Arbs, Junk Lords, And G MenChris Welles
DEN OF THIEVES By James B. Stewart Simon & Schuster -- 493pp -- $25
EAGLE ON THE STREET By David A. Vise and Steve Coll Scribners -- 395pp -- $24.95
INSIDE OUT By Dennis B. Levine with William Hoffer Putnam -- 431pp -- $22.95
It could have been, and it may yet be, a movie. An anonymous letter to Merrill Lynch & Co. discloses details of an insider-trading scheme. The feds get on the trail, which leads to Dennis B. Levine, an investment banker at Drexel Burnham Lambert Inc. Levine cops a plea and tells the feds about big-time arbitrageur Ivan F. Boesky. Boesky also makes a deal and gives the feds dirt on Drexel's junk-bond czar, Michael R. Milken, who, after a long fight, capitulates. The bad guys end up in the slammer.
To the public and the press, Levine, Boesky, Milken, and their small band of co-conspirators have come to epitomize the extensive wrongdoing that corrupted the financial world during the 1980s. If there was a defining moment, it was when Boesky dispatched a briefcase of cash to investment banker Martin A. Siegel as a payoff for hot tips. Although the bad guys' exploits have been voluminously reported, a wave of books, including Den of Thieves, Eagle on the Street, and Inside Out, is adding fresh details to the story.
While the actual dealings are often arcane, the story line of most of this coverage is simple and "high concept" enough for a Hollywood producer: Greedy scamsters get their comeuppance through, as Den of Thieves puts it, "the sometimes heroic efforts of underpaid, overworked government lawyers."
These three books make solid reading and respectably accomplish what they set out to do. But readers seeking insights into the last decade's financial abuses may be disappointed. As chronicles of the age, all three are simplistic, narrow, and one-sided. The abuses were deeper, more complex, and more systemic than these accounts suggest. The most disturbing activities of the '80s were not isolated acts by individuals but broad misbehavior by corrupt institutions. Further, there were more grays than blacks and whites. Some of the good guys were really bad guys, and many bad guys never went to jail.
Den of Thieves, by James B. Stewart, front-page editor of The Wall Street Journal, is by far the best and most important of the three, and it seems likely to become the definitive account of the Levine-Boesky-Milken tale. Packed with scenes of high drama, the narrative often moves at breakneck speed. It contains no major bombshells, largely because Stewart and various Journal collaborators already have reported so much of the story. But it does offer a wealth of fascinating minutiae, especially concerning the government's relentless campaign to pressure Drexel employees and other witnesses into giving evidence against Milken. Anyone who still believes that Milken's crimes were careless, almost accidental slips over the line will be disabused. Stewart shows convincingly that Milken acted deliberately. His efforts to cover his tracks when the feds started closing in make it clear he knew he was guilty.
Stewart's account of Goldman, Sachs & Co. arbitrageur Robert Freeman is especially damning. After steadfastly maintaining his innocence, Freeman eventually pleaded guilty to one minor count of insider trading. Stewart recounts in elaborate detail, however, how Freeman and Marty Siegel, the government's main witness against Freeman, routinely traded illegal tips for several years.
For all its vivid details, the credibility of Thieves is marred by questions about whether Stewart's relationship with his sources colored the book. Like many recent nonfiction books, Thieves is a you-are-there narrative that makes ample use of reconstructed quotes. Yet Stewart discloses little about where the information came from or how reliable it is. Still, because he seems to have intimate knowledge of the states of mind of some individuals but not others, one can infer which ones he talked with. Key sources seem to be Siegel, Drexel Chief Executive Frederick H. Joseph, most of the Drexel and Boesky employees who were granted immunity by the government, and the prosecutors. Either because they refused or weren't asked, most of the book's central characters, including Levine, Freeman, Boesky, and Milken, apparently did not talk with Stewart.
Perhaps inevitably, Stewart tends to treat those he interviewed much more favorably and sympathetically than those he didn't. Prime examples of the former are prosecutors. A lawyer and author of a previous book on prosecutors, Stewart was evidently aided in his numerous Journal scoops by sources in or allied with the government. Thieves reads like the case for the prosecution: Stewart exaggerates evidence against the bad guys while giving short shrift to criticism of the prosecutors' tactics.
Nowhere, for instance, does Stewart mention the government's ill-conceived pursuit of James Sherwin, former vice-chairman of GAF Corp., for alleged stock manipulation. After two mistrials and a jury conviction that was overturned on appeal, prosecutors gave up last August. And Stewart dismisses in a sentence the government's embarrassing decision to drop its two-year probe of former Kidder, Peabody & Co. arbitrageurs Richard B. Wigton and Timothy L. Tabor.
