The Bad Barrel
Auletta, Ken
THE BAD BARREL by Ken Auletta Wall Street says Dennis Levine was a yuppie who got greedy —an aberration in a good system. Don't believe it. Jay Leno, the comic, tells of the time he...
...Dennis Levine may be a thief, but the culture or ethos of Wall Street bears at least a measure of blame...
...Another piece of evidence: It is not uncommon for the stock price of a target company to climb days before a merger is announced...
...Now that the bottom line has shifted to containing the firms' embarrassment, Kay and his colleagues sound a bit like Captain Renault in Casablanca, who declared, "I am shocked—shocked!—to find that gambling is going on here...
...Why, then, should we be surprised that people on Wall Street conform to prevailing values...
...Not until the notoriety of Dennis Levine did many denizens of the financial community seem to know what insider trading was...
...Stock prices gyrate so wildly because the market is now ruled by impatient speculators rather than long term investors...
...We know that some ghetto kids are, indeed, victims of unemployment or an indifferent or bad government, but that some are also victims of a bad culture...
...In more than half of these transactions, neither Levine nor his employer were insiders...
...They readily used his information to seek clients and to make investment decisions...
...And these values come from the top down, not the bottom up...
...The yuppies are, in most cases, impressionable junior associates, who often derive their values, their do's and don'ts, from elder role models...
...Dennis Levine thrived, in part, because he was known as someone with access to hot tips and secrets...
...It becomes more and more difficult to separate the legal from the illegal ." The issue here is broader than just risk arbitrage...
...members of a uniquely corrupt generation, and were motivated by personal greed...
...The people who say this are, I fear, hiding from the truth...
...A great growth industry on Wall Street has been risk arbitrage, where people bet on the rise, or fall, of stock prices...
...Little shareholders don't have the same edge...
...Only a fool would believe that many risk arbitrageurs don't seek, and gain, inside information unavailable to other shareholders...
...But it gets awfully close...
...Few believed it was systemic...
...No one laughed...
...During the time he worked at three investment banks, Levine is alleged in 54 instances to have used insider information to buy stock in companies about to be acquired or to make other deals...
...How many of you know what a bagel is...
...he asked, peering out at his audience...
...Most of the press coverage of the Levine case has adopted this tone—Levine and his cronies were yuppies, Ken Auletta is author of Greed and Glory on Wall Street: The Fall of the House of Lehman...
...It looks very much as if yuppies weren't the only ones stealing, or as if Levine and his friends did it at least as much to impress their superiors as to shovel fast money in their pockets...
...In the two days before the merger, RCA's stock price rocketed from $48.75 to $63.50 per share...
...We are dealing not just with a corruption problem, but also with a conformity problem...
...Many can't wait to get rich...
...Wall Streets' professions of hurt innocence are disingenuous...
...Similar run-ups in stock prices occurred prior to the mergers between ABC and Capital Cities, and General Foods and Philip Morris, among others...
...This suggests that Levine relied for his tips on a network of people who may not think it unusual (or wrong) to pass along such information...
...Partners marveled at how much Levine knew, how plugged in he was...
...For example, in the five days prior to RCA's merger with General Electric, 10 million RCA shares-2 percent of its stock—changed hands...
...It is quite an eye-opener to ask investment bankers what they wouldn't do—what "deal" would you refuse to participate in...
...But only a fool would believe that many risk arbitrageurs don't seek, and gain, inside information unavailable to other shareholders...
...Too many stocks have moved up before deals have been announced for it simply to be a random phenomenon," George L. Ball, chairman and CEO of Prudential-Bache Securities, told a House subcommittee in June...
...Usually, the question was greeted by a pained silence...
...Faculty members at our leading business schools complain that many of their students are foresaking careers in corporate America, with up to half of them preferring the Wall Street's professions of hurt innocence are disingenuous...
...He was morose—until it dawned on him: Suppose they don't know what a bagel is...
...Maybe 1 percent are rotten, it is commonly said...
...Seeing themselves as part of a service business, investment bankers have adopted the self-concept of lawyers who make no moral judgments and excuse themselves by proclaiming that everyone has a right to a trial...
...It is not illegal...
...In the Levine case alone, investment bankers at three separate firms and a distinguished takeover attorney have been indicted...
...In other contexts, we're beginning to comprehend the impact of peer group pressure...
...Jay Leno, the comic, tells of the time he performed in rural Alabama and told his bagel joke...
...They keep calling companies and try to pick up little bits of information...
...THE BAD BARREL by Ken Auletta Wall Street says Dennis Levine was a yuppie who got greedy —an aberration in a good system...
