Bull!

by Maggie Mahar

  It was true that LBOs would no longer prop up share prices. The bull needed a new source of cash. But the buyer who would drive the bull market of the nineties was already waiting in the wings: the individual investor.

  The crash of 1987 had taught him all he needed to know about bull markets: buy on dips. “People drew the lesson, not because that is what they did in ’87,” said Farrell, Merrill Lynch’s chief investor advisor, “but because that is what they didn’t do.” Throughout most of 1988, people were still taking more money out of equity funds than they were putting in.49

  But investors who sold would watch neighbors who bought grow rich. It was a lesson that they would never forget.

  THE CAST ASSEMBLES (1990–95)

  —6—

  THE GURUS

  ABBY JOSEPH COHEN

  On an October morning in 1990, a 38-year-old mother of two with a wide-open face and short-cropped light brown hair boarded a bus in Flushing, Queens, en route to her first day at a new job. It was early, about 6:30 A.M. But she knew that if she waited until rush hour, it could take an hour and a half to wend her way to 85 Broad Street in downtown Manhattan. As she stepped onto the bus, she looked like many another Queens housewife, but in fact, Abby Joseph Cohen was on her way to becoming one of the most powerful women in America. If Alan Greenspan would turn out to be the father of the bull market of the nineties—as surely he would—Abby Joseph Cohen, the new chair of investment strategy at Goldman Sachs, would be its muse.

  That October day, she was aware that in joining Goldman Sachs, she was joining one of Wall Street’s most venerable firms. Goldman was Wall Street’s premier investment bank, and well on its way to becoming the most profitable. That year alone, the firm generated some $600 million before taxes, or roughly $5 million apiece for the firm’s 128 partners.1 In Cohen’s mind Goldman Sachs & Co. “set the gold standard” for Wall Street’s great investment houses.2 If she was nervous, she would not admit it.

  It took more than gilt to define that standard. The “Goldman culture” played a major role in the bank’s mystique. At the 121-year-old firm, white shirts were still preferred to blue, and displays of temper were taboo—even partners were expected to keep their egos in check. Modesty was appreciated; publicity was not. Traders learned not to shout. Glitz was out. Bankers at other firms might flash French cuffs, but at 85 Broad Street they were more likely to wear their white sleeves rolled up. Unpretentious, hardworking, and smart, Cohen might not be one of the boys, but she would fit in with the code.3

  Long known as Wall Street’s most genteel club, Goldman was the only major Wall Street firm that had remained a private partnership. By 1990, Salomon Brothers, Morgan Stanley, and Merrill Lynch were publicly traded corporations, while Shearson Lehman and Kidder Peabody had become units of corporate giants. Goldman, by contrast, remained independent: the firm belonged to its 128 partners. When they made a deal, they were wagering their own net worth. Understandably, this led to a certain fiscal conservatism.

  As it turned out, Cohen was joining Goldman at a transitional point in the firm’s long history. Two months earlier, senior partner John Weinberg (whose father, Sidney, brought the firm back from disaster following the ’29 crash) announced that he was retiring. His two top lieutenants, Robert Rubin and Stephen Friedman, would become the firm’s co-chairmen. “Our single biggest priority,” said Rubin, “is keeping the social fabric together.”4

  Yet that fabric was already showing signs of strain. At the end of the eighties, Goldman—once a bastion of lifetime employment—had caught up with the times, slashing roughly one-fourth of its workforce. There were other signs, too, which hinted that, as it grew, the close-knit firm was changing. In the past, Goldman had been known for its collegial relationships, but in 1989 it hired outside consultants to shepherd its staff into focus groups and probe their concerns. “They’ve tried to institutionalize all that ‘uncle stuff,’” said a disenchanted trader who left the firm. Most shocking of all, interlopers were masquerading as uncles. Traditionally, one became a partner at Goldman by rising through the ranks, but in an about-face, the partnership had begun to take in outsiders.5

  Cohen, however, was not invited to join the club as a partner, even though her new position as co-chair of investment strategy—a job that she would share with Goldman partner Steven Einhorn—made her one of the bank’s most visible seers. But at the beginning of 1990, only one of the firm’s 128 partners was a woman.6 To be fair, it is not at all clear that Cohen’s sex was the most important barrier to partnership. With few exceptions, the firm boasted a long tradition of expecting would-be partners to patiently wait their turn. A novitiate needed to demonstrate some capacity for self-effacement if he hoped to achieve Goldman’s ideal of egoless team play. Anyone who could not bear the feeling that he or she was languishing on the vine probably would not fit in.

