The Go-Go Years (36 page)

Steinberg's day in Washington—Wednesday the nineteenth—was a depressing one. All occasions now seemed to inform against him. For one thing, the mysterious decline in Leasco's stock price was reducing the company's takeover power day by day. But the situation was not yet hopeless on that front. Steinberg calculated that he could put together a tender offer that would be attractive to Chemical stockholders, and that would not cut Leasco's earnings, down to a Leasco stock price of 85. As of February 19 the price stood at around 110, so that an interesting offer remained entirely feasible—provided some way could be found to prevent the stock's downward toboggan ride from continuing. The other pressing concern was the national legislative situation—the matter that had brought Steinberg to Washington—and here he found a bleak picture indeed. The nation's legislators were in a grimly anticonglomerate, antitakeover mood. During the day Steinberg talked to half the members of the Senate Banking and Currency Committee and to several members of the Federal Reserve Board; without exception,
he found his interviewees adamantly opposed to a Leasco takeover of Chemical on grounds that seemed to him to be entirely unreasonable. Time and again, he explained that his object was not the destruction of a bank but its revitalization, and he argued that takeovers of one company by another, far from being automatically bad, are a valuable and necessary part of the free-enterprise system, and in some cases the only way by which backward and outmoded management methods can be replaced by aggressive, forward-looking ones. Time and again, he found his arguments going unanswered, and himself being treated as a sort of business pirate bent on seizing and looting property that did not belong to him. The climax of these brief and sketchy dialogues was one with the key man, Senator Sparkman, part of which went, according to Steinberg's account, as follows:

SPARKMAN.
A couple of weeks ago I had a fellow in here complaining that somebody moved in and took over his bank and then fired him. Now, we can't have things like that.

STEINBERG.
But, Senator, the whole economy runs on profit. If a bank president isn't delivering, he should be replaced just like anyone else. Unless you want to change the whole system—

SPARKMAN.
No, no, I don't want to do that. By the way, have you seen the bill I'm going to introduce against bank takeovers? (Calling to his secretary) Miss———, where's that bill the lawyer for Chemical Bank sent in? I want to show it to Mr. Steinberg.

It was thus that Steinberg learned for the first time of the bill Simmons had drafted at Chemical's behest and, as Senator Sparkman so candidly put it, “sent in.” As it happened, Sparkman introduced the bill in late March; unlike the New York State legislation, it was never passed; but on March 19, the knowledge that a lawyer on Chemical retainer was apparently functioning as a sort of unofficial legislative assistant to the chairman of the Senate Banking and Currency Committee served to deepen Steinberg's gathering despair. Only much later did he come to see his conversation with Sparkman as a piece of high Washington comedy.

“I came back to New York that night feeling that I had been given a very clear message,” Steinberg said later. In fact, that day, with the realization that the national powers of government as well as those of business were solidly aligned against him, Steinberg decided on surrender. The following morning, he went as scheduled to his third meeting with the Chemical's top officers, at 20 Pine Street. As things turned out, it was to be his last such meeting. Again let us hear two versions:

Steinberg:
“I came into the meeting with a public statement in my pocket—a surrender statement. I told them I'd been in Washington the previous day, and I told them whom I'd met. I said I'd concluded as a result of those conversations that the only way we could proceed with a tender offer was with Chemical's great enthusiasm for the merger, and I wasn't sure even that would help. I waited a few moments. To put it mildly, nobody from Chemical expressed great enthusiasm. Then I said that in half an hour I was going to release a statement of withdrawal. I pulled the statement out of my pocket and read it to the Chemical men. You could sense the relief—almost touch it. There was a kind of quiet pandemonium. Everybody shook hands. I haven't seen any of them since then.”

Renchard:
“Steinberg came in with a couple of henchmen. He said he'd decided it wasn't the time to pursue the matter, and he was going to make an announcement to that effect later that day. It was a very friendly and satisfactory meeting.”

The announcement that Steinberg released later—which, in view of the fact that its last part largely negates a philosophy that he had expressed previously and would reaffirm later, suggests that he had been temporarily brainwashed—read as follows:

GREAT NECK N. Y., February 20, 1969—Saul P. Steinberg, chairman of Leasco Data Processing Equipment Corporation, stated today that he has no plans to acquire control of the Chemical New York Corporation. Without the support and enthusiasm of the management, Leasco has no interest in pressing for an affiliation with Chemical.

Mr. Steinberg observed that hostile takeovers of money-center banks were against the best interest of the economy because of the danger of upsetting the stability and prestige of the banking system and diminishing public confidence in it.

It was presumably with satisfaction that Romnes, Copeland, Tyson, Long, Learson, Funston, and the other Chemical directors that afternoon read the following telegram:

PLEASED TO REPORT LEASCO HAS ANNOUNCED WITHDRAWAL OF PLANS TO PRESS FOR AFFILIATION WITH CHEMICAL

BILL RENCHARD

6

So it was over, just two weeks after it had formally begun. “They”—the Chemical Bank, most of the banking business, the Cravath law firm, a cross section of Wall Street power and influence, the leading proxy solicitors, the governor and legislature of New York State, the members of the Federal Reserve Board and the Senate Banking and Currency Committee, and sundry more or less related forces—had combined to beat Saul Steinberg of Leasco, and apparently to cause him to lose his nerve at the last moment. (He and Leasco came back—gamely, although disastrously from a financial point of view—to take over control that summer of Pergamon Press, a British publishing giant.)

And yet it wasn't really quite over; for American business and society alike, it had reverberations, some perhaps beneficial, others certainly purgative and self-revelatory. Renchard said later, “I took the whole thing very seriously, although a lot of people I know didn't. At the bank we're more on the alert now for that kind of thing. I took a lot of kidding about it. If Steinberg had gone ahead, it could have resulted in quite a fight. I'm not saying we would have been defeated. I still think we could have successfully fought them off. I'm just as glad not to have had to go through the process, though.”

What Steinberg, for his part, chiefly remembers about the whole episode is the aura of hysteria that seemed to pervade so many people's reactions to it. “Nobody was objective,” he says. “I wanted objective opinions, and I couldn't get them. All through those two weeks, bankers and businessmen I'd never met kept calling up out of the blue and attacking us for merely
thinking about taking over a big bank. Some of the attacks were pretty funny—responsible investment bankers talking as if we were using Mafia tactics. And it went on afterwards. Months after we'd abandoned our plans, executives of major corporations were still calling up and ranting, ‘I feel it was so
wrong
, what you tried to do—' And yet they could never say why. We'd touched some kind of a nerve center. I still don't know exactly what it was. Once, at a party, the head of a huge corporation asked me if there had been any anti-Semitism in the campaign against us. I said, not that I knew of. There are bankers and businessmen who are anti-Semitic, but it was more than that. I think now it would have been a good thing if we'd done a hostile takeover, and then there had been Congressional hearings, to get all those rancid emotions out in the open air.”

Ruefully, Steinberg summed up his emotional reaction when he said, immediately after his surrender, “I always knew there was an Establishment—I just used to think I was a part of it.” As for the Establishment, perhaps
its
last word on the affair was the apothegm allegedly pronounced on it by an officer of a lordly commercial bank, who is supposed to have said, with a lordly mixture of misinformation, illogic, and sententiousness, “Never trust a fat man.”

CHAPTER XI

Revelry Before Waterloo

1

While Steinberg was finding out that he did not belong to the Establishment, and that in its old age it was neither too gentlemanly nor too toothless to fight, the investment revolution of the nineteen sixties was all but completed, and the era was having its last great speculative fling.

By 1969, institutional investors had effectively taken over the New York Stock Exchange business. At the beginning of the decade their share in it had been less than a third; now they had 54 percent of total public-share volume and 60 percent of total public-dollar volume. The mutual funds, the fastest-growing of the investing institutions, now held assets of some $50 billion, and were moving in and out of the market at a turnover rate of 50 percent, or half of their portfolios per year, as against less than 20 percent as recently at 1962.

The market was beginning to unravel in earnest. The Dow, after peaking out at 970 in May—only a few points below the all-time high of January 1966—went into a steep three-month decline that left it just above the 800 mark late in July. The
Federal Reserve, worried about accelerating inflation, kept constricting the money supply, driving interest rates through the roof without apparently accomplishing its purpose, and there came to be the specter—confounding to classical economists—of a recession accompanied by runaway inflation, the worst of two apparently opposing worlds. The failure of the blue-chip Dow to reflect the true situation was becoming more pronounced all the time; the advance guard of the former high flyers were already crashing not 20 percent like the Dow but 50 to 75 percent, and even more. Transitron, which had peaked at 60 early in the decade, could be bought below 10 by June 1969. Early in the year, National General had sunk from a high of 66 to 35, Ling-Temco-Vought from 135 to 62, Litton Industries from 100 to 50. The Stock Exchange, which for some years had used the motto “Own your share in American business,” suddenly dropped it in 1969, without explanation.

A particularly ominous foreshadowing of things to come was to be found in the abrupt decline in brokerage-firm profits. Trading volume, the source of brokerage revenue, was diminishing rapidly; for 1969 it had shrunk from the 1968 figure by about 4 percent on the Big Board, almost 15 percent on the Amex, and considerably more than that in the over-the-counter market. Meanwhile the huge expansion downtown of personnel and facilities to meet the volume rise of the previous year had raised brokerage costs enormously. Unit costs of basic expenses were skyrocketing anyhow; clerical and administrative salaries on Wall Street were up about 60 percent in a decade, and the charges of auditors and lawyers up almost 80 percent. As a result of this squeeze, most Stock Exchange member firms were no longer operating in the black after the first half of 1969.

The omens were everywhere; doom hung in the air, and a tomorrow-we-die, night-before-Waterloo mood was pandemic. The national climate was just right for a binge. The country, tired of riots and crime and liberalism, and with a new conservative Republican administration in Washington, was moving politically to the right, which in economic terms meant toward the newer forms of laissez faire. Mergers went on increasing at a
fantastic rate, and so, as a result, did capital concentration: billion-dollar corporations had, in only a decade, enlarged their share of total national assets from 26 to 46 percent. “Creative accounting” continued to flourish, and accounting authorities to shrug; the Accounting Principles Board, notified by the S.E.C. in February 1969 that it should promptly curb abuses of the pooling-of-interest method of merger accounting, shilly-shallied and took no action throughout the year. (Nor did the S.E.C. press the matter further.) Deal-making brokers, meanwhile, had learned how to bring together the two great new forces in the stock market—the conglomerates and the mutual funds—in a way that all but constituted a conspiracy to deceive the public. The deal-maker would propose and promote a merger, in the process salting away for himself large blocks of the stock of the merging companies. Next, he would sell the companies' stock to funds on the basis of the secret merger plans; then when the merger was announced, the accountants would work their bottom-line magic, the merger-mad, bottom-line-loving public would bid up the stock, the insiders would unload, and the public would be left holding as big and empty a bag as in the more naive market manipulations of the nineteen twenties.

Still, the victims of such schemes were comparatively few. Tens of millions of investors who had been lucky or shrewd enough to avoid the most popular conglomerates, and the other go-go stocks of the most-actively-traded list, were sitting pretty. As late as mid-1969, you did not have to have bought the Dow blue chips to be doing well. If you had bought, say, Fairchild Camera in early 1965, you had tripled your money. If you had bought Boise Cascade at the start of 1967, you had nearly quadrupled it. Even an old warhorse like American Home Products had doubled since late 1966, and any of hundreds of other sound stocks had yielded comparable results. Most of these handsome profits would largely evaporate within the coming year, but nobody knew that, and in mid-1969 the profits were gratifyingly there, on paper, to make the small investor feel confident and rich, and to put him in a spending mood. Private schools and colleges were hand-picking their enrollments from a record
flock of applicants; tables were scarce at expensive restaurants; in some areas, a Mercedes was almost as common a sight on the road as a Pontiac; and all that summer and fall, packed airliners departing for or returning from Europe were so numerous at New York City's Kennedy International that they sometimes had to wait hours for clearance to take off or land. Catching the mood of Wall Street itself, the investing public was living as if there were no tomorrow.