So far, Jacobs liked what he saw. On March 9, he and Virgil Sherrill met with Sherwood, Prudential's president, and Frank Hoenemeyer, its top investment strategist. The Prudential executives clearly had already done a lot of homework. They said that Prudential wanted to tap into a wealthier customer base. Although Bache was at the lower end of that scale for Wall Street, its customers still had a higher average income than Prudential's customers. They knocked aside Jacob's original concerns that a mutual company couldn't purchase a securities firm, saying that Prudential lawyers had already thoroughly researched the issue and that it presented no problem. They wanted a deal wrapped up quickly. Speed and secrecy were of the essence.
By St. Patrick's Day, everything was in high gear. That morning, personnel reports on senior Bache executives were delivered to Prudential. The reports, ranging in length from two to four pages, included a full biographical sketch and a picture of each executive. They were reviewed both by senior executives of Prudential and its board. A report on Jim Darr, the man who would play the most significant role in Prudential's investment, was not included in the stack.
After an eight-hour summit meeting, Beck and a group of Prudential executives voted to recommend the purchase of Bache to the insurance company's directors. The next morning, after a two-and-a-half-hour meeting, the board voted unanimously in favor of purchasing Bache at a price of $32 a share, or about $385 million.
Given the green light, a retinue of Prudential executives trooped over to the offices of Sullivan & Cromwell to meet with Jacobs and his advisers. The deal was approved, they said, at $32 a share. Jacobs felt a little shockedâthat price was only slightly above the market value. The $385 million equaled Bache's cash flow for only about three weeks. He conferred with Clifford for a moment, and the lawyer then approached the Prudential executives. Everyone was pleased with Prudential's offer, Clifford said, but Bache was interested in a higher price.
Beck cut the suggestion down instantly. “Listen,” he said. “If you don't want this deal to fall apart, you'd better take what we're giving you.” The price was $32 a share, and no more.
Clifford backed down, and within a matter of minutes, there were handshakes and smiles all around. Jacobs called an emergency meeting of Bache senior executives at 4:00 P.M. to let them know about the deal. That evening, Beck and Hoenemeyer arrived at Bache headquarters to meet with the firm's directors. After a short and friendly introduction, the two men left the room for a few minutes. The proposed offer sailed through Bache's board with unanimous approval. Beck and Jacobs, starving after their nonstop work, celebrated the victory with salami sandwiches.
About that time, Sam Belzberg was on a plane landing in the Edmonton airport. He was flying with his wife to London, and the only available flight from Vancouver required the short stopover. Belzberg expected the stop to be uneventful. Because the time on the ground was so short, none of the passengers was permitted to get off the plane.
So it surprised Belzberg when a Canadian Mountie boarded the plane in Edmonton and walked directly toward him.
“Mr. Belzberg?” the Mountie said after reaching Belzberg's seat. “You have a telephone call.”
Belzberg was told he could get off the plane as long as he was accompanied by the Mountie. Within a few minutes, he was in the airport, speaking with one of his close aides. They had heard some critical information: Bache was being sold to Prudential Insurance.
Belzberg stood in the airport for several minutes, almost speechless. His quarry of several years had suddenly slipped his grasp. The whole ugly battle was coming to an end.
Harry Jacobs bounded out to a helicopter pad in downtown Manhattan and scrambled aboard for the short flight to Newark. It was early in the day on March 19. Already, midlevel executives and brokers at Bache were learning about the merger, although they had heard nothing yet from their chairman. The front page of that morning's
New York Times
carried an article headlined “A Prudential Offer for Bache Accepted” that provided numerous details of the deal.
After arriving at Prudential's headquarters, Jacobs was whisked to Beck's office, where he was presented with piles of documents to review. Then, with little fanfare, the executives signed the contract, agreeing to convert Bache into a private subsidiary of the Prudential.
Later that day, the news was officially announced to the wire services. As Bache brokers watched the headline cross the tape, the mood at the firm became one of absolute delight. After months of scandal and stumbling, Bache had found a parent with pockets so deep that they seemed to reach down into Fort Knox. Calculators appeared on Bache desktops across the country as the employees with stakes in the firm counted the money they would make from the deal. Not only were their futures more secure, but many of them stood to receive a financial windfall.
Prudential managers began touring the firm almost immediately. In New York, Beck, Sherwood, and Garnett Keith, the executive vice-president responsible for overseeing Prudential's newest acquisition, arrived at Bache for a walk-around. Meeting with groups at a time, Beck extended his hand to as many of the employees as possible.
“We're looking forward to working with all of you,” Beck said repeatedly. “We think that this is a great match.” Prudential was committed to the firm's success, Beck said. They planned to do whatever it took to make Bache into the finest brokerage firm in the world.
Over the coming weeks, despite all of the excitement, little changed in the day-to-day business of the brokerage firm. Beck paid little attention to the goings-on at Bache, handing off responsibilities for direct oversight to Garnett Keith. The only significant change seemed to be that, for the first time in years, Harry Jacobs felt safe again. “We have a feeling of relief,” Jacobs told a reporter shortly after the deal was completed. “After the Prudential merger, we felt more secure in our jobs.”
With huge capital and a rock-solid reputation standing behind the firm, Bache was ready to expand its business across America. Soon every division of the firm, including tax shelters, would be able to reach millions of potential new customers.
CHAPTER 5
“PITTMAN, PICK UP, GODDAMNIT!” Darr screamed into the office intercom. “Pick up! Pittman! Don't you hurt her!”
It was a Friday night in 1981. The sounds of Bill Pittman screaming and cursing at Kathy Eastwick, a compliance administrator, were thundering through the fifth-floor hallways in Bache's tax shelter department. He sounded frighteningly close to beating her.
Pittman was already well known in the department as a man with an irrational temper. At times, he would look up in the middle of a meeting and inexplicably threaten a colleague. He frightened coworkers by walking the hallways with a baseball bat, periodically smacking it into his palm. It was the kind of behavior, colleagues whispered, that, combined with Pittman's relative lack of talent or education, would get him bounced out of almost any Wall Street firm.
But not Bache. Since the Futon Five debacle, when Pittman threw his complete support behind Darr, his career had taken off. No one had shown Darr more unquestioning loyalty. As an apparent reward, Darr greatly increased Pittman's influence. His responsibilities as a product manager grew, he was included in more top-level meetings, and he gained greater access to Darr than almost anyone else. But even as Pittman's authority increased, the job stress seemed to dig at him more and more. His blowups became more frequent. This time, as members of the department listened to Pittman scream at Eastwick, some wondered whether he was losing his mind.
The run-in started because of demands Pittman had made of a secretary an hour or so earlier. He had told her that he wanted some marketing materials for a new partnership printed up that night. The secretary had gone to the firm's print shop to ask if they could do an emergency rush job, but as soon as the printers found out it was for Pittman, they had refused. They weren't going to put themselves out for a man they disliked. As the joke went at Bache, with his temper tantrums, Bill Pittman had burned more bridges than the atomic bomb at Hiroshima.
When the secretary told Pittman he would have to wait, he screamed at her and threw a cup of coffee on her desk. The secretary burst into tears and ran away. Eastwick, who supervised the secretaries, found the woman crying a few minutes later and tried to calm her down. Eastwick couldn't believe how nasty Pittman had been. A few minutes later, she stormed into Pittman's office.
“What have you done to this poor woman?” she asked. “Look, Bill, there's no reason to get so upset. I'll make sure the printing gets done by early next week.”
Pittman looked up from his desk, his eyes blazing in absolute fury. “No!” he screamed. “I want it done tonight! I want it done right now!”
“Bill, it's Friday night,” Eastwick said. “Everybody's going home.”
“Don't you undermine me! Goddamn you! You work for me!”
With that, Pittman stood up and pounded his fist on his desk.
“I'm just telling you that you're being too tough on the girl,” Eastwick yelled back.
“Don't you talk to me like that!” Pittman yelled, slamming his fist onto the desk again. “Who the hell do you think you are?”
Pittman seemed to lose control as his screaming grew louder. He repeatedly banged his fist into the desk. Then, with a wild look in his eye, he leaned over and slid his hands under his desk. Even though the desk appeared to weigh more than a hundred pounds, Pittman started to lift it.
Oh, my God
, Eastwick thought.
He's trying to throw his desk at me
.
Darr heard the ruckus in the next office and buzzed the intercom, demanding that Pittman pick up. Finally, as Eastwick broke into hysterical tears, Darr burst into Pittman's office.
“Pittman, are you nuts?” he yelled. “Leave her alone!”
Darr grabbed Eastwick, pulling her into his office and shutting the door. Then he headed back to Pittman's office. As Eastwick cried, Darr screamed at Pittman, telling him he had to learn to control himself. Darr would later claim to colleagues that he had grabbed Pittman by the shirt and thrown him against the wall.
Other members of the department who witnessed the exchange couldn't believe what they had seen. It wasn't just unprofessional, it was
scary
. After all, Pittman wasn't some inconsequential administrator anymore. He was a decision maker, one of the most powerful people in the tax shelter department, someone who would help set its agenda over the coming years. And he acted like a madman.
Another winner from the undoing of the Futon Five was Paul Proscia. A man of average height with dark, receding hair, Proscia had been bouncing around Bache since graduating from St. John's University in 1968. He spent most of his years at the firm as Pittman had, primarily handling administrative duties. The job was distant from the business of assembling and selling securitiesâlargely, Proscia spent his days making sure that stock certificates weren't lost or stolen. But in the late 1970s, he got his big break when Harry Jacobs selected him as assistant to the chairman. The job lasted two years, and by all accounts, the genial Jacobs thought highly of Proscia. But when Proscia left the chairman's office to take a job as the assistant manager in a commodities department in downtown Manhattan, things didn't go quite as well. He was out of the job in a few months, and ready for a new assignment.
Shortly after the announcement that he had been cleared of allegations from the Futon Five, Darr brought Proscia into the tax shelter department as a product manager. Although the department needed the help, few of his new colleagues could understand this particular hireâProscia didn't seem to have much knowledge about the business. And it didn't help that when Proscia felt pressured in some sales presentations, he started stuttering. Other members of the department whispered that Darr must have been trying to put himself in good stead with Harry Jacobs by hiring the chairman's former assistant. Even though Darr had been cleared by Bache, they reasoned, it never hurt to try to counter the stench of the allegation. Besides, given time, they knew Proscia would figure out how to do his job.
Then, just a few months later, Darr made an announcement: He was promoting Proscia to senior product manager. The other New York marketers were lividâthey couldn't believe that they would have to report to someone who was still learning some of the basics. Worse, sometimes his behavior was totally unprofessional. At one quarterly meeting at the Drake Hotel in Manhattan, Proscia got rip-roaring drunk. About midnight, the meeting broke up and a group of inebriated Bache executives and partnership sponsors left through the hotel lobby. Proscia, who was having one for the road, stumbled and spilled his tequila on a girl about seventeen years old. His colleagues watched in horror as the department's newest executive got down on his hands and knees and licked the alcohol off the teenager's leg.
The person who was the angriest about Proscia's promotion was Wally Allen. As one of the only experienced product managers in the department, Allen not only didn't respect Proscia but at times had to pick up the slack caused by his new boss's lack of experience. Repeatedly, Darr called Allen in to help out on deals that Proscia couldn't handle. The worst came in early 1981 with Montford Place, a real estate deal sponsored by a young general partner named Rick Strauss. The deal itself, involving apartments in Texas, was average at best, and Strauss did not have much experience yet. But Darr treated the deal like it was the keys to the kingdom: Strauss's father was Bob Strauss, the former chairman of the Democratic Party, and his uncle was Theodore Strauss, a prominent Dallas businessman. If Darr could get to them, he predicted that the firm would land a lot of new business.
“This relationship is going to be a stepping-stone to big things,” Darr said of the deal at one staff meeting. “Ultimately, we'll develop something with his father and with all the vast connections his family has.”
It sounded like a great idea until Darr turned the deal over to Proscia to sell to brokers. After several months, the Strauss deal languished, unsold, on the shelf. Darr did everything he could to push it along, including threatening the jobs of all the regional marketers if they didn't flog it. But nothing worked. Investors were not interested. Finally, Darr called Allen in and asked if he would help out.
“Fine, I'll be glad to do it,” Allen said. “But I want to have complete control of the deal.”
“OK, Wally,” Darr replied. “But try and humor Paul a little bit.”
The response just made Allen angry. “Look, Jim, if I'm going to do it, then I'm going to do it. I'm not going to play games.”
Darr agreed, and Allen went into high gear. He organized a meeting with Rick Strauss for some brokers he knew in Dallas. Then he took the brokers to tour the property. It was a tough sellâthe deal had been around so long, it had the musty, stale air of an investment in trouble. But after a few weeks of hard work, the sales started coming in.
One afternoon Allen was at his desk, reviewing some of the materials from the Strauss deal, when his telephone rang. It was Proscia, calling from outside the office. He wanted Allen to update him on what was happening with the Montford deal.
“Paul, just stay out,” Allen said. “Either I'm going to do the deal, or you're going to do the deal. But it's not going to be both of us.”
Proscia seemed taken aback by Allen's condescending tone. “Hey, Wally,” he yelled. “I'm the top guy here. So we do what I say.”
“Fine,” Allen snapped. “Then you go sell this fucking deal.” He hung up.
At that moment, Allen realized that he couldn't stay at Bache. Working for Darr had been bad enough. Now he had to report to somebody he couldn't respect.
The next chance I get
, he thought,
I'm out of here
.
He sat back and shook his head. Business for the department was just taking off. Demand for tax shelters was growing around the country. Darr was hiring new marketers and due diligence executives almost every day. But now, at this important juncture, the New York marketing effort of Bache's tax shelter division was falling into the hands of Paul Proscia and Bill Pittman. Two guys, Allen thought, who a year or so earlier were little more than flunkies.
Ellen Schachter slipped on her dress shoes and walked to the mirror in her bedroom. She gave herself one last lookover: Her clothes were attractive but not flashy, her brown hair was in a conservative business cut. It was just the right image for her interview with Jim Darr. The meeting in March 1981 was the last hurdle for her to get a job in Bache's tax shelter department. She did not want to blow it. The job was the best she had ever tried to get.
Schachter was amazed that she had gotten this far in the process. As much as the possibility of getting the job intrigued her, it also worried her deeply. Although she was an MBA and had worked as an accountant for years, she didn't know much about tax shelters. She had never even worked on Wall Street before. Her application for this job had been a fluke. Schachter had been a bored accountant when her father suggested she approach a stockbroker he knew at Bache about opportunities there. The broker had agreed to shop her résumé around the firm, and the tax shelter department was the first to approach her about a job examining the quality of deals to make sure they were safe investments. She was amazed that the firm thought she was qualified. She said as much in one of her first interviews with Dennis Marron, a surviving member of the Futon Five.
“Don't worry,” Marron replied. “We'll train you as you go.”
At the time, Bache desperately needed more bodies in the department. The year 1981 was developing into the most important one in the department's history. A tax revolt was spreading across the country. As the year began, Ronald Reagan was inaugurated as the nation's fortieth president, raising hopes for a more probusiness mind-set in Washington. Inflation was still rampant, pushing taxpayers into higher tax brackets even though their spending power remained unchanged. The shelters lost most of their smarmy tingeâno longer were they looked down on as a means of helping the rich escape their obligations; instead, they were sold as a financial necessity, a hedge against inflation in an era of high taxation. They were quickly becoming one of Wall Street's most popular products.
At Bache, Darr worked fast to meet the surging demand. On the marketing side, he had already established several tiers of executives. In New York, there were product managers responsible for answering broker questions about a deal and helping to usher it through the system. At the next level were the regional marketers, spread across the country. They told brokers about new deals and conducted seminars. In coordination with the product managers, they also arranged meetings with the developers and oil executives who wanted the lucrative general partner's role in the shelters. The regional marketers, in turn, had help from the marketers who worked for the general partners. These marketers, called wholesalers, sold only one sponsor's products and met with the firm's regional marketers and product managers to plan ways to bombard brokers with educational material and sales literature. Although wholesalers did not work for Bache, they were given extremely wide latitude to travel throughout the branch offices, helping the department persuade the brokers to sell the latest deal.
Outside of marketing, the other important division of the tax shelter department was due diligence. On Wall Street, due diligence is one of those five-dollar financial terms with a very simple meaning. When brokerage executives say they performed due diligence on a deal, it means that they examined it closely to make sure there were no glaring problems that might put investors at risk. In Bache's tax shelter division, the due diligence team was broken down into two groups, one for real estate deals and the other for energy deals. Deals involving equipment leasing or esoteric assets like horse-breeding farms were handled by both groups.