Money and Power (34 page)

After a long litany of Goldman’s ongoing omissions and misrepresentations to his clients, Pollack referred to a blue memo written by John Whitehead, the partner in charge of Goldman’s Corporate Finance Department. Whitehead wrote that he feared the commercial paper department “feels itself to be very much under the gun from the rest of the firm to produce instant profits at the maximum level possible for their department. Clearly this is not the proper objective and I think we should tell them so. Their job is to make the maximum possible contribution to the firm’s overall profits, not just their own; to do it in the long run, not just immediately.” Pollack said Whitehead was “perceptive” and saw “what was wrong” in the commercial paper department.

Pollack was brilliant right to the end. He said the case could be summarized simply: “
When the company went under, Goldman Sachs, which for nearly two years had maintained an inventory [of Penn Central’s commercial paper], was left with zero in its own position. These plaintiffs were left with $3 million.”

On October 9, the federal jury reached a unanimous verdict against Goldman and ordered the firm to repay the $3 million, plus interest accrued since the filing of the lawsuit more than four years earlier, to the three plaintiffs. The
Times
called it a “
landmark case” and the “first of its kind to go before a jury” and said that the verdict “could lay the groundwork” to resolve another thirty-five similar suits against Goldman, amounting to nearly $30 million. It was the first time a jury had extended securities law to commercial paper, which was a corporate IOU rather than technically a security.

The jury’s verdict was a big blow—“
epochal,” Pollack said—to both Goldman’s reputation and its traditional legal strategy of fighting claims against the firm rather than settling for reasonable amounts. The jury
awarded the three plaintiffs one hundred cents on the dollar plus another $1 million in interest. Goldman could not afford to have the remaining Penn Central lawsuits against it go that direction. “
This was not a minor event,” Pollack said. “If you consider the fact that their total exposure was $82.5 million and they had total capital of $50 million, you can draw your own conclusions about whether this was an emergency for Goldman Sachs. It’s fair to say they were on red alert.”

In March 1975, Goldman settled with
Getty Oil for $1.4 million, or seventy cents on the dollar. Some twenty lawsuits against Goldman remained outstanding, totaling around $20 million. According to a statement Novotny released, Goldman had “carefully prepared for any potential outcome of the remaining litigation to insure that these suits will not impair our capital.” In December 1975, a federal judge ruled against Goldman and ordered the firm to pay $500,000, with interest, to
Franklin Savings Bank, which had bought Penn Central commercial paper a few months before the bankruptcy. Even when Goldman appeared to win a suit, it ended up losing. For instance, in June 1976, a federal judge in St. Louis ruled in Goldman’s favor against
Alton Box Board Company, of Alton, Illinois, which was seeking $625,000. The judge found no “indication that the purchase was induced by any misrepresentation or omission of material fact” by Goldman and that Goldman “was warranted” in representing that Penn Central was “creditworthy” when it continued to sell its commercial paper. But Goldman lost Alton’s appeal and, in November 1977, agreed to pay Alton $925,000, which was not only the original amount of the note, plus interest, but also Alton’s attorneys’ fees and court costs. In October 1976, a federal judge ruled that Goldman had to repay $600,000, plus interest, to the
University Hill Foundation, a fund associated with Los Angeles’s
Loyola University. (In the end, Goldman ended up buying back enough of the Penn Central commercial paper to offset a portion of its losses when the company emerged from bankruptcy protection and revived. “
The value of the paper subsequently rose when the railroad reorganized, limiting our losses some more,” Whitehead observed.)

——

I
F ANY OF
these ongoing legal judgments against Goldman affected Gus Levy, he did not let on. He ran into Pollack in 1976 at a public event, after not having spoken to him in six years. (They once served together on the board of the
Foster Grant Corporation, a manufacturer of sunglasses.) The two men exchanged pleasantries about their health and their families. “
He said he felt great,” Pollack said of Levy. Nor did Levy seem fazed by L. Jay Tenenbaum’s unexpected decision to retire from
Goldman in November 1975, after more than twenty-two years at the firm. At the time, he was the third or fourth highest paid partner at the firm, with a 3.5 percent share of the profits. But he was burned out. Additionally, he had just remarried—an airline stewardess—and he wanted to make sure his second marriage did not go the way of his first, which it very well might have had he stayed at Goldman Sachs. “
L. Jay had
had
it,” Peter Levy said. “There was a lot of pressure and he just wanted out.” Ever diplomatic, Robert Rubin described Tenenbaum’s departure from Goldman as a long-planned act of selflessness. “
He was trying to clear the way for his own eventual retirement, even though he was only forty-four when he hired me.”

