William E. Simon, former treasury secretary of the U.S.,
investment banker and philanthropist, died last week. I was
disappointed in the lack of coverage his passing brought. But
then that”s why I”m here, to fill in the gaps.
Simon was born in 1927 in Paterson, NJ. After high school he
served in the army and then enrolled at Lafayette College. Upon
graduation in 1952, he took a $75-a-week job trading municipal
bonds (Union Securities) and by 1964 he was working at
Salomon Brothers where he developed a reputation as a skilled
bond trader, and a very tough person to work for. By the early
1970s he was earning $2 million a year.
Meanwhile, Richard Nixon was starting his second term in
office. At the behest of Treasury Secretary George Schultz,
Simon was recruited to be his deputy. Soon thereafter, Simon
found himself immersed in our nation”s energy policy.
On October 6, 1973, the Jewish holy day of Yom Kippur,
Egyptian forces attacked Israel from across the Suez Canal while
at the same time Syrian forces were flooding the Golan Heights
in a surprise offensive. [See “Wall Street History” 10/8/99]
While Israel, with U.S. help, soon recovered, OPEC struck back
against the West by imposing an oil embargo on October 17.
Overnight, the price of a barrel of oil rose from $3 to $5.11. [In
January 1974, they raised it further to $11.65.]
Suddenly, America”s standard of living was being held hostage
to border clashes in strange parts of the world. And it was
William Simon, with Nixon”s blessing, who established policies
that saw us through the crisis.
Simon ensured that dwindling supplies of oil were allocated
primarily to factories, and home heating oil was favored over
gasoline for motorists. “I”m the guy who caused the lines at the
gas stations,” he said. And he thundered, “We have become a
nation of great energy wastrels.”
In early 1974, Schultz resigned as Treasury Secretary and Nixon
named Simon to replace him. Immediately, Simon got together
with the Arab nations and encouraged them to reinvest their oil
windfall back into their economies and he was instrumental in
creating an international credit line for poor nations that had been
hurt by soaring energy costs.
In 1975, Simon and Nixon”s successor, Gerald Ford, became
very publicly involved in the financial troubles that were
plaguing New York City. Simon, ever the fiscal
conservative, was initially adamant that the Big Apple not be
bailed out. Ford, also conservative and with Midwestern roots,
assumed the support of those in rural America. ”Why should
New York be saved by the federal government?” Simon and
Ford thought that by doing so they would only encourage other
cities to continue to spend wildly.
By October 1975, New York stood on the brink of collapse. On
October 29, President Ford promised to veto any “bailout.” The
New York Daily News ran with the now famous headline, “Ford
To City: Drop Dead.”
Simon”s position had been that New York”s plea for help
undermined the Constitution”s federalist principles, i.e., it was
none of Washington”s business. And it can not be ignored that
New York was a predominantly Democratic city little loved by
the rest of the country. In classic Simon fashion he announced,
“We”re going to sell New York to the Shah of Iran. It”s a hell of
an investment.”
But eventually, cooler heads prevailed. The Wall Street
community that Simon knew so well convinced the treasury
secretary and the President that to allow New York to default
would have huge negative consequences across the land. And in
November a bailout plan was mapped out.
After Ford”s election defeat, Simon returned to Wall Street but
also became very involved in the U.S. Olympic movement. And
it was the Republican Simon who supported the Democratic
President Carter when the latter sought a boycott of the 1980
Summer Games, scheduled to be held in Moscow, due to the
Soviet invasion of Afghanistan.
In 1980, Simon was elected president of the U.S. Olympic
Foundation and was instrumental in turning a floundering
movement around. The 1984 Los Angeles Olympics were a
huge commercial success (despite a reciprocal boycott by the
Eastern bloc nations) thanks in large part to Simon, as well as
local committee chairman Peter Ueberroth.
But, it was in 1982 that William Simon pulled off his greatest
coup. Along with partner Raymond Chambers, their company,
Wesray (William E. Simon, Ray —), purchased Gibson
Greetings Cards from RCA. But this was no ordinary purchase.