  As for Cohen, the brotherhood would not anoint her for eight long years. When it did, she would become all the more famous by continuing to take the bus to work.

  If Abby Joseph Cohen were virtually any other Wall Street idol, all of the bus riding might lead one to suspect that she was in training to run for public office. But in Cohen’s case, the truth was that she was a creature of habit. Abby Cohen preferred the accustomed track: it appealed to her strong sense of order and tradition. This would be both Cohen’s greatest strength, but also, perhaps, her greatest weakness. By the end of the nineties, one might say of Cohen what Fed-watcher Martin Mayer said of Fed Chairman Alan Greenspan: “Here…as elsewhere, Greenspan is trapped by his unshakable philosophical bias that whatever is, is right.”7

  When it came to the workings of American-style capitalism, they shared a laissez-faire optimism: if it works, don’t fix it.

  Certainly, Cohen’s upbringing provided sound basis for such optimism. Even after becoming a partner at Goldman, Cohen remained connected to that childhood, continuing to live in the Flushing, Queens, neighborhood where she grew up, the child of college-educated Polish immigrants. Her father, Raymond Joseph, was an accountant employed by J.K. Lasser, while her mother, Shirley Joseph, had worked in the financial division of General Foods. Cohen’s parents graced her with a sense that, despite the fact that she was a girl, she could do whatever she might set out to do. In 1969, that meant going to Cornell, one of the few Ivy League colleges that accepted women as undergraduates. There, Cohen double-majored in economics and computer science—“which then was called electrical engineering,” she recalled. “At that time, we worked on enormous IBM mainframes big enough to fill a room. We programmed them in languages like Fortran.”8 She met her future husband, David, in Econ 101, and after graduating they moved to Washington, D.C., where Cohen worked in the statistics division of the Federal Reserve while earning a masters in economics at George Washington University.

  Following a seven-year stint as an economist at T. Rowe Price, the Baltimore-based mutual fund company, Cohen landed a job on Wall Street in 1983 as a portfolio strategist at Drexel Burnham Lambert. Cohen found herself in exactly the right place at precisely the right moment: the bull was just learning to run. Four years later she wasn’t quite so lucky: in mid-1987 Drexel named Cohen its chief market strategist—just in time for the October crash.

  Some gurus saw the crash coming. In September, for example, Goldman’s Steve Einhorn advised his clients to sell stocks and raise cash, suggesting that they reduce their stock holdings to 40 percent of their portfolio, while increasing cash to 35 percent.

  Cohen, by contrast, was blindsided. “We did not give our clients suitable warning. The experience showed that my kit was missing a tool,” she later confessed.9 Although she was caught off guard, Cohen did not lose her nerve. In the wake of Black Monday she advised Drexel’s clients to buy. For those who had any cash left, it was good advice.

  When Drexel collapsed under the weight of a junk bond scandal in 1990, Cohen, who was not implicated, got up, brushed the debris off her skirt, and found temporary shelter as chief market
strategist at Barclays de Zoete Wedd, a London-based bank. She had been there only a few months when the call came from Goldman. Once again her stars were aligned: over the next 10 years, Abby Joseph Cohen would become the bull market’s preeminent seer, “the mother of all optimists,” one London paper dubbed her.10

  But in the autumn of 1990, Cohen was not yet a bull. One of the lesser, but pointed, ironies of the bull market is that when Goldman Sachs hired Abby Joseph Cohen, she was far from enthusiastic about the market. “According to The Wall Street Journal, I was the biggest bear around,” Cohen remembered 11 years later, half smiling, half grimacing at the thought.11 Indeed, in September of 1990, a month before Cohen joined Goldman, the paper had described her as a “prescient bear…unmoved by peace, Perestroika, European unity and [other] supposed market panaceas.” Instead, Cohen focused on corporate profits: “I think conditions are deteriorating,” she told the Journal. “The growth rate of profits peaked in early 1988.”12

  Following the October 1987 crash, Cohen believed that the market would bounce back—which it did—but her optimism did not last for long. In June of 1989, she refused to be impressed by a rally that she saw as “a nice little boomlet,” nothing more.13 Roughly a year later, the Dow grazed 3000, but Cohen remained cool, noting that since the beginning of the year, “investors still would have been better off holding 3-month Treasury bills.”14 By then, the economy was sliding into the recession that would cost President George Bush his second term. A month later, Iraq’s invasion of Kuwait pushed the market over the edge, confirming Cohen’s fears that the rally lacked a solid foundation. By year-end the Dow had tumbled from its July high of nearly 3000 to 2365.

