The Go-Go Years (21 page)

5

Moving half-consciously toward apotheosis, Tsai in late 1965 cleared his desk at Fidelity, said a deeply regretful good-bye to Edward Johnson and a more coolly casual one to Ned, and moved himself to New York to establish his own Manhattan Fund. He took a suite of rooms at the Regency Hotel and a suite of offices at 680 Fifth Avenue; at the latter, he established himself in a large corner room, where the carpet was beige, the thermostat was always set at a chilly 55 degrees to keep the occupant's head clear, and the principal ornament was a large leather-covered representation of a bull. There he set about selling shares, at $10 each, to establish initial participation in his new enterprise and give him some assets upon which to work his presumed investment magic. What he was really selling, of course, was that magic and nothing else; the real initial asset of Manhattan Fund was Tsai's reputation for investment skill. In his new role as his own boss, he was cool, composed, and commanding. He had come a long way from the raw, promising youth who had walked into Johnson's office thirteen years earlier. Publicity, although he still feared it, agreed with him; he had learned well enough to live with it; in fact, he had about it the hot-stove-you-can't-help-touching ambivalence that is common among financiers. Now he sparred with the press, jocularly, easily, and with evident pleasure. Early that year someone asked him why he was always buying stocks like Polaroid, Syntex, and Fairchild Camera and never the old wheelhorses like U.S. Steel. “Well, you can't kiss all the girls,” Tsai replied, extending his old boss's metaphor with an Oriental grin. Still, to preserve his and his family's privacy he kept his home telephone number a secret even from his office colleagues.

How many shares of Manhattan Fund would be sold before the official opening date, February 15, 1966? Tsai set himself on
an original conservative goal of $25 million worth. But he far underestimated the extent to which he had captured the public imagination. It is possible to believe that more was at work than rational appraisal based on Tsai's record. There was in the middle sixties an underground current of thought in the country that said the West had failed, that its rational liberalism was only a hypocritical cover for privilege and violence; that salvation, if possible at all, lay in the more intuitive approach of the East. Such ideas, to be sure, did not seem to have taken firm root among the kind of people who invest in mutual funds. But perhaps many of the original investors in Manhattan Fund, contemptously as they might reject such ideas in their conscious thought, were reacting to them unconsciously when they decided to entrust their savings and thus a part of their future to Tsai. At all events, checks poured in to Manhattan Fund in a torrent. What would the opening total finally be, then? Not twenty-five but one hundred million? Or, unbelievable as it sounded, one hundred and fifty?

Not at all. On February 15, at the staid Pine Street offices of Manhattan Fund's staid bankers, the Chemical Bank, there took place the chief event of that season in American finance. Harold L. Bache, head of the firm that managed the Manhattan Fund share offering, handed Tsai a check representing the proceeds of the sale and the original assets of his mutual fund. The sum inscribed on the check was $247 million. At the standard management fee of one-half of 1 percent per year, Tsai's new organization, called Tsai Management and Research, was starting life with an annual gross income of a million and a quarter dollars.

He was off and running on his own. As the magazine
The Institutional Investor
reported later, he

set up Manhattan Fund just like Fidelity Capital. He loaded it with all of his big glamour favorites. To facilitate his chartist maneuverings, he built an elaborate trading room with a Trans-Jets tape, a Quotron electronic board with the prices of relevant
securities and three-foot-square, giant loose leaf notebooks filled with point-and-figure charts and other technical indicators of all his holdings. Adjoining the trading room was erected “Information Central,” so aswarm with visual displays and panels that slid and rotated about that it resembled some Pentagon war room. Three men were hired to work full time maintaining literally hundreds of averages, ratios, oscillators, and indices, ranging from a “ten-day oscillator of differences in advances and declines” to charts of several Treasury issues, to 25-, 65- and 150-day moving averages for the Dow. “We keep everything,” [said] Walter Deemer, a former Merrill Lynch analyst and boss of Information Central who regards his charts the way an expert horticulturalist might regard a bed of prize geraniums. “You may only want a certain graph once a year, but when you do, it's here.”

