The Go-Go Years (45 page)

The committee revised its schedule, and began meeting formally twice a week—Tuesdays and Thursdays at eight-thirty in the morning—and putting in so many additional hours that some of its members were soon devoting most of their time to its work rather than to the affairs of their own companies. Early in June, when the committee had been in existence for only a few weeks, it faced the first of three heroic challenges: the impending collapse of Hayden, Stone and Company.

That venerable firm had been in serious trouble since 1968, as the Exchange had ample occasion to know; in that year—a banner business year in which Hayden, Stone's gross income was at an all-time high of $ 113 million—its record-keeping situation had become so bad that it had literally called on the Coast Guard for help, hiring members of that service to moonlight in the back office. As early as the spring of 1969, investors in Hayden, Stone were getting the message that the good days were gone, and accordingly they began withdrawing their capital in huge amounts. The firm's attitude toward its problems at that time was vividly shown in its treatment of its treasurer, Walter Isaacson, who in the summer of 1969 began protesting that, with revenues going down, costs going up, and the capital base eroding, operations ought to be cut back drastically. Isaacson's unpleasant warnings ceased when he was summarily fired.

In September 1969, matters were hardly improved when the Stock Exchange backed restrictions on Hayden, Stone's operations by fining the firm $150,000 for rule infractions during the previous year. But, shortly thereafter, the Exchange suddenly turned soft on its erring member. In October, it removed all restrictions on Hayden, Stone's operations, and in November it made no objections to an offering circular to prospective investors in which Hayden, Stone made some extravagant and dubious claims as to its future. While no explanation
was offered, it may logically be assumed that the Exchange's sudden blandness was motivated by fear that Hayden, Stone's capital situation had become so precarious that those 90,000 customer accounts were imminently threatened. At all events, the firm started out 1970 in technical capital compliance only on the basis of such gossamer assets as a tax refund claim that, far from having been approved by the Internal Revenue Service, had not yet even been filed.

By late May, when the Crisis Committee came into existence, Hayden, Stone was a huge black cloud on Wall Street's horizon, a storm latent but brewing. Its roster of branch offices had shrunk from eighty at the beginning of the year to sixty-two, and its back-office expenses had been drastically curtailed through mass firings, but, even so, it continued to lose approximately $1 million a month on current operations. Meanwhile, though, its capital problems had apparently been solved, at least temporarily and technically, at a single stroke. On Friday, March 13—of all dates—a group of Oklahoma businessmen signed demand notes lending Hayden, Stone $12.4 million, pledging stock in their own companies as collateral. They included Bill Swisher of CMI corporation, who pledged 165,000 shares then worth $4,372,500; Jack E. Golsen of LSB Industries, who pledged 200,000 of his firm's shares worth $1.2 million; and—most unfortunately, as it turned out—Jack L. Clark of Four Seasons Nursing Centers, who pledged 120,000 shares of
his
firm's high-flying stock with a March market value just short of $5 million. All told, the collateral added up to $17.5 million, apparently an ample sum to cover the $12.4 million demand note and give Hayden, Stone a rosy capital future. A rosy present income for the Oklahomans was assured by an interest rate on their “money” of around 7 percent.

However, as the reader will have no trouble discerning, something was wrong here. For one thing, Wall Street was not supposed to go knocking on the doors of little-known, unseasoned firms in Oklahoma for capital; it was supposed to be the other way around. More to the immediate point, the demand-note capital was insubstantial; the terms of the notes were such
that Hayden, Stone, which so desperately needed capital to cover current operating losses, could not get its hands on a cent, unless the firm were either insolvent or in violation of Rule 325. Finally, were market fluctuations to cause the value of the loaned stock to drop below $12.4 million, the amount of Hayden, Stone's available credit would diminish accordingly. In sum, it was a classic case of phantom capital, created by a shuffle of papers and used to maintain formal compliance with a rule of the Stock Exchange's that the Exchange had no stomach for enforcing.

