Chapter 3

STRUGGLES THAT PAID OFF

“I’ve missed more than nine thousand shots
in my career. I’ve lost almost three hundred games.
Twenty-six times I’ve been trusted to take
the game-winning shot and missed.
I’ve failed over and over and over again
in my life. That’s why I succeed.”

—Michael Jordan

Risk takers make things happen. It’s not in their nature to live vicariously through someone else’s life. They are driven to create their own lives, one after another, and they rarely take time off until they’re finished.

The belief that we only use 10 percent of our brains is an urban legend. We all use 100 percent of both sides of our brains. But research shows that risk takers move between each side with greater agility, forming a more complex network of connections that allows them to think in more creative ways.1

I’d taken the big risk of moving to Los Angeles, despite the many good reasons I had to stay in New York. And now I was going to need every spark of that neural agility I could muster to make it work.

NEW BEGINNINGS

When you’re starting from scratch, you need boldness to win.

The early years in LA were tough. It’s hard to start an investment banking practice with no credits for deals to one’s name. Years later Bear Stearns would be recognized by Fortune as the second most admired securities firm in America,2 with contracts in derivative financial instruments of over $13 trillion,3 but in 1977, it was not yet a force to be reckoned with. Especially in LA, where most companies turned to New York for investment banking, Bear Stearns had very little impact.

My assumption was that the best way to overcome such hurdles was to take on assignments that could build my reputation and not be shy about asking my satisfied clients to introduce me to others.

When one of the attorneys learned that I had trained as an engineer and paid my way through Georgia Tech by working at the Georgia Power Company, he introduced me to Jim Greene, who was on the financial staff at the Southern California Edison Company (now Edison International).

Jim told me that Southern California Edison was under enormous political pressure to finance “green energy” projects, most of which were ill-conceived. As we talked about the deals, I helped Jim identify viable options. When I saw the terms of agreement with the businesses they had been considering, I unmasked a number of defects in those deals. Edison was very pleased.

As a result, I was able to list as one of my first satisfied clients on the West Coast the largest power company in the United States. At the same time, I was making new friends, especially Jim Greene.

To my good fortune, Jim soon afterward left Edison for TOSCO. Founded in 1955 by a group of investors who believed that extracting oil from oil shale could be a lucrative entrepreneurial venture, the Oil Shale Co. (which adopted the acronym TOSCO in 1976) struggled for decades. It tried to diversify by buying oil refineries, using a lot of borrowed money.

In 1970, TOSCO acquired the California refinery Signal Oil & Gas for $22.5 million, followed in 1976 by a $222 million acquisition of Phillips Petroleum West Coast that included the giant Avon Refinery. This gave TOSCO a refining capacity of over two hundred thousand barrels a day.4

With those two moves, TOSCO became the largest supplier of gasoline to independent markets on the West Coast and the third-largest independent refiner in the entire United States. Between 1975 and 1980, TOSCO had a tenfold increase in earnings,5 despite losing money in the oil shale business. The high energy needs for the extraction of the liquid oil from shale rock led to losses, no matter how high oil prices soared.

Avon was the most complex oil refinery on the West Coast, importing heavy crude oil from the Alaska North Slope and producing premium gasoline. But refining profits were very cyclical. By 1985, TOSCO was dead broke. They owed $600 million to a group of banks and had a $250 million negative shareholder equity account—huge money in 1985!

Competition among investment bankers eager to advise the company was fierce. When Jim recommended me to the company, he told them, “We need more than an excellent investment banker. Bailing this company out is going to take dedication—and creativity!”

When I was ultimately selected to recapitalize and refinance TOSCO, it was the biggest investment banking fee assignment in the history of Bear Stearns.

First, I negotiated with the banks for a large reduction in TOSCO’s debt to ease the pressure. Arco was a high-quality company that owned Alaska North Slope Crude and needed premium gasoline for its California service stations. I negotiated a product exchange with them that increased TOSCO’s earnings visibility and stability and made possible the sale by TOSCO of a $250 million mortgage bond. I persuaded Arco to provide a “conditional put” on the refinery in order to enhance the bond’s credit appeal. Then I helped assemble a prestigious group of buyers for a new issue of convertible preferred stock.

I bought $3 million of the new convertible preferred stock myself and joined the TOSCO board. When I shut down the shale operation, TOSCO stock soared! There would be many more to come, but this was my first investment banking coup. The day we completed the final transactions for TOSCO was a proud day.

After Howard Allen, a top Edison officer, heard of my work for Edison, he told his fellow board members at Republic Corp., a little local conglomerate in need of refinancing. I did that work for them.

Shortly afterward, on a Sunday afternoon, the Republic CEO called me at home: “Rick Guerin owns a lot of our stock, and he wants to take my job.” Republic’s CEO wasn’t the strongest CEO around, and Guerin was very smart. This was a real problem.

J. P. “Rick” Guerin had transformed himself from a Sun Valley ski instructor into one of the top financiers in Los Angeles. He often partnered on deals with Charlie Munger, whose other partner was (and is) Warren Buffett.

As I saw it, the only hope for the CEO was if Republic were sold to someone who would keep him on. I started a two-prong process. First, I approached J. B. Fuqua, a buyer I trusted, who had been my client for several years. Second, I launched an attack against Guerin and Munger.

I knew that Fuqua had bought a controlling share of a company with a large tax-loss carryforward. In order to benefit from the valuable tax shelter before it expired, he needed to find a profitable business to merge with. I recommended Republic. Not only was the business a good fit, but the Republic management would get a reprieve. I explained my reservations about the strength of the CEO, but Fuqua was content to replace him later should he not perform.

J.B.’s interest pitted him against Guerin and Munger in the auction. On the first vote, the Republic board deadlocked! Guerin shrewdly held firm and refused to up his bid.

The board asked my advice. I suggested that Guerin propose an amount he would accept from Fuqua. The price was high, but J.B. was motivated and he paid it.

