Money and Power (27 page)

By the end of January 1968, the first month of the new fiscal year, Rubin’s bet had cost the firm $675,000. “That was a lot of money back then,” Rubin wrote, “more than we made on any other arbitrage transaction that year and a noticeable slice out of the firm’s yearly profits.” Levy, whom Rubin described as having “terrific insight into deals in retrospect,” was “furious” and “stalked around the trading room muttering that
we should have known better than to think a merger like that would go through.… Anybody could have seen that was going to happen!”

While the loss had been sizable, Levy and Tenenbaum also knew that it was in the nature of the bets Goldman was making in merger arbitrage. Occasionally deals would fall apart and the bets would go awry but the odds—at least the way Goldman was calculating them—favored the firm the majority of the time. After all, most publicly announced deals do get completed in one form or another, and given the extent of the market intelligence Rubin and Tenenbaum and Mayers were picking up, chances were that Goldman would win more often than it would lose. “
Having Gus Levy remind you of all the reasons you were a moron wasn’t always the most pleasant way to begin a day,” Rubin explained, “but not only could I live with the risk without becoming a nervous wreck[,] risk taking actually comported with my way of looking at the world.” Although the antecedents aren’t exactly clear, Rubin said he “
took naturally to being rigorously analytical in weighing probabilities” and “described this as being like a mental yellow pad. Risk arbitrage sometimes involved taking large losses, but if you did your analysis properly and didn’t get swept up in the psychology of the herd, you could be successful.” While “flux and uncertainty made arbitrage quite nerve-wracking for some people,” Rubin continued, “somehow or other, I was able to take it in reasonable stride.”

The pressure to bet correctly was intense, even if Rubin preferred to minimize it and even though Goldman’s market presence gave it some advantages.

——

I
N
M
AY
1968, Levy was on the cover of
Finance
magazine, known then as “the magazine of money.” The headline on the article, “The Biggest Man on the Block,” was a reference to Levy’s—and Goldman’s—dominance of
block trading. While Goldman was not known for its innovations, the introduction of block trading was one. The idea was that with the rise of institutional investors—
mutual funds,
pension funds, and their ilk—the willingness to buy big blocks of stock in one fell swoop from clients became a valuable service. Previously, large blocks of stock that a client wanted to sell would need to be broken up into smaller pieces that the market could absorb without moving the stock price materially (usually downward, as a result of more supply than demand). This would often take a long time and negatively affect the stock price, costing the client money. By agreeing to buy the block of stock from the client immediately, Goldman took the risk of selling it from the client, using its own capital, making the bet that later it would be able to sell the
stock at a higher price. In any event, Goldman would also get the fees for buying and the fees for selling. All the risk is in the buying, which is why Levy coined the phrase, “Something well bought is half sold.”

In 1968, for instance, almost half the volume of stock traded on the
New York Stock Exchange came from institutional investors. “We, of course, know where all the big blocks are,” Levy said in May 1968. Levy was the biggest block trader for Investors Diversified Services, or IDS, then the nation’s largest mutual fund company, owned by
Allan P. Kirby, Levy’s old nemesis from his battle with the Murchisons. Goldman liked to be known at that time as “the biggest mover of stock on Wall Street.” There was plenty of evidence to back up the claim. For instance, on October 31, 1967, Levy “crossed”—meaning he acted for both buyer and seller, and collected all associated fees—1,150,700 shares of
Alcan Aluminum, at $23 per share, then the largest single individual trade ever. Levy was “so intrigued” by the trade that
Finance
reported that he went to the floor of the exchange himself to work with the specialist as the trade was crossing the tape.

The magazine allowed that as Levy was nearing his fifty-eighth birthday, he was “evolving” quickly from a “tough trader with [a] point-spread orientation” into a statesman of the financial community. “He wants to be Mr. Wall Street” just like Sidney Weinberg, said a friend of Levy’s. For his part, Levy remarked one Saturday morning from his Sutton Place apartment, with stacks of work papers surrounding him and his multiline phone lighting up with calls time and time again, that he had been “working too hard,” although he clearly loved doing so. His long-term ambition, he allowed, was to perhaps obtain “some Government job, appointive, not elected,” although such a position was “down the line. I’m not ready for that yet.”