Then the shaky structure cracked. In mid-May, the S.E.C. suddenly suspended trading in Four Seasons Nursing Centers, which shortly thereafter expired in bankruptcy. Down the drain went $5 million in Oklahoma stock value on $3.3 million of Hayden, Stone capital. And the prices of the other Oklahoma stocks were dropping—20, 30, 40 percent—along with the rest of the market. By the beginning of June, when the Crisis Committee was hardly a week old, the market value of the Oklahoma stock had declined from $17.5 million to around $9 million, and as a result Hayden, Stone was plainly in violation of the capital rule, as a routine surprise audit would confirm a few days later. Things were in a worsening mess now; but what, the committee members asked themselves, could the Stock Exchange do? Blow the whistle on Hayden, Stone and let its customers fend for themselves? The Special Trust Fund, almost gone anyway, was ludicrously inadequate to handle such a giant liquidation. On the other hand, if the Exchange looked the other way and did nothing, apparently Hayden, Stone would be unable to meet its obligations and would sooner or later be forced into bankruptcy by its creditors. As Lasker and Rohatyn saw the matter, the Exchange had only one course—to find new capital to save Hayden, Stone, or to admit to the public that Wall Street could no longer be relied upon.

As a first step, the Exchange found some capital in a curious place. The Special Trust Fund was more than doubled by transferring into it $30 million that the Exchange had squirreled away as a building fund. No time to be thinking about new buildings now! The fund, as we have seen, was clearly intended
for the single purpose of rescuing the customers of bankrupt member firms. But these were parlous times, and the language of the Special Trust Fund provisions was conveniently vague. So the Exchange's governors, on recommendation of the Crisis Committee, now voted to lend $5 million of their constituents' money, entrusted to them specifically to save the customers of failed firms, to Hayden, Stone to keep it in business. It was just a matter of saving the broker in order to save the customers, they rationalized. More fancifully described, it was a matter of strapped parents tapping the children's piggy bank to prevent foreclosure of the mortgage on the homestead. Thus, on July 2, Hayden, Stone was restored to capital compliance—this time with real money, albeit money obtained in a most peculiar way.

But the reprieve was short-lived. By now, houses were crumbling from one end of Wall Street to the other. Day after day, time and again, the Exchange's staff would bring the Crisis Committee news of more firms that were on the brink of capital violation because of diminished business and consequent capital withdrawals. Time and again the committee would begin to probe in a new place, and find the same softness, the same imaginary assets shoring up a top-heavy facade. Several more firms, the largest of them Blair and Company, went under in June and July. In mid-August, the Exchange, through President Haack, announced for the first time the names of ten brokerage firms that were in bankruptcy or liquidation, and gave soothing reassurances that the augmented trust fund, now theoretically amounting to $55 million, was adequate to make their customers whole. Nevertheless, by the last week of August it was generally known in the Street that the fund was again depleted. And, at about the same time, there was an ominous new turn. Three more firms with in excess of ten thousand accounts among them—Robinson and Company, First Devonshire Corporation, and Charles Plohn and Company, the vehicle of our old acquaintance Two-a-Week Charlie, the garbage-stock king—were suspended for capital deficiencies and went into liquidation. For the first time, the Exchange pointedly did not commit the trust fund to the help of the customers—in the case of Robinson, on
the technicality that the firm had resigned its Exchange membership back in July and was therefore not eligible for help; in the case of Plohn, because it did not believe that such help was needed; and in the case of First Devonshire, without any clear explanation. In retrospect the explanation is clear. The trust fund had been spent.

Meanwhile, Hayden, Stone went on losing money. The Oklahomans were screaming bloody murder at what was happening to their investment, and the loudest screamer was Jack Golsen. He, like the others, had little practical reason to raise a fuss; he believed now that, because of his subordination agreement, most or all of his investment was gone whether Hayden, Stone was rescued or not. He was screaming to relieve his outraged feelings—and, moreover, on principle. The conduct of Hayden, Stone's affairs, as it was now being gradually revealed, seemed to Golsen to be a public scandal. “In my business, if we are missing inventory, we stop everything and look for it,” he complained. “In Wall Street, if they're missing seven million dollars, they just accept it as part of the game.” This was a double standard, he insisted: Hayden, Stone would never dream of underwriting the stock of another company that operated as it did itself. The representations that the officers of the firm had made to him, in asking for the loan, now appeared to him to have been false; it seemed to him that Hayden, Stone's talk about its capital assets represented “dealings not in realities but in the abstract.”