All the time there were ironies abounding. The social impartiality of the stock market, and the fact that the performance record of a mutual fund was as reducible to exact figures as a ballplayer's batting average—the factors that had worked in Tsai's favor when he had been an unknown Chinese boy knocking at panelled doors in a land far from home—had now turned into factors against him. He was on the spot, watched by a nation of investors and
expected
to make 50 percent profit a year on his customers' money. Less would be failure, and the fickle public would convert its hero overnight into a bum. And the timing of the situation was inexorably bad. The market was too high. The leather idol in Tsai's office was not a bull by accident. Temperamentally he was a bull himself, and therefore he needed an up market to keep winning. But by the greatest irony of all, he happened to start his own fund only a few weeks after the bull market of the nineteen sixties, as measured by the Dow industrials, had reached a peak that it would not reach again.

So Tsai in 1966 rode unawares toward his fall, and his adoring public toward its disillusionment.

6

The epilogue is anticlimax. The first meteor of the nineteen sixties was the first to burn out. But by shrewd and nimble footwork Tsai managed to get his heart's desire nonetheless.

Through its first two years, the Manhattan Fund, as well as the other smaller funds Tsai managed from his new independent stronghold, stayed popular with investors though they were generally undeserving of popularity. Away from Johnson's benign paternal surveillance, Tsai seemed to lose his stock-picking flair. After performing creditably in 1967, his funds took a beating in the tricky market of 1968; for the first seven months of that year, Manhattan Fund's asset value per share declined 6.6 percent, leaving it 299th among the 305 leading funds whose performances were regularly analyzed and compared by the brokerage firm of Arthur Lipper. At the height of the decade, the master of go-go was going in the wrong direction. Still, in the face of such depressing performance figures, the magic of Tsai's name remained undimmed when it came to attracting new investment money; by mid-1968 the assets managed by Tsai Management and Research had grown to over $500 million, which meant that the firm had a gross annual income from fees of over $2 million. Whether, on the basis of performance, it was earning the fee was another matter. But if Tsai no longer seemed to know when to cash in the investments he made for others, he knew when to cash in his own. In August, 1968, he sold Tsai Management and Research to C.N.A. Financial Corporation, an insurance holding company, in exchange for a high executive post with C.N.A. and C.N.A. stock worth in the neighborhood of $30 million.

Thus Tsai, just in time and in one stroke, joined the nearly big rich of America. As executive vice president and the largest individual stockholder of C.N.A., he turned over the running of
Tsai Management and Research to others and devoted himself to heading C.N.A.'s acquisition program. As a fund manager, he was retired. And why not? He was now a major stockholder of a huge, long-established American corporation with a listing on the New York Stock Exchange; he had a sizable office and golf clubs and country homes; he had a trust fund that would assure his son a considerable income for life.

The immigrant from Shanghai—in his aims and aspirations the simplest and most straightforward of any of the five or six prototypical moneymen of the nineteen sixties—had, like so many Irish, Jews, Italians, and others before him, emerged from a distant foreign city in response to a glimmer on a golden shore. Yet he was already failing at his chosen calling when he got rich from it. By another strange irony, he got rich in a way that would shortly be called illegal. In June 1971, Judge Henry J. Friendly of the U.S. Court of Appeals for the Second Circuit held that any profits from sale of a mutual-fund management company belong not to the sellers of the management company but to the shareholders of the fund. The decision was a return to the traditional doctrine—from which, as we saw, Edward Johnson had benefitted in acquiring Fidelity back in 1943—that a trustee may not traffic in his trust. Had the new decision been in effect in 1968, Tsai would have been prevented from selling out.

But no matter. The Friendly decision was not retroactive; Tsai and the many other fund managers who had sold their organizations early enough were allowed to keep their gains. Tsai might now be scorned in his profession for the early loss of his investment skill, and he might even be considered in some quarters a man who had cashed in his chips just before the casino's doors were barred. But for all that, in his heyday in 1966 the young wizard from Boston had been Wall Street's first Oriental hero.

