Panderer to Power: The Untold Story of How Alan Greenspan Enriched Wall Street and Left a Legacy of Recession (6 page)

In “Gold and Economic Freedom,” Greenspan had warned that the “gold standard is incompatible with chronic deficit spending (the hallmark of the welfare state).” In the closing paragraph, he reminded readers that “deficit spending is simply a scheme for the confiscation of wealth.” To drive the nail home with a 2 4, he warned: “This is the shabby secret of the welfare statists’ tirades against gold.” Yet it was soon after this tirade against welfare statists that Greenspan changed course—he aimed his efforts toward Washington.

⁴⁰
Ayn Rand,
Capitalism: The Unknown Ideal
, Signet (paperback) 1967, essay by Alan Greenspan: “Gold and Economic Freedom” pp. 96–101
⁴¹
Bremner,
Chairman of the Fed
, pp. 204, 224.

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1967–1973

How Alan Greenspan, a man who believed in the philosophy of little government interference and few rules or regulations, could end up becoming chairman of the greatest regulatory agency in the country is beyond me.

—Barbara Walters, 2008
¹

Alan Greenspan entered politics during the 1968 Nixon election campaign. By different accounts, this decision was influenced by at least two old friends. Greenspan met Leonard Garment on a noontime walk. Garment was a fellow graduate of the Henry Jerome Orchestra, where Greenspan spent his wilderness years between the Juilliard School and New York University. By this time, Garment was a lawyer who also recruited volunteers for the Nixon presidential campaign.
²
Greenspan hosted Garment at the Bankers Club in Manhattan. Greenspan impressed his host with his enthusiasm for the presidential candidate.
³
Garment arranged a meeting with Nixon. The economist put on quite a performance.

¹
Barbara Walters,
Audition: A Memoir
(New York: Knopf, 2008), p. 262.
²
Justin Martin,
Greenspan: The Man behind Money
(Cambridge, Mass.: Perseus, 2000), pp. 67–69.
³
Leonard Garment,
Crazy Rhythm
(New York: Times Books, 1997), p. 107.

31

In Garment’s recollection, Greenspan’s verbal calisthenics were “Nepal Katmandu language.” Nixon loved it: “That’s a very intelligent man.”
⁴

Martin Anderson also propelled Greenspan’s political career. Influential in Nixon’s policy research efforts, Anderson was familiar with Greenspan through Objectivist acquaintances.
⁵
Greenspan served with Anderson’s policy group.

As a Rand acolyte, Greenspan was forbidden to collaborate with the government. He rationalized his participation in terms that were not terribly convincing, unless one is Alan Greenspan, who had a special knack for appearing virtuous while raiding the cookie jar. He told Joseph Kraft for a 1976 profile published in the
New York Times Magazine
that he agreed to go to Washington in 1968 only when Arthur Burns at the Federal Reserve and Treasury Secretary William Simon told Greenspan “ ‘that I could have a real effect.’”
⁶

1968: Working for Nixon

Greenspan’s role was coordinator of domestic policy research. It was, in the words of a Greenspan biographer, “a volunteer part-time gig, requiring just a few hours a day.”
⁷
Greenspan gathered papers to be reviewed by different issue task forces. The task forces helped form policy for Nixon on topical issues. Most of Greenspan’s research was shipped off to Nixon’s staff.

After his 1968 victory, Nixon wanted Greenspan to join his administration. Greenspan soldiered on in a temporary capacity, serving as liaison with the Bureau of the Budget during the 1968–1969 transition.
⁸
He turned down the job of budget director.
⁹

By the late 1960s, Greenspan was a millionaire. He owned an apartment at 860–870 United Nations Plaza, known as “U.N. Plaza,” a new and fashionable address where Walter Cronkite, Truman Capote, and Senator Robert F. Kennedy lived.
¹⁰
He seemed drawn to the celebrity culture.

⁴
Martin,
Greenspan
, p. 69.
⁵
Ibid.
⁶
Joseph Kraft, “Right, for Ford,”
New York Times Magazine
, April 25, 1976, p. 27. Burns and Simon held those positions when the article was written in 1976, not in 1968. William McChesney Martin was chairman of the Fed until January 31, 1970. Arthur Burns became a member of the Federal Reserve Board on the same day and chairman of the board on February 1, 1970 .
⁷
Martin,
Greenspan
, p. 71.
⁸
“The Soft-Sell Charm of Alan Greenspan”,
BusinessWeek
, April 28, 1975, p. 2.
⁹
Martin,
Greenspan
, p. 74.

