King of Capital: The Remarkable Rise, Fall, and Rise Again of Steve Schwarzman and Blackstone
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Over time, however, there were growing strains and their camaraderie faded. Pinpointing the source is hard, but some trace it to the time around 1992 when Peterson’s slice of the profits was reduced. From the beginning, he and Schwarzman had had sole voting control over the buyout and M&A businesses and had an equal share in the profits, then about 30 percent each. As new partners arrived, they had each been given slices of what the firm made, which diluted Peterson’s and Schwarzman’s portions equally. That year the two founders agreed that, henceforth, as new partners joined, Peterson would cede more of his share to them. Thus, over time, his cut of the bottom line would steadily drop. By then, there was no dispute that Schwarzman was pulling more weight at the firm. Even so, the financial realignment marked the end of their equal partnership and an acknowledgment of Schwarzman’s primacy at the enterprise they’d created and built together.
“I felt it was fair that our shares would be diluted as we added new partners, but my shares should be diluted somewhat more than his. That is what we did, and I fully agreed it was fair,” Peterson says.
His career as a savant and writer was eating up much of his time, and he’d long ago ceded the top managerial role to his younger cofounder. What’s more, his cut would remain substantial, within five points of Schwarzman’s, and would remain well above any other partner’s.
The profit split was not what pushed the men apart, says an investment banker who is a friend of Peterson’s, but rather values and style. “With Pete, it wasn’t the money. Money didn’t matter to Pete the way it did to Steve,” says the banker, who describes Peterson’s material cravings as modest, certainly by Schwarzman’s standards. “What eventually got to Pete was Steve’s lifestyle, his flashing his wealth, his drawing attention to himself. That’s not what Pete is about.”
“Pete doesn’t believe the point of making money is to let everyone know you made it,” says a second person, who knows them both well. “Steve doesn’t have a problem with that.”
Though to this day both tout their relationship as “the longest-lasting partnership on Wall Street,” by the 2000s their relations were frayed and they carped about each other to friends. Schwarzman would grumble about Peterson still collecting millions but contributing little, while Peterson would snipe about Schwarzman’s crass displays of wealth.
There were other strains, too, at the top of an organization that shed partners faster than a dog sheds hair. In 1992, just two years after Schwarzman recruited him from First Boston for the buyout team, David Batten quit for a high-profile position at Lazard Frères, and Joe Robert, whom Batten had recruited in 1991 to buy distressed real estate in a joint venture with Blackstone, defected to Goldman Sachs. Yerger Johnstone, an M&A honcho hired from Morgan Stanley in 1991, lasted less than three years. Even by Wall Street’s easy-go standards, the revolving door at Blackstone whirled fast.
Far more consequential than those losses were three others that gutted the leadership of Blackstone’s core businesses: the departures of Henry Silverman, Roger Altman, and Larry Fink from 1991 to 1994.
Silverman was the first out, and not because he had blundered. On the contrary, Silverman oozed competence. Six years older than Schwarzman, he was shrewd, cool, and commanding, a master craftsman with an eagle eye for great deals. Schwarzman very much liked his style and to this day talks admiringly of the way Silverman foresaw when he joined Blackstone that the Days Inn hotel chain would get in trouble and that Blackstone would be able to buy it on the cheap.
There was no doubt about Silverman’s contributions at Blackstone. But Prudential Insurance, the anchor investor for Blackstone’s first fund, had it in for Silverman over a deal from his days at Reliance Capital, the investment arm of financier Saul Steinberg’s Reliance Insurance. In 1987 Prudential bought John Blair Communications, a television ad business from Telemundo, which was owned by Reliance Capital. Prudential grossly overpaid and Blair began to founder not long after the purchase. Prudential later sued Reliance and Telemundo, claiming they had misrepresented Blair’s condition. The suit was still alive in 1991 when Prudential discovered that Silverman had resurfaced at Blackstone, and it urged Schwarzman and Peterson to boot him out.
