The Predators’ Ball (40 page)

By the fall of '86, the shock of Levine, who had been by far the most high-profile of Drexel's miscreants, had faded at Drexel. Soon, Drexel officials hoped, he would be forgotten, erased from public memory, as cleanly as he had been wiped from Drexel's annals. Copies of Drexel's glossy 1985 annual report had just been distributed in the firm when the news of Levine's arrest hit; they were quickly recalled. New copies were issued, and in place of Dennis Levine's smiling image Martin Siegel's appeared.

Siegel moved from Kidder to Drexel in February 1986. In so doing, he was betting more on Joseph than on Milken. After about a half-dozen meetings with Joseph through the summer of 1985, he had gone out to the West Coast in October to meet Milken. Siegel had found Milken almost frightening—like a speed junkie, he thought, incapable of sitting still, shooting off ideas, here, here and there, like a sparkler. Milken told him, “When you start to add up how much you have, I don't want you working for me. Then you're not hungry anymore.” Siegel thought Milken wanted to be the richest man in the world.

That kind of rawness was not something Siegel wished to see in himself. He felt more comfortable with Joseph—a bright, smooth-talking and attractive salesman, like himself—and with Joseph's projection of their building a world-class financial institution together. He and Joseph were both builders, Siegel decided—he had built Kidder's M&A department from nothing, and Joseph, powered by Milken's engine, might indeed create an institution comparable to a Morgan Stanley, a First Boston, a Goldman, Sachs. Siegel thought it was a historic opportunity, to be in the vanguard of such an enterprise. And he and Joseph agreed that his presence would accelerate that process. Siegel had a franchise in tender-offer defense, a whole roster of blue-chip and loyal clients, who, he guessed, would follow him anywhere—even into Drexel's lion's den.

He made sure, too, that his relationship with Martin Lipton,
with whom he had worked on so many deals and who was also a kind of father figure to him, would remain intact. That relationship had been soldered in 1983 when together they had inaugurated the poison pill (Lipton's creation) defending Lenox, Inc., against an attempted takeover by Brown-Forman Distillers Corporation.

Other investment bankers on whom Lipton had tried to foist his poison pill had been reluctant to use it. It was sure to be open to legal challenge, they argued, and if successful it might kill the golden goose, the takeover business. But Lipton had urged Siegel that they should implement it, that if they did they would own the defense market. And that is not far from what had happened. Lipton had proceeded to carve out his defense franchise, refusing to represent aggressors in hostile junk-bond-financed deals and, of course, becoming one of the fiercest, most outspoken critics of what he derisively called Drexel's “hostile, junk-bond, two-tiered, bust-up takeover.”

Now Lipton promised Siegel that despite Siegel's joining the Huns, he would continue to work with him—but only on defense. So Drexel got not only Martin Siegel, but the promise of a sometime alliance with the dean of the defense bar in M&A, and the erstwhile leader of the establishment onslaught against Drexel into the bargain. Lipton negotiated Siegel's employment contract with Drexel.

That contract assured that at the same time that Siegel would be satisfying his image of himself as a builder, he would be getting richer. He had obtained from Drexel a guarantee of $3 million a year for three years. With possible further bonuses and his investments in Milken's trading partnerships, he was sure to make much more. Drexel had also promised to make him whole on the profit he would have reaped on his Kidder stock (he was that firm's fourth-largest shareholder) if Kidder went public or was sold within two years of his coming to Drexel. Kidder was bought by General Electric about six months after Siegel left.

If Siegel needed further confirmation of the financial opportunism of his move, he got it when the results of the first two months of 1986 came in at Drexel. In each of those months, Drexel made more money than Kidder had in the entire preceding year.

However leery of Milken Siegel had been at their initial meeting, once he joined Drexel he too came under Milken's spell. He went out to Beverly Hills for three-day periods, spending from 4
A.M
. to 8
P.M
. with the indefatigable Milken, and was awed by the
fecundity of ideas that had first seemed to him wild and uncontrolled. At Kidder, he had had to generate the new ideas, and they had never come to him from the trading side. Now Milken was the generator.

Siegel's primary mission, however—as conceptualized by him and Joseph—was to build a defense business at Drexel, with the kinds of blue-chip clients the firm had never had. If Drexel was to become a major financial institution, it could no longer be merely a haven for renegades. Siegel's goal was to have twenty-five or thirty clients on a tender defense retainer, much as the law firm of Skadden, Arps did. And he got off to a good start. In his first month at Drexel, he contacted about twenty of his old clients. He began to represent several, either on defense or on financing.

One was Lear Siegler, the aerospace concern and manufacturer of auto parts, which needed help because its stock was being accumulated by the greenmailing Belzberg brothers. Siegel was, of course, well situated to mediate with the Belzbergs (they had been part of Milken's coterie ever since Mesa-Gulf), and ultimately the Belzbergs were bought out by Lear Siegler. According to Dan Dorfman in
New York
magazine, the Belzbergs made a profit of almost $7.5 million.

But the potential conflicts that could arise in Drexel's attempting to go both ways were vividly illustrated at this time. Contemporaneous with Drexel's representing Lear Siegler
against
the dreaded Belzbergs, it was also representing the Belzbergs as they greenmailed Ashland Oil. Here the Belzbergs reaped a profit of $15.4 million, according to Dorfman. If there was not an ethical dilemma (conflicts of interest are rarely recognized in the investment banking world), such dual purpose might give pause to the sort of client Siegel was trying to bring aboard. Potential clients might wonder, as they disclosed their financials to their investment banker, where his loyalty, or that of his partners, really resided.

Siegel decided that the best way for his Kidder clients to overcome their fear of Drexel would be for them to become acquainted with his partners, to meet Milken, to understand that true security lay in their being in the Drexel camp, not outside it. So he invited more than a dozen of them to the 1986 Predators' Ball.

In one year so much had changed that even the old name, Predators' Ball, sounded faintly archaic. Among the two thousand guests were many CEOs of major corporations. T. Boone Pickens,
the raider who had started it all with Mesa-Gulf, and had been a keynote speaker at Drexel conferences in 1984 and 1985, attended but was not invited to speak (and was clearly miffed). Ronald Perelman, now chairman of Revlon, opened the conference, and Dr. Armand Hammer, chairman of Occidental, closed it. There were also presentations by Beatrice, Gulf + Western, Burroughs, Warner Communications and Lear Siegler. As one of the conference organizers exclaimed excitedly, “It's the Academy Awards of business!”

The old ethos was still there, though not as strident and all-encompassing as in years past. In one of the videos that are produced each year at Milken's direction,
Dallas'
J. R. Ewing (Larry Hagman) appeared, flashing a “Drexel Express titanium card,” which, he declared, had a $10 billion line of credit. J. R. urged, “Don't go hunting without it!”

But the best line of the conference, most participants agreed, was delivered by Nelson Peltz, who was asked to give a presentation for the first time. A year earlier, Peltz had been a nervous hopeful, with nothing to his name but a controlling interest in a meager wire and cable company. Now he was magically transformed into one of the nation's industrialists, with a controlling interest in a $4 billion empire. In a play on Winston Churchill's famous declaration, Peltz gazed out at the crowd, many of them holders of his bonds, and declared, “Never have so few owed so much to so many.”

Martin Siegel played a prominent role, appearing on a panel and at one point, in reference to his move from the bluenose Kidder to the dread Drexel, donned first a white cowboy hat and then a black. His old Kidder clients, among them the chairmen of Lear Siegler and Pan American, seemed rather dazzled by it all. One guest wondered, “Wow, Marty, does Kidder throw these kinds of things?” But probably no one was more dazzled than Siegel himself. The personal wealth there, he calculated, was three times the GNP. And it was not only the sheer dollars but the power and influence that he found so awe-inspiring.

One manifestation of that growing power and influence was a political presence far larger than at any previous conference. Senators Bill Bradley and Frank Lautenberg of New Jersey, Howard Metzenbaum of Ohio and Alan Cranston of California all spoke at the conference. Senate Majority Leader Robert Dole was supposed to appear as a surprise speaker at a corporate-finance breakfast, but he canceled at the last moment. Representative Timothy Wirth of Colorado
and Massachusetts Senator Edward M. Kennedy came, but they were not speakers. “Kennedy told me,” recalled Tubby Burnham, “ ‘I'm here to listen and to learn.' ”

Drexel had spared no effort—and no expense—in educating Congress over the past year and a half.

Representative Wirth was one of the early recipients of Drexel's lavish attentions—not surprisingly, since he chaired the hearings of the House Subcommittee on Telecommunications, Consumer Protection and Finance on takeovers, in 1984 and again in the first half of 1985. At first, Wirth spearheaded the congressional assault; but by April 1985, when he attended the Predators' Ball, he was straddling the fence, and by the end of that year he had become a staunch supporter of Drexel and its junk bonds. In fact, one of his top aides, David Aylward, left his job with Wirth to help organize Alliance for Capital Access, a lobby formed to oppose federal limits on junk-bond financings, formed by Drexel clients at Drexel's prompting. The leader of Alliance was Larry Mizel of M.D.C. Holdings, a longtime issuer of junk bonds and also a major subscriber to the bonds in the takeover deals.

Under the Federal Election Campaign Act, the limits on contributions to candidates per election are $1,000 for a contribution by an individual and $5,000 by a multicandidate committee (the category in which Drexel's Political Action Committee falls). In 1985, Drexel's PAC donated $2,000 to Wirth, falling short of its limit by $3,000. But contributions by individuals at the firm (including $1,000 from both Michael and Lowell Milken, and $1,000 from Gary Winnick, who left the firm in the fall of '85) totaled about $17,000. Roughly $9,000 of this was comprised of donations of $250 from members of the Milken group. There were also some contributions from Milken's extended family. Donations from Tom Spiegel, Abraham Spiegel, Helene Spiegel, Edita Spiegel, Lee Eckel (a Columbia Savings director) and a Columbia PAC totaled $7,150.

While Drexel executives knew that Wirth was their supporter by the latter half of 1985, Wachtell, Lipton—with Martin Lipton spearheading the anti-junk crusade—apparently did not. In late 1985, twenty members of the Wachtell firm each donated $500 to Wirth—for a total of $10,000.

By mid-1985, the center of activity for anti-takeover legislation had shifted from the House to the Senate, and Senator Alfonse M. D'Amato of New York, chairman of the Senate Banking Committee's
subcommittee on securities, had primacy. Drexel was by far the biggest donor among financial firms to D'Amato from 1981 to 1986; its contributions totaled $70,750. (The next-highest D'Amato contribution from an investment-banking firm was Morgan Stanley's at $40,600.)

As reported by Bruce Ingersoll and Brooks Jackson in
The Wall Street Journal,
Drexel's courting of D'Amato moved into high gear at the end of May 1985, when D'Amato was preparing to hold hearings on proposed legislation. One bill would have curbed the use of junk bonds in takeovers and buyouts, and another would have limited junk-bond purchases by thrifts. Harry Horowitz, Milken's boyhood chum who joined Milken's group in 1979 to perform administrative functions and by the mideighties was his Washington lobbyist and Predators' Ball organizer, set up a fund-raising dinner for D'Amato at Chasen's in Beverly Hills. The guest list at that dinner included twenty-three executives from Drexel and a half dozen from Columbia Savings and Loan, including Thomas Spiegel. D'Amato's take from this dinner was more than $33,000.

During the late spring of 1985, the wave of anti-takeover sentiment in Congress was cresting, and many legislators were eager to take some action. According to the
Journal
account, D'Amato assured his fellow senators that he would have legislation ready to be considered before the summer recess. That, however, did not happen. It was December 1985 when D'Amato finally had his draft bill readied, and by that time the issue had lost its heat. In any event, D'Amato's proposed legislation carried no provisions onerous to Drexel. On the subject of junk bonds, he suggested a federal study. Five days after D'Amato introduced his innocuous bill, Fred Joseph and thirty-five other Drexel executives each donated $500 to the Senator's campaign.

In the end, of the thirty bills that dealt with regulating takeovers in 1984 and 1985, not one passed. While Drexel's (and other investment-banking firms' too) lobbying efforts were herculean, at least as much credit for their nonpassage must go to the Reagan Administration, which had said that it would veto any such legislation.

And the SEC, which was of course the agency most involved, did not support any of the proposed bills. This was hardly surprising, considering that it was the pro-takeover attitude of the SEC and the Justice Department (in its antitrust policies) under Reagan that had
fueled the M&A activity of the early eighties. The SEC did do a study of junk bonds in takeover financing, which reached the predictable conclusion: Released in June 1986, it stated that there was no “justification for new regulatory initiatives aimed at curbing the use of this kind of debt issuance in takeover bids or indeed as it relates to any other aspects of corporate financing activity.”