Money and Power (17 page)

There was also the feeling that
Henry Ford Sr.’s hatred of Jews, and Jewish bankers, made him opposed to doing business with Wall Street, including going there to discuss an IPO. But his grandson shared no such reluctance, and so he was sympathetic when, in October 1953, “Electric Charlie” Wilson told him that the
Ford Foundation wanted to hire Weinberg and Goldman Sachs as the foundation’s adviser on
the IPO. “You can’t have Weinberg,” Ford told Wilson. “We want him as an adviser to the family.” Not surprisingly, the Ford family—not the Ford Foundation—got Weinberg as their adviser, and the foundation had to make do with three advisers where one Weinberg would have sufficed. When Weinberg asked Ford how long the assignment would last, Ford responded that he had no idea, which was good enough for Weinberg, who gladly took
it—as would any investment banker worth his salt—spending nearly half his time during the next two years, working largely in secret, to get the deal completed.

In many ways, the Ford IPO was a mirror image of the Owens-Corning deal. On one side were the Ford Foundation, which owned 88 percent of Ford’s shares, and Ford’s outside directors and some company management, who together owned another 2 percent of the shares. The Ford family owned the other 10 percent of the Ford shares—but, importantly, all of the voting rights to them that allowed for ultimate decisions for how the company would be run and when
it would go public as well as other essential corporate governance decisions. “
The big problem,” E. J. Kahn Jr. wrote in
The New Yorker,
“was to get all hands to agree on how much money the Fords should get for transferring a part of their voting rights in the company to the shares the Foundation wanted to sell.” This bit of shuttle diplomacy and alchemy was left to Weinberg. He had to find a solution that satisfied the
New York Stock Exchange, which required that the shares the foundation was selling have voting rights; that satisfied the Ford family, in that the value conveyed to them for sharing their voting rights could not be a taxable event; that satisfied the Ford Foundation, which could not lose its tax-exempt status; and, of course, that satisfied the IRS, which had to somehow bless the deal as a tax-free transaction.

Weinberg worked in secret on more than fifty different proposals on how the financial reorganization of Ford and the Ford Foundation might be structured in order to satisfy all concerned. Once, during the process, when Henry Ford was traveling in Europe and Weinberg wanted to communicate with him by cablegram without giving away any of the confidential details of the plan,
he created an alphabet soup of names to
cover his tracks,
including such charming pseudonyms as “Alice” for Henry Ford and “Ann” and “Audrey” for his two brothers. Ford, the company, was “Agnes,” although at other times it was simply “X.” “Cable offices here and abroad soon found themselves handling messages that read like passages from Louisa May Alcott,” according to one account. (Code names for Wall Street deals soon thereafter became standard practice.)
The solution that Weinberg hit on that worked for all involved the Fords increasing their equity stake in the company by 1.74 percent (after the IPO that extra bit of ownership was worth some $60 million to the family). For Weinberg’s advice, Goldman received a fee said to be “as high as a million dollars,” which would certainly have been a milestone in the early 1950s. Goldman also participated as an underwriter of the huge Ford Foundation offering, which
added millions more to Goldman’s coffers, even if this risked conflicts of interest (concern about which the Goldman partners somehow overcame).

The first inkling the world got that the Fords were cooking up an IPO came in March 1955, when Henry Ford and Weinberg decided to attend a charity event together in Palm Beach—after working all day—and they were spotted by a society columnist when Ford brought Weinberg over to say hello to the
Duke and Duchess of Windsor. Weinberg was mildly offended that his cover had been blown. “
How could you keep
anything confidential under those conditions?” he wondered later. Of course, he almost blew it on his own, when that same year he had traveled by private plane to Detroit for a clandestine meeting with Mrs. Ford and her children and left behind on a newsstand at the airport the only copy of the company’s confidential financial report outside the family’s hands. At the time, he had traveled to Detroit with his associate,
John Whitehead, and
when later, after they had left the airport in the limousine Ford had sent for them, Weinberg discovered that he no longer had in his possession the leather briefcase with the confidential papers, he nearly exploded. “
John, John, where in hell did you put my portfolio?” he demanded to know. Weinberg ordered the car turned around to return to the newsstand. Fortunately for Weinberg—and no doubt Whitehead, too—the briefcase was sitting
right where Weinberg had left it. “If you fellas hadn’t come soon for those papers, I’d’ve tossed ’em away,” the vendor told the two men.

