about to strike a rich new lode. In a case of double-dealing that enraged Peterson when it came to light, a high-ranking partner, James Glanville, urged one of his clients to make a hostile bid for a company that other Lehman partners were advising on how to defend against hostile bids.
The warfare was over the top even by Wall Street’s dog-eat-dog standards. Robert Rubin, a Goldman Sachs partner who went on to be treasury secretary in the Clinton administration, told Lehman president Hellman that their two firms had equally talented partners. The difference, Rubin said, was that the partners at Goldman understood that their real competition came from beyond the walls of the firm. Lehman’s partners seemed to believe that their chief competition came from inside.
The Lehman infighting amazed outsiders. “I don’t understand why all of you at Lehman Brothers hate each other,” Bruce Wasserstein, one of the top investment bankers of the time, once said to Schwarzman and another Lehman partner. “I get along with both of you.”
“If you were at Lehman Brothers, we’d hate you, too,” Schwarzman replied.
The bitterest schism was between Glucksman’s traders and the investment bankers. The traders viewed the bankers as pinstriped and manicured blue bloods; the bankers saw the traders as hard-edged and low bred. Peterson tried to bridge the divide. A key bone of contention was pay. Before Peterson arrived, employees were kept in the dark on how bonuses and promotions were decided. The partners at the top decreed who got what and awarded themselves the lion’s share of the annual bonus pool regardless of their contributions. Peterson established a new compensation system, inspired in part by Bell & Howell’s, that tied bonuses to performance. He limited his own bonuses and instituted peer reviews. Yet even this meritocratic approach failed to quell the storm of complaints over pay that invariably erupted every year at bonus season. Exacerbating matters was the fact that each of the trading and advisory businesses had its ups and downs, and whichever group was having the stronger year inevitably felt it deserved the greater share of Lehman’s profits. The partners’ brattishness and greed ate at Peterson, whose efforts to unify and tame Lehman flopped.
Peterson had allies within Lehman, mostly bankers, but few of the firm’s three dozen partners were his steadfast friends. He was closest to Hellman and George Ball, a former undersecretary of state in the Kennedy and Johnson administrations. Of the younger partners, he took a liking to Roger Altman, a skilled “relationship” banker in Peterson’s mold, whom Peterson named one of three coheads of investment banking at Lehman. Peterson was also drawn to Schwarzman, who in the early 1980s chaired Lehman’s M&A committee within investment banking. Schwarzman wasn’t the bank’s only M&A luminary. In any given year, a half-dozen other Lehman bankers might generate more fees, but he mixed easily with CEOs, and his incisive instincts and his virtuosity as a deal maker set him apart.
Those qualities were prized by Peterson, and over the years, the two developed a kind of tag-team approach to courting clients. Peterson would angle for a chief executive’s attention, then Schwarzman would reel him in with his tactical inventiveness and command of detail, figuring out how to sell stocks or bonds to finance an acquisition or identifying which companies might want to buy a subsidiary the CEO wanted to sell and how to sell it for the highest price.
“I guess I was thought of as a kind of wise man who would sit down with the CEO in a context of mutual respect,” says Peterson. “I think most would agree that I produced a good deal of new advisory business. But it’s one thing to produce it, and it’s another to implement it, to carry most of the load. I experimented with various people in that role, and Steve was simply one of the very best. It was a very complementary and productive relationship.”
Schwarzman was more than just a deal broker. In some cases, he was integrally involved in restructuring a business, as he was with International Harvester, a farm equipment and truck maker, in the 1970s. Harvester’s CEO, Archie McArdle, originally phoned Peterson, with whom he had served on the board of General Foods, and told Peterson he wanted Lehman to replace Morgan Stanley as his company’s investment bank. Harvester was at death’s door at the time, bleeding cash and unable to borrow. Peterson dispatched Schwarzman to help McArdle perform triage and over the following months Schwarzman and a brigade of his colleagues strategized and found buyers for a passel of Harvester assets, raising the cash the company desperately needed.
Similarly, Peterson landed Bendix Corporation as a client shortly before a new CEO, William Agee, came on board there in 1976. Agee wanted to remake the diversified engineering and manufacturing company by buying high-growth, high-tech businesses and selling many slower-growing businesses. Peterson handed the assignment off to Schwarzman, who became Agee’s trusted consigliere, advising him what to buy and to sell, and then executing the deals. “Bill was a prolific deal-oriented person. I would talk to him every day, including weekends,” Schwarzman says.
