In an Uncertain World (7 page)

Unfortunately, the deal didn't work out as we hoped. The merger fell apart in January because an unexpected decline in quarterly earnings at Univis prompted Becton Dickinson to pull out. When the merger went sour, the stock of Univis fell, not only back to its preannouncement price of $24½ but all the way down to $18. As a result, we suddenly had a loss on our books of $485,000. We also faced a second loss on our short position, because Becton Dickinson shot up to $64 after the deal fell apart. We would have to buy Becton shares for $64 in the open market to replace the ones we'd borrowed and sold short at $55, which was going to cost us an additional $190,000. Everything that could go wrong had gone wrong. This was it: the dreaded arbitrage perfect storm.

By the end of January, we were down some $675,000 on the deal. That was a lot of money back then, more than we made on any other arbitrage transaction that year and a noticeable slice out of the firm's yearly profits. Gus Levy, who always had terrific insight into deals in retrospect, was furious. He stalked around the trading room muttering that we should have known better than to think a merger like that would go through. L. Jay joked afterward that he'd been to “Univis University.”

But a critical point was that while the result may have been bad, the investment decision wasn't necessarily wrong. After a deal broke up, we'd always reexamine it, looking for clues we might have missed. But even a large and painful loss didn't mean that we had misjudged anything. As with any actuarial business, the essence of arbitrage is that if you calculate the odds correctly, you will make money on the majority of deals and on the sum total of all your deals. If you take a six-to-one risk, the foreseeable risks will occur and you will lose money every seventh time. Other times deals will break up for reasons that you could not reasonably have foreseen (a potential that also needs to be worked into your calculations). To an outsider, our business might have looked like gambling. In fact, it was the opposite of gambling, or at least of most amateur gambling. It was an investment business built on careful analysis, disciplined judgments—often made under considerable pressure—and the law of averages.

Flux and uncertainty made arbitrage quite nerve-racking for some people. But somehow or other, I was able to take it in reasonable stride. Arbitrage suited me, not only temperamentally but as a way of thinking—a kind of mental discipline. I took naturally to being rigorously analytical in weighing probabilities. I described this as being like a mental yellow pad. Risk arbitrage sometimes involved taking large losses, but if you did your analysis properly and didn't get swept up into the psychology of the herd, you could be successful. Intermittent losses—sometimes greatly in excess of your worst-case expectations—were a part of the business. I accepted that, though some in our business did seem highly stressed much of the time. Having Gus Levy remind you of all the reasons you were a moron wasn't always the most pleasant way to begin a day. But not only could I live with risk without becoming a nervous wreck; risk taking actually comported with my way of looking at the world.

Did arbitrage suit me because I instinctively thought the way an arbitrageur thinks? Or did I learn to think in terms of probabilities by practicing arbitrage? Arbitrage certainly reinforced my instinct to look at issues probabilistically. But that instinct had been formed long before I got to Goldman Sachs. The arbitrage business I learned there was consistent with the way I thought about life, as a process of weighing odds in a world without absolutes or provable certainties. This outlook was rooted in my basic temperament and shaped by the intellectual influence of various teachers and friends. Looking back at my life up to that point, I think you could trace the development of the mental processes and temperament of an effective arbitrageur.

   

I GREW UP with the influence of my two grandfathers, Morris Rubin and Samuel Seiderman. As I look back, I think both of these men affected me in ways I wasn't really aware of while they were alive.

Morris Rubin was my paternal grandfather. He was born in 1882 in Minsk, Russia, from which he fled as a teenager to avoid being drafted into the Czar's army—somehow, as a young Jew, he didn't think the Russian military would be a terrific career choice. Morris arrived at Ellis Island as a penniless immigrant at the age of fifteen. The first question he asked was
Where can I learn to speak English
? He found work delivering milk and in 1906 married Rose Krebs, my paternal grandmother. Born in Poland, my grandmother Rose was the opposite of my grandfather Morris in every apparent respect—taciturn where he was exuberant, a worrier where he was a perennial optimist. They began their married life in a tenement on the Lower East Side of Manhattan.

