Money and Power (24 page)

Tenenbaum seemed to echo this sentiment, although soon enough he would burn out at Goldman and leave the firm in his early fifties. “Gus Levy ruined my first marriage,” he would tell people when explaining why he left. “I wasn’t going to let him ruin my second.” Before then, though, he spoke of the firm like a family. “
The thing about Goldman Sachs, it was not only a place where you work with
people,” he said. “They became your lifelong friends. This was much more of a social type situation. Guys go into a factory and work in an office, and they have their own lives. That isn’t the way it was. We were all very close.”

——

A
S
L
EVY SPENT
more and more of his time running the firm and managing his extracurricular activities, Tenenbaum began to take on more responsibility and more initiative in building Goldman’s arbitrage business.

One way that the arbitrage business became more complex was that as the M&A business began to pick up in the 1960s, Goldman would “arb” the deals by buying and selling stock in the companies involved in a deal—usually after the deal had been announced publicly. In this new frontier of
merger arbitrage—known among arbitrageurs as “
event driven”
arbitrage—information was power and could mean the difference between making a lot of money or losing a lot of money. The people with the information about M&A deals were, of course, the people responsible for putting the deals together in the first place—the corporate executives, the investment bankers, and the lawyers—and arbitrageurs would think nothing of “making the call”—as arbs referred to the practice—to these groups of
insiders to try to glean whatever bits of information they could that would give them a trading advantage. Since there were often months between when a deal was announced and when it closed—the time that was needed for regulatory approvals, either by the Justice Department or the
Federal Trade Commission or the SEC, and to file proxy statements and obtain shareholder votes—and the stocks of the companies involved in a deal continued to trade during
this period of uncertainty, arbs put themselves in the position of either making or losing vast amounts of money based on subtle or not-so-subtle changes in the deal along the way. For instance, if an arb knew that the Justice Department was going to block an announced merger on antitrust grounds before it was announced publicly, he stood to make money based on that information that others in the market did not have. And so, in the event-driven arbitrage business, the ethos became
all about making the calls to get information others did not have. (While the rules about insider trading were in their infancy during the 1960s—and not nearly as black and white as they are today—it was a good bet that trading the stock of a company involved in a merger
before
the deal was announced based on nonpublic material information was an easy way to court regulatory scrutiny.)

For instance, Tenenbaum explained, soon after a merger was announced, he needed to figure out whether it would be reviewed by the Justice Department, which had the power to block a deal on antitrust grounds, or the Federal Trade Commission, which did not have injunctive power. If an arb found out that the FTC was going to get the deal, he knew the deal would not get blocked and he could make money on the
spread between where the price of the company
being bought would trade for in the market and where it would trade—generally higher—when the deal ultimately closed. If the arb found out that the Justice Department would be reviewing the deal—raising the possibility it could be terminated on antitrust grounds—an arb would trade the stocks a different way. “
If you found out that Federal Trade is going to get it”—and here Tenenbaum clapped his hands
together—“it was a goddamn good spread there hanging over the market,” he said.

In an effort to improve the quality of the information he was getting, Tenenbaum decided to hire a Washington law firm, Jacobs & Rowley, consisting of two attorneys, Heath Jacobs and
Worth Rowley, who used to work in the antitrust division of the Justice Department. “
I don’t know how I found them, but I found them,” he said. “They both had been with the Justice Department as agents, so they
knew all the people in the department. They went to the right cocktail parties.” After an announcement of a merger, Tenenbaum would call up the law firm. “Boys, is this a Federal Trade thing or is it Justice?” he’d want to know. Soon enough, the lawyers would call him back and share their opinion. “We think it’s going to be Federal Trade,” they would tell Tenenbaum and then would explain why they thought the way they did.
“Fine,” he would reply, “and I got it going.” Was this inside information? “Well, inside information, call it whatever the hell you want,” but he would get what he needed to know to make the trade more profitable for Goldman.

On tax matters, always a big part of mergers, he relied on tax lawyers he hired who also used to work in the Justice Department. “
If there were tax cases, I wanted to know whether they were serious or not serious,” he said. “I didn’t use
Sullivan & Cromwell, our lawyers, because they never thought there should be any antitrust. They were too right wing. I needed guys who knew the players, the
line guys. I had good tax lawyers. I had good antitrust lawyers. I also was pretty good at talking to management and treasurers.”

Tenenbaum thought nothing of calling up a company’s executives and peppering them with questions about an announced deal. “When do you think you’ll sign the agreement?” he would ask them. They would answer things like, “Well, we’re about a month out.” Tenenbaum said, “I kept a good calendar and called them in a month.” The executives didn’t mind the calls, Tenenbaum said. “I’d say,
‘Did all the directors agree to it? Was it unanimous?’ They were pretty happy to answer me. I didn’t have any problem.” He did draw the line, though, he said, and did not execute a trade when he would make a call and find out the merger agreement was going to be signed the next day. “I didn’t buy a thing,” he
said. “
That’s shooting fish in a barrel. That was the way I designated.
I never shot fish in a barrel.”

That would be inside information, he believed, not seeing that perhaps also getting lawyers in Washington to provide nonpublic information about mergers could also be perceived as inside information. “
The question is what is inside information?” Tenenbaum asked. “What is it? It’s something that is special and is going to be an announcement. Now, if some guy says, ‘We’re signing the merger agreement in a
month,’ that’s not inside information. It could be a month. It could be six weeks. It could never happen.” He kept close tabs on what they told him, though, and if someone told him a merger would be announced in a few weeks, he would check back with them and ask how it was coming along. Making these kinds of calls were his “own instinct,” he said, and were not done at the suggestion of Levy.

Levy also supported Tenenbaum’s effort to hire more analysts and traders to grow the arbitrage business.
Robert Lenzner was one of the more unusual people Goldman hired, as was the way in which Levy hired him. Lenzner’s father was Levy’s dentist, in New York, and one day he simply asked Levy if he would give his son a job. Bob Lenzner was highly credentialed but, unlike Tenenbaum, had no relevant experience in Wall Street, let
alone in arbitrage. He graduated from Exeter in 1953, Harvard College in 1957, and attended Oxford University for a year after Harvard. In his senior year at Harvard, Lenzner was the business manager of the
Harvard Crimson
. He graduated from Columbia University’s Graduate School of Business in 1961.

Levy hired Lenzner as his assistant in 1962. “
Gus brought him in just like he brought me in for my dad,” Tenenbaum said. “After Lenzner was in Gus’s office as his assistant for six months, he says, ‘You get that guy out of here.’ ” (Another version of the story has Levy telling Tenenbaum to get rid of Lenzner after
one
day.) The combination of the imperious Levy and the nervous
Lenzner was not a good match. Levy did not want him around any longer. To appease Levy, Tenenbaum took Lenzner as his assistant. One of the first deals Tenenbaum and Lenzner worked on together involved
Sinclair Oil’s September 1963 agreement to buy
Texas Gulf Producing Company for $252 million. Texas Gulf, which had oil and gas properties in Texas and Louisiana as well as production operations in
Libya and
Peru, had put itself up for sale the previous April. Texas Gulf’s shareholders approved the sale to Sinclair in May 1964 but the deal could not close until the Libyan government signed off on the transfer of Texas Gulf’s production facility in the country to Sinclair. Whether Libya would sign off was becoming a greater and greater threat
to the deal’s closing and for Goldman’s arbitrage department a greater and
greater concern. The firm had a bunch of money tied up in a bet the deal would close, but without the Libyan’s government’s sign-off it could not happen. Nerves were starting to fray on Broad Street.

In typical fashion, Tenenbaum had been in regular communication with Joe Dowler, the treasurer of Sinclair Oil. At one point, Lenzner asked Tenenbaum to let him help. “
L. Jay, I know you’re working with Dowler, but let me follow this thing,” Lenzner told Tenenbaum. “I know all the stringers for the
New York Times
that are out in Libya. I can get us a lot of information because
there’s a feast of Ramadan, where nobody did anything, and I know what they’re doing during Ramadan,” which is the ninth month of the Islamic calendar and usually in the late summer. Lenzner spoke with the
Times
stringers in Libya and from them received “wonderful information,” Tenenbaum said, which he then shared with Dowler. “I was able to feed it to Dowler and get into Dowler’s good graces,” he said. “This is
what you did. You formed a friendship [based on] the fact that you were valuable to them. And you got stuff back from them. ‘Joe, everything okay with this merger?’ I would ask. He would reply, ‘Fine.’ ”

Another important link in Goldman’s information chain about pending deals—in addition to bankers, lawyers, and corporate executives—was other Wall Street arbitrageurs, the most prominent among them being
Harold Cohen and
Dicky Bear, at
L. F. Rothschild, and
George Soros and
Arthur Klingenstein, at Wertheim & Company. For reasons not entirely
clear—beyond allowing Goldman to make sure valuable information about deals was shared—Goldman had joint-account relationships with both L. F. Rothschild and Wertheim during this time, meaning that the firms would jointly arb certain deals together, sharing ratably in the profits and losses. Goldman and L. F. Rothschild were “joint account” on the Texas Gulf deal, for instance.

Having access to the intelligence Lenzner was uncovering in Libya was very helpful to Goldman, L. F. Rothschild, and Sinclair. “Lenzner’s doing a beautiful job getting us information,” Tenenbaum said. “One day he comes to me, very excited. He says, ‘L. Jay, L. Jay, we’ve got a problem in Libya. I just heard that there may be an uprising in Libya, civil war, something in Libya. It’s terrible.’ I said, ‘Oh, my
God!’ ” It turned out there was some early uprising involving Libyan colonel Mu‘ammar al-Gaddafi. Tenenbaum suggested to Lenzner that he call the Libyan ambassador to the United States and “check the story and see what it’s about.” Lenzner thought that was a great idea. “So, he goes away,” Tenenbaum said. “An hour later, he comes back to me. He said, ‘Oh, my god.
We’re in trouble.
We’re in trouble.’ I said, ‘Bob, what’s wrong? What’s wrong?’ He says, ‘The Goldman Sachs’s operator attached me to the
Liberian
ambassador, instead of the
Libyan
ambassador.” Lenzner told the Liberian ambassador to the United States that there was “a revolution going on in your country.” The ambassador said to Lenzner, “What are you talking about?” Lenzner said, “Well,
I heard about it.”

“My god,” the ambassador said. “You’re telling me there’s a revolution in Liberia.”

Lenzner replied, plenty flustered, “No, Libya. I don’t know what … Oh, my god …” That’s when Lenzner got off the phone and told Tenenbaum what happened. He realized quickly he had screwed up.

Tenenbaum called
Dicky Bear, at Rothschild. “I said, ‘You know what my nut’s done now?’ ” Tenenbaum said. “I tell him the story.”

After getting off the phone with Tenenbaum, Bear decided he was going to play a joke on Lenzner. He waited thirty minutes and went back to his office, where his private phone was, and called Lenzner. “Lenzner,” Bear said, officiously, “John K. Smith with the
U.S. State Department. We’ve just had a complaint from the Liberian people that you’re spreading rumors of revolution in their country.”

“Well, Lenzner goes bananas,” Tenenbaum said. “Comes back and tells me.”

Tenenbaum told Lenzner that the call was actually from Dicky Bear, who was pulling Lenzner’s leg. “He grabbed everything on his desk and he swept the whole thing right off the desk,” he said. “He says, ‘God damn it.’ He left the office and didn’t come back for three days.” In the end, the Libyan government approved the Texas Gulf deal in November 1964. The deal closed three weeks later, and Goldman made plenty of
money.

Another time,
David Henkel, a distinguished and very Waspy partner at
Sullivan & Cromwell, came to Goldman to meet with Levy and Lenzner to discuss a legal concept related to arbitraging a deal. The three men met together in a small conference room. After about three minutes of listening to Henkel, Levy had had enough. “
Gus suddenly becomes furious,” Lenzner recalled. “In his
inimitable New Orleans accent, he barks: ‘I don’t wanna hear what I CAN’T DO; I wanna hear WHAT I CAN DO!’ And he bolts the room leaving me there to clean up. That’s what I learned from six years under Gus Levy: ‘I DON’T WANNA HEAH WHAT I CAN’T DO. I WANNA HEAH WHAT I CAN DO!’ ”

Around this time,
Albert Feldman, Goldman’s trader devoted to arbitrage, quit because
Robert Mnuchin made partner and he didn’t.
Bruce Mayers, then an arb at a small Wall Street firm, had done some
trading with Mnuchin at Goldman, and when Feldman quit, Mnuchin called up Mayers to see if he wanted to take the job that Feldman had vacated. Mayers, a graduate of Erasmus High
in Brooklyn and the Wharton School in Philadelphia, had been content to make around thirty thousand dollars a year at
Gregory & Sons, a small brokerage, doing little deals. “
Which was
really
good money in those years,” he remembered. Mayers was doing well at Gregory & Sons and had done well at his previous firm by making bits of money here and there, taking advantage of differences in the pricing of
various securities. “I did some really very big deals which kind of made a name for myself, which is not meant in any way other than the fact that I was growing by devoting my time to one thing while the Goldman Sachses and the
L. F. Rothschilds and
Salomon Brothers of the world, which were the bigger names in arbitrage, had different parameters,” he said.