The Wall Street that Alan Greenspan observed from his day job was radically different from the mortuary of gray-faced men who had moped around the stock exchange in the 1950s. The stock market attracted a Youth Movement. The 1960s would be known as “the Go-Go Years.”

The fear of a “disastrous stock market break” (a possibility that Greenspan discussed with the
New York Times
in 1965) would elude investors for another seven years.
¹¹
But from 1966 to 1973, the market endured a period of indecision, with sharp breaks and recoveries.

Mutual fund assets—a barometer for retail interest in the stock market—rose from $1 billion in 1945 to $35 billion in 1965, and to $50 billion by 1969.
¹²
Richard Jenrette, cofounder of Donaldson, Lufkin & Jenrette, called this the “great garbage market,” since the public ignored old stalwarts such as General Motors and General Electric and bought Four Seasons Nursing Centers and United Convalescent Homes.
¹³

By 1969, institutional investors had come to dominate the stock market: they held 60 percent of New York Stock Exchange dollar volume, roughly double their position in 1960.
¹⁴

In short, this was the same carnival atmosphere Greenspan would see three decades later, only in the 1960s the numbers were smaller.

The Rise and Fall of the Conglomerates

The serendipitous restructuring of American companies had compounded at an astounding pace since Greenspan’s early professional career. Federal Reserve Chairman William McChesney Martin explained both the construction and the consequences of accelerated finance before the Senate Committee on Finance on August 13, 1957. Martin warned that “a spiral of mounting prices and wages seeks more and more financing” with a “considerable volume of the expenditure … financed at all times out of borrowed funds.”
¹⁵
The “slick and the clever” would tend to do best.
¹⁶

¹⁰
Robert A. M. Stern, Thomas Mellins, and David Fishman,
New York 1960; Architecture and Urbanism between the Second World War and the Bicentennial
(New York: Monacelli Press, 1995), pp. 630, 632; Martin,
Greenspan
, pp. 64–65

¹¹
Vartanig G. Vartan, “There Are Smiles on Wall Street, Smiles Are Relit,”
New York Times
, June 17, 1965.
¹²
John Brooks,
The Go-Go Years
Weybright and Talley, 1973, p. 101.
¹³
Ibid., p. 184.
¹⁴
Ibid., p. 260.

Borrowed funds were rising in the 1960s because the Federal Reserve was printing too much money. Credit was increasing at doubledigit rates by mid-decade. The economy was growing at a single-digit pace. What was the result? Alan Greenspan knew when he spoke to
Fortune
magazine in 1959. The reporter summarized Greenspan’s concerns: “The Fed … has recently been boxed in by a huge and partially monetized federal debt, which tends to produce an addition to the money supply, whose size is unrelated to the needs of private business.”
¹⁷
And so, speculation and frenzied finance followed.

There will be three periods of abundant finance discussed over the course of this book: first, the 1960s conglomerates phase; second, the 1980s leveragedbuyout period; third, the recent buyout boom that peaked in 2007. Refinancing and merging companies is healthy, up to a point. It is when the flows of credit grow out of proportion to the economy that finance mutates companies.

During the conglomerate years, Alan Greenspan, as consultant, knew how vulnerable the Fortune 500 companies had become. There was no knowing if the biggest and strongest might fall victim to an onslaught of bank debt, convertible bonds, and warrant issues that shareholders found irresistible. It was a world turned upside down. Greenspan was Federal Reserve chairman when leveraged buyouts reached their peak in 1989, and he was still chairman in 2006, when the latest buyout scramble was building to a climax.

“Conglomerates” were unheard of during Greenspan’s early years (so much so that when the structure gained hold in the 1960s, the society pages of the
New York Times
clumsily classified the victors as “conglomerateurs”
¹⁸
).

¹⁵
William McChesney Martin, Statement before the Committee on Finance, U.S. Senate, August 13, 1957; fraser.stlouisfedorg/historicaldocs/wmm57/download/30925/ martin57_0813.pdf, pp. 8, 11.

¹⁶
Ibid., p. 18.
¹⁷
Gilbert Burck, “A New Kind of Stock Market,”
Fortune
, March 1959, p. 201.

