The investment banker thought for a moment and then whistled past the graveyard in assessing the impact on his business of the government's insider trading investigation. "I honestly believe it won't be that much," he said contentedly. "Hostile takeovers may pause for a while, but on the whole, nothing much will change."
Like others in the financial community, he's making a serious miscalculation. The Securities and Exchange Commission's investigation, related court decisions and promised congressional hearings next year will have a profound effect on the way business has been done for the last several years.
The SEC investigation will go on for at least a year. Information will be sought not only from employees of Drexel Burnham Lambert but from the highly regarded merger and acquisition specialists at the leading investment bankers such as First Boston, Morgan Stanley, Merrill Lynch, Salomon and Shearson Lehman. Those were the firms, after all, that did the really big deals--like the merger of General Foods into Philip Morris and the forced restructuring of Phillips Petroleum's balance sheet. Those were the firms that maintained large and highly paid staffs to think up and encourage acquisitions for their clients.
Stock Price Run-Ups
Nobody is saying there was anything illegal in such activity, but the stock price run-ups that preceded public announcements in such deals was disturbing. Last fall, long before Dennis Levine and Ivan Boesky hit the headlines, SEC Chairman John S. R. Shad denounced the appearance of insider trading in RCA prior to the announcement of its merger with General Electric. Shad said then he meant to put a stop to it.
Now his SEC has more evidence than its enforcement staff of 600 can handle. The commission's annual enforcement budget, at $34 million, amounts to the investment banking fees on just two merger deals. Yet it must not only pursue new leads but adjudicate claims of those who were defrauded because of Boesky's trading.
The SEC won't be alone, however. Private lawsuits will reopen the books on completed mergers. Already, Anheuser Busch, the St. Louis-based brewer, has a suit in court claiming that it was forced to pay too much for the Dallas bakery company Campbell-Taggart because inside tips passed around by Paul Thayer and Dennis Levine pushed up the stock price. Look for scores of other complaints from persons and groups who will realize now that they lost money because of illegal manipulation of stock prices.
Wall Street may get a jolt also from next year's congressional hearings. Blinded by their own sophistication, the financial types think that new hearings on takeover legislation--like others in recent years--will be defeated by the complexity of the subject.
But Congress next year may inquire about subjects as uncomplicated as greed and as politically potent as job losses and disrupted communities. The new hearings may recall, in fact, those of 1933 in which the Senate Banking Committee inquired whether the securities markets should be regulated because of stock pool abuses in the 1920s.
Pools in the 1920s, in which smart individuals would buy and drive up the price of a stock, attract investment from the public and then dump the stock at a fine profit, were not considered wrong, as John Brooks tells us in his book, "Once in Golconda."
But by 1933, when the partners of J. P. Morgan & Co. were hauled down to testify before Senate Banking, things had changed. The country no longer wanted to hear financiers and bankers lecture it on economics. And the Securities Exchange Act, setting up the SEC, became law in 1934. Today clever men named Icahn and Pickens, not content with the wealth they have acquired through takeovers, have taken to lecturing the country on business management and the splendor of their own virtue.
Their spiel is wearing thin. Last week other voices were beginning to be heard: Treasury Secretary James Baker suggesting that additional regulation of securities markets might be needed, and Thomas Sawyer, the mayor of Akron, Ohio--headquarters of takeover target Goodyear Tire--testifying to Congress on how much a loss of Goodyear's contributions would hurt city services.
Is change coming? One doesn't have to be clairvoyant to foresee a discussion of restructuring in the Senate hearing room next year between a golden-parachuted corporate executive and the spiritual successor of Sen. Sam Ervin of Watergate fame. "We consulted the best legal counsel, senator," the executive will say in defense of his action.
"But your actions led to the layoffs of 5,000 people," the senator will reply, leaning into the microphones. "Did you consult them? Did you consult their families?"
A few days of that on national television might make even today's young lions of Wall Street question their priorities. And so they should.