The most telling example of Stewart's propensity to ignore or bury information at odds with his argument is the way he handles the two-week hearing held in 1990 before Federal Judge Kimba M. Wood prior to her sentencing of Milken. A kind of minitrial, it was the only test of the government's case in open court. The prosecutors requested the hearing to demonstrate that Milken's crimes were far broader and more serious than the six charges to which he had pled guilty, most of which related to his conspiracy with Boesky. By this time, the government had the benefit of millions of pages of Drexel documents assembled over several years as well as the cooperation of more than a dozen of Milken's closest associates who, having negotiated plea bargains, had every motivation to disclose dirt about Milken. Although Wood found that Milken had obstructed justice in connection with the Boesky arrangement, she dismissed all of the other allegations.
Her findings poke a sizable hole in Stewart's thesis that Milken was the pivotal figure in what he calls "the greatest criminal conspiracy the financial world has ever known." So how does he deal with the hearing? Like an attorney preparing a brief. He relegates it to a footnote in the back of the book. Milken lawyer Alan Dershowitz is mounting an elaborate attack on the book's alleged errors and distortions that will include challenging Stewart to a debate.
It may be years, if ever, before we know the extent of Milken's criminality. He more or less controlled the junk-bond market for many years, which gave him a great ability to set prices. He maintained his power through sometimes-incestuous relationships with junk buyers that were nourished by dubious quid pro quos. Yet so far, despite plenty of assertions, there is little conclusive evidence of serious wrongdoing beyond his arrangement with Boesky. Stewart mentions a lawsuit by the Federal Deposit Insurance Corp. asserting that Milken's activities were a major cause of the savings and loan crisis. But only a handful of S&Ls held large junk portfolios. Overall, only 2% of the ravaged industry's assets were invested in junk.
Eagle on the Street, by Steve Coll and David A. Vise of The Washington Post, plows much of the same ground as Thieves. In addition to recounting the Levine-Boesky-Milken saga, much less effectively than Thieves, it offers a broad portrayal of the Securities & Exchange Commission's activities during the 1980s. Much of its plodding and diffuse narrative analyzes John Shad, a former vice-chairman of E. F. Hutton & Co. and longtime Wall Streeter who served as SEC chairman from 1981 to 1987. Its central, not very surprising, thesis is that because of his background, Shad felt that wrongdoing on Wall Street was much less widespread than the SEC's staff believed. Although he sought to quash few major cases, he was less than enthusiastic about many of the SEC's enforcement actions.
Eagle, though, overreaches when it blames Shad for many of the abuses that afflicted the Street. Had there been "more balanced regulation of takeover financing, disclosure, and trading practices" in the early 1980s, the book claims, "there would have been less police work for the agency's enforcement division to do later." While that's somewhat true, it's also true that very few regulators in the early 1980s anticipated how egregious the decade's excesses would turn out to be.
Inside Out, Dennis Levine's self-serving account of his decline, fall, and rehabilitation, is occasionally engrossing, if not very illuminating. Too much of the book retells his involvement in numerous takeover deals, an apparent attempt to show how important an investment banker he was. The best sections depict how he recruited his network of inside sources and how he slipped into illicit activity one small step at a time. Levine eventually became, he says, an "insider-trading junkie," unable to resist the "adrenaline rush" of another score.
For all their reportage, these books provide a frustratingly constrained glimpse of the sins of the '80s. Most of the abuses involved misbehavior by entire institutions. Levine, Boesky, and Milken essentially acted independently, though Stewart asserts that some firms, such as Goldman Sachs, stonewalled probes of their employees. Stewart argues that when individuals trade on inside information or manipulate stocks, "our confidence in the underlying fairness of the market is shattered." Still, the direct damage seems small. Judge Wood calculated that investor losses from the crimes Milken admitted were only $318,082.
Other financial crimes that flourished during the decade were far more injurious, broader, and more chronic. Most notable is the S&L debacle. Although it may lack such colorful dramatis personae as Boesky and Milken, its scope dwarfs the Wall Street scandals: The mess may cost the public $500 billion. Already, 661 people have been convicted. Lazy and crooked regulators and other government officials are almost as much to blame as S&L executives.
Less publicized, but also far more immediately damaging to investors and investor confidence than Milken's crimes, have been the penny-stock rings. Many of the firms involved have been wholly criminal enterprises committed to defrauding the public. Recent revelations about the Treasury market suggest that Salomon Brothers Inc.'s misdeeds may have been part of a conspiracy by several firms to rig that market. The notorious Bank of Credit & Commerce International corrupted hundreds of government officials around the world and bilked investors and depositors of billions of dollars.
What's more, some of the most outrageous Wall Street abuses were perfectly legal. No one went to jail when investment bankers conspired with chief executives to engineer ill-considered leveraged buyouts that not only damaged shareholders but subjected companies to ruinous debt payments.
The book that should be written about the '80s would link financial malfeasance to the even broader pattern of political corruption that thrived during the Reagan years, a time of laissez-faire and easy morality that gave us such atrocities as the Iran-contra scandal--and led to over a hundred Administration officials being forced to leave office. Den of Thieves, Eagle on the Street, and Inside Out are useful morality tales. But they are only the first step in understanding why we went wrong and what we need to do about it.