Levy was really focused on consolidating his growing power at Goldman Sachs. His trading operation there in the late 1960s had become the profit engine of the firm. “
More growth occurred during his period of leadership than during Sidney’s period of leadership,”
John Whitehead observed. “Sidney saw to it that the firm survived and that its reputation reached a high level, but it was Gus who saw to it that the firm had the thrust and the drive to grow during this period.”

Weinberg, then in his seventies, was still a force around the firm to be sure. But Levy and his minions—Tenenbaum, Rubin, and (until he left the firm) Lenzner—were the ones driving the firm’s profits. “
It was the only firm on the Street that was both a trading firm and an investment banking firm,” Bob Rubin recalled of Goldman when he first got there. Rubin met Sidney Weinberg—“Mr. Weinberg” to one and all—only
once, and that was as a result of writing a memo for him, at Levy’s request, having to do with the Ford family’s interest in possibly exercising some Ford stock
options.

Rubin spoke on the phone with Weinberg and received his orders about what the memo should be about. “
At some later point, Gus said that Mr. Weinberg said I did a good job,” he continued. “And then one day, I was sitting in the trading room, and all of a sudden, L. Jay stood up. I was wondering what he was standing up for? And all of a sudden, this little man was walking in the door with a vest, and that was Sidney Weinberg, so I met him. That was the only time I met him.” The reason that Rubin had only met Weinberg one time was that, thanks to Levy, Weinberg no longer had his office at 55 Broad Street. Levy had dispatched him to an uptown Goldman office at the Seagram Building at 375 Park Avenue in the mid-1960s. By the end, Weinberg and Levy didn’t much like each other. “
Sidney looked down his nose at Gus,” Whitehead said. “But Sidney, I’m sure, acknowledged to himself that there was no other choice, and therefore selected Gus” to succeed him. “
He preached mandatory retirement at age 65,” the
Times
observed in 1971, “but he never quite practiced it.” The paper continued that Weinberg’s “semi-retirement” allowed Goldman to transform from what was a “one-man show to a more broadly based operation.” It was highly unusual for a senior partner of a firm to be removed physically from the firm’s offices, but without Weinberg at 55 Broad Street, Levy had a freer rein to run the firm the way he saw fit.

The story of how Levy engineered this move remains one of the more elusive in the Goldman lore. Neither of the previous two books about the firm mentioned the dispute between Levy and Weinberg that resulted in Weinberg moving his office to the Seagram Building. But there is no disputing Levy’s desire to run the firm as he wanted, free of Weinberg’s hugely conservative and controlling nature. “
Sidney was a little jealous of his, I guess, priority,” partner
George Doty explained, “and he would step on Gus whenever he thought Gus was looming too large on the horizon. But Gus was a major moneymaker for the firm. So it was a love-hate relationship.”

Levy saw that huge moneymaking opportunities existed in arbitrage, in
block trading, and then in option and
commodities trading. As an investment banker who had come from near poverty and lived through the Depression, Weinberg was highly risk averse, especially when it came to using the firm’s scarce capital—which, after all, was nothing more than the partners’ money—to make trading bets. Levy unleashed a wave of pent-up creative energy among the Goldman troops. “
Gus was much more aggressive with an interest in getting new business and things
like that,”
Alan Stein, a former Goldman partner, recalled. “And he also gave a lot more power to individuals to do their own thing, which Sidney never really liked to do. He was very much a control person.” Doty was brought in from an accounting firm to try to counterbalance Levy’s risk-taking tendencies. “
Sidney and Walter Sachs used to be scared of Gus for taking them over the cliff because he was a better risk taker in the markets than they really had the stomach for,” Doty said. “I was brought in at least partly as the counterbalance and to try and prevent us from getting too exposed.”

Sandy Lewis had no knowledge of how Levy was able to get Weinberg to move uptown, either. But he was well aware of how important the move was to Gus Levy. “
It was a cause for celebration between Dad and Gus,” he said. “I can never remember such mirth. They were delighted to get him out of there. It’s not that they didn’t respect him. They did. But he was holding back principal trading. Not just getting agency business. That man did not want trading to get to be a big deal at Goldman Sachs. He hated it. He feared what it would do to the firm. He saw what happened in the Crash.”