On November 9, 1955, the Ford Foundation announced that it had hired seven investment banks, led by
Blyth & Co., to manage the sale of close to 10.2 million shares of Ford stock—22 percent of the foundation’s holdings—in the largest IPO ever to that time. Goldman was one of the seven lead underwriters selected, although no mention
was made of Weinberg and Goldman’s unique role advising the Ford
family. At that time, press reports listed Goldman’s capital at $9.2 million and explained how the firm had lead-managed $27 million worth of securities in 1954. The entire syndicate of underwriters for the Ford offering—which was priced at $64.50 a share and generated $642.6 million of proceeds on January 17, 1956, with the balance of $15.3 million going in fees to the underwriters—totaled 722 investment houses, in large part
because the stock was sold to retail investors generally in chunks of no more than one hundred shares at a time. At a meeting before a large percentage of the underwriters, Henry Ford II tried to tamp down the increasing enthusiasm for the deal. “I think some people are indulging in wishful thinking about their chances for fast and fabulous gains,” he said. Ford’s stock closed at $70.50 on its first day of trading on the
New York Stock
Exchange, a respectable 9.3 percent increase on the day.

In addition to Goldman’s advisory fee, Henry Ford sent Weinberg a handwritten letter, which he had framed and kept in his office at Goldman. “
Without you, it could not have been accomplished,” the letter said, in part. Weinberg used to tell visitors to his office that the letter was “the big payoff as far as I’m concerned.” The deal was a huge coup for Weinberg and Goldman.

In August 1956, Ford asked Weinberg to become a director of the Ford Motor Company, the first—and only—automobile company board on which he served. Until then, Weinberg owned a Cadillac and an Oldsmobile—two cars made by
General Motors, where he had many friends among the executives. He made sure his own GM cars had either Goodrich or Sears tires (companies where he was also a director, although he resigned from the Sears board
in 1953 after a federal judge ruled he had to give up the seat at either Sears or Goodrich). But after getting the call from Ford to serve on the board of directors, out went the Cadillac and the Oldsmobile, replaced by a shiny new Lincoln and by a shiny new Mercury, both made by the Ford Motor Company.

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N
OT BEING ON
the Sears board any longer did not seem to hinder Weinberg’s ability to generate business from the company. Indeed, some two years after engineering his Ford coup—the largest equity deal of all time to that point—he and Goldman also structured and sold a $350 million debt deal for Sears, its first in the public markets since 1921 and the largest public debt deal up to that time. As a result, the
New York Times
referred to Weinberg as a “
financial Alexander the Great,” meaning that Weinberg was “very nearly left without any new worlds of securities to
conquer.” Asked whether he and Goldman could top their current successes in the future, Weinberg replied to the paper, “Maybe we’ll be asked to sell bonds for the United States Government,” a tongue-in-cheek
response because the U.S. government required no underwriter to help it sell its securities. He said that some Wall Street competitors had “jokingly suggested” that Goldman “might be able to help the Treasury.” To which, Weinberg reportedly quipped, “We would consider it for a fee.”

By this time, Goldman had busted out of its 30 Pine Street headquarters and had moved into a new “
ultra-modern” building at 20 Broad Street, just a stone’s throw from the
New York Stock Exchange. The most striking innovation of the new building, according to the
Times,
was the introduction of sixteen turret-style, vertical telephone boxes at each trading desk, which gave Goldman 1,920
private-access lines to the firm’s traders at any time. The
New York Telephone Company designed the new phone system especially for Goldman and its traders so that it could handle more client calls, more seamlessly than before. The other innovation worth mentioning was a vertical document filing system, which slid on tracks on the floor and comprised one thousand square feet, one-third of the space devoted to business files at Pine Street.