When Tenenbaum retired, Ray Young, the partner in charge of equity sales, gave Rubin some unsolicited advice. Rubin had to make a choice, Young told him. He could continue to focus on event-driven arbitrage in a trading environment “
focusing intently on my business, being short with people, and projecting an impersonal attitude,” Rubin wrote, which would let him “continue as a successful arbitrageur.” Or, Rubin could take Young’s advice and “start thinking more about the people in the trading room and in sales—about their concerns and views—and how to enable them to be successful … [and] become more broadly involved in the life of the firm.” Not surprisingly, soon after Tenenbaum’s departure, Rubin took Young’s advice and began to think more broadly about his role at the firm. “Ray Young’s advice pointed me toward a whole new world that I hadn’t thought much about,” he conceded. Of course not.

Not only had Tenenbaum left behind at Goldman what could have become a major fortune, he also left behind the more enduring legacy of the people he hired, including Rubin, and the men who followed Rubin in the arbitrage department, Robert Freeman and Richard Perry among them. Tenenbaum also hired another young lawyer,
Steve Friedman, who would become part of the firm’s burgeoning M&A group.

As for Levy, there was not the slightest crack in his façade of invincibility. In April 1976, Levy gave an interview to a business writer for
UPI, and the subsequent puff piece, which did not even mention Penn Central or the lawsuits against Goldman its bankruptcy had spawned, appeared in a number of local papers around the country. The article recounted Levy’s rigorous work schedule, his extensive board seats—of “almost two dozen” American companies—and his vast philanthropic and political reach. It also pointed out how hard people at Goldman worked and conceded Levy was a “demanding” boss. “Sure, there’s a lot of pressure here,” Levy said. “But one secret of our success is to be consistent,
and one way to be consistent is to make calls, do your job and be constantly in touch with current and prospective customers. I’ve never heard of anyone complain of overwork here.” The article pointed out that Goldman had become a leader in providing advice to companies that were the subject of hostile advances from raiders and other corporations. Levy noted Goldman’s “policy” of not “siding with firms that want to take over another company against its objections.” He then added, “Sometimes it gets very messy.”

When asked how he did it all, Levy responded, “I wish I knew” and complimented his wife as being “a very understanding woman.” The article credited his lack of sleep—at most, five or six hours a night—with giving him the extra time he needed to get things done. “[T]he bags under his eyes to the contrary,” Levy was, the writer pointed out, a “vigorous, lean, healthy-looking individual.” Levy did not smoke and drank minimally, according to the article, notwithstanding his regular evening martinis. He exercised nearly every day, either on a machine in his apartment or by jogging in a nearby park. “I guess I just happen to have a better than average constitution,” Levy explained.

Six months later, on October 26, while at a meeting of the commissioners of the
Port Authority of New York and New Jersey, Levy suddenly put his head down, as if lost in deep thought. He seemed to be napping, which made perfect sense since he had taken the red-eye from Los Angeles the night before after attending a
May Department Stores board of directors’ meeting and then working a full day at Goldman. “
Knowing of Levy’s habit of intense concentration on something else,”
Roy Smith explained, “the other commissioners thought nothing of the fact that he had slumped down in his chair and seemed to be staring straight ahead. After a while someone asked if he was all right, and finding him not to be, called for an ambulance.” He was sixty-six years old. Levy was taken to
Mount Sinai Hospital, where he was still chairman of the board of trustees. Novotny told the
New York Times
Levy had suffered “a mild stroke,” which was almost certainly inaccurate. That night, Levy was kept in the intensive care unit and his condition was listed as “stable,” according to a brief article in the paper.