Not only did I earn a nice fee on the sale, but I enabled one client to keep his job and another to buy the company he needed to keep his tax shelter. At the same time, I got to mix it up with Guerin and Munger. It was satisfying all around.

Guerin’s and Munger’s conspicuous successes roused my competitive nature. I personally purchased shares in the closed-end investment company that they managed. The shares sold at a sizable discount from its break-up value. I saw it as an opportunity to go on the offensive to defend my client.

I met with Munger and told him frankly, “At the next shareholders’ meeting, I intend to propose that they take steps to make the shares trade in the market at their full value.” I don’t know if this added pressure helped me achieve the result I wanted, but Munger knew exactly what I was doing.

If I had to do it over again, I’d do it differently. Guerin and Munger were (and are) great business talents. Had I been thinking longer term, I would have realized that it was far better to have them on my side. Fortunately, they forgave my cheekiness. We became friends, and Guerin became a client.

At the time, they controlled an unprofitable regional airline, PSA. In 1985, the airline industry was fragmented, and deregulation had set off a price war in air travel fares.

Hoping to settle a costly battle with the union, PSA had given the workers shares in the airline. The union accepted the shares with the proviso that, if PSA had not become publicly traded before January 1, 1987, the shares would have to be exchanged for shares in the public holding company.

Guerin was fervently opposed to that. PSA leased all its aircraft from the holding company. If the union took over those shares, it would dilute Guerin’s ownership of these major assets.

His only hope was to ensure the public offering of PSA, but he immediately ran into obstacles. When he tried to persuade Wall Street firms to do an initial offering to take PSA public, every one of them refused—even Salomon Brothers, the huge firm controlled by Warren Buffett and Charlie Munger! He needed a creative workaround.

Remembering my resourcefulness in Republic, Guerin called me to ask for help

It was immediately evident that PSA was being run by able but discouraged managers who readily confessed that the company wasn’t profitable and that there were no expectations of profits in the near term. Their candor was deadly. If their predictions were right, there was no reason for anyone to take them public. The airline should be allowed to sink into oblivion.

I had a more optimistic view. When I did my analysis, I saw that oil prices were dropping, which would lower PSA’s costs, and a major discount airline had just gone broke. I figured that the airfare price war would abate before long, permitting the desperate airlines to hold their current pricing, even with lower fuel prices. “When that happens,” I told Guerin, “I think a wave of consolidation will come over the industry, providing economies of scale and a price discipline that’s long overdue. The question is, would PSA be willing to merge?”

Guerin assured me that they would—if the offer were good enough. The biggest firms on Wall Street had already rejected the PSA stock offering. Salomon Brothers had asked their best, most experienced people to do the analysis, and they all had turned it down. The PSA management itself believed all hope was gone. This was a risky deal that could embarrass our firm, but it was just what I liked: big upside and small downside (and a chance to outwit everyone else). I couldn’t refuse!

“Yes,” I told Guerin. “I’ll lead the IPO.”

There was only one problem. My syndicate partner didn’t like the deal.

Livio Borghese was a shrewd but cautious investor from one of the most renowned families of Roman nobility. The Borghese family descended from Pope Paul V and Napoleon Bonaparte.6 In 1958 Livio’s mother, Marcella, used her own makeup recipes to create a famous line of exclusive skin care products, called Princess Marcella Borghese, for the cosmetic giant Revlon.7 Livio’s father, Prince Paolo Borghese, had died only the year before, in 1985.8

Livio was trying to build up Bear Stearns’s reputation from second-tier firm to leader. Afraid that the stock of PSA might later fall to a lower price than what it sold for at the IPO, he insisted on a full 15 percent “green shoe.”

With a green shoe, an underwriter can sell more shares than the amount listed and short the additional amount. Thus, if the stock slips below the IPO price, the underwriter can buy shares to prop the market price up to match the IPO price. If, on the other hand, the shares sell above the IPO price, the underwriter can buy the additional green shoe shares from the issuer at the IPO price, instead of paying higher prices in the market in order to cover his short.

PSA refused to give Bear Stearns a green shoe option to buy more than 7.5 percent of its shares at the IPO price of seven dollars per share, because they viewed that price as a bargain. Livio refused to do the IPO without the option of 15 percent risk-free buying in the aftermarket. From his point of view, that fail-safe was only reasonable, since there were so few strong buyers interested in the IPO.

To solve the problem, I agreed to personally match all of Bear Stearns’s aftermarket purchases at prices below the IPO price. My colleagues at Bear Stearns—and even my syndicate partner—considered it to be a huge risk, but, as I saw it, I was simply putting my money where my mouth was.

Luckily for me, the IPO was sloppy and the price slipped below seven dollars per share. Bear bought in all the shares that they were short, and I matched them.

As I predicted, airline profit outlook and industry consolidation prospects soon improved. When it did, PSA stock went up. Five months later, it was selling for ten dollars per share.

I then received a call from Lehman Brothers, who told me that their client US Air wished to buy PSA, but they didn’t want an auction. In other words, they wanted it badly enough to forgo all bids and to pay a preemptive price! I negotiated a deal for seventeen dollars cash per share.

PSA was then the largest California airline. It was bought by US Air, which was bought by America West Airlines, which then bought American Airlines in the biggest takeover in US history.

BLUE CROSS

The sweetest rewards are those you win for betting on your own creations.

One of my proudest achievements in my investment banking career came in 1992, with my design of a method to properly convert nonprofit health plans to for-profit health plans.

Blue Cross had been conceived as a nonprofit. When Justin Kimball was made vice president of the College of Medicine at Baylor University in Texas in 1929, he found that the hospital had a backlog of unpaid medicals bills. Looking into it further, he discovered that the university had not pushed for collection because many of the bills were from local schoolteachers.

