Ambush on Wall Street
Ross Perot was had. . . and had in a big way.
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Fine. Except that two months before the Goodbody takeover would have been completed, there was trouble at duPont Glore Forgan. Some claimed, among other things, that the firm’s vaults held about $15 million less in securities than its customers claimed they owned. The implications were clear: if duPont went under, then Merrill Lynch would not save Goodbody, and about a half-million customers of the two firms would lose their savings. Congress had not yet approved formation of the Securities Investor Protection Corp., which would insure customer accounts for up to $50,000 in case a broker went bust. Indeed, NYSE officials had been persuading legislators to support the SIPC bill by testifying that there would be no major brokerage firm collapses in the near future. Further, if the two firms went under, people would know that Wall Street’s paperwork problems were serious. And all that was coming just when investors were beginning to return to the market. If there is anything as valued on Wall Street as money, it is confidence; that commodity was ebbing fast.
Just about this time, Ross Perot was making headlines by flying to Hanoi in an attempt to get North Vietnam to release American prisoners of war. It was not the first time Perot’s name had been cast in hot lead outside of Texas. There was a steady stream of publicity almost from the day his computer firm, Electronic Data Systems, Inc., went public in 1968, making Perot an instant millionaire. Because EDS earnings were growing fast, investors snapped up the stock. When it hit $162 a share in 1970, Perot became one of the richest men in the world, with a net worth on paper of some $1.4 billion. Perot began to acquire a unique reputation in the East: He was at least as rich as the hard-shell reactionaries like H. L. Hunt and Clement Stone, but he was relatively non-political. Better yet, the Hanoi mission showed him to be patriotic and humanitarian. Just the man for the job.
In November, 1970, while Goodbody and duPont teetered, Perot began getting calls from his old friend John Connally, then in Washington as Secretary of the Treasury. “The President would consider it a decent and patriotic act,” Connally said, “if you would intervene in the duPont mess and help save the country from economic chaos.” Perot subsequently received the same message in calls from Attorney General John Mitchell and Presidential Assistant Peter Flanigan. Perot denies that Nixon personally asked him to intervene. But the two men had spoken often before, and Perot was a trustee of the Richard Nixon Foundation. It is likely that the Texan would want to hear the call to patriotism from the horse’s mouth before committing huge sums of money. In any case, Perot began flying to New York for conferences with Lazard Frères partner Felix Rohatyn, head of the NYSE’s surveillance committee and the man charged with finding a bridegroom for duPont.
Perot was chary at first. “Does it really matter if Wall Street fails?” he asked a reporter. Perot had been to New York several times in the past to get financing for EDS expansion, and he held the securities industry in considerable contempt for what he considered its slipshod practices. Indeed, EDS had just been called in by duPont a couple of months earlier to help straighten out its computer operation, so he knew the problems firsthand. As Perot put it: “You just can’t expect people on Wall Street to be as disciplined as they are in the computer business.”
Yet Perot also saw a need to protect his EDS contract with duPont, then worth about $8 million a year, as well as an opportunity to use duPont as a showcase to win other data processing contracts on Wall Street. He asked Rohatyn for the same kind of indemnification that Merrill Lynch got for rescuing Goodbody; Rohatyn said sorry, but the NYSE no longer had that kind of money. Perot decided to go ahead anyway, and figured that it would cost him about $5 million.
A few days before the deal was to be signed, the results of duPont’s annual audit showed that it would take not $5 million, but $10 million to save the firm. Perot angrily asked for another audit, but Exchange officials explained that there wasn’t time, that they would have to suspend duPont before the figures would be in. Perot said what the hell, and loaned duPont $10 million. Over the next few months, the Social Security Administration approved payment of five government data-processing subcontracts with EDS that had been held up for as long as a year because some Social Security officials thought they were too lucrative for EDS. And leading Wall Street personalities began assuring the press that Perot had been given a good deal. Indeed, it did not look bad at the time. In return for Perot’s cash, duPont’s general partners agreed to raise another $15 million in new capital on their own. If they could not, then ownership of the firm would go to Perot.
Trouble was, the partners were unable to raise the new capital, and it turned out that duPont’s needs were far more than Perot’s initial $10 million plunge—three or four times more. Before long, the young man from Texarkana found himself the owner of a money-losing brokerage house.
To his credit, Perot made the best of it. He brought up his best EDS executives from Dallas and installed them as top officers at duPont, established a marvel of a broker training school in Los Angeles, and set out to woo the small investor back to the stock market with some imaginative advertising. Last July he seized an opportunity to attract more small investors by merging duPont’s sales force with that of Walston, which specialized in small accounts.
Yet Perot never enjoyed much gratitude for his efforts. Indeed, as soon as he took over Walston, the same brokerage executives who had applauded his rescue operation wasted little time in raiding his sales force. Within three months, some 500 of Perot’s top producers had been spirited away, and Perot had to go to court to stop any further theft. The day after Walston’s closing was announced in January, two competitors—Dean Witter and Blyth Eastman Dillon—reportedly sent recruiters out to Perot’s Los Angeles training school to sign up as many brokers as they could find.
Almost from the moment Perot set foot on Wall Street, there was a sotto voce campaign to denigrate his actions, his statements and his style. The older partners and officers who call the shots in the industry frankly did not like the way that Perot was racing around the country criticizing the industry for lethargy and drumming up publicity for his new ideas. They disliked the ideas even more, especially Perot’s notion that brokers should be rewarded on the basis of how much money they make for their clients, not how many shares of stock they turn over. Moreover, there was a sour suspicion in many boardrooms that Perot had taken over duPont and Walston largely to set up juicy data processing contracts for EDS; indeed, EDS was grossing about $20 million a year, with 18 percent of its revenues from Wall Street back-office work.
Beyond all that, many people on Wall Street were turned off by Perot’s folksy, champion-of-the-little-man manner. “He alienated a lot of the schmucks in the industry, so they started talking him down,” recalls a leading computer-stock analyst who has followed Perot from EDS’s infancy. Concludes Barren’s columnist Alan Abelson, probably the Street’s leading commentator: “He tried to impose his provincial attitudes on some pretty sophisticated people here, who consider themselves to be every bit as energetic and entrepreneurial as he is. And his style left something to be desired. He came across as a super-Boy Scout.”
Was Perot snookered into saving Wall Street, and then double-crossed by the very people he had saved? To be fair, his downfall was caused as much by the reticence of small investors to put their money in a floundering stock market as it was by any Eastern Establishment plot. Yet there are some people who think that Perot may have been used. They wonder why apparently no wealthy Easterners were enlisted to perform the “decent and patriotic act” of bailing out duPont.
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