His son Peter, then a partner at Goldman, remembered being called after the meeting at the Port Authority. “
He couldn’t be seen that night,” he said, “and the next day I went to see him. And he seemed okay. Actually he seemed fairly lucid and recognized me, and the next day he didn’t. And then he went into a coma.”
Peter Levy sat with his father at Mount Sinai during much of the ordeal but he knew his father’s
prospects were grim when he asked the doctor about the prognosis and the doctor shrugged. “The worst thing you can do,” he said. Gus Levy died on November 3.

The outpouring of accolades for him was one measure of his importance on Wall Street and in New York. “Gus Levy was a very special human being,” the partners of Goldman allowed. “He was a generous man and devoted humanitarian, championing improved health care, increased educational opportunities, and the brotherhood of man. His untiring efforts on behalf of his clients, friends and associates and his achievements as a leader of the financial community rank him as a truly great man. All of us are richer for having known Gus Levy.” The firm also published a long list of Levy’s civic, philanthropic, and corporate associations, including his thirty-one board seats, his three honorary degrees, and his fourteen-year stint—who knew?—as treasurer of the
International Synagogue at Kennedy Airport. Paid tributes in the
Times
came from his fellow Wall Street titans, including
Laurence Tisch, and even a young
Henry Kravis. On November 4, the NYSE observed one minute of silence in honor of Levy.

At a funeral service on the morning of November 7 at
Temple Emanu-El, on Fifth Avenue, some two thousand people gathered to mourn Levy. Vice President
Nelson Rockefeller, a longtime friend, delivered the principal eulogy. But even this moment was stage-managed; Novotny had written the words Rockefeller would utter, even retyping them on a special typewriter so that the vice president, who suffered from dyslexia, could read them. “What an extraordinary man,” said Rockefeller, who had regularly sought out Levy for advice. Walter Frank, Levy’s predecessor at the NYSE, said he was in “shock, shock” when he heard about Levy’s death. “We lost a great man,” Frank said. “He was a great man.” (In 2002, Goldman acquired Frank’s specialist firm.) Stopped by a reporter after the service, former New York City mayor
John Lindsay said he was in a “state of shock” over Levy’s death and that “in the years I was Mayor and in Congress, Gus Levy helped me beyond measure.”

The next day, Levy’s body was flown to New Orleans for burial at the Metairie Cemetery, on Pontchartrain Boulevard, in one of the above-ground crypts used in the city because it is below sea level. Nobody from Goldman went to the burial. Nor did Levy’s wife or his two children. “
I didn’t go down,” Peter Levy said. “None of the family went down. My mother said, ‘There’s no need to go down. We’ll just mourn for him up here.’ ” Levy left an estate worth “millions,” his son said, including a large apartment at 4 Sutton Place and a country estate—
Apple Hill Farm—in Armonk, New York, next to the Blind Brook Club, where he played golf
regularly; he was known to take the red-eye back from Los Angeles after a client meeting and head straight to the golf course.

Given the suddenness of Levy’s death, Bob Rubin didn’t get to say his good-byes, either. “
After Gus died, I’d always regretted that I’d never asked him what he, driving himself all day long every day, thought life was all about,” he wrote in his memoir. “I don’t know if he would have had an answer, but one answer I don’t think he would have given was money.”

T
ime for reflection, or not, Levy’s death caught everyone at Goldman by surprise. There was a firm to run, and there was no one to run it. “
As you’ve all heard, Gus Levy died yesterday of a stroke,” Bob Mnuchin told the troops on the morning call. “There’ll be time to discuss his contributions at a later time. Right now, as he taught us so well, it’s important that we all get on with our work and the job to be done today. That’s what Gus would have wanted.”

But what if Levy had somehow, somewhere left instructions about what was to happen if he were—metaphorically speaking—hit by a bus? There seems to be a fair amount of confusion about whether or not Levy had actually designated his successors. In his memoir, Rubin wrote that Levy was young enough when he died that “
he’d been able to ignore the issue of succession at the firm.” While, as one of the costs of getting Sidney Weinberg to move uptown to the
Seagram Building, Levy had agreed to put together a
Management Committee—the obvious place to look for new leaders—there was never any question that Levy was running Goldman with an iron fist and the other men on the Management Committee served at his pleasure. Levy’s pleasure was to minimize their involvement in the overall management of the firm and leave things to him, alone.