Kimball had no desire to pressure underpaid schoolteachers with health expenses, either, so he devised a payment plan. Each teacher could prepay fifty cents a month (six dollars annually) for twenty-one days of semiprivate hospitalization at Baylor Hospital. By the end of the year, three-quarters of the teachers in Dallas had gladly signed up for the plan. In two years, journalists at the Dallas Morning News and broadcasters at the Dallas radio station WFAA had joined.9 From there, Kimball’s prepayment plan spread so rapidly that it was clear he’d answered a long-standing need.

The company merged with Blue Shield in 1982, becoming Blue Cross Blue Shield, the oldest, most experienced provider of health coverage in America. It expanded to every ZIP code in the country, covering 96 percent of hospitals and 93 percent of physicians. Today it has more than 106 million members.10

During the 1980s, the health industry in California was dominated by for-profit health insurers and medical conglomerates. To exploit this growth, the managers of some nonprofit health plans converted them to for-profit plans.

State laws allowed those conversions, as long as the full fair market value of the business was given to charities focused on the same communities that were served by the nonprofit companies. But it wasn’t working out that way.

Managers were hiring accounting firms to report the net worth of the businesses and not their fair market value. This allowed managers to buy at a fraction of the true economic value.

The conversion process was supervised by the Department of Corporations (DOC) commissioner, who reported to the California secretary of business, transportation, and housing. When Carl Covitz became secretary, he saw what was going on, and he immediately called a halt to this inequity.

Covitz instructed the DOC commissioner, Thomas Sayles, that he must provide a real valuation of the next plan that sought conversion. That plan was HealthNet. It proposed to pay $100 million cash (which equaled its net worth) to a new charity, the California Wellness Foundation. It was an outrageous bargain for HealthNet.

Secretary Covitz quickly figured out what was going on. He knew my work, and he asked me to put a stop to the conversion, which I did. I looked over their conversion plan and believed that HealthNet could earn a lot of money in the new environment, so it was worth much more than $100 million. By comparing HealthNet to similar companies, I found it seemed to be worth several hundreds of millions of dollars. But I had to design a deal that didn’t risk bankrupting them! I kept the $100 million cash payment, but I added a $100 million bond that paid interest only when HealthNet could afford it. I also took 80 percent of their stock. In sum, I required payment of:

$100 million cash

$100 million income debenture

80 percent of the outstanding shares

HealthNet executives and their advisers went bonkers! I stood firm. The executives decided that my deal was better than no deal, and the transaction closed. There were legal challenges to the deal, but the judge ruled that it was a good result. Thus, it became a new precedent!

I was really happy about the result. Not only did I manage to change the way these deals were done in California, but my prediction was accurate. After only two years, the California Wellness Foundation was worth $800 million! Soon I became even happier.

In 1994, there was a whole new cast of characters dealing with health coverage in California politics. The new Department of Corporations commissioner, Gary Mendoza, hired me to advise him on the Blue Cross of California transactions that were monetizing its subsidiary, WellPoint. At stake was a conversion fee to charity in the $3 billion range.

Over several years of work, Gary and I negotiated an arrangement whereby $3 billion in stock was contributed to two new foundations. The governance rules for these foundations were established to maximize the likelihood that their charitable purpose always would benefit the wider community.

These health-care conversions were the most personally satisfying of my investment banking career. They were original creations of restructures that made new California law, which ended the unfair pricing, which had shortchanged charities. My reputation soared.

WICKES

Stand your ground—even against the experts—if you know you’re right.

For many years at Bear Stearns’s New York offices, we had been buying distressed debt, then applying our considerable financial skills to making it more valuable. In the course of those purchases in the market, we bought Wickes’s bonds while Wickes was in bankruptcy.

Since Wickes was a California company, the New York Bear Stearns office called me. “We’d like to appoint you to represent us on the creditors’ committee. There are more than two hundred and fifty thousand creditors.”

I’d never served on a creditors’ committee before. It was my first experience with a big bankruptcy. But I loved the idea of it. This was then one of the largest bankruptcies in corporate history.11

A casualty of the 1981-1982 recession, Wickes faced debts of $1.6 billion.12 Although it had made about $4 billion in sales the previous year, it was quickly running out of cash, and its suppliers had lost patience. On April 24, 1982, the management filed a Chapter 11 petition for reorganization under federal bankruptcy law. That allowed them to suspend payments to creditors while they reorganized their affairs.13

With so many creditors, our committee meetings had to be held in featureless ballrooms at low-end hotels beneath the grinding roar of 747s coming and going from LAX—and making a hell of a lot more progress than we were.

Two banks with the most senior debt were in the lead committee positions: Bank of Boston and Security Pacific National Bank. Through arrogance, the lead bankers refused to meet with those of us who held the most junior debt. They thought that our investments had become worthless. I couldn’t even get a meeting with them on behalf of Bear Stearns. “We don’t even want to talk to you,” they brusquely dismissed us. But I got their attention.

The banks had made big loans to Wickes shortly before it went broke. If I could prove that Wickes was already broke at the time of these loans, then those bank loans would not be senior but would be subordinated themselves. This idea was very popular with the hundreds of holders of the junior debt!

I further argued that, since it was hard to predict Wickes’s future earnings, the present valuations of Wickes could be much too low. And if they were, then our junior debt was actually valuable. There was a lot support for that position as well—no doubt because Wickes’s own management team had the same opinion and wanted to participate for their own future compensation! As a result, they wanted to see the creation of stock purchase warrants for nonmanagement holders, so that the terms of these warrants were negotiated by others. A warrant’s value is based on the price at which the warrant holder is able to buy the shares, and on how long the warrant holders have the right to buy the shares. We got a pretty good deal.

I had made an impression on the Wickes board, and they began to hire me for other deals. When I was able to bring them favorable results on those deals, it helped my reputation even more.

