THE QUESTION got asked in New York during the Knapp Commission investigation of police corruption in the early 1970s and it gets asked in Washington today about Michael Deaver and widespread influence peddling. Now it should be asked about the ripening scandal on Wall Street: Is the entire barrel rotten, or just a few apples?
Denizens of Wall Street insist that investment bankers like Dennis Levine, who was just indicted for using insider information to pyramid a $12.6-million fortune (and who denies the charges), represent merely the rare rotten apple in an otherwise clean barrel.
They are hiding from the truth. As is the case with municipal or Washington corruption, the problem is more endemic than episodic. Whatever Dennis Levine may have done, the culture of Wall Street is not blameless.
During the time he worked at three investment banking houses, Levine is alleged in 54 instances to have used insider information to buy stock in companies about to be acquired or to make other deals. Yet in more than half of these transactions, neither Levine nor his employer were insiders. Which suggests, if the allegations are true, that Levine relied for his tips on a network of people who may not think it wrong to pass along such information. It is not uncommon for the stock price of a target company to climb days before a merger is announced, a pattern displayed in the merger of RCA with General Electric, ABC with Capital Cities Communications, General Foods with Philip Morris. Clearly, more than one rotten apple was at work.
Dennis Levine thrived, in part, because he was known as someone with access to secrets. He spent much of his day on the phone swapping information. Partners marveled at how much Dennis knew. They used his information to seek clients, to make investment decisions. At 33, Dennis Levine received multi-million dollar bonuses. Now, like Captain Renault in the movie "Casablanca," his former employers declare, "I am shocked -- shocked! -- to find that gambling is going on here."
Wall Street's professions of hurt innocence are puzzling. A great growth industry on the Street has been risk arbitrage, where people bet on the rise, or fall, of stock prices. Today, an estimated $10 billion of capital is in the hands of risk arbitrageurs. Do Wall Streeters really believe that many risk arbitrageurs don't seek, and gain, inside information?
Laurence Tisch, the chairman of the Loews Corp. and one of this generation's preeminent investors, says he doesn't believe the barrel is rotten. But he does believe too many people on Wall Street are preoccupied with "getting that little extra edge." Arbitrageurs, he says, "strive to get information that is not public. They keep calling companies and try to pick up little bits of information. It is not illegal. But it gets awfully close. . . . Little shareholders don't have the same edge. It becomes more and more difficult to separate the legal from the illegal."
The issue here is broader than just risk arbitrage. At issue is the value system of Wall Street, a deregulated, in-bred community where high overhead and abundant opportunities to amass wealth propel investment bankers to generate more "deals," more fees, more short-term speculation. The resulting frenzy erodes long term loyalties -- to clients, to stocks and even to your own firm, which is a major reason so many private Wall Street partnerships have been sold. Patience, a virtue we urge on our children or on the poor, becomes the first casualty. Young associates can't wait to get rich. Stock prices gyrate so wildly because the market is now dominated by impatient spectulators rather than long-term investors.
In a community unrestrained by patience or tradition, everything becomes a deal. Bankers are scored by how many deals they bring in. The fees and bonuses are elephantine, which helps explain the rush, these past few years, toward so many unproductive mergers, so many risky junk-bond deals, so much choking debt exchanged for equity.
Instead of serving as wise counselors, who think of the long-term interest of companies, investment bankers increasingly think only of the deal. Ask investment bankers what they wouldn't do -- What "deal" would you refuse to participate in? -- and you will be struck by how little thought many give to this core question.
Recently, while reporting a book on Wall Street, I regularly asked that question. Invariably, the question was greeted by a pained silence. And then, like the Tin Man in the "Wizard of Oz," you could hear the rusty parts of their brain clank as they declared: "I wouldn't do business with the Mafia," or "I wouldn't do business with a bad credit risk." Obviously, thriving Wall Street has devoted too little time to saying "no" or to pondering limits.
In this sense, Dennis Levine -- as portrayed in the indictment -- is a byproduct of Wall Street's lax value system, just as surely as Michael Deaver is a product of a Washington where people trade on their relationships with presidents. By ignoring this truth, the barons of Wall Street fulfill H.L. Mencken's portrait of Calvin Coolidge:
"He would have responded to bad times precisely as he responded to good ones -- that is, by pulling down the blinds, stretching his legs upon his desk, and snoozing away the lazy afternoons . . . . Nero fiddled, but Coolidge only snored."