James Joseph Ling and Saul Steinberg stood at the beginning and the end of the conglomerations. In 1955, Jimmy Ling, the owner of an electrical contracting company with $1.5 million in sales, handed out prospectuses at a Texas State Fair. He sold 450,000 shares at $2.25 apiece.
¹⁹
By 1967, he ran the thirty eighth-largest industrial company in America and by 1969, the fourteenth-largest.
²⁰
When the economy turned down in 1969, Ling-Temco-Vought collapsed, its stock falling from $167 in 1967 to $11 a share. Ling was shown the door in 1970.
²¹

Saul Steinberg incorporated Ideal Leasing in 1962. In 1964, with earnings of $255,000 and revenues of $1.8 million, Steinberg renamed his company “Leasco” and took it public. From 1964 to 1968, Leasco stock appreciated 5,410 percent.
²²
The 29-year-old Steinberg set his sights on Chemical Bank—the sixth-largest commercial bank in the United States.
²³
He failed.

The pyramiding of securities could not be sustained. Accounting tricks, mountains of paper claims, and all of the other disguises that give cosmetic coverage to bubbles started to topple. In addition, the corporate establishment coordinated its counterattack with Washington. In 1969, the Justice Department, several members of the Senate Banking and Currency Committee, the law firm of Cravath, Swaine & Moore (Chemical Bank’s counsel), and members of the Federal Reserve Board brought Steinberg’s effort to an end.
²⁴
This was within weeks of a
Time
magazine cover featuring James Joseph Ling. The cover subtitle: “Threat or Boon to U.S. Business?”
²⁵
It has traditionally been true that politicians rediscover their populist leanings when such magazine headlines appear.

Deindustrialization, anxiety, and the general collapse of American living standards has been the topic of thousands of books by worthy economists and sociologists. The American peak is generally considered to have been in the 1960s, with the slide commencing about 1970. John Brooks, author of
The Go-Go Years
, described the disorientation:

¹⁸
Brooks,
Go-Go Years
, p. 153.
¹⁹
Ibid., p. 165.
²⁰
Ibid., pp. 165–166.
²¹
Fundinguniverse.com/company-histories/The LTV-Corporation-Company-History.
²²
Brooks,
Go-Go Years
, p. 238.
²³
Ibid., p. 230.
²⁴
Ibid., pp. 254–255.
²⁵
Full title of front cover: “Takeovers in High Gear: Threat or Boon to U.S. Business?”
Time
, March 7, 1969.

The economy and amour propre of whole communities became disrupted. Conglomerates’ headquarters were mostly on the two coasts, and often enough their corporate victims resided in the cities in between. The result was the repeated reduction of midAmerican cities’ oldest established industries from independent ventures to subsidiaries of conglomerate spiderwebs based in New York or Los Angeles.
²⁶

It did not help the dispirited that the median household income rose from $43,677 in 1973 to $49,968 in 2007. This is surely an overstatement, since the government’s calculation of inflation exaggerates the rise in income.
²⁷

Increasing Involvement in Washington Politics

When Greenspan was not advising clients, he was ready for any and all temporary shuttle assignments between New York and Washington. This arrangement fit his pattern of social and professional relationships: buzzing around the hive of activity with occasional forays to gather honey, sating his appetite, then humming into the mist.

Greenspan served on one important Washington committee: the Gates Commission (formally, the President’s Commission on an AllVolunteer Armed Force), whose stated objective was to review the military draft as opposed to an all-volunteer military. Nixon appointed five pro-draft members, five antidraft members, and five question marks; Greenspan was in the third category.

Milton Friedman is generally recognized as the catalyst toward persuading the pro-draft contingent to its unanimous all-volunteer vote.
²⁸
Friedman had been an acolyte of Arthur Burns (when Burns taught at Rutgers), before moving to the faculty at the University of Chicago. He was a strong advocate of abolishing the draft. Temperamentally, he and Greenspan lived on different planets. (When General Westmoreland appeared before the commission and said he didn’t want to command an army of mercenaries, Freidman queried, “General, would you rather command an army of slaves?”)
²⁹
Greenspan gravitated toward the antidraft party in typical fashion. A researcher for the Gates Commission recalls that Greenspan had not been too aware of the issues. Once he learned more about the arguments, though, he became a convert.
³⁰
It is difficult to believe the man who coauthored the 1966
Fortune
exposé on suspect government spending in Vietnam was so detached.