Then came a really dramatic moment. The market crash of 1987 caused Wickes stock to plummet. Seizing the day, Wickes’s CEO engaged Drexel Burnham to take Wickes private at a low valuation through a leveraged buyout.

This infuriated the shareholders and frightened Wickes’s directors. To my surprise, the directors told Drexel that they would not vote for the buyout unless I was hired to provide a fairness opinion. Drexel hated this idea because there was very bad blood between us, because I was Drexel’s main competitor. But the directors held firm, and I was hired.

Our research showed that no large mergers had been announced since the October 1987 market crash. So there were no recent comparable transactions. Also, Wickes’s high level of debt magnified the problem of valuing the shares.

When a company has a high debt ratio, value variations in its assets create multiples of those valuations of the shares. Our valuations could easily be off by 10 percent to 20 percent. If that were the case, then the range of fair values of the shares would vary by several times that!

As I saw it, we had no choice but to tell the board that the fair price was within a very large range. Since the offer being made by management was on the low side of that range, there was a good chance that the board could be accused of making a sweetheart deal for management, so I suggested that Bear Stearns be hired to sell Wickes to the highest satisfactory bidder. If after forty-five days of strong effort, no higher bids were received, then we would provide our opinion that the management takeover was fair.

Management and Drexel screamed. But the board agreed. And we proceeded. It proved to be a prudent process. Twenty class action lawsuits were filed instantly against the Wickes board. But when I explained to their lawyers what our process was, every one of them settled. After forty days had passed and no better offer had been made, we told Drexel that they were welcome to proceed in five days.

Drexel’s financial condition looked far too leveraged to me, so I didn’t think that they could finance this deal by themselves. I hadn’t seen any effort on Drexel’s part to syndicate the debt from this deal, so I asked for assurance that they would proceed.

“Of course,” Drexel said. Four days later, they canceled because Wickes’s earnings had dropped precipitously.

I was summoned to an emergency Wickes board meeting. Wickes’s short-term loans probably could not be paid off and Wickes would enter Chapter 11 bankruptcy again. (Actually, Chapter 22, if you count the first Chapter 11!)

Wickes’s board of directors asked me to rescue them. The next day was a Friday. Wickes’s controller, their outside counsel, various board members, and I commandeered the corporate jet to visit each of the major divisions that were showing drops in earnings. I assured the board that we would know what the problems were by Monday.

The trip was an eye-opener. What was immediately clear was the widespread discontent throughout the company. None of the major division managers got along with the top corporate managers. Their solution was to try to avoid corporate as much as possible.

When I asked the leader of one of the divisions how their annual earnings budget was calculated, he shrugged and said, “We just add 10 percent to last year’s earnings.”

“Why?”

“Because corporate says we need grow 10 percent a year!”

We were stunned. Clearly, Wickes needed to be sold ASAP.

I extended the auction. In public announcements, we made it clear that there was no minimum bid. As could be expected, all the bottom-feeders showed up.

On the high end, luminaries like Sam Zell got in on the action, too. He was well on his way to the $6 billion net worth he’s renowned for today. And his bid revealed how he got so rich.

In the Wickes auction, Sam made a bid that was so complex that I couldn’t value the equity going to the Wickes shareholders.

In the end, Blackstone won the auction. The Los Angeles Times announced that:

Wickes Cos., the Santa Monica owner of Builders Emporium that was the object of a failed management buyout, agreed on Wednesday to be acquired by two New York investment banking firms for about $538 million… The investment banking firms buying Wickes are Blackstone Capital Partners and Wasserstein, Perella Partners. Under the agreement, they will buy all of the firm’s 47.8 million outstanding stock for a combination of cash and securities worth a total of $11.25 a share.14

Wickes had reached the peaks of success as one of the largest public conglomerates, but it no longer exists today.

KERKORIAN

Convincing others to risk public humiliation with you will only amplify the payoff.

In 1990, my partner, George Mason, introduced me to a good friend, Kirk Kerkorian. The controlling stockholder of MGM Grand, Kirk arranged for Bear Stearns to join Merrill Lynch in what was effectively an IPO of the MGM Grand.

In a great example of his fertile mind, Kirk wanted to use the MGM movie studio brand for a new company, which would be the largest hotel-casino in the world. On the south end of the Las Vegas Strip, the MGM Grand would boast a casino, a luxury hotel, and a theme park.

Kirk had already built two of the largest casino-hotels in Las Vegas. As far back as 1969, he had transformed the town by hiring Barbra Streisand to sing at the International for more than $100,000 a week and by signing Elvis Presley to a five-year contract. Everyone knew that Las Vegas was a gold mine, but Kirk was one of the few who saw its potential to move beyond casinos and to become an adult Disneyland.15

So it was odd when Merrill Lynch pronounced the MGM Grand deal impossible and canceled the offering.

There was no question that the deal would be a challenge. Kirk was talented but controversial. He was proposing a project of an unprecedented scale at a time when the US economy was weak. It must have looked imprudent to the more cautious minds at Merrill Lynch.

To make it worse, the financing was inadequate to complete the project. This would mean costly delays, at best, with the potential for failure. And I knew that Kirk would never agree to take on the personal selling effort customary for financings of this sort. Nevertheless, I conferred with George Mason and we hatched a plan.

I proposed that Bear proceed single-handedly with the IPO for $40 million, instead of the $90 million proposed by Merrill Lynch. When I pitched it to Kirk, he agreed.

It was another matter entirely to convince the skeptical management at Bear to risk the embarrassment of publicly failing, as much as they relished the opportunity to outdo the much bigger Merrill Lynch. It took all my powers of persuasion to pull it off, but ultimately, they gave us the go-ahead.

As the cherry on top, I got Kirk to agree to be videotaped describing his vision of the project. I believe it to be the first ever use of video to market an IPO. However, as we were starting our sales effort, Kirk refused to do the video! So his CEO, Jeff Barbakow, and I taped a sales pitch and sent out ninety copies. We sold almost $90 million in stock!