“Pru felt it would be very difficult, as the lead investor in Blackstone, to be in litigation against one of the key managers of Blackstone’s fund,” says Gary Trabka, the Prudential executive who oversaw the insurer’s investment in Blackstone’s fund at the time.
Schwarzman looked into the matter and concluded that Silverman was likely blameless, but he and Peterson felt they had no choice but to accede to their investor. Silverman didn’t have to go far to find a new job, however. He simply went to work full-time as chairman and CEO of Hospitality Franchising Systems, the hotel system he had helped Blackstone buy the year before. Blackstone gave him a chunk of HFS stock and free rein to run the business. As severance packages go, this one was a doozie, for HFS went public in 1992 and, over the next fifteen years, Silverman transformed it into Cendant Corporation, a franchising empire that controlled top brands such as the real estate brokerages Coldwell Banker and Century 21, Avis and Budget car rentals, Wyndham hotels, and the Travelport and Orbitz reservation systems. (Prudential’s Blair Communications suit was ultimately settled for about $20 million, according to Silverman.)
Roger Altman’s departure wasn’t as cut-and-dried. With Altman, the primary bones of contention were loyalty and money. Schwarzman had always held something of a grudge against Altman for fending off his and Peterson’s entreaties to join Blackstone until it had finished raising its first fund. Altman had paid dearly for his dillydallying, receiving only about a 4 percent stake in the firm. He had quickly become a powerful revenue magnet for Blackstone, generating a wealth of M&A fees and fathering two of its more successful early buyouts, Transtar and Six Flags, and resented his lowly stake.
“The genesis of the schism between Roger and Steve and Pete is that Roger was really unhappy about his equity,” says a former Blackstone partner.
For years Altman agitated for a bigger piece of the pie, and in 1991 or early 1992 Schwarzman and Peterson relented, elevating Altman’s share to around 7 percent.
The peace didn’t last long. Altman, who had always been drawn to politics, had put his career at Lehman on hold to work for the Carter administration. Soon after his stake in Blackstone went up, he was working behind the scenes to help elect his friend and former Georgetown University classmate, Bill Clinton, president, which ate into the hours he gave Blackstone. Peterson, Altman’s mentor at Lehman, was understanding about Altman’s political involvements, remembers Austin Beutner, a former Blackstone partner and friend of Altman’s. “When I left Blackstone to do my thing in government, Pete was one of the first to congratulate me on the opportunity,” he says. “I’m sure he felt the same way for Roger.”
Schwarzman was less forgiving. “Roger, right after the bump up in his equity, starts spending maybe one-third of his time on the campaign. Steve wasn’t happy about it,” one former partner says.
Events in Schwarzman’s personal life fueled his sense of pique. In 1990, his wife, Ellen, filed for divorce and began angling for a hefty settlement. “This thing with Roger asking for more partnership points was going on while Steve thought he was losing half his net worth to Ellen,” says a former Blackstone partner. Schwarzman would buttonhole partners and moan that Ellen wanted to dispossess him of “50 percent of his net worth,” says another ex-colleague. “He complained a lot about that.” (Because Schwarzman at the time was worth at least $100 million, Ellen Schwarzman presumably was asking for $50 million or more.)
The divorce steeled Schwarzman’s resolve to safeguard his hard-earned fortune. He wasn’t going to cede a fraction of his worth to a partner who then gave short shrift to Blackstone. “There is no one who ever got a scintilla of equity in Blackstone who didn’t feel like it was pulling teeth from Steve. He’s not one of these people who graciously hands out equity,” the same former partner says.
Altman’s exit from Washington in 1994 was even bumpier. That August he resigned under pressure over his handling of congressional inquiries into Whitewater—a financial and political scandal that grew out of a dubious 1980s Arkansas land deal involving Bill and Hillary Clinton. Though the Clintons were never prosecuted for their roles in the affair, other Whitewater figures were convicted of fraud. When Altman returned to New York, says a friend, he fully expected Schwarzman and Peterson to cast aside bygones and ask him to rejoin the firm, but the invitation was never extended. Altman went on to start an M&A–private equity boutique of his own, Evercore Partners, which swiftly established itself as a top deal adviser.