Early in August there was an attempt, prompted by the Exchange, to save Hayden, Stone through a merger with Walston and Company; but the deal fell through. The next merger candidate was Cogan, Berlind, Weill and Levitt (the same firm, with a name change, that had so profitably brokered the Leasco-Reliance merger in 1968). C.B.W.L., still doing well, was a small firm eager to expand, and the merger with Hayden, Stone would be a quick path to expansion. Unfortunately, it might also be a quick path to financial and operational chaos. Even apart from the difficulty attendant upon taking on a virtually bankrupt partner, one problem was that a merger would mean
too much
expansion; Hayden, Stone still had forty-five operating branch offices, and C.B.W.L. wanted no more than twenty of them. Knowing full well that it would have to sweeten the deal, the Stock Exchange offered $7.6 million to C.B.W.L. in exchange for its assuming the Hayden, Stone mess—a $7.6 million that the Exchange didn't have just then, in its trust fund or anywhere else, but that it believed it could raise from its membership. And that did it. At last agreement was reached that the Hayden, Stone offices would be divided between C.B.W.L. and Walston. The surviving firm was to be named CBWL-Hayden, Stone, Inc.

The whole thing almost fell through in what for the Crisis Committee was a hair-raising sequence of events on September 2 and 3. On the afternoon of the second, the Chicago Board of Trade, the nation's largest commodity exchange, suddenly announced that it planned to suspend Hayden, Stone for insolvency. Such a suspension would force the New York Stock Exchange to take similar action the next day, and that would be the ball game. Haack, Rohatyn, and Lasker pleaded with the Chicago authorities by telephone late into the night, and again early in the morning; at the last miniute, the suspension order was revoked in consideration of Hayden, Stone's putting up a half a million dollars in escrow. And
that
crisis was surmounted. But there remained a single crucial detail to be carried out—that of getting approval of the merger from every last one of Hayden, Stone's 108 subordinated lenders. It was, indeed, a delicate situation. Since they all apparently stood to lose most of their money anyway, their egos could have free play, unfettered by financial considerations. Meanwhile, they found themselves in the satisfying position of being able to hold up the Wall Street Establishment—for revenge, for publicity, or for principle—by simply refusing to sign and thus forcing Hayden, Stone out of business.

All the persuasive powers of the Stock Exchange authorities were brought to bear. Haack flew to London to get one lender's signature, and got it. Others at first refused to sign, then allowed themselves to be persuaded. But time was running out; the Exchange could not go on ignoring its capital rule forever, and at last, under S.E.C. pressure, a deadline had to be set: the
deal would be consummated by 10:00 A.M. on Friday, September 11 or Hayden, Stone would go into suspension, its 90,000 customers would be left out in the cold, and public confidence in Wall Street would end, possibly forever. By the morning of September 10, all of the subordinated lenders had signed except Golsen.

He stood firmly on principle. Why, he wanted to know, should he sign and thus help preserve the hopelessly and shamefully inefficient and slipshod business methods of the city slickers in Wall Street? “I'm interested in justice being done,” he said. “I want an example made. The only way to make it is to go to a liquidation and let the Exchange lose twenty-five million or so. I want this crime to be brought to the attention of the public.”

So for a day Golsen, in Oklahoma, held Hayden, Stone's and perhaps Wall Street's fate in his hand, while Lasker, from his office at the Exchange and his suite uptown at the Carlyle, pleaded repeatedly by phone. Lasker finally, at almost literally the last minute, won. It has been said that his clincher, delivered in the middle of the night of September 10, was a suggestion—or a threat—to have Richard Nixon himself call Golsen. Lasker vehemently denies that he went any further than to tell Golsen in general terms that he knew the President was very much concerned about the Wall Street situation and its effect on the national economy. Rather, Lasker attributes his success with Golsen to a homely coincidence. On the evening of September 10, Lasker says, an old friend and Wall Street colleague of his—Alan C. Greenberg, of Bear, Stearns and Company—called him unexpectedly and said, “Bunny, I hear you want a favor from Jack Golsen. I've known Golsen all my life. We were kids together in Oklahoma and, before we were both married, I used to date his wife and he used to date mine. You want me to call him?”