Subsequently, I raised $700 million for the construction of his MGM Grand Hotel mega-resort.16 The first video had been so effective that I wrote and edited on my home VCR a video of Kirk’s life in order to sell another $200 million in MGM Grand stock.

Impressed with my work, Kirk made me the financial adviser for his major transactions. One morning in September 1990, he invited a team of financial and legal advisers and me to his cottage at Wanda Park for lunch and tennis.

When we’d all arrived, Kirk announced his plan to buy 9.9 percent of Chrysler, 22 million shares in all, without pre-clearing the purchase with the volatile Lee Iacocca, the Chrysler chairman.17

I thought it was a terrible idea. Chrysler had billions of dollars in debt, plus huge unfunded pension obligations and dim prospects for recovery. But I told him that I would rally all the resources of Bear Stearns to deliver our best-informed opinion of Chrysler’s value.

“I’d rather you didn’t,” Kirk said.

Startled by his abrupt rejection, I called Ace afterward and explained what had happened. He’d commiserated about other clients, but this time Ace said flatly, “You don’t tell Babe Ruth how to hold the bat!”

We launched Kirk’s campaign slowly in October. When the news broke in December that he had bought 9.8 percent of the company’s stock for $272 million, the stock price jumped sixty-two cents overnight. Chrysler’s management called an emergency meeting. In one day, Kirk made $12.65 million.18 Before the end, those millions had become billions.

Ace had been right to respect Kirk’s genius for seeing opportunities that no one else could see. I’d been wrong about the investment, but I was right about some things.

Kirk had said that Iacocca would welcome him as a 10 percent shareholder, but I told him, “I’ve never seen a CEO without a 10 percent shareholder who wanted a 10 percent shareholder.”

Kirk’s purchase set off a pitched battle with Iacocca. It took six years for Kirk to cement his profits. But Kirk recognized that Chrysler’s stock was very depressed at ten dollars per share and represented very little short-term risk. He was also right that his investment would bring him substantial profits. They totaled over thirty dollars per share. But my fundamental analysis of Chrysler was correct. I was just early. Daimler-Benz, which bought Chrysler from Kirk, lost many billions on the deal!

Born the son of illiterate Armenian immigrants, as a kid, Kirk was a prizefighter. His formal education ended with his graduation from reform school. Yet forty years later he was winning takeover battles with Columbia Pictures Inc., Western Airlines, MGM, TransWorld Airlines, and Chrysler Corp.

In hope of finding a job, he obtained a fake Los Angeles high school graduation certificate, but he didn’t need it. With World War II going on, the air force desperately needed instructors with cockpit experience to train pilots. He started as an instructor but soon calculated that it would pay better and be more challenging to deliver American bombers across the North Atlantic. He spent the rest of the war flying Mosquito fighter-bombers from Canada to Scotland.19

When the war ended, he started a flight school and charter service with a five-seat Cessna. He sold that business to acquire a fleet of used airplanes that he soon sold to buy a small airline in 1947. Most of his customers were chartering the airline to fly to the rapidly growing city of Las Vegas. The airline was so profitable that, over the years, he sold it and then bought it again.20

In 1968, he sold the airline for the last time, making $100 million, which he used to start building what would become the largest hotel-casino in Las Vegas. Soon he sold the casino for a huge profit, and he went on to make additional fortunes in movie studio stocks, because he recognized the hidden profits to be made from studio real estate and from film libraries.

During our work together on the MGM Grand IPO, I started playing tennis with Kirk. The hottest ticket of the year in September 1990 was the US tennis Open finals match, which featured the new sensation in tennis: Andre Agassi. Andre’s dad was working as a pit boss in one of Kirk’s casinos. Andre had changed his name from Agassian, which annoyed Kirk, who was very proud of his Armenian heritage.

I knew I had to find the tickets for Kirk and his girlfriend, Barbara, the glamorous widow of Cary Grant, especially since he had given Suzanne and me a ride to New York City on his plane. The only trouble was, all six seats in my courtside box had already been filled by Ace and Kathy Greenberg, their two guests, Suzanne, and me.

So I called Carl Icahn, who had a courtside box near mine. Carl was stuck in Trans World Airlines (TWA) and wanted to unload it. Kirk was one of the few prospective buyers. “Would you be willing to offer two courtside box seats to Ace’s guests if it gives you the chance to spend some quality time with Kirk?” Carl readily agreed. When I explained the arrangement to Kirk, a wheeler and dealer himself, he was delighted. Although Kirk never bought TWA, his airline savvy came in handy. He shared a helpful route-scheduling strategy with Carl.

As a brilliant visionary, Kirk had business insights so powerful he never needed to master business operations skills. As a result, most of his early businesses did not have long-term operational success. Then the unexpected happened. In the late 1990s Kirk made Terry Lanni, an excellent manager, CEO of the MGM Grand. Kirk controlled it until his death in 2015. It continues its success today under Terry’s great successor, Jim Murren. Together Terry and Kirk built the enterprise into the most successful casino company in the world.

JENNY CRAIG

If everybody else is doing it, there’s bound to be a better way.

About the same time I was working with Kerkorian, I met Sid and Jenny Craig. Merrill Lynch had failed to complete an IPO for their Jenny Craig Weight-Loss Centers and they needed expansion capital, so they came to me. I was impressed with their business plan and with their complementary skills—in both their business and their personal lives.

The two of them might never have met. Born in Vancouver as Sidney Bernstein, Sid had been a child tap dancer who taught dance to help pay for college at Fresno State. He later succeeded as the Arthur Murray dance lesson franchisee in Utah (despite the religious bias against dancing!). Jenny was a glamorous, dark-haired Cajun raised in New Orleans as Genevieve Guidroz Bourcq.

