I started my Wall Street career in November of 1982, which, since the Bull Market began in August of that year, makes me a Bull Market baby. Oh, to think that the market was around 770 that summer. Also in 1982, an arbitrageur by the name of Ivan Boesky decided that he didn't exactly always have the magic touch in selecting deals to invest in so he switched tactics, thus earning his place in the annals of Wall Street History.
Boesky was the son of a Detroit bar owner who had come to the Street in 1975. Setting up shop in relative obscurity and having attended a law school no one on the Street had ever heard of, Boesky used his family's money to enter the arbitrage business. He quickly built a reputation for himself as a shrewd operator.
Boesky used to bet on takeover situations, mostly after a deal had been announced, thereby assuring the arb of a profit if the deal went through at the announced price. For example, Co. X announces a takeover of Co. Y at $70 a share. Co. Y stock, which had been $40 before the announcement, climbs to $65. An arb may step in at that point (or as it is climbing to that level) and place a heavy bet that the deal gets done at the announced $70 a share, thereby assuring him a $5 profit. Now if you leverage that bet, the percentage gain could be much greater than the simple $5 and sometimes a competing offer would enter the picture at, let's say, $75 or higher. All the better for the arb.
But there were other times when the announced deal would fall through. In these cases the arb could get squeezed. This was the case in May of 1982 when Gulf Oil's announced takeover attempt of Cities Service failed. Boesky lost $24 million on this deal. And it was this loss that apparently led Ivan to build a secret network of investment bankers and brokers, simply to improve his odds. This network would then supply Boesky with insider information. Two of the key figures were Martin Siegel of Kidder Peabody and Dennis Levine of Drexel, Burnham, Lambert - both old and respected firms.
Using inside information supplied by Siegel, Boesky made $28 million from Nestle's acquisition of Carnation in 1984. They were heady times for many on Wall Street. It was the time of "Master's of the Universe," and much cruder labels. The big money guys on the Street worked hard. "Lunch is for wimps," said Gordon Gekko in the movie "Wall Street," a great depiction of that era. Boesky was one who worked 21-hour days. Hard work, a product of the trader culture, came to replace play as the motif of the super-rich.
It was also the time when the LBO, or leveraged buyout, took off. LBO's were ways to make money by taking public companies private. Companies would float bonds to buy up a controlling interest in the stock and then use the company's cash flow to finance the debt. The secret was forecasting out the company's cash flow, the measure of how much debt it could support.
Dennis Levine of Drexel and Boesky became fast friends by 1986. Boesky had opened an investment fund called the Hudson Fund. Drexel agreed to raise over $600 million for him through a junk offering provided that it was paid almost $24 million fees. And later, even the notorious Charles Keating of Lincoln S&L fame contributed $100 million to Boesky's arbitrage partnership.
Boesky began to work some deals but he was building an empire built on tips more than doing his homework. And he invested a portion of his gains in ways that only enhanced his reputation. For example, Boesky owned the Beverly Hills Hotel in L.A., site of Michael Milken's Predator's Ball which spoke of the virtues of junk bonds as dozens of politicians and academics feasted on sumptuous dinners amid a bevy of Trump-like arm candy. (Even Bill Bradley found himself delivering a speech to Milken's audience.)
But during the course of 1986, the Fed's were growing increasingly leery of the trading activity in some of the deals that Boesky was investing in. He was soon indicted on a variety of charges in an insider-trading scandal that was to stain the industry for the rest of the decade.
The most notorious of the Boesky allegations involved an engineering company, Fischbach, that had been subject to a hostile raid by a Drexel client. As described in Charles Morris' book, "Money, Greed, and Risk," the deal went down like this:
|"(Fischbach) bought back the raider's stock, and negotiated a standstill agreement, barring another takeover attempt unless some new raider acquired a 10% stock position in the company. Boesky later acquired a 10% position in Fischbach, allegedly at the behest of Michael Milken, and made a takeover declaration, opening the door to an eventual takeover by another Milken client. Milken allegedly guaranteed Boesky against any losses, which would have been illegal. Milken said he never made any such guarantees, that he merely advised Boesky that Fischbach was a great opportunity, but that he never made guarantees. Boesky's testimony went like this."
Q: O.K. And did Milken say to you in that conversation that he would guarantee you against loss?
A: These were not the words, never were the words.
Q: It's the code you were talking about, the Wall Street code?
A: I never used that word either. It was an understanding.
Q: O.K. What were the words you remember Milken using?
A: "Just buy it, don't worry about it," something to that effect
I've forgotten the exact language of the conversation.
Officials at Fischbach ended up being indicted for bid rigging. A deal eventually went through but not at the level that Boesky had even paid. Allegedly, Boesky had bought the stock at $50 with the final sale being at $45 compared with current market value of $40.
Boesky admitted to numerous offenses and then turned state's evidence, primarily against Milken. He received a 3 1/2 year prison sentence and $100 million fine after admitting to the charges and reached a plea bargain with Rudy Giuliani, U.S. attorney for the Southern District of N.Y. Giuliani was to draw criticism because Ivan was allowed to unload his holdings before his indictment was officially announced, realizing profits from it before being convicted. Others considered the sentence and fine as being too light. But Giuliani and company was after a much bigger fish, namely Milken.
As Boesky left federal court in 1987, he proclaimed, "Greed is all right
everybody should be a little greedy." The man who once paid for secret information with a suitcase full of cash was off to the slammer.
Charles Morris, "Money, Greed, and Risk"
Charles Geisst, "Wall Street / A History"
Edward Chancellor, "Devil Take the Hindmost"
John Steele Gordon, "The Great Game"