Book Excerpt: 'The Real Deal'
One day I passed a Bache & Company office and peered in. The sputtering ticker tape and buzz of activity looked interesting, and I ended up asking my father what he thought about the business. His wife, Marian, soon introduced me to a friend who happened to be a broker at Bear Stearns. Suddenly, I had a job as a runner earning $150 a month. Most of the people with whom I initially worked were on Social Security, and I knew I could do better. I quickly graduated to margin clerk. The brokerage business was fascinating. I used to spend my lunch break taking in the scene in the "board room," a large bullpen where the brokers worked. There was a two-sided glass partition. On one side were salespeople and traders while on the other stood the firm's legendary leader, Cy Lewis, a big man oozing with power who constantly barked out instructions to his traders. Alongside Cy sat a young Ace Greenberg, who one day would earn his own reputation as Bear's CEO.
Being a margin clerk taught me a great deal about how the business operated and instilled a lifelong appreciation regarding the importance of a good back office. As a margin clerk, I received calls from brokers asking how much money their clients had to invest. These were the days before computers, and I had to perform all the calculations by hand, matching securities and figuring borrowing capacity based on margin rates. I was just getting my feet wet working when I received a notice from the air force that it was time to report for duty. Since more than a year had now passed since my last physical, I was told to go first to Mitchell AFB on Long Island for the required checkup. Unexpectedly, I failed the exam because of a cavity that required root canal work. By the fall of 1955, the administration of Dwight Eisenhower was beginning to reduce the military's manpower requirements, and before I knew it, I was given the option to change my mind on my service obligation. Ever since I crashed a T-33 flight simulator during my summer boot camp experience a year earlier, I had begun to have second thoughts about becoming a pilot, and now my positive experience at Bear Stearns encouraged me to think about a different career. I ended up asking my boss whether he thought I could make it in the brokerage business. With his encouraging reply, I decided to turn in my air force bars. It's funny how events had conspired to change my destiny: First, my parents' divorce forced me to graduate late, thus delaying my service obligation, and now, a simple physical exam steered me in an entirely different direction.
During late 1955 and early 1956, I plugged away at my job while studying for my broker's license at night. By June, I passed the required exam. Bear Stearns moved me to the brokerage office at One Wall Street. I was excited by my rapid progress and the move to the heart of the financial world. It felt great receiving the license and having the chance to run what felt like my own business. I worked hard as a young broker. Since I was still given to shyness, Joanie helped me immensely. She'd push me to make cold calls and to touch base with my clients each day. Her words still ring clearly: "Did you call So-and-So today? Be sure to follow up!"
I never had a sophisticated calling program; rather, I took every referral I could get, first concentrating on family friends and then soliciting waiters and maître d's in the restaurants I frequented. Early on, probably a fifth of my clients worked in restaurants. Once in a while, there were some pleasant surprises as when the maître d' of Jimmy's Lagrange Restaurant gave me an account which included $100,000 worth of AT&T stock.
My first year had its ups and downs. I vividly remember losing sleep because I had made some bad stock calls and lost money for my clients. For a while, I was afraid to go out to eat since I knew I'd have to confront my waiter clients. Still, working hard to master the firm's investment research, I soon began to excel. By September 1956, I was doing well enough that Joanie and I could afford to take an apartment of our own and thankfully get out from under the discomfort of living with her parents. Our new apartment in East Rockaway cost $135 a month in rent, or half my income, but the independence was well worth it. Just as we were set to move, Joanie gave birth to our son, Marc. I loved being a new father, though the sense of responsibility now pushed me all the more to excel at work.
I continued to increase my production and generated $25,000 in gross commissions in 1957, which meant I was bringing home $7,500. I was doing well enough, but 1957 was a difficult year for the market. President Eisenhower's heart attack reversed investors' prior surge in confidence, and the Dow Jones Average dropped nearly 13 percent that year as trading volume flattened. I was still nervous at the start of 1958, and one of my uncles encouraged me to consider moving to a small brokerage operation named after its owner, Frank LaGrange. This was only a three-person firm, but what appealed to me was the offer for a guaranteed $7,500 in base pay plus profit sharing. Conservatively, I believed the pay structure would insulate me against the risk of a poor market.
Working for LaGrange was generally unpleasant. My boss had a love affair with railroad and sugar stocks (this was pre-Castro), while I was drawn to start-up and technology-oriented companies. I used to hang out at lunch with analyst-brokers from neighboring Unterberg Towbin and share stock ideas. Tommy Unterberg and I soon became good friends—he'd often sleep on the sofa in my apartment so that we could get an early start the next day going out to research companies in the area. Frank LaGrange didn't approve of my hanging out with technology analyst friends and insisted that I should concentrate instead on more staid companies. Not helping matters any, he hated my smoking and constantly harped that his wife didn't like the smell of tobacco on his shirts. Before I knew it, I felt whipsawed as the market recovered vigorously in 1958. It surged 34 percent for the year and had undermined my original reason for leaving Bear Stearns. Thinking I'd receive a healthy bonus, I felt entirely misled at year end when LaGrange announced there were no profits to share.
Fortunately, I saw a way out. For weeks, the sales manager at Burnham & Company had been calling trying to get me to jump ship. He'd play on everything I didn't like about LaGrange by advertising Burnham's family-like culture, its emphasis on a wide range of stocks, and its paternalistic founder. The sales manager assured me that with my skills and Burnham's support "you'll triple your production, I guarantee it." Usually words like that should make anyone suspicious, but I took the bait and, sure enough, my commissions zoomed to the point where I brought home $25,000 in 1959. Of course, those were years when commissions were regulated and actually maintained at very rich levels. For instance, commissions then approximated 7 percent of clients' assets, or ten times the rate typically earned forty years later. However I earned it, my pay put me in the elite of all retail brokers at the time.
Burnham & Company was a terrific place most of all because of its founder, I. W. "Tubby" Burnham. Tubby was one of the most down-to-earth and nicest men I have ever known. The grandson of the distiller I. W. Harper, Tubby had earned his nickname as a child when he was forced to gain fifty pounds as part of the cure for typhoid fever. He opened the firm's doors in 1935—I was impressed that someone could build a firm that could stand such a test of time. Tubby was the perfect mentor: He was a consummate retail broker and always enjoyed working with young employees with whom he shared his accumulated wisdom. He'd constantly walk around the fifty-person firm and ask employees for their ideas. He demonstrated his humanity by treating his employees as though they were family and imparted to each the sense that they were all equally important. It was a style so lacking elsewhere on Wall Street. Tubby may not have been a rocket scientist, but he taught me the importance of focusing on the basics in running a business, especially the need to respect and value one's employees.
Mirroring my professional growth, our family and lifestyle were also maturing. My success at Burnham gave Joanie and me the means to afford a larger two-bedroom apartment in our building. The expansion came just in time for the birth of our daughter, Jessica. We were proud parents but followed traditional roles with Joanie staying home to take care of Marc and Jessica while I was the breadwinner. Unlike most of our friends, we didn't benefit from a wealthy parental support system, a fact which I resented since I never asked for a lot. Without any extra financial help, it felt like we were in a titanic struggle to make a place for ourselves. In hindsight, I wish I had been able to spend more time with my kids in those years, but I felt that the majority of my time and energy had to go toward building my business. It was a matter of basic survival.
In early 1959, Burnham & Company celebrated its twenty-fifth anniversary, an event which had a profound impact on me. With my father's businesses, I had never seen such longevity, and the notion of building something which would be bigger than any one person seemed awesome. By this point, Arthur Carter and I already were thinking of starting our own firm, and that celebration spurred us on. I even figured Tubby might back us if I appealed to him and used his story as an example of what we wanted to accomplish.
We had already spent nearly four years fantasizing about opening our own business. Our ruminations had begun shortly after we first met as across-the-hall neighbors in our East Rockaway apartment. Arthur and his wife, Linda, had moved in a month before us and also had a newborn child. Arthur and I used to talk about the stock market at every chance we could get. We had plenty in common and quickly became good friends. We'd rarely allow much time to go by without cooking dinner for one another, and as time went on, we vacationed together as well.
Arthur was a year and a half older than I and clearly brilliant. The son of an IRS agent father and a mother who was a French teacher, he had grown up in Woodmere and graduated from Brown where he had studied French and music. His father once had him tested to determine what sort of career would most suit him, and the results showed a remarkable breadth of aptitude. He considered a career as a classical pianist before aiming his sights on becoming an investment banker. As I'd see more in later years, his multiple talents imparted an impatient nature and an eagerness to experiment with new things.
Commuting together into Manhattan each morning, Arthur and I compared notes on our companies, the brokerage industry, and stocks we liked. We were not sophisticated, but that didn't stop us from thinking otherwise. We were both young and idealistic, and we soon began to dream about what we might create if we were to start our own business.
It was fun thinking out loud together, but our planning was premature, as Arthur soon decided to quit Lehman and enroll at Dartmouth for his MBA. While he was there, I managed his investment account. I'd come up with stocks to buy; and, just as often, Arthur would tell me what he liked, and I'd go off and research the idea and determine whether we'd buy it. It was a great collaboration and all the more fired our ambitions to team up one day.
Upon obtaining his degree, Arthur went to work for an investment bank other than Lehman but realized the job wasn't for him. It was now late 1959, and the stock market was enjoying a terrific year. I was thriving at Burnham and gaining self-confidence. Arthur and I were commuting together once more, and we redoubled our talk about starting our own firm. We quickly settled on our business plan, which would take the best of Allen & Company and its investment banking focus and combine it with retail brokerage services which might cover our overhead. We each felt we weren't good at big-company politics and believed we could make a decent living with our newly conceived business model. I reasoned that if we took the plunge and it didn't work out I could always go back to working for Tubby.
Filled with enthusiasm, we decided to run our idea past Arthur's father-in-law, Peter Schweitzer, who was a successful and wealthy entrepreneur making cigarette paper. Schweitzer did not discourage us, but he made us realize that we lacked enough customers to make a viable venture and recommended we bring in additional partners. Arthur suggested we approach his childhood friend Roger Berlind. Roger had a passion for songwriting. An unsuccessful attempt at writing for a career had brought him to the Wall Street firm Eastman Dillon as a broker instead.
Perhaps Roger had already been thinking of going off on his own as he quickly warmed to the idea of joining us. However, he insisted we also bring along his friend and Eastman colleague Peter Potoma, who was the son-in-law of publishing magnate George Delacorte. We accepted the idea as we figured Peter's family connection might come in handy. As I got to know Roger, I realized he hid his being Jewish well, and Arthur and I assumed he wanted Potoma to be included so that we wouldn't be seen to the outside world as a Jewish firm. After all, in the 1950s, Wall Street firms were clearly classified by their ethnicities. In that regard at least our new firm would surely break the mold.
Coming together, the four of us must have sounded awfully arrogant for our young ages. We all agreed there was little good investment research around and that we could do much better by pooling our collective intelligence. The Dow Jones Industrial Average had surged over 50 percent in 1958–59 all the way to 680. No doubt those robust market conditions made us all feel particularly smart even if we knew the old adage on the Street never to confuse brains with a bull market. The group assembled, Arthur went back to his father-in-law and asked him to help us buy a seat on the New York Stock Exchange in order to get our business up and running. In addition, each of us agreed to kick in what we could out of our own savings. For Joanie and me, that meant contributing $30,000, which was virtually all we had—we only held back $1,000 in case of an emergency.
Schweitzer initially responded positively to our request for help in buying the seat, and we soon signed a contract that gave us two weeks to come up with the $160,000 purchase price. Suddenly, though, Arthur's father-in-law changed course and declined to give us the financial support he had promised. By early 1960, the market had turned soft and so, too, had Mr. Schweitzer.
It was a terrible quandary as, by now, we had all given notice to our employers, and we felt on the hook legally with our contractual commitment. I got especially cold feet and even offered at one point that we should sell the seat, take a loss, and wait a couple of years before trying again. Yet our luck turned when Peter's wife's family and Roger's mother and mine pitched in and committed to help us pay for the seat. As a Delacorte, Peter's wife came from substantial means and helped him step up his initial contribution. I didn't have wealthy family connections on which to draw, but unbelievably, my mother gave us $30,000, which was fully 60 percent of all she owned following her divorce. It was an act of complete selflessness. In contrast to Peter Schweitzer, who was probably worth $50 million and gave us nothing, my mother, with her $50,000 net worth, went to the mat for her son.
Altogether, we raised $250,000, which was enough to pay for the seat on the exchange and still have enough left over to defray the cost of our office space and our other operating costs. Each of the four partners actually had contributed different amounts, but we decided we'd still each have an equal ownership share as we knew we were all pulling together. We decided to pay ourselves $12,500 apiece in our first year, which helped us have something left over after our other costs to reinvest in the business.
That payout amounted to a 50 percent cut from what I had been earning at Burnham, but the drop didn't bother me as I felt proud to be in business on my own. Joanie was also incredibly supportive and willing to pinch pennies and sacrifice. While many of our friends were then buying their first homes in fancy North Shore neighborhoods on Long Island, we plowed our savings into the business and moved into a garden apartment rental in Baldwin, a middle-class neighborhood on the South Shore.
As we got closer to setting up shop, the market downturn of early 1960 intensified. Everyone we knew began to question whether we really wanted to take on such a risk. People like Arthur's father-in-law asked, "Who are you guys to think you can do this successfully?" In fact, we could only point to two similarly oriented firms which had successfully started up in the 1950s, Donaldson Lufkin Jenrette and Faulkner Dawkins.
Nonetheless, none of us would countenance backing out now. After all, we knew what our costs would be and the commissions we'd need to be profitable. Given our past production, we felt it wasn't as big a risk as everyone seemed to think. We were also reassured by Tubby Burnham's willingness to have Burnham & Company settle our trades, which we all took as a vote of confidence. In the end, we figured we had plenty of room to cover our costs even factoring in the risk of a sharp falloff in commissions.
As I look back on that period now, I marvel at our naïveté and our inherent optimism. We were young and infused with energy and had gained our first business experience during the mostly dynamic 1950s. There surely were economic fluctuations in those years, but for the most part it was a time of rising prosperity, healthy economic growth, and empowerment for American investors. The end of the Korean War initially unleashed the country's potential, and the economy grew steadily through most of the decade.
By the 1957 launch of Sputnik, the Space Age burst onto the scene and spawned a slew of new companies built on technological innovation. Between rising personal incomes and the explosion in innovation, the fundamentals underpinning the stock market were very positive indeed. Between 1955 and the end of 1959, the Dow Index surged 40 percent to nearly 700 while trading volumes jumped 25 percent to three million shares a day, a whopping number at the time even if it's laughable by today's billion-share standard. Equally important, individuals were coming to realize how they might diversify their savings by investing in stocks and bonds. As we opened our doors, there were about fifteen million individuals in the United States actively buying stocks—that number was less than 10 percent of the country's population but was up sharply from only about five million at the start of the 1950s. We may have started Carter, Berlind, Potoma & Weill with uncomfortably small quarters and little more than our collective optimism, yet we instinctively felt that we were in a business full of promise. From the start, we worked incredibly hard to build our new company, and looking back, it was a tremendously exciting time in my life. I loved going out and visiting companies I thought might represent good investments and then pitching the ideas to our clients.
Each day, we'd listen to the sound of the ticker tape for a sign of the markets' direction—a loud tape meant stronger trading volumes and typically higher prices while a quiet tape meant we had to redouble our client-calling efforts to generate business. And all of us tried as hard as we could to build relationships with companies, which we hoped might lead to an eventual payday from an investment banking transaction. We rarely thought too much about the big picture, but in our hearts we felt as though the capital markets were wide open and poised for tremendous growth.
In retrospect, I didn't know the half of it!
Excerpted from The Real Deal: My Life in Business and Philanthropy, copyright © 2006 by Sanford I. Weill. All rights reserved.
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