  Cohen understood that the bull could not resume his run unless interest rates fell. “If rates were high, companies wouldn’t be spending on capital investments.”15 High rates also meant paying the piper for the debt amassed in the eighties, a decade when individual, corporate, and government IOUs spiraled from 140 percent of GDP to 190 percent.16 But Federal Reserve Chairman Alan Greenspan already had begun trimming. In January of 1989, the Fed funds rate (the rate that banks charge each other on overnight loans), stood at 9.5 percent; by the end of ’90 the Fed had brought that key short-term rate down to 8.25 percent. More cuts followed, and by April of 1991, returns on three-month Treasuries had shrunk to 5.7 percent—down from 7.6 percent a year earlier—good news for brokers trying to coax investors into stocks. Meanwhile, in March an easy victory in the Gulf War buoyed spirits on the Street.

  At this point, Steve Einhorn, the partner who had hired Cohen to work with him at Goldman Sachs, became openly bullish. In February of 1991, Einhorn announced that Act II of the bull market was in progress. “The single most attractive place to put money now is in the stock market,” Einhorn declared, advising clients to put “60 to 65 percent of their assets in stocks”—up from his target of 40 to 45 percent only a month earlier.17

  While Einhorn took center stage, Cohen, perhaps still chastened by the ’87 crash, hung back in the wings. Even when the Dow finally closed above 3000 two months later, she remained cautious: “The P/E multiples [still] don’t thrill me,” said Cohen in April of 1991, referring to the fact stocks on the S&P were changing hands at 17.8 times earnings—far above the average P/E ratio of 12.6 over the preceding 10 years. But, like Einhorn, she was impressed by Greenspan’s continuing cuts: “The Fed stood up and said there really is a recession, and policy has been changed to handle that.”18

  In April of 1991, the Dow stood at 3000—up from 2000 at the beginning of 1987. Not bad: the index had climbed 50 percent in less than four years. But investors could be excused if they had not enjoyed the ride. Since 1987, they had endured the biggest one-day plunge in stock market history, scandal on Wall Street, graft in the S&L banking system, a national recession, soaring white-collar unemployment, and a war that threatened stability in the Middle East. Within a few months, their fortitude would be tested once again: in late November of 1991, the Dow fell 121 points in one day.

  Market watchers saw this as a crucial moment. Would investors head for the door? The financial press looked for gurus to say it wasn’t so. Finally, Abby Joseph Cohen stepped forward: “What the market is going through now is transitory,” Cohen declared. She made it clear that she put her faith in the Fed: “Ultimately the Fed has a significant amount of power to get us out of this malaise.”19

  At that tender point Cohen’s faith in the Fed was much needed—and Alan Greenspan lived up to her expectations. At the end of 1991, the Fed chairman lopped a full point off the Federal Funds rate, bringing that key short-term rate to 4 percent—the lowest it had been in 27 years. Wall Street responded in kind: the Dow ended 1991 at 3168.83, a gain of more than 20 percent, while the Nasdaq climbed an astounding 56.8 percent, to 586.34. But even then, not everyone was sure what to make of the rally.

  Cohen remained bullish, if cautious: “People must remember that the 1980’s were an anomaly,” Abby Joseph Cohen warned at the end of 1991.20 They should not expect another run-up to match the sprint from 1984 to 1990 when returns averaged 15.3 percent a year.