...And then you could hear the rusty parts of their brains clank like the Tin Man in The Wizard of Oz as they declared: "I wouldn't do business with the mafia," or "I wouldn't do business with a bad credit risk ." Obviously, thriving Wall Street has devoted too little time to saying "no" or to pondering limits...
...The fees and bonuses are elephantine, which helps explain the rush, these past few years, of so many unproductive mergers, of so many risky junk-bond deals, of so much choking debt exchanged for equity...
...Dennis Levine is a by-product of Wall Streets' lax value system, just as surely as Michael Deaver was influenced by what he thought normal in Washington and Janet Cooke was a by-product of the relaxed standards of the new journalism...
...quicker upward trajectory offered by investment banking and consulting...
...The people who run Wall Street and the reporters who buy their excuses, in talking only about a few bad apples are leaving the whole barrel to rot...
...They assumed it was a form of thievery practiced by a handful of corrupt individuals...
...The resulting frenzy erodes long-term loyalties—to clients, to stocks, and even to firms, which is a major reason so many private Wall Street partnerships have been sold...
...At the time the bottom line for them was information...
...Abritrageurs bridle, fairly, at the implication that they should be penalized for being smarter and more aggressive than a competitor in gaining corporate intelligence...
...Obviously speculators were operating on more than just hunches...
...They worry, fairly, that critics will lump the skilled hunch-player with the inside trader, and that in seeking to police Wall Street traders the Securities and Exchange Commission might inadvertently strangle initiative...
...Arbitrageurs, he says, "strive to get information that is not public...
...In a community unrestrained by patience or tradition, everything becomes a deal...
...Fewer students demonstrate the patience to serve apprenticeships...
...They seem not to know what a bagel is...
...We understand that teenagers drop out of school or have babies in part because of peer pressures that say It's OK...
...This has been the pattern in too many mergers...
...Just as obviously, more than one rotten apple has been at work...
...Levine's boss at Drexel Burnham Lambert Inc., David Kay, chief of the corporate finance department, told The Wall Street Journal: "He could make things happen . . . . He was a tape watcher, and he would generate deals by knowing what was about to happen...
...Several of the culprits pocketed no money...
...While reporting a book on Wall Street, I regularly asked that question and was stunned at how little thought many senior Wall Street executives gave to it...
...In this sense they were kindred souls of Washington officialdom, which at first did not comprehend why Michael Deaver might have behaved improperly because in Washington trading on relationships is normal...
...Instead of serving as wise counselors who think of the long-term interests of the companies, investment bankers increasingly think only of the quick score...
...At 33, Dennis Levine was awarded million-dollar bonuses, which makes his quite a different case from that of R. Foster Wynans, who claimed he was barely getting by in New York on a cub reporter's salary...
...But he does believe too many people on Wall Street are preoccupied with "getting that little extra edge...
...The gregarious Levine spent much of his day on the phone swapping information...
...It is the value system of Wall Street, a deregulated, in-bred community where high overheads and abundant opportunities for wealth propel investment bankers to generate ever more information, more fees, more short-term speculation...
...Wall Street elders insist that up-and-coming investment bankers like Dennis Levine, who pleaded guilty to parlaying insider information to build a $12.6 million fortune, are merely the rotten apples in an otherwise clean barrel...
...As in the case with Washington lobbying or political fund-raising, or municipal corruption, the problem is more endemic than episodic...
...Laurence Tisch, currently the acting CEO of CBS and one of this generation's preeminent investors, says he doesn't believe the barrel is rotten...
...Perhaps they were just trying to impress, showing off their credentials as movers and shakers, proving to their bosses how well connected they were...
...It is not too far-fetched to surmise that Kay and other elders on Wall Street didn't want to know where their hotshot protege was getting his information...
...A lone hand went up, and a burly man exclaimed, "A bea-gel is a huntin' dog...
...Bankers are scored by how many deals they bring in...
...Dennis Levine is a by-product of Wall Street's value system, just as surely as Michael Deaver was influenced by what he thought normal in Washington...
...I firmly believe it's an aberration, and it's happening at the fringe," observed Shearson Lehman Brothers CEO Peter Cohen last July...
...Yet the question begs to be asked about the ripening scandal on Wall Street as it does about Deaverism: Are just a few apples rotten, or is it the entire barrel...
...Patience, a private virtue, becomes the first casualty...
...Something like that happened recently on Wall Street...
...There are many skillful players in this lucrative line of work, and the profits are so vast that today Salomon Brothers estimates that $10 billion of capital is in the hands of risk arbitrageurs, compared to only $10 million ten years ago...
Vol. 18 • December 1986 • No. 11