Sometime after their first child, my father, Alexander Rubin, was born in 1907, Morris and Rose moved to Flatbush, Brooklyn, a rung up the socioeconomic ladder from the Lower East Side. The family did well until the early 1920s, when my grandfather became gravely ill with an infection contracted following a tonsillectomy. After he was on disability for a couple of years, Rose felt that her husband was dying. A doctor told her that his only chance of survival was to live in the sun. So the Rubins picked up and moved to Miami, Florida. After just a few months there, Morris completely recovered.

My grandfather was a little man with a huge force of personality and tremendous commercial instincts. His arrival in Miami coincided with a big Florida land boom and he quickly made a good deal of money speculating in real estate with large leverage. For a short time in the 1920s, Morris Rubin was a wealthy man. Then came the Florida land bust, which preceded the stock market crash of 1929 by a couple of years and wiped him out. This was an enormous psychological blow. In 1930, he arrived at my father's Columbia Law School graduation unshaven and unkempt, having driven from Miami with a pistol in the glove compartment of his Chevy. Financially ruined and distraught that he couldn't help his eldest son open a law office in New York, he couldn't decide whether to attend my father's graduation or shoot himself.

This story makes Morris Rubin sound like someone for whom financial success was terribly important. But having gotten past that crisis some years before I was born, my grandfather developed an extraordinary sense of equanimity about his lost fortune. By the time I was a little boy, everyone knew him as an irrepressibly affectionate little man with a thick European accent and a joyful attitude toward life. He greeted everyone with a bear hug. Most days, Morris would be out in the garden in back of his house on Prairie Avenue, just a mile from ours in Miami, tending his mango and avocado trees. After his crisis, he still dabbled in the stock market and real estate. But he had somehow changed his way of thinking so that his happiness wasn't contingent on being wealthy or successful. My grandfather transformed himself into someone whose identity wasn't tied to his net worth. Though he would never again be rich, he didn't lament his losses. He had enough to live on, and there were greater pleasures in life.

My mother's family had been in the United States for many generations. My grandfather Samuel Seiderman was a lawyer, an investor in real estate, a political activist, and a major figure in his Brooklyn world. He knew everyone; his close friend Emanuel Celler was elected to Congress in the 1920s and remained there for five decades. My grandfather was also a founder of a synagogue in Crown Heights, where he lived. Samuel's wife, my grandmother Ella, presided over the proper Victorian house they built for themselves. Her parents, my great-grandparents, the Schneiders, had been very successful in their own right and lived in the house next door.

My grandfather Seiderman's great love was politics. He was closely involved with “Boss” John McCooey, the power broker who controlled Brooklyn's Democratic political machine for the first few decades of the century, through the Madison Democratic Club. At the club's headquarters in Crown Heights, McCooey would hold court several nights a week, receiving supplicants for jobs, union cards, health care, or other kinds of assistance. He dispensed favors and collected votes in return.

After McCooey died in 1934, he was succeeded by my grandfather's friend Irwin Steingut, the Speaker of the New York State Assembly and a close ally of New York's governor, Herbert Lehman. When Irwin Steingut died in 1952, his power and positions passed to his son Stanley Steingut. For many years, my grandfather ran the club for the Steinguts while they were away at the legislature in Albany. Family legend has my grandfather and his colleagues sitting around in the basement of what I remember as their enormous house at 750 Eastern Parkway and choosing judges.

My grandfather Seiderman died in 1958, when I was a sophomore in college, but his influence remained with me: he had made politics seem appealing and his example had helped seed my desire to become involved in the world. I always had a sense of my grandfather as a large presence in his community, mostly from my mother, who admired him enormously. My parents made the point that he was deeply engaged in politics but never dependent upon it financially, and they thought he was effective in his political work partly because he didn't need anything from it.