By the 1970s Sid had formed a series of salons called Body Contour, which offered ladies figure control. While positioning the salons for rapid expansion in several markets at once, including New Orleans, he met Jenny. She became his national director of operations and his wife.21 Since both had been married before, their combined families had five children. It seems that they found, as I had with Suzanne, that the second marriage is the charm.

In her autobiography, Jenny said that Sid had:

[T]he charisma of a Jack Kennedy, the intelligence of an Alan Greenspan, the creative mind of a Steven Spielberg, and the humor of a Jackie Mason, along with the good looks of a Clark Gable.

I’ve learned that everyone has a soulmate somewhere, and if we’re lucky enough to find them to share our life with, then we are more fortunate than most… Sid has enriched my life in more ways than I can count.22

Together they contributed philanthropic support to many organizations. When Hurricane Katrina devastated the Gulf Coast, where Jenny grew up, they immediately got involved to help victims and became one of the largest donors.23

When I met them, Sid and Jenny had sold the salons for a good profit, but because of a noncompete clause in the United States, they had moved to Australia in 1983 to create their new company, Jenny Craig Weight-Loss Centers. As soon as the noncompete clause expired, they came back to expand Jenny Craig to the States.

Rather than try to revive the failed IPO, I suggested a leveraged recap for their needed capital. I would form a group to make a large loan to the business and get stock purchase warrants for “free.”

“By making a loan, instead of simply buying stock,” I explained, “we will be in a safer position if the business doesn’t prosper, and we will set the exercise price of the warrants by a formula that is based on future performance.”

The undetermined exercise price helped us hedge two other challenges. First, if we had chosen a fixed price that was too high, the investors would hate it, but if we set the price too low, the Craigs would hate it. Second, if we changed the price in the future, we would create tax problems, since the IRS imputes profits from any lowering of the exercise price.

The undetermined price worked. Over the next three years, the company’s earnings tripled. Morgan Stanley undertook a very successful IPO for the company. Jenny put it this way:

Michael Tennenbaum… soon became a good friend in addition to being the leader of that project. I have always admired Michael’s genius. I consider him a giant in the financial community, and I would still solicit his advice on any investment. The recap catapulted Sid and me into a whole different financial arena. One hundred ten million dollars were distributed to corporations we personally had control of. We had never had that much money outside the Jenny Craig company before.24

The Craigs were happy. We were happy. And as a bonus, we were thinner, thanks to their free advice!

I persuaded the underwriters that the company didn’t need cash from an exercise of the green shoe option, saying that, in fact, using shares from the existing shareholders would be less dilutive to all shareholders. They agreed. As a result, we sold a lot of our shares when the green shoe option was exercised.

It’s a good thing, too, because six months later, in 1993, a recession hit California, their major market. The Jenny Craig stock price dropped, and we were all sued by the notorious strike suit lawyer Bill Lerach. I was particularly vulnerable because I was a selling shareholder in the IPO, a director of the issuer, and a partner in a lead underwriter of the IPO! It was very annoying, especially since the drop in earnings wasn’t our fault. How could we have foreseen the recession?

The special counsel hired by the board advised us that Lerach usually settled these kinds of lawsuits for the amount of the insurance carried for the board.

Always insightful, Sid quipped, “Well, I could have saved on insurance premiums if I’d just bought a smaller policy!” No one else had seen that strategy. As it turned out, the company did, in fact, settle for the amount of the insurance—most of which went to lawyers. What a scam!

Jenny Craig Weight-Loss Centers rallied and went on to new heights. Jenny Craig pioneered the sale of diet dinners in retail stores. By the time Sid died on July 21, 2008, it was the largest, most successful chain of weight-loss centers in the world. Under Sid’s leadership, Jenny Craig Inc. had become a multinational corporation with 655 centers in four countries and remains a leader in the field.25

By that time, the special counsel hired by the board, Steve Wilson, was a part of my new business. I met him during these transactions and he had so impressed me that I began to rely on him for other matters. When he took early retirement years later as a senior partner of Latham & Watkins, I invited him to join my new firm as our chief administrative partner.

From Bear Stearns’s perspective, the Jenny Craig investment was a great success, because our analysis of the industry was correct. Good homework is always the best precursor to good investing. And, always, it’s a recipe for avoiding disaster.

PEBBLE BEACH

Not every deal works out as anticipated.

Marvin Davis was one of Ace’s major clients. Davis bought a lot of stock on Ace’s excellent advice. By February 2004 Davis was the thirtieth richest person in America, worth $5.8 billion, according to Forbes. At charity events, his signature move was to ostentatiously write a personal check that matched the total amount of money raised.

A man with voracious appetites, Davis was a towering presence at six foot four and maybe three hundred pounds. He had a reputation for being ruthless in all his dealings. When he bought 20th Century Fox for $720 million in 1981 by leveraging other people’s money, it was one of the most brilliant deals I had ever seen. Romancing the Stone, M*A*S*H, and the original Star Wars were among his first hits. Just four years later, he sold it to Rupert Murdoch for a $350 million profit.

In 1990 Davis sold the renowned golf courses in Pebble Beach, California, to Japanese investors for $841 million. They held on to the property for two years. It wasn’t until they tried to sell it that they discovered they had paid more than it was worth. No one offered more than $490 million, despite an improved investment environment. Their attorneys called me and asked me to analyze and give them a more accurate valuation of the property. Because of its proximity to San Francisco, Suzanne and I decided to fly up together, then meet friends in the city afterward.

The jagged silhouette of a lone cypress rising from the rocky cliff on the scenic 17-Mile Drive of the Monterey Peninsula is an icon. The Pebble Beach resorts and Pacific Grove nestle along a coastline with a fifty-three-hundred-acre forest of cypress trees. It’s so beautiful and distinctive that you’d think the real estate would be worth a lot.

One of the first places my client showed us was a pristine hill overlooking the ocean. Nothing had been built yet, but it appeared to be a prime location. It would be ideal for the golf courses these investors were developing.