And forever on Wall Street, Simon will be known for it. Gibson
Greetings, while not technically the first leveraged buyout
(LBO), was the first to achieve huge success.
Simon and Chambers came to the LBO game at a most
opportune time. Stocks were treated like dirt back in the early
1980s. It”s interesting to note that given the hue and cry today
over price / earnings multiples, the P/E on the S&P 500 was 7.5
in early ”82 (based on trailing earnings). Value stocks, in
particular, had been in the doldrums for years.
But when stocks are undervalued (as was the case for many value
issues this past spring) almost any successful company is a
candidate for a LBO since the debt required to buy up the stock
doesn”t make much of a dent in the company”s cash flows. In
the case of Gibson Greetings, the cash flow was more than twice
the amount needed to pay interest on the loans. So all Simon
needed to do was sit back, meet his debt payments, and wait for
the equity market to turn around.
Wesray paid $80 million for Gibson, only $1 million of it in
cash. Simon”s share of the initial payment was about $330,000.
Some fourteen months later, with investors returning to stocks
in a big way (the Great Bull Market commenced August, 1982),
Gibson was sold off in a public offering which netted $290
million. Wesray used the offering proceeds to pay off the debt,
pocketed $48 million from selling some of their own stock in the
offering and were left owning stock worth about $190 million
and rising. When all was said and done, Simon”s $330,000 was
worth close to $70 million. Now folks, I know that doesn”t
seem like much today, but think back, that was 1983. Now start
multiplying it by anything near a market return. Yeah, not too
shabby. And the LBO game was on in force, thereafter.
Market historian Charles Morris had the following take:
“The Gibson deal suggests how much the early LBO movement
was simply an arbitrage on an underpriced market. Gibson had a
small niche in a business dominated by big players like
Hallmark. Over a five-year period it had doubled its market
share, with an innovative strategy involving easy-to-use store
racks, computerized inventory systems, and the use of popular
cartoon characters like Garfield, a strategy that was paying off
well before the LBO. Wesray”s contribution was mostly to focus
the market”s attention. The partners” high profile on Wall Street
ensured a glittering public offering (at quite a reasonable
multiple of earnings) of a previously obscure little firm that they
had snapped up for only a fraction of its true worth.”
Wesray was involved in other successful deals after Gibson but
the partnership between Simon and Chambers soured in 1986.
For his part, Simon devoted increasing time to his philanthropic
endeavors (while Chambers, parlaying his phenomenal success
in real estate ventures, eventually became the leading force
behind YankeesNets LLC, though not in title, as well as the
renaissance taking place today in Newark, NJ).
Unfortunately, the philanthropy side of the William Simon story
took an ugly turn in 1995. Fund-raiser John Bennett had earlier
founded New Era Philanthropy, an organization that evolved into
one of the great Ponzi schemes of all time. I will save the full
New Era story for another time but, for our purposes, suffice it to
say that the scam hinged around the beneficence of an
“anonymous donor.” Bennett ran around the country soliciting
donations from the likes of Julian Robertson (of Tiger
Management fame) and the great John Templeton, as well as
countless other titans of finance. Basically, if you donated
$10,000, in six months time that would be matched by the
anonymous donor. Then the $20,000 would be passed on to the
charity of the donor”s choice. Too good to be true? Of course.
But William Simon fell for it, to the tune of $1 million. Simon
had actually volunteered to be the “anonymous donor” but
Bennett turned him down. And, wouldn”t you know, there never
was one.
During his last years, Simon, a eucharistic minister, spent
extensive time with the terminally ill.
William Simon.An American Story.
Sources:
Richard Stevenson / New York Times
“It Was a Very Good Year,” Martin Fridson
“Devil Take the Hindmost,” Edward Chancellor
“Money, Greed, and Risk,” Charles Morris
Brian Trumbore