I remembered this years later when I became involved in politics, although my focus was on psychological rather than financial independence. Relying on politics for your sense of who you are greatly impedes your ability to remain true to yourself, your views, and your values. Feeling you can walk away allows you the freedom to decide how much to accommodate to the demands of a political environment. And financial freedom—though neither necessary nor sufficient—can help contribute to psychological autonomy.

My mother grew up in her father's Democratic political milieu. She saw Franklin D. Roosevelt inaugurated in Washington, D.C., in 1933—staying during her visit at the Jefferson Hotel, where I subsequently lived for my six and a half years in Washington. Unlike my father, my mother had a stable, cosseted childhood. The family was prosperous enough to send her on a trip to Italy during the summer of 1930—though by the time my grandparents died, the family money had been greatly diminished.

My mother met my father at a dance at the Waldorf-Astoria hotel in 1933. As he tells the story, he was there with a law client of his who was being honored for a large donation he was giving to a hospital. He and his client were sitting at the head table, and the client was saying that he had made a big mistake by not marrying. My father should avoid such a mistake—in fact, he should ask this young woman sitting nearby to dance. My father looked at the woman and said he didn't feel like dancing.

Then he looked up at the balcony and saw my mother. “Now, there's a girl I'd like to dance with,” he told his client. My mother's father, who was also at the head table, overheard this remark.

“You'd like to dance with that young lady?” Samuel Seiderman said. “That's my daughter.”

My parents are in some ways an example of opposites attracting. My mother has a positive outlook and a comfortable sense of self. When problems arise, her attitude is that everything will work out for the best. My father has a strong and incisive analytic mind, and he is confident in what he does, but he is also something of a worrier. He doesn't like to leave important details to others, whether they're about business, health, or family. These descriptions are as accurate about them in their nineties as I gather they would have been in their thirties. They've been happily married, despite the differences in their outlooks on life, for nearly seventy years.

   

I WAS BORN IN 1938, when my parents were still living in Neponsit, Queens. When I was three, we moved to an apartment in Manhattan on West Eighty-first Street across from the American Museum of Natural History. I went to Walden School, a progressive private school on Central Park West, a few blocks from our apartment building. Walden stressed creative expression, cooperation, and social concern. It was the kind of place where the students called their teachers by their first names. My third grade teacher, whom I remember fondly, was Thora.

After graduating from Columbia Law School, my father joined the law firm of the father of one of his classmates, which became Rubin & Hetkin. The firm specialized in real estate but also had as a client
The New Yorker
magazine, whose board my father's partner came to join. My dad's specialty was challenging property-tax assessments. My father also kept a hand in what little was left of his father's businesses after the crash. One of these was a money-losing mica mining operation centered in the town of Sylva, North Carolina. Mica was an essential strategic mineral used as a wire insulator for airplanes. In the 1930s, it came cheaply from the East Indies and so wasn't worth much. But when World War II broke out in Europe, that supply was threatened. My father wrote to the War Department, offering to give the mines to the government for free. After Pearl Harbor, the War Department got in touch with my grandfather, asking him to go to North Carolina to run the mines. He volunteered my father, who had spent several summers working in the mines, and my father's job for the duration of the war became running the operation, supplying sheet mica to the government at a fixed price. When I was four, we moved to the nearby town of Asheville, North Carolina.

The North Carolina Highlands was a beautiful place, but poor and remote. The people in the town called my father “Jew man” and “Mr. Jew.” It was a bit much for my mother, who felt as if she'd woken up in the wrong century. She rather quickly moved back to Manhattan with me and my sister, Jane, who was born in 1942. My father would come home by train every few weeks for a visit. The mining operation roughly broke even, and my grandfather sold it for a pittance after the war.

When I was nine, we moved from Manhattan to Miami Beach. Florida meant a calmer, more pleasant life for my father, who also wanted to be nearer to his father. After we moved, he continued to do some legal work, built a shopping center, studied stocks and investments, and played golf. My mother also played, and she had a shelf full of local club trophies.