“What’s this place called?” I asked.

“Tierra Seca,” he said with a sigh. “In Spanish, it means ‘dry land.’”

The investors had discovered that they could not develop that empty hill because there was no water on Tierra Seca and no way to get water there. The locals had to approve the installation of water pipelines, and they made it clear that they didn’t want anyone to develop the land. I could only imagine the look on the investors’ faces when they realized that too late.

When I recommended that the Pebble Beach investors sue Davis, Ace came down on me hard for recommending someone sue one of his biggest clients. Then the investors themselves failed to pay us the fee they’d agreed to in the contract. Ugly deal all around.

BRUCE McNALL

Caveat emptor. Always.

In 1993, an effervescent and rotund entrepreneur, Bruce McNall, was making a big splash in LA. Building on his success dealing in rare, ancient coins, he did business with oil heirs, Wall Street power brokers, and Hollywood producers from his offices on Rodeo Drive in Beverly Hills.

When he was introduced to me, he explained that he was using his sports empire to turn Southern California into the center of the hockey world. He had recently bought the moribund hockey team the Los Angeles Kings and energized it with the recruitment of the great Wayne Gretzky. He was trying the same thing in the Canadian Football League by buying the Toronto Argonauts. Now he wanted to take his sports empire public.

Bruce agreed that I could manage an IPO for his sports empire. Naturally, the process involved a number of due-diligence questions before we could begin. I provided both Bruce and his chief financial officer with a checklist of preliminary questions, but we never got all the answers.

Always ready with a colorful excuse, Bruce evaded my prompting for weeks. Every time we spoke, he assured me that he was serious about the IPO and putting together the materials to give me what we needed, then he never called me back.

Finally, in frustration, I called his chief financial officer and said firmly, “If we’re going to go through with the IPO, I need the answers to my checklist right away.”

There was a pause on the other end of the line before he said, “If I told you that both the teams are losing a lot of money, would you still want the answers?”

Suddenly, it all made sense. “Thanks anyway,” I said.

By December 1993, McNall’s empire was crumbling. He defaulted on a $90 million loan with Bank of America. Since he had used the Kings hockey team as collateral, they were forced into bankruptcy. Weeks later, three of his banks—European American Bank, Credit Lyonnais, and IBJ Schroder—filed for involuntary bankruptcy.26

In the 1980s McNall had become partners with David Begelman, a former president of Columbia Pictures, who had been charged with felony grand theft for check forgeries in the name of Cliff Roberson and others in the late 1970s. In an exposé about the two men, Vanity Fair reported that they got along well from the start: “Both were poseurs and lavish, clear-eyed liars.” Together they borrowed millions, paying off old lenders by borrowing more money from new lenders under false pretenses.27

McNall’s fall came hard and fast. Because of McNall’s involvement, Begelman’s production company, Gladden Entertainment, which had produced hits like Mr. Mom and The Fabulous Baker Boys, was forced into bankruptcy by April 1994.

Federal investigators were astounded by the extent of their illegal activities, as they sorted through a tangle of assets including coins from Emperor Nero in Ancient Rome, sports teams, movie contracts, and financial fraud. The New York Times called it “a tale of international intrigue and empire building as grand as any from the 1980’s.”28

To make matters worse, when Merrill Lynch tried to itemize the rare coin assets of McNall’s World Coin Fund, they found that 399 coins, valued at $3.3 million, were missing. McNall had failed to mention that he had returned them to Hans Schram, the dealer he had bought them from in Zurich, when he defaulted on the $100,000-a-month contract. This prompted a class action suit by the investors.29

On April 20, 1994, the FBI appeared with federal subpoenas for its criminal investigation of the McNall companies, including Begelman’s Gladden Entertainment. By May McNall was in bankruptcy. Begelman was in such dire financial straits that he had to borrow $125,000 for his mortgage payments from his former boss at MGM, Kirk Kerkorian.30

At his trial in December 1994, McNall pleaded guilty to one count of conspiracy, two counts of bank fraud, and one count of wire fraud. He confessed to inflating his personal worth by falsifying financial statements, appraisal values, and tax returns in order to bilk six banks out of $236 million. Outside the courthouse, his lawyer Tom Pollack told reporters, “Bruce pleaded guilty because he is guilty… There’s a lot more to this story than what came out in the charges.”31

To David Begelman’s horror, McNall negotiated a deal. Federal sentencing guidelines dictated that McNall should be remanded to prison for nine years, but the prosecutor made it clear that his time could be reduced if he helped with the investigation.32

“Bruce McNall is cutting me in half,” Begelman told a friend in August. Afraid that the FBI and the federal prosecutors might be building a criminal case against him with McNall’s cooperation, he committed suicide. Living under false pretenses until the very end, he checked into the Century Plaza Hotel on the Avenue of the Stars under a false name, then left a note beside his body that read, “My real name is David Begelman.”33

McNall got out of jail in 2001, after only seven years. He contacted me when Hachette published his autobiography, Fun While It Lasted: My Rise and Fall in the Land of Fame and Fortune. “Do you think I can raise enough money to make a movie about my story?” he asked, as ebullient as ever.

“You’d have more luck getting people to invest in exchange for your promise that they wouldn’t be in it!” I told him.

PAUL ALLEN

You don’t have to be able to see the future to bet on those who can.

In 1993, a representative of Paul Allen called me. “I asked several law firms to name the most creative investment banker in Los Angeles,” he told me. “Your name was on every list.” He said he wanted me to advise Paul Allen on making a major investment in a new company.

“What company?” I asked.

“America Online.”

Neither Paul Allen nor America Online were as famous then as they would be later. In the early 1990s, both were just coming into their own. Although Paul had cofounded Microsoft, his partner, Bill Gates, was the front man. Overweight and bearded, Paul preferred to stay in the shadows. Inconspicuous, amenable Paul had quietly become one of the richest people in America—and he was one of the smartest.