  Nevertheless, in the early nineties, she saw the economy improving: “The U.S. was turning a corner: the deficit was getting smaller,” she recalled years later. “There was an upturn in capital spending on research and development. And inflation was under control. When it’s out of control—and the data is puffed up by inflation—everyone makes very bad decisions.” In that context, she decided that stocks were cheap. “Picture a cardigan sweater on sale half price,” she urged a visitor in 2001. “It has a button missing—but who cares? Even if you’re a little disappointed, there’s room for error.”21

  As the bull market picked up steam, Cohen would grow into her role as the market’s muse. For the rest of the decade, no matter how high stock prices climbed, Cohen never wavered in her belief in the New Economy. And it seemed that neither the public nor the press would ever lose its faith in Cohen. As late as August of 1999—just months before the major indices peaked—Barron’s would tell investors: “Stay Relaxed, Abby Cohen Says There’s No Bear in Sight.”22 Like Walter Cronkite in the sixties, or Ronald Reagan in the eighties, Abby Joseph Cohen had become one of the most trusted faces on American television.

  It was no accident that the most trusted guru of the nineties turned out to be a woman. For in the eighties the bull market had become a rogue’s gallery of male exhibitionists. One could argue that Wall Street was always a rogue’s gallery, of course, and not be too far off the mark. But in the Greed Decade, even the pros were embarrassed. The barbarians who came through the gate had crossed a line—now some were behind bars. The Street was looking for a new image, not just for the public but for itself. The masters of the universe were about to be replaced with a Jewish mother, a prophet who, as Business Week noted approvingly, “wore sensible shoes.”23

  Certainly, the decade ahead would need a calming influence. The bull of the nineties proved a rough beast. As he lurched forward, breaking through one barrier after another, he would take investors on a high-speed ride. Along the way, even momentum investors suffered bouts of anxiety—doubting their good fortune and wondering how long it could last. Meanwhile, value investors began to doubt themselves. The times demanded a soothing, reassuring presence. If CNBC’s blow-by-blow reporting sent your blood racing, Cohen’s confident composure could settle your nerves. She could not tether the bull—nor did she try—but her genius was that she could make even an irrational market seem perfectly sensible, at least for a time.

  IN WASHINGTON—ALAN GREENSPAN

  The cast that drove the bull market would not be complete without its crucial Washington contingent. On the hill, senators and congressmen on both sides of the aisle, from Newt Gingrich to Joe Lieberman, extolled the virtues of the New Economy. In the White House, two presidents named Bush, father and son, presided, like bookends, over the beginning and end of the New Era. In between, the Clinton administration paid down the deficit while c
elebrating an economy that managed to combine low unemployment with low inflation. Along the way, the two-term president demonstrated that he could teach Wall Street’s salesmen something about “spin.”

  But more than any of Washington’s elected politicians, it was Alan Greenspan who nurtured the public’s faith that however high the market might soar, the people in charge knew what they were doing.

  In 1974, Gerald Ford had just moved into the White House when he asked Bill Seidman, his assistant for economic affairs, to talk to Alan Greenspan. “Before Nixon resigned, he had nominated Greenspan to become head of his Council of Economic Advisors,” Seidman recalled, “but the appointment had never been confirmed, and now Ford needed to decide what to do.” Years later, Seidman still remembered the scene. “After he sat down, Greenspan said to me, ‘You know, I’m not a politician, I’m an economist.’

  “But I thought he was okay,” Seidman continued. “So I told Ford—and Greenspan got the job. Within a couple of months, it was apparent to all of us that he was a much better politician than anyone had guessed—maybe a better politician than he was an economist. And he was a good economist,” added Seidman, who understood both economics and Potomac politics better than most.24

  Heir to the accounting firm Seidman and Seidman, Bill Seidman had come to Washington a year earlier to fill a slot as an undersecretary at HUD. But the summer of 1973 turned out to be Watergate summer. Few presidential appointments would be confirmed that season, and Seidman was about to pack his bags to go home when Gerald Ford, who at that point had just been appointed vice president, asked him to help clean up the mess that a departing Vice President Spiro Agnew had left in his wake. (After being investigated by the U.S. Attorney’s office in Baltimore for allegedly receiving payoffs from engineers seeking contracts while he was governor of Maryland, the Vice President had resigned. In his haste to leave town, Agnew left his office a shambles. Not the least of the items to be disposed of, Seidman recalled, were large cases of Scotch whiskey, presented to Agnew by eager supplicants.)25 Seidman agreed to help out, and when Ford became president, he stayed on. This is when he first met Alan Greenspan.