“That he wasn’t asked back had nothing to do with Whitewater,” a former partner says. “It had everything to do with what had gone on before.”
Altman’s absence left a gaping hole in Blackstone’s M&A operation, one that Peterson’s diminishing involvement made wider. Other parts of the business grew by leaps and bounds after 1992, but the M&A group did not. Its inability to keep pace with the explosive growth in Bruce Wasserstein’s M&A business exasperated Schwarzman, even though he had left Wasserstein behind in the dust in the leveraged buyout arena.
Significant as the loss of Altman was, the departure that hurt most on the bottom line was Larry Fink’s. By early 1992, BFM’s assets under management had rocketed to $8.1 billion and it was earning $13 million a year after taxes. It was doing so well that in mid-1992, Fink and Blackstone laid plans to raise outside capital through an IPO. At the time, Fink, Ralph Schlosstein, and other senior BFM managers jointly owned 45 percent of the business through a partnership while Blackstone Group and its partners owned another 35.3 percent. Fink and Schlosstein individually owned much of the rest.
But Fink and Schwarzman soon were at loggerheads over money. In order to corral top-notch talent, Fink insisted that he be able to award new hires a stake in BFM—the same lure Schwarzman had used to bring Fink under the Blackstone roof. Schwarzman and BFM’s executives had been doing just that, steadily handing over part of their own stakes as the business added senior staff. But after Blackstone’s stake slipped to around 35 percent, Schwarzman drew the line, telling Fink the parent company wouldn’t drop its stake further.
Some trace Schwarzman’s intransigence to his divorce battle. “He was obsessed about it,” says one colleague from the time. “When money is as important to you as it is to Steve, and you think you’re going to lose fifty percent of your savings, you become more difficult.”
At an impasse, Schwarzman found himself negotiating a second divorce—between Blackstone and Fink’s group. Convinced that Blackstone had become a drag on his grand designs, Fink shelved his plans for an IPO and demanded the outright sale of his unit. Schwarzman, despite his strong initial resistance, finally relented. In June 1994, the business, which in the interim had adopted the name BlackRock Financial Management and seen its assets climb to $23 billion, was sold to PNC Bank Corporation of Pittsburgh for $240 million. Blackstone’s partners made out well, pocketing upward of $80 million in cash, in addition to about $30 million in dividends they’d collected from BFM over the previous six years. Schwarzman personally banked more than $25 million, enough to subsidize most if not all of his split from Ellen. (Though the size of the divorce settlement was never disclosed, BusinessWeek put it above $20 million.)
BlackRock went on to surpass Fink’s headiest dreams. Over the next dozen years it grew into an investment empire comprising $1.2 trillion of assets, mostly fixed-income and real estate securities, reshuffled its ownership, and went public in 2006. By 2010, BlackRock was the world’s biggest publicly traded money manager, twice as big as its nearest rival, with $3.2 trillion in assets and 8,500 employees in 24 countries. Fink emerged as a Wall Street prince on a par with Schwarzman and became an adviser to the Obama administration on ways to resuscitate the U.S. economy.
Schwarzman would later freely admit he’d sold BlackRock too soon. Though he personally earned a tidy sum on the sale to PNC, if Schwarzman had held on to even 3 percent of BlackRock—less than a third of his ownership stake when BlackRock was sold to PNC—he’d have been about $1.3 billion richer by 2010.
After Henry Silverman’s forced departure, Blackstone’s complement of LBO specialists was skeletally thin. It now consisted of a cadre of bright, young strivers and a single middle-aged luminary, the brainy and difficult David Stockman.
A high-octane personality by nature, Stockman kept his mind in overdrive by consuming more caffeine and nicotine than a French existentialist. He was a two-fister, alternately guzzling coffee from a mug in one hand and taking deep drags from a cigarette in the other. He later quit smoking, but his caffeine habit remained. Blackstone partner Chinh Chu, then a junior staffer, recalls flying with Stockman to Kokomo, Indiana, fifty miles north of Indianapolis, to visit the headquarters of Haynes International, a machinery maker Blackstone owned. When they arrived and got in their rented car, Stockman started driving in the wrong direction. When Chu asked where they were going, Stockman replied, “There’s not a Starbucks until Indianapolis.” Two hours and a hundred-mile round-trip to the state capital later, they arrived at Haynes.