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G
IVEN
G
OLDMAN’S INCREASING
prowess in the business of underwriting debt and equity securities for its growing stable of clients (thanks in large part to Weinberg’s connections and board seats), it was not particularly surprising that the firm found itself enmeshed in a massive antitrust lawsuit brought by the U.S. government in October 1947 against Wall Street’s seventeen most influential firms.
In its complaint, the government alleged that between 1915 and 1947, these firms created “an integrated, over-all conspiracy and combination” starting in 1915 “and in continuous operation thereafter, by which” the banks “ ‘developed a system’ to eliminate competition and monopolize
‘the cream of the business’ of investment banking.” Indeed, even though Goldman was far from the largest
or most successful of the seventeen securities firms named in the complaint—that honor probably belonged to
Morgan Stanley & Co., which was listed as the lead defendant—and even though the Goldman partners did not believe the government’s allegations were true, the firm was pleased nonetheless to be among those deemed to be the most powerful Wall Street firms. To have been excluded from the lawsuit—as were, say, Merrill Lynch
& Co., Lazard Frères & Co., and
Halsey Stuart & Co., then the largest bond underwriter—would have been worse, or so the convoluted logic went around the firm.

The crux of the government’s case was that these seventeen firms
conspired against the rest of the investment banking industry and their corporate clients to control the fees and other financial benefits that could be gained through the underwriting of the debt and equity securities of their corporate clients. As to the fact that executives at the corporations issuing the securities would be able to decide, at their sole discretion, which banks
to hire and fire and when, the complaint alleged that to “preserve and enhance their control over the business of merchandising securities,” the banks kept “control over the financial and business affairs of the issuers, by giving free financial advice to issuers, by infiltrating the boards of directors of issuers, by selecting officers of issuers who were friendly to them [and] by utilizing their influence with commercial banks with whom issuers do
business.”

Regarding the last point, it is essential to keep in mind that the Glass-Steagall Act of 1933 required the separation of commercial banking from investment banking by June 16, 1934. On that date, most investment banking firms, such as Goldman Sachs, chose to remain in the investment banking business. They either had very little in the way of consumer deposits—which they quickly got rid of—or had no interest in that kind of business. Those firms that were
decidedly more integrated, and thus more powerful in the market—such as J. P. Morgan & Co.—were forced to choose between the two sides of the business. J. P. Morgan chose to stay in the commercial banking business and to remain a depository institution.

The other stinging allegation—that these seventeen firms used their seats on the boards of directors of their clients to win and control investment banking business—hit particularly hard at Goldman Sachs and Sidney Weinberg, who had more directorships than any other banker on Wall Street. The complaint alleged that when a banker from “one of the 17 defendant banking houses becomes a director of an issuer, this is understood by all the rest to be the
equivalent of ‘raising a red flag,’ and thus warning the others to keep off.”

These practices were said “to have gone on for almost forty years,” U.S. Circuit Court judge
Harold R. Medina wrote in his February 1954 ruling, “in the midst of a plethora of congressional investigations, through two wars of great magnitude, and under the very noses of the Securities and Exchange Commission and the Interstate Commerce Commission, without leaving any direct documentary or testimonial proof of the formation or
continuance of the combination and conspiracy.” As if his judicial leanings weren’t already clear by this obvious tone of incredulity—found just nine pages into his extraordinary 417-page ruling—he added flatly, in
the next sentence, “The government case depends entirely on circumstantial evidence.”

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O
N
S
EPTEMBER
22, 1953, Judge Medina dismissed all the charges “on merits and with prejudice,” effectively barring the government from further litigation against the seventeen securities firms. Medina threw the case out after hearing only the government’s side, after the defense had made summary judgment motions before him to do so. A few weeks later, on October 14, he published his complete
ruling, an important—if rarely viewed—distillation, preserved in amber, of the investment banking business in the United States from its origins through the first half of the twentieth century. “
The best description of the business that I know of is Judge Medina’s opinion,” Walter Sachs said later. “That was a remarkable document. It’s a document that any author of investment banking history will want to study
very carefully.”