Often it seemed like Peterson’s mind drifted to those larger public issues. During investment committee and management committee meetings he would scrawl away furiously on yellow legal pads, preparing his next speech or book. But his brain could entertain more than one intricate line of thought at a time. Jonathan Colby, who worked at Blackstone from 1989 to 1996 before moving to another buyout firm, Carlyle Group, describes his first job interview with Peterson. It began in Peterson’s office, then shifted to a limo that took Peterson to an event where he was to speak. Peterson drafted his speech in the car, “scribbling away on his legal pad the whole time,” while Colby talked on, Colby says. Later that evening, Colby met with Schwarzman back at Blackstone’s offices.
“Steve asked me how it went with Pete. I told him I don’t think Pete had heard a word I said. So Steve called up Pete at home and asked him what I’d said. Pete was able to repeat all of it, virtually verbatim.”
Peterson rarely deigned to shoot the breeze with junior or midlevel employees. One, who spoke with Schwarzman almost daily, says Peterson was remote, never once sitting down to talk. Many ex-staffers recall passing him on the way to the elevator accompanied by luminaries like Henry Kissinger, who sometimes stopped by for lunch. They remember the annual Blackstone Christmas bashes Peterson hosted where, decked out as Santa Claus, he would distribute Hermès ties to the men and scarves to the women.
For one party, Blackstone chartered a boat with a helipad to navigate the waters off Manhattan. Peterson was perceptibly uncomfortable mingling with anyone under the age of thirty, says a former associate, then in his twenties. “The joke was that Pete wanted a helipad so he could make a quick getaway and not have to spend time talking to younger people.”
Nevertheless, Peterson continued to shape the firm by his tone, veterans say. “He was absolutely a presence, a day-to-day presence, really throughout the nineties” through his role on the investment and management committees, says partner Lawrence Guffey, who calls Peterson a “compass for the firm.” It was Schwarzman, though, who set the agenda. And no one would ever accuse him of being aloof or detached. He was a ferociously engaged boss.
His ambition was manifest while he was growing up in Huntington Valley, Pennsylvania, a Philadelphia suburb. In a revealing anecdote in a 2008 magazine profile, Schwarzman recounted how as a teenager he had urged his father to develop the family store, which sold linens and housewares, into a chain. The elder Schwarzman retorted that the business was fine just as it was and he intended to keep it that way. Unsatisfied with that answer, young Steve kept hectoring his father.
“I saw the business as a model you could expand nationally. If you look at how Bed Bath & Beyond has done, that probably wasn’t a terrible judgment,” Schwarzman says. “My dad had no interest whatsoever in doing it. He was a very bright person, but he was not aggressive.”
In school, Schwarzman’s competitive drive was funneled into sports. “He could fly, man!” says Bobby Bryant, who ran track with Schwarzman at Huntington Junior High School and who remains a friend. “In junior high, he was only two-tenths of a second off the national junior-high record for the hundred-yard dash. He anchored our relay team. He was a short guy, but he could jump up and grab the basketball rim.”
Schwarzman also excelled academically at Abington High School and won a spot at Yale in 1965, where he majored in social sciences. He was a solid A and B student, recalls Jeffrey Rosen, a Yale classmate and friend, who today is deputy chairman of Lazard, the investment bank. “Steve was an intense, competitive athlete,” Rosen says, who loved to play touch football and soccer in the large, interior courtyard at Davenport College, where he resided.
He was also something of a ladies’ man, which was no small achievement given that Yale was still an all-male school at the time. He struck up a friendship with Davenport’s dean, Horace Taft, a prominent physicist, and his wife, Mary Jane, who loved the ballet. She kindled a fascination in Schwarzman for dance. In his junior year, Schwarzman started a club, the Davenport Ballet Society, and arranged for its members to see a dress rehearsal of the Nutcracker Suite by George Balanchine’s New York City Ballet at Lincoln Center. Later that year, Schwarzman staged a dance festival at which students from nearby women’s colleges performed. Rosen suspected Schwarzman started the club at least in part “as an excuse to meet girls,” yet the event was a big hit. Schwarzman also won an invitation to join Skull and Bones, the secret and elite society of Yale seniors whose alumni include both Presidents Bush. (George W. Bush joined Skull and Bones in 1968, a year before Schwarzman, and the two knew each other but not well, Schwarzman says.)