America Online, or AOL as it would be known, was just taking its place as one of the early pioneers on the internet, offering a dial-up service to millions across the country. Its 56K speeds are hard to imagine today in our world of two hundred MBPS, but in the mid-1990s, AOL dominated internet access in America. It became so powerful that in eight years, at the height of the dot-com boom, AOL would take over the media giant Time Warner for $165 billion, one of the largest corporate mergers ever done at that time.34

I didn’t understand their potential, but I did understand their financials. They were capitalizing expenses and recognizing every income dollar that they could. “Their earnings aren’t real,” I told Allen. “And they’re burning through a lot of cash.”

Paul had already bought more than 20 percent of AOL’s stock, and it was on the rise to enormous heights, but he was determined to own a third of the company. We set up a meeting in Seattle with AOL chairman Steve Case and his adviser, Steve Rattner, but they basically brushed us off because Paul had been too aggressive. Nonetheless, Paul made big profits in AOL. Once again, I’d erred in telling Babe Ruth how to hold his bat!

Nonetheless, Allen and I hit it off. When he decided to buy Ticketmaster later that year, he came to me. Ticketmaster Entertainment Inc. was a pioneer in online international ticket sales and distribution based in Beverly Hills. At the time, it was owned by the fabled Pritzker family.

Jay Pritzker, the visionary of the family, was a friend of mine. I’d always been extremely fond of him and awed by his brilliance. It was a little awkward being on the other side of a deal from him, but I had no doubt that he could take care of himself.

It was rare that the Pritzkers ever sold a business, but as it happened, Paul Allen was in luck. Jay was fed up with the Ticketmaster CEO and was looking for a way out. When I set up a meeting between Paul and Jay, we were going to make a deal. It was awesome working with these two geniuses.

Before the deal closed, I asked Paul what he saw as the future of the exciting technology just beginning to emerge. “The telephone, the computer, and the television will converge into one device,” he told me. It was only 1994!

Ultimately, Paul invested $243 million to buy 80 percent of Ticketmaster. He quickly made a substantial profit. When Home Shopping Network (HSN) bought 47.5 percent of Allen’s stock just four years later, it cost them $209 million of their own stock.35

JAY PRITZKER

The most legendary story about Jay Pritzker is one that takes place at Fat Eddie’s, a coffee shop in the Hyatt Hotel at LAX.36 Sipping coffee while waiting for a plane, Jay somehow heard that the Hyatt hotel at the airport was for sale. How he learned this is a matter of speculation.

Some say he was chatting with a waitress in his usual, friendly way, and she told him she was worried about her job because the hotel was being sold.37 Others say that Jay would’ve noticed Fat Eddie’s was exceptionally busy and the hotel had no vacancies. He later told the Chicago Daily News that the Hyatt was “simply the first first-class hotel that I had ever seen at an airport.” Whatever led him to the decision, Jay decided to buy the Hyatt on the spot. He wrote an offer of $2.2 million on a napkin from Fat Eddie’s. Its owner, Hyatt von Dehn, promptly accepted.38

Jay liked to build on a hotel’s native personality, whether it was sleek and urban or intimate and elegant like European hotels. When a hotel in Atlanta that was only partially complete came on the market in 1967, no one was interested. It was widely believed that the architect had been too ambitious. He had designed the grand hotel around an atrium so high that there were fears that it would collapse on the guests below in the first bout of bad weather.

Jay saw it differently. He loved the atrium design. When he bought the hotel, he explained that such a spectacular, distinctive feature would make it the most famous hotel in Atlanta. Since he opened the Hyatt Regency Atlanta, it has become a major influence on hotel design around the world.39 And the atrium has never collapsed. (Of course not, since it was designed by John C. Portman Jr., a famous graduate of Georgia Tech’s School of Architecture.)

“He had a lot of guts,” recalled Douglas G. Geoga, president of the Hyatt Hotels subsidiary. When he heard the skeptics mutter that the atrium was so high that the hot air would condense to stir up a whirling mini-rainstorm inside the hotel, Jay would scoff. He considered these rumors an unfortunate consequence of “overeducation.”40

Although they tried to avoid publicity, both Jay and his brother, Robert, were renowned in the financial world for their business acumen. The Pritzkers have appeared near the top of Forbes’s “America’s Richest Families” since the magazine began the listing in 1982.41

Originally, the family came from a Jewish ghetto near Kiev, then in Russia, in 1881. Nicholas Pritzker founded a law firm. His son, Abram, graduated from Harvard Law, but he had a flair for business. By the time Jay was born, the wealth of their entire extended family was already quite vast. Whether they become involved with publishing, cruise liners, insurance, casinos, or television, they are prone to succeed, with an approach that is both “wise and aggressive.”42

Together, Jay and Robert built an empire within the Marmon Corporation. It included interests in Ticketmaster, McCall’s magazine, Braniff Airlines, Levitz Furniture, and a number of casinos in Atlantic City, Lake Tahoe, and Las Vegas. By 1998, their combined net worth was estimated to be $13.5 billion, an increase of $6 billion from the year before.43

In 1979 Jay Pritzker created a prestigious architectural prize, awarding $100,000 to a world-class architect. It has come to be regarded as the Nobel Prize for architecture. Wherever the ceremony was held, Jay attended and gave a speech. He died from a stroke at age seventy-seven, far too young an age.

ARDEN-MAYFAIR

Build your reputation on satisfied clients.

When I left New York, Arden-Mayfair Inc. (now Arden Group) was under attack. Its managers told me that they needed additional equity financing to fend off a hostile shareholder. When I analyzed their records, I immediately saw the problem. Their capital structure was remarkably inefficient. They were unable to make the most of their position because their assets were a hodgepodge that made little financial sense.

Based on my advice, they liquidated the Arden Dairy and the Mