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Den of Thievesby James B Stewart
Martin Siegel, the youngest member of the class just graduated from the Harvard Business School, reported for work at Kidder, Peabody & Co.'s Manhattan headquarters at 20 Exchange Place in August 1971. That morning, the 23-year-old Siegel wandered through the halls looking at the portraits of Henry Kidder, Francis Peabody, Albert R. Gordon, and others that hung above the Oriental rugs and slightly threadbare carpets. Siegel tried to absorb the images of this strange and rarefied world of old money and discreet power.
He didn't have much time for reflection. He and his new wife hadn't even unpacked before he was thrown into a day-and-night project to win some new underwriting business from the Federal National Mortgage Association. Siegel's partner on the project made little impression on him, except for his name: Theodore Roosevelt IV, or maybe V; Siegel could never remember which.
In 1971, with the Vietnam War still raging and spurring opposition to the Establishment, few top students were going to business school, let alone Wall Street. Siegel, one of the top graduates in his Harvard class, had had his pick of nearly every major investment bank and securities firm. He had applied to 22; all had shown interest.
Kidder, Peabody, with about $30 million in total capital, barely ranked in the country's top 20 investment firms. In the hierarchy of Wall Street, Kidder, Peabody was in the second-tier, or "major" bracket. It didn't rank in the elite "special" bracket with Salomon Brothers, First Boston, Morgan Stanley, Merrill Lynch, or Goldman, Sachs.
Though the winds of change were apparent in 1971, Wall Street was still split between the "Jewish" and the "WASP" firms. At an earlier time, when major corporations and banks had discriminated overtly against Jews, Wall Street had rewarded merit and enterprise. Firms like Goldman, Sachs, Lehman Brothers, and Kuhn Loeb (made up historically of aristocratic Jews of German descent) had joined the ranks of the most prestigious WASP firms: Morgan Stanley — an outgrowth of J. P. Morgan's financial empire — First Boston, Dillon, Read, and Brown Brothers Harriman. Giant Merrill Lynch Pierce Fenner & Smith, something of an anomaly, had once been considered the "Catholic" firm. Kidder, Peabody remained firmly in the WASP camp. Siegel was the first Jew it hired in corporate finance.
Siegel was looking for variety and excitement. Only investment banking offered the prospect of an immediate market verdict on a new stock issue or the announcement of a big acquisition. He had narrowed his choices to three firms: Goldman, Sachs, Shearson Hayden Stone, and Kidder, Peabody. A Goldman recruiting partner phoned, and asked, if Goldman made him an offer, would he accept? Siegel didn't commit. Shearson Hayden Stone offered him the largest salary — $24,000 a year.
Kidder, Peabody offered only $16,000. But Siegel saw unique opportunities there. The firm was full of old men, but had a roster of healthy blue-chip clients. Siegel envisioned a fast climb to the top.
Kidder, Peabody's aristocratic aura appealed to Siegel. One of America's oldest investment banks, it was founded in Boston as Kidder, Peabody & Co. in 1865, just before the end of the Civil War. Early on, Kidder raised capital for the railroad boom, primarily for the Atchison, Topeka & Santa Fe. Its clients also included two stalwarts of establishment respectability, United States Steel and American Telephone & Telegraph.
The modern Kidder, Peabody was dominated by Albert H. Gordon, the son of a wealthy Boston leather merchant, and graduate of Harvard College and Business School. In 1929, when the firm was devastated by the market crash, Gordon, a young bond salesman at Goldman, Sachs, stepped in with $100,000 of his own capital. Along with two partners, he acquired the firm in 1931.
The indefatigable Gordon, a physical-fitness fanatic with limitless energy and impeccable Brahmin bearing, moved the firm's headquarters to Wall Street from Boston and set about building a roster of clients. He had an advantage: Kidder, Peabody's reputation, in sharp contrast to many of its rivals, had remained remarkably unsullied in the aftermath of the crash.
The shock of the crash and the Depression had set off a reform movement in Congress culminating in Senate hearings conducted by special counsel Ferdinand Pecora beginning in 1932. Through Pecora's withering cross-examination of some of Wall Street's leading investment bankers, the American public learned about insider trading, stock-price manipulation, and profiteering through so-called investment trusts. Most of the abuses uncovered involved information bestowed on a favored few and withheld from the investing public. It was not only information that directly affected stock prices, such as the price of merger or takeover offers, but information that could more subtly be turned to a professional's advantage: the true spread between prices bid and prices asked, for example, or the identities of buyers of large blocks of stock and the motives behind their purchases.
In the wake of widespread public revulsion and populist fury, Congress passed historic legislation, the Securities Act of 1933 and the Securities Exchange Act of 1934. A new federal agency, the Securities and Exchange Commission, was created to enforce their provisions. Congress deemed the enforcement of its new securities laws to be so important that it enacted corresponding criminal statutes.
By separating banking from securities underwriting, the raising of capital, and distribution of stocks, bonds, and other securities, the securities acts set the stage for modern investment banking. Under Gordon's guidance, Kidder, Peabody concentrated on its underwriting function. The firm was a pioneer at opening branch offices in U.S. cities. The idea was, as Gordon liked to put it, to "sell your way to success."
Through most of its history, Kidder, Peabody was a tightly controlled partnership, with Gordon personally owning most of the firm and its profits. When the firm incorporated in the 1960s, the ownership changed little; Gordon simply became the firm's largest shareholder. He was parsimonious about bestowing ownership stakes on the firm's executives.
Kidder, Peabody prospered, if not spectacularly, under Gordon's conservative leadership. Determined to avoid another capital crisis, Gordon insisted that Kidder's executives plow their earnings back into the firm. This gave the firm the capital to survive the sudden drop in trading volume and profits that struck Wall Street in 1969. A Kidder vice president, Ralph DeNunzio, served as vice chairman of the New York Stock Exchange and helped arrange the merger of such old-line houses as Goodbody & Co. and du Pont. DeNunzio became chairman of the stock exchange in 1971, the same year Siegel graduated from Harvard Business School.
Martin Siegel's lineage was modest in contrast to that of the leaders of Kidder, Peabody. His father and an uncle owned three shoe stores in Boston, outlets that relied on American suppliers and catered to middle-to-working-class tastes. In the late sixties and early seventies, the stores were devastated by chains benefiting from national advertising and low-cost foreign suppliers. This was painful for Siegel, who had never seen anyone work so hard for so little as his father. As a kid growing up in Natick, a Boston suburb, he had almost never seen his father, who worked seven days a week, often spending the night in the city. Unlike his classmates' fathers, Siegel's father never played ball with him.
Siegel wasn't good at sports in school; he started first grade a year early, so his physical development lagged behind his classmates'. But starting as a freshman in high school, he excelled academically. He thought he wanted to be an astronaut. When Siegel was accepted in his junior year of high schoo
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