John C. Whitehead is the former senior partner of Goldman, Sachs & Co. He has spent his entire 37-year Wall Street career at Goldman Sachs, serving as co-chairman of the investment banking firm's management committee from 1976 until late last year. He continues to serve as chairman of the firm's international advisory board.
In a recent discussion with staff writer David A. Vise, who worked at Goldman Sachs before joining The Post, Whitehead shared his views on a variety of securities industry issues.
Q. Lawyers, investment bankers, financial printers and corporate executives have inside information about pending corporate takeovers before the public. With increased trading of U.S. stocks abroad, illegal insider trading is more difficult to police. What should be done?
A. Anyone who profits from inside information is abusing the system and ought to go to jail. I believe the laws should be strengthened to increase the penalties and to assist in catching the culprits. This kind of conduct is inexcusable, and tougher laws would encourage the SEC to be even more aggressive than it is now in catching the perpetrators and sending them to jail.
Q. The value of completed mergers in 1984 was more than double the previous annual record. Recently, we saw people in Bartlesville, Okla., holding prayer meetings while trying to prevent Phillips Petroleum from being acquired by Boone Pickens. The people in Bartlesville feared they would lose their jobs and the city would be devastated if Phillips' headquarters were moved. What, if anything, needs to be done about all of this?
A. I think we should be concerned about all of this, but it is part of the free enterprise system. If Bartlesville is an anachronism, it probably will go. But it should go in some kind of a humane way, with a gradual phase-out that doesn't affect the community too harshly.
Q. Do we need Congress to pass legislation altering the takeover rules?
A. I always prefer to find private-sector solutions to these problems. In this whole area of takeovers, the business community has looked to government more than it should.
For example, when it comes to the question of greenmail, which I consider to be one of the worst antitakeover abuses, I urge companies to amend their own charters so that they cannot legally pay greenmail. Several companies have adopted this type of charter amendment.
Q. Are you concerned that corporate raiders can launch a hostile takeover bid of almost any size by financing the raid with junk bonds?
A. I'm concerned about the use of junk bonds because I'm concerned that their quality is not being analyzed as carefully as it should be by investors. In our free-enterprise society, there are all types of investments, ranging from extremely safe to extremely risky, and we need capital to flow to all these. But I suspect that some of these lower-grade bonds are selling at prices higher than they deserve to.
Q. The New York Stock Exchange is considering changing its listing requirements so that companies could create two classes of stock: voting and limited voting. Some experts think taking voting rights away from common stockholders threatens the integrity of the system. What do you think?
A. I was on the board of the New York Stock Exchange until I retired as cochairman of the management committee of Goldman Sachs. I think the one-share, one-vote concept is part of the foundation of the free-enterprise system as we know it in the United States. Any tampering with that is very serious. I hope very much that the stock exchange turns down the proposed change and recognizes its responsibility to maintain high standards.
Q. But if the stockholders of a corporation vote to approve two classes of stock, why should the exchange interfere?
A. That's an appealing argument. But I would ask, if the stockholders vote to approve the company not issuing an annual report or not having an audit committee, would the stock exchange permit that? Should the exchange leave all of these principles up to the stockholders, or does the exchange itself stand for something?
And what about the minority shareholders? If two-thirds of the stockholders approve of giving up their one-share, one-vote power, what about the one-third that vote against it?
Q. The New York Stock Exchange says it is considering changing this rule and others because it no longer needs to regulate the activities of listed companies, since the Securities and Exchange Commission has become the principal regulator. Is that the real reason for considering this rule change?
A. I think the stock exchange would like to keep its listed companies, and when current rules require the delisting of companies like Dow Jones and Hershey, it looks for ways to prevent that from happening. The second thing that is pushing this rule change is the legitimate fear of takeovers that company managements have. But the solution to that problem is not to take away the vote.
Q. What will happen if the rule is changed?
A. Eventually, all companies will be controlled by some small, inside group. Public stockholders will not have any role or significant voting rights.
Q. While many investment banking firms and brokerage houses have merged with big well-capitalized financial institutions, Goldman Sachs has remained an independent, private partnership. Would it benefit Goldman Sachs to merge, for example, with General Electric Credit Corp., or are there greater benefits in remaining independent?
A. We have made three pledges to our people: that we will stay independent, private and a partnership. I see nothing on the horizon that would cause us to have to go back on those pledges. I think my successors at Goldman Sachs feel as strongly about this as I do.
I don't believe we feel any pressure to change. Our capital funds are approaching $1 billion. I think we have enough capital to operate in this new world of bigger organizations. Currently, we have more excess capital than any other firm.
Q. Many investment banking firms are moving into merchant banking activities by investing their own capital in leveraged buyouts, real estate and venture capital. Why is Goldman Sachs moving into this area more slowly than your competitors, and what do you think about the ethical questions that arise when an adviser suddenly becomes an investor in a deal?
A. It does raise conflict-of-interest questions, and that's one of the reasons that we have pretty much stayed out of it. The other reason that we've stayed out of it is that we believe it's very important for us to keep our capital liquid. Our principal function is to be a middleman between users of capital and savers of capital. And that traditional investment banking function requires large amounts of liquid capital. So we're very cautious about locking up capital in permanent investments.
Q. This trend toward merchant banking marks the return to a practice that was popular in this country before the Glass-Steagall Act was passed in 1933, leaving investment banks with small capital bases. We also are witnessing a return by commercial banks, which have federal deposit insurance, to riskier activities like underwriting. What do you think about commercial banks like Bankers Trust competing with firms like Goldman Sachs for underwriting business?
A. I believe the principles behind the Glass-Steagall Act were valid when enacted and are valid today, and I hope that Congress defines an appropriate dividing line between the regulated functions of commercial banking and the more unregulated investment banking functions.
As long as commercial banks have low-cost, federally guaranteed deposits, and access to borrow at the Fed window, it's reasonable to expect those banks to restrict themselves to reasonably safe activities.
If a commercial bank chooses to give up those special benefits, it seems to me they should be free to compete in the broader arena and to go into any kind of business they want to, including investment banking.
Q. How would that work?
A. Let each bank decide whether it prefers to be a regulated bank, entitled to special benefits like deposit insurance and better tax treatment, but not entitled to go into investment banking activities, or an unregulated bank, which would not have those special benefits and which could go into investment banking or insurance or any other activities.
Q. You recently surprised Wall Street by stepping down as co-head of Goldman Sachs. What are your goals now?
A. I'm president of the International Rescue Committee, which for 50 years has been helping people who flee from oppression or tyranny. I expect to spend a larger share of my time leading that organization.
My second major project is somewhat less focused, but I have a strong conviction that now is the time for private-sector companies to step up and play a larger role in solving the country's social problems. We have historically considered these to be the responsibility of government, but I don't believe government really is able to solve these problems. I'm referring to the problems of unemployment, of poverty, of education and health care, mass transportation and decaying cities. I want to encourage private-sector companies to enthusiastically look at these social problems as business opportunities, not out of the goodness of their hearts, but for a profit.