Wednesday, August 5, 2009

August 4,2009/2

When I first went to work on Wall Street, in 1961, I found the work tremendously exciting - in the sense that I fancied we were raising capital to fuel the growth, innovation and refurbishment of American commerce. At Lehman Brothers, our poster boy was Litton Industries, a company that was dedicated to the proposition that super-managers, armed with the latest in management technique and theory, could manage the hell out of any business. My father had been a key figure in Litton's early financing, a feat that had enormously magnified his reputation as a "wonder banker."
Litton spawned what in the 1960s became "the conglomerate craze." The Litton model bred a host of followers and imitators. Inevitably, everyone started to reach, and high prices began to be paid for businesses in intractable markets or with intractable production or services problems. On Wall Street, we loved it. The money to be made was unreal: fees for "expertising" a takeover, fees for followup underwritings and debt placements etc. etc. A prize example was Walter Kidde Co.'s acquisition of United States Lines, a marriage made in hell since the moment it was suggested to me in the dormy house at Pine Valley. A rubric "intercontinental intermodal transportation" - meaning containers - was coined and away we went. What mattered, and only mattered, was that a deal could somehow be done. The fee was the sole object. Wall Street and America had, so to speak, parted ways. Or perhaps Wall Street was now in touch with an aspect of the American character, if there is such a thing, that had been suppressed by the patriotic, one-for-all fervor unleashed by World War II and its Korean stepchild.
By the end of the decade, the deals were getting crazier and crazier, and were being financed mainly by debt - to the extent that the Fed finally came up to the Street, called in the hot-shot bankers and decreed "game over!" Banks were to stop making "non-productive loans," and to get the point across on the corporate side, interest on such loans, mainly for takeovers, would no longer be deductible for tax purposes.
At about that time, say 1970, I committed the sin that I think finished my career at Lehman Brothers as much as any other, including the quarrel with Daryll F. Zanuck that got me kicked off the board of Twentieth Century-Fox. I got a call from a banking client, the CEO of an old-line, profitable New Orleans shipping company called Lykes Brothers. He had been talked by a woman in New York (the less said about her the better) into considering a bid for Jones & Laughlin, the famous steelmaker then going slowly and steadily broke in Pennsylvania and Ohio. He had investigated the situation and convinced himself that there commercial and financial virtues hidden in J&L that he alone saw and that he alone could trade on to revuild the steelmaker into a glowing temple on the hill. He wanted to make a bid. Would we handle it for him? I said I'd like to think it over and call him back.
I thought it over, and I called him back - to tell him that, much as we cherished his business, this was one we would sit out. I could see only bankruptcy, the disemployment of thousands, the ruin of communities: disgrace (a little-regarded outcome in American business and non-existent n Wall Street) for all concerned. I had no wish to involve my firm in such a situation.
You guess the result. He went to another partner; Lehman did the deal and earned a bunch of nice fees, and in short order all the dire outcomes I had predicted came to pass. J&L and Lykes went bust. The demographic carnage in the Rust Belt was something to see. I fell into disfavor at One William Street. And so it goes.
Wall Street cares nothing for the economic state of the nation at large. The recent rally and the profits in the banks tell us that. Still, it was a terrible lesson for an idealistic young man to have had to digest just at the cusp of middle-age, as I was in 1970.

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