Stockman’s febrile temperament alternately entertained and bemused his associates, who marveled at his mind’s capacity to soak up oceans of data. Yet by the early 1990s, it was evident that the Reagan administration whiz kid was an unreliable judge of deals. Yes, he’d been dead right about Edgcomb, warning Schwarzman in advance of that buyout’s perils. But he also had delivered similarly gloomy judgments on other Blackstone investments that later performed well, including Transtar, Days Inn, and Six Flags. Meanwhile, his Collins & Aikman (formerly Wickes) investment was struggling.
It wasn’t just that he was sometimes wrong. His high-handed dismissals of his fellow partners’ deals left him with few friends. At an investment committee meeting in 1991, Stockman arrived armed with two assistants, graphs, and spreadsheets, prepared to do battle over a proposed $81 million equity investment in Six Flags, an amusement park operator that had fallen on hard times under its previous owner, Wesray Capital. Blackstone and Time Warner, its corporate partner in the investment, had worked up a plan to boost TV advertising using Time Warner’s popular Looney Tunes cartoon characters, which they believed would lure kids back to the parks and resuscitate the business. Everyone involved in the deal was convinced that Six Flags could be turned around: Time Warner; Roger Altman, who had spotted the opportunity and recruited Bob Pittman, a cofounder of MTV and a media marketing guru, to manage Six Flags; Henry Silverman, the deal’s overseer; and Howard Lipson, who had helped Silverman vet the proposal. Stockman begged to differ.
“David came to the meeting with a fully baked counterargument” to the plan, a person at the meeting says. Stockman produced a graph showing that leisure spending by Americans had been rising as a percentage of economic activity and insisted that it inevitably would drop back to the historic norm. He also had an analysis of the cost of adding exciting new attractions—“the need to top yourself, the thrill factor—which he said was going up, so capital spending would be a problem,” this person says.
“I think your attendance projections are too optimistic, and your capital spending assumptions are too light,” Stockman asserted.
In fact, the transaction had been tailored to protect Blackstone in the event of just such problems. Blackstone had agreed tha
t Time Warner would get a lopsided share of the profits if the company performed exceptionally well. In exchange Blackstone got what amounted to a guarantee that it would earn a minimum return of 25 percent so long as cash flows grew modestly. When Stockman was finished and it was Howard Lipson’s turn to speak, he told Stockman, “You know, even if all your assumptions are right, and we plug your attendance and capital spending figures into our model, we still get a 25 percent return.”
Flustered, Stockman stared at Lipson’s spreadsheet and retorted, “Well, that’s just because of the way you structured it.”
“Exactly!” said Lipson.
Silverman, Altman, and Lipson won the argument, and in the coming months the investment played out exactly as they’d hoped. In December 1992, a year after the $760 million buyout, Time Warner exercised its option to buy out Blackstone’s stake in the resurgent company for $104 million. Stockman’s dyspeptic prophesy notwithstanding, Blackstone raked in a 27 percent return.
Because of his spotty record, Stockman never earned Schwarzman’s unconditional trust. Nor did he ascend to the role of Schwarzman’s chief deputy, which Silverman effectively had occupied until he left in 1991—a role to which Stockman’s fame, experience, and age might otherwise have entitled him. Instead, that function gradually passed to a much younger man, who’d joined Blackstone from Shearson Lehman in 1987 as a lowly vice president.
James Mossman was twenty-nine years old in 1988, when he untangled the financial complexities of Transtar, USX’s short-line railroad, and persuaded his superiors to make the investment that put Blackstone on the map. The next year, he solidified his status as a rising star with brilliant financial-modeling work and with his hard-bitten style while negotiating key elements of the CNW buyout. No one was more enamored of him than Schwarzman.