Peterson and Schwarzman made an odd couple. Apart from the twenty-one-year gap in their ages, the six-foot Peterson towered over the five-foot-six Schwarzman, and Peterson’s dark Mediterranean coloring contrasted with Schwarzman’s fair complexion and baby blue eyes. While Peterson could be remote and preoccupied, Schwarzman was jaunty, down-to-earth, always engaged and taking the measure of those around him. Whereas Peterson instinctively shied away from confrontation, Schwarzman could get in people’s faces when he needed to. Their lives had followed different paths, too, until they intersected at Lehman. Schwarzman’s family had owned a large dry goods store in Philadelphia and he had grown up comfortably middle-class in the suburbs—“two cars and one house,” as he puts it—whereas Peterson was the smalltown boy of very modest means from the American heartland.
While Peterson adored the role of distinguished elder statesman, Schwarzman had a brasher way and a flair for self-promotion. That shone through in a fawning profile in the New York Times Magazine in January 1980 shortly after Schwarzman had added several M&A feathers to his cap, advising RCA on its $1.4 billion acquisition of CIT Financial Corporation and Tropicana Products’ $488 million sale to Beatrice Foods. The Times proclaimed him “probably” the hottest of a “new generation of younger investment bankers,” extolling his aggressiveness, imaginativeness, thoroughness, and “infectious vitality that make other people like to work with him.” Peterson and Martin Lipton, a powerful M&A lawyer, sang his praises.
“Normally chief executives are reticent working with someone that age, but he is being sought out by major clients,” Peterson told the Times. Schwarzman, Lipton said, possessed a rare “instinct that puts him in the right place at the right time.” (Schwarzman offered little insight into his own drive, other than saying, “I’m an implementer” and “I have a tremendous need to succeed.”) At a company outing that spring, colleagues presented him a copy of the story set against a framed mirror—so he could see his own image reflected back when he gazed at it. Not everyone at the firm responded to Schwarzman’s vanity with amusement, though. As one Lehman alumnus puts it, “He was appreciated by some, not loved by all.”
The Times feature may have been hyperbolic, but it was on the mark about Schwarzman’s abilities. “He had a pretty good ego, but Steve was inherently a great deal guy,” says Hellman, Lehman’s president in the mid-1970s. “Steve had a God-given ability to look at a transaction and make something out of it that others of us would miss,” says Hellman, who is not close to Schwarzman. Hellman goes so far as to compare Schwarzman to Felix Rohatyn of Lazard Frères, the most accomplished merger banker of the 1960s and 1970s who gained wide praise, too, for orchestrating a restructuring of New York City’s debt in 1975 that spared the city from bankruptcy.
Ralph Schlosstein, another Lehman banker from that era, recalls Schwarzman’s bold and crafty approach when he advised the railroad CSX Corporation on the sale of
two daily newspapers in Florida in November 1982. After initial bids came in, Morris Communications, a small Augusta, Georgia, media outfit, had blown away the other bidders with a $200 million offer versus $135 million from Cox Communications and $100 million from Gannett Company. Another banker might have given Cox and Gannett a shot at topping Morris, but with the disparity in the offers it was unlikely Morris would budge.
Not that CSX would have been displeased. The newspapers generated only about $6 million in operating income, so $200 million was an extraordinarily good price. “CSX was saying, ‘Sign them up!’ ” says Schlosstein, who worked on the sale with Schwarzman. Schwarzman instead advised CSX to hold off. Zeroing in on the fact that Morris had a major bank backing its bid, he reckoned Morris could be induced to pay more. Rather than reveal the bids, he kept the amounts under wraps and proceeded to arrange a second round of sealed bids. He hoped to convince Morris that Cox and Gannett were hot on its heels. The stratagem worked, as Morris hiked its offer by $15 million.
“That was $15 million Steve got for CSX that nobody else, including CSX, had the guts to do,” says Schlosstein. Today sealed-bid auctions for companies are the norm, but then they were exceedingly rare. “We made it up as we went along,” says Schwarzman, who credits himself with pioneering the idea.
As the economy emerged from a grueling recession in the early 1980s, Lehman’s banking business took off and its traders racked up bigger and bigger profits playing the markets. But instead of fostering peace at the firm, Lehman’s prosperity brought the long-simmering friction between its bankers and traders to a boil as the traders felt they were shortchanged by the bank’s compensation system.