Fresh out of Yale and off the family dole in June 1969, Schwarzman set off to try his luck on Wall Street. Through a contact in the Yale admissions office, he landed a position at Donaldson, Lufkin & Jenrette, an investment bank. There was little glamour or glitz to this young banker’s life, though. As a penny-pinching plebian, he rented tiny flats by the month in gritty neighborhoods. His first was a fourth-floor walk-up on the Lower East Side, next to the precinct house where the opening sequence of the 1970s television series Kojak was shot. Cockroaches skittered away when he arrived home and flipped on the lights. A subsequent rental, on Second Avenue and Forty-ninth Street, above the Midtown Shade Company, was one and a half rooms with no kitchen and a common bathroom down the hall.
The living conditions were a comedown from the ivied world of Yale, as was his stint at DLJ, where his energy and cleverness didn’t make up for his cluelessness about finance. At Yale, he’d studied psychology, sociology, and anthropology; the business world was terra incognita. “They gave me an office and a secretary, but I was utterly unprepared for any commercial enterprise, let alone a fast-moving one like DLJ and the securities business. I had no knowledge of accounting. I didn’t even know what a common stock was before I went there.”
He calls his time at DLJ “a very searing experience.” Even so, he says, he showed enough raw talent to earn a farewell lunch with DLJ senior partner Bill Donaldson. “I’m not sure I did anything to merit that lunch, other than the fact that Bill had hired me,” Schwarzman says. “I asked him why he had hired me, because in my view, I had provided no value-added for his firm.” Donaldson, Schwarzman says, answered: “I make bets on people on my own instincts, and my instinct is that someday you’re going to be the president of DLJ.” (Donaldson says he has no memory of the lunch or of making such a statement but says Schwarzman was a hardworking and promising young man.)
He was accepted to business school at Harvard and got his MBA in 1972. After graduating, he entertained offers from Lehman Brothers and Morgan Stanley. Back then Wall Street still was ethnically divided into the WASP firms of Morgan Stanley and First Boston; the mostly Catholic Merrill Lynch; and the elite Jewish houses of Lehman, Goldman, and Salomon Brothers. Those divisions would begin to break down later in the 1970s, but Schwarzman claims he was only the third Jew to receive a job offer from Morgan Stanley. When the bank’s president, Robert H. B. “Bob” Baldwin, extended the offer, he qualified it, telling Schwarzman he would have to “change [his] personality to fit in.” Schwarzman told him he wouldn’t do that, and chose Lehman.
The Steve Schwarzman who became the driving force of Blackstone reflected the verve and talent of that younger man. He also had paradoxical qualities.
In Blackstone’s early years he worked tirelessly, logging fourteen-hour days, his mind constantly immersed in ways to strengthen the fledgling business. Associates and bankers fielded calls from him at all hours to hash over ideas. “He would often call me on Saturday morning to ask me what I thought of this or that, or I would call him,” says Jimmy Lee, the Chemical Bank lending chief. “He was building his firm, I was building mine, and we reinforced each other.”
Former partner Bret Pearlman, who worked at the firm from 1989 to 2004, remembers as a young employee getting voice mails from Schwarzman left at 5:30 A.M. commenting on memos Pearlman had left him the night before. The calls spoke
volumes, both about Schwarzman’s attentiveness and about the work ethic he demanded. “Steve never expected more out of you than he expected out of himself,” says Pearlman.
To many, the desire and drive were linked uncomfortably to a less attractive quality. On Wall Street, where money is the yardstick of success, greed is as ubiquitous as exhaust fumes at Daytona. But even by the standards of the Street many considered Schwarzman a money grubber. “When I worked with Steve, he was aggressively greedy,” says one former partner. “But he didn’t try to hide it. He was always honest and straight, and his word was his bond. A lot of people motivated by money are elliptical and disingenuous. They will put their arm around you and reach into your pocket. Whereas Steve would come up to you and say, ‘I’m going to try and take your wallet.’ ” A banker recalls once asking a Blackstone partner about Schwarzman’s athletic prowess. “I asked him if what I’d heard was true, that Steve was good at basketball and could jump really high,” the banker says. “He said, ‘Yeah, if he’s jumping for a bag of money!’ ”
As he grew richer, the displays of his wealth became more conspicuous, and irksome, even to other financial types. The head of another private equity firm recalls walking along a white-sand beach in St. Barts in the Caribbean with his children in the 1990s when an enormous yacht pulled into the harbor and weighed anchor. Two Jet Skis piloted by crew members emerged from the boat and motored in with a cargo of a folding table and chairs, big umbrella, tableware, a wine bucket, and fancy food. After laying the table, the two buzzed back to the yacht to retrieve a tall and striking woman and a shorter man. Moving in to see who was responsible for this strange scene, the witness recognized Schwarzman and his wife. “Here I am schlepping my kids around, drenched in sweat, and Schwarzman pulls up in a yacht to have lunch. To say it was ostentatious is an understatement. I’m not pleading poverty here, but I really did feel like there should be a revolution.”
Schwarzman had a softer side. The same person who mercilessly hounded Steven Winograd from Blackstone over the Edgcomb debacle also cultivated warm relations with young recruits such as Howard Lipson, David Blitzer, and James Mossman, furthering their careers. He took pains to remember subordinates’ wedding anniversaries and birthdays. “If you were going through something tough personally, Steve made a point of calling. He was good about stuff like that,” Lipson says. He could be compassionate, too. When Steven Fenster, a friend and former Lehman partner, came down with a fatal form of pancreatic cancer, Schwarzman saw to his medical treatment. After Fenster died, Schwarzman and Allan Kaplan, another Lehman alumnus, raised money to endow a professorship in his name at Harvard Business School.
He was also free of airs. He enjoyed working directly with young analysts and associates, for instance, and often solicited their views directly. On the eve of an investment committee meeting, former partner Bret Pearlman says of his early years at the firm, Schwarzman would often call to get Pearlman’s views about a proposed deal. “He always did that with the younger people,” Pearlman says. “He knew he needed that other avenue of conversation.”
Early on Schwarzman stood out in a field of aspiring buyout moguls, says one investor who first met him in the early 1990s. “I just remember thinking this guy is a friggin’ dynamo. Holy moly! He was all energy, all these different insights and thoughts,” says Mario Giannini of Hamilton Lane, which advises pension funds and other investors. “Who is this guy? He has this sort of blend of self-confidence and self-deprecating style that was interesting. At the time it was a very different style from a lot of his buyout peers. He can be so self-deprecating, and you don’t normally hear that from people in the industry. It’s disarming sometimes. And yet as you listen to him, he’s just very smart.”
Schwarzman had an “unfiltered” quality, as the head of another private equity firm puts it. He was enthusiastic and spontaneous and at times just plain brash and oddly insensitive. His manner could thus charm or irritate, accordingly. “There’s something impishly, immaturely admirable about Steve,” this person says. Even friends and partners who were fond of him found themselves rolling their eyes at the ill-considered thoughts that escaped his mouth on occasion.
Internally, there was no question that Schwarzman was the boss, but he didn’t dictate decisions from the top. “Steve is not the sort to lay down the law and say, ‘I think we should do this,’ ” says former partner Simon Lonergan. He didn’t need to dominate the room; he preferred to hear views from around the table before making a decision.
Still, an arrogance could shine through at times. In 1990 he told a Wall Street Journal reporter that Blackstone’s success derived from his ability to “explain financial stuff to morons,” and he had a penchant for putting down competitors and others behind their backs. His seeming compulsion to brag—about being the first Jew admitted to Skull and Bones and the first banker in history to orchestrate a sealed-bid corporate auction—rubbed many the wrong way.
Despite his savvy as a banker and manager, even after years as a CEO he could be strangely tone-deaf and tactless at times. At Blackstone’s annual meeting with its fund investors in Florida in the spring of 2008, he put his foot in his mouth while explaining why a buyout Blackstone had planned of a residential lender, PHH Mortgage, had collapsed that spring. “Trying to buy a mortgage bank in the midst of the subprime crisis was the equivalent of being a noodle salesman in Nagasaki when the atomic bomb went off,” he said. “Not a lot of noodles left, or even a person, and that’s what happened to us on this deal.” The radioactive jest, which quickly leaked out to the press, could not have come at a worse time, as the firm was trying to catch up to competitors like Carlyle and Texas Pacific Group in Asia.
Schwarzman “always has a few off-the-cuff zingers that leave heads shaking,” says a limited partner who was there.
As the firm grew larger and went public, that blindness to the way he was perceived became a serious liability.
CHAPTER 8
End of an Era, Beginning of an Image Problem
The merger mania that had heated up in 1988 intensified in early 1989, fueling Blackstone’s M&A unit, which advised on $8 billion of deals that year, taking in fees from clients such as Sony, PepsiCo, French computer maker Société des Machines Bull, and Varity Corp. The firm also lined up a buyer for the National Enquirer, the supermarket tabloid. Another fountain of fees was Larry Fink’s bond-investment affiliate, Blackstone Financial Management, which turned profitable within months of its launch. Fink used just $150,000 of the $5 million credit line Blackstone had provided to start the joint venture, and he quickly repaid that. By the end of 1989 Fink was managing $2.7 billion of outside investors’ money, more than four times the $585 million his group had raised a year and a half earlier. That year Fink’s team pulled in $13.4 million in management fees, posting a $3.9 million net profit. Blackstone’s partners had struck gold. They collectively owned 40 percent of a successful, fast-growing money manager, and it had cost them next to nothing.
But the waning months of the decade were marked by mounting anxiety over a faltering economy and what that would mean for leveraged buyouts. In the early fall of 1989, fears began to surface that a raft of recent LBOs would buckle under their onerous debt loads. As the year wore on, panicked lenders started to cut off financing for future LBOs altogether.
The brewing economic storm battered Blackstone early. It had aggravated the financial ills of Wickes, the textiles and home improvement conglomerate Blackstone had bought, and triggered the demise of both Edgcomb and Blackstone’s risk-arbitrage operation. The turn of mood in the markets would clobber the firm a fourth time that year, nearly capsizing Blackstone’s $1.6 billion buyout of Chicago and Northwestern, a regional railroad, and threatening the very existence of Donaldson, Lufkin & Jenrette, Schwarzman’s first employer out of college and one of the main lenders for the purchase.
In the CNW deal, like Transtar, Blackstone stepped in as a white knight—an ally of management—for a company facing a hostile ta
keover bid. In April 1989, Japonica Partners, a Drexel-backed corporate raider, launched a hostile offer for CNW Corporation, the railroad’s publicly traded parent, after buying up nearly 9 percent of CNW’s shares in the open market. Immediately after catching wind of Japonica’s move, CNW chief executive Robert Schmiege reached out to potential investors he thought would be friendly toward management to see if they’d be willing to trump Japonica’s $44-a-share bid. Both Blackstone and DLJ expressed interest, and at Schmiege’s suggestion they pooled forces and started crafting a joint offer.
Soon after, a third potential coinvestor surfaced: Union Pacific Railroad, the nation’s third-largest railroad. UP, whose tracks from the West Coast ended at Omaha, had long coveted CNW, whose lines ran from there to Chicago, the nation’s rail hub and the connection to eastern lines. UP’s chairman, Drew Lewis, transportation secretary in the Reagan administration and an old friend of Peterson’s, called Peterson and said UP wanted in.
UP was the obvious ultimate owner of CNW, but under federal rules it could not buy more than 25 percent without obtaining regulatory approval, a process that could stretch on for years. UP collaborated with CNW on shipments to and from the East, and Lewis was horrified at the thought of CNW’s falling into Japonica’s hands, fearing that the raider would slash upkeep and hurt service. The federal railroad merger rules prevented UP from topping Japonica’s offer. Taking a stake in a Blackstone buyout of CNW would serve UP’s purposes nicely.
“I asked Lewis, ‘What would you do if you owned it?’ ” Peterson says. Lewis said that CNW’s railbeds hadn’t been upgraded and that UP wanted to be able run trains at up to fifty-five miles per hour. “So we said, why don’t we make that railbed investment part of the deal?” Lewis also requested that CNW hand off to UP some of its highly lucrative business hauling low-sulfur coal from mines in Wyoming’s Powder River basin. “We told him that if his prices were competitive, that would be fine with us,” says Peterson.
King of Capital: The Remarkable Rise, Fall, and Rise Again of Steve Schwarzman and Blackstone Page 10