CHAPTER VII

The Conglomerateurs

1

The year 1966 found Wall Street slowly and reluctantly beginning to recognize itself as a marketplace for the millions rather than an élite gambling club with a limited membership list. Manuel Cohen, Cary's activist successor as head of the S.E.C.—a Brooklyn-born lawyer, as flamboyant in manner as Cary had been reticent, whose wife engagingly characterized her husband's job by saying, “If I were doing it, it would be called nagging”—was nagging Wall Street as vigorously as he could. That summer, his S.E.C. forced a recalcitrant New York Stock Exchange to relax slightly the ironclad monopoly implied in its cherished Rule 394, which forbade members, except in rare instances, to transact business in listed stocks off the Exchange; under the amended rule they were allowed to deal off the Exchange in cases where they could not fill an order at a fair price on it. Seeking to implement Cary's Special Study, Cohen and his men pressed for commission discounts on large-volume stock transactions, and for an end to “give-ups,” the time-honored commission splits between brokers that were lately being used
by mutual funds to reward brokers for pushing their shares, and that in some businesses less given to euphemism might have been called kickbacks. With enthusiastic S.E.C. support and approval, the Amex made the reform-minded S.E.C. veteran Ralph Saul its new president. In December, the S.E.C. came out at last with its long-awaited report to Congress on mutual funds. The report recommended strongly worded legislation to require that mutual-fund management fees be reduced to more reasonable levels; to prohibit contractual share-buying plans that involved “front-end commision loads”; and to sharply lower the limits on all mutual-fund sales charges to investors.

Funston, in the twilight of his day as Stock Exchange president, became a progressively more stubborn conservator of the status quo. The earlier Funston, who had been chiefly responsible for the arrangements that had saved the hapless customers after the Ira Haupt and Company disaster in November 1963, now began to look like a flaming liberal by contrast with the later Funston. When New York City, pressed for money like all large American cities, proposed to raise its relatively modest stock transfer tax by half, Funston threatened (as Richard Whitney had done in 1933) to move his Exchange to New Jersey. The new tax, raised 25 percent, went into effect in July, and the Stock Exchange stayed where it was—but with diminished credibility and diminished grace as an institutional citizen.

On the matter of Rule 394, Funston simply dug his heels in and said, “We cannot and will not budge on this issue”—and then, under S.E.C. and public pressure, he budged. In related areas, the mulishness of Funston and of others on Wall Sreet was more productive. The Exchange argued that give-ups and unreduced commissions on large transactions were necessary to the orderly and profitable functioning of the securities business; as things turned out, give-ups would not be abolished, and volume discounts instituted, until 1968. The ever-more-powerful mutual fund industry fought the S.E.C.'s proposals to Congress for dear life—and fought them so effectively that the decade would run out four years later with Congress still dithering and mutual-fund reform bills still tied up in committee.

And Funston, increasingly isolated as champion of the rear guard, announced his resignation, to take effect in September 1967.

All this happened while the market, as measured by the hoary but still standard Dow industrials, was having its worst year, in terms of net January-through-December percentage loss, since 1937. The problem was chiefly a shortage of money. Back in December 1965, in the face of mounting inflationary pressures, the Federal Reserve had applied the monetary screws in classic fashion by raising the discount rate from 4 to 4 ½ percent, and over the succeeding months it had conducted its operations in a way calculated to restrain further the expansion of credit. But the medicine failed twice, effecting no cure and causing dangerous side effects. Credit continued to expand and inflation to proceed; meanwhile, the credit-dependent home-building industry collapsed, exacerbating an already existing national housing crisis; and—more important for Wall Street—money in huge quantities deserted the stock market to take advantage of the soaring interest rates on bonds that tight money had brought about. By the end of August 1966, the paper value of all issues listed on the New York Stock Exchange had declined more than $100 billion since February, and in late December—by which time the Fed had reconsidered and then reversed its ill-fated policy—the Dow, which had started the year at near 1,000, was hovering around 790.