But as his influence grew at Goldman and on Wall Street, Levy—now known as “Mr. Wall Street”—decided that Weinberg had to go. Levy’s succession of Weinberg was more akin to that between Weinberg and
Waddill Catchings than the smooth, well-conceived leadership change the firm’s image makers would have one believe. “Sidney Weinberg, like a lot of strong leaders, did not slip gently into the night when Gus Levy
became senior partner,” explained
Peter Weinberg, Sidney’s grandson. “In fact, I had always heard it was a hell of a challenge to get him out of the building up to 375 Park. I believe Sidney Weinberg felt he ran the firm until the day he died.” Added Rubin, with typical understatement, “When Mr. Weinberg turned over the running of the firm to Gus, I think there was some stress there,” he said. “Jimmy”—Weinberg, one of Sidney’s two sons—“once said to me that Mr. Weinberg found it hard not running the firm.” Even though Weinberg was not physically at Goldman’s offices on Broad Street, he still retained for himself the power to set the partners’ biannual profit percentages, which meant that Weinberg—not Levy—decided what partners got paid. On Wall Street, there was nothing more important. “
Sidney, until the day he died … he was always the boss,” Doty said. “He was the senior partner. I don’t think Gus loved it. Gus had grown substantially in the public eye. He had become a very good investment banker. He had become chairman of the
New York Stock Exchange. But Sidney never left any doubt in anybody’s mind who was the senior partner of the firm.”

In 1969, toward the end of the annual partners’ dinner—often held at the ‘21’ Club—Levy stood up to toast Weinberg. “
Mr. Weinberg,” he said, “even though your office is now uptown and we’re downtown so we don’t see you at the office anymore, we all want you to know that you are
always
in our thoughts and
always
in our hearts and we are so glad you are active and well and we just want you to know that never a day goes by without our thinking of you and how much we respect you. Wherever you are and wherever you go, Goldman Sachs is always with you—and you are always with Goldman Sachs.” The other Goldman partners applauded Levy and his homage.

But Weinberg, at age seventy-seven, was not ready to go quietly. “
Those are very nice thoughts, Gus, and I’m glad you feel as you say you do,” he said in response. “But don’t you ever forget this, Gus. No matter where I am,
I
am the senior partner of Goldman Sachs and
I
run this firm.” Until the end, Weinberg remained a thorn in Levy’s side. “While Sidney was alive he was a damper on Gus’s business because he used to say that some of Gus’s business was—‘borderline’ is the wrong word and I don’t want to offend anybody by saying it—but he thought maybe some of Gus’s business was ‘too Jewish,’ which is an expression he might have used,” explained one former partner. “So when Gus was freed of Sidney, he could go after whatever business he thought was good for the firm. In the meantime Gus’s own standards had developed. He had become more cautious of the firm’s image and was less likely to try to go after business that was marginal.”

——

O
N
J
ULY
24, 1969, after a short illness, Weinberg died at the Columbia-Presbyterian Medical Center. His lengthy obituary appeared on the front page of the
New York Times,
and in addition to recounting his hardscrabble upbringing in Brooklyn, and his investment banking prowess, there was also a recounting of his generally unknown role as a presidential adviser. In addition to working with and for President Roosevelt, he also advised—behind the scenes—Presidents Truman, Eisenhower, Kennedy, and Johnson. Although he voted for Democrats, he hedged his bets. His influence in the two Eisenhower administrations was said, by the
Times,
to be “enormous.”

President Kennedy asked Weinberg for help on tax proposals and on how to create
COMSAT, the Communications Satellite Corporation (the IPO of which Bob Rubin worked on as a lawyer). In 1964, Weinberg helped form a Johnson for President group that worked to get Johnson elected in his own right that year. He recommended both
John T. Connor and Henry Fowler to Johnson, who chose both men for his cabinet—
Connor as secretary of commerce and Fowler as secretary of the treasury. (Fowler later became the first former government official to join Goldman as a partner.)
Hubert Humphrey, the Minnesota senator, was the only presidential candidate Weinberg backed who ended up losing the presidency. At his death, Weinberg was on three corporate boards:
Ford Motor Company,
General Cigar Company, and the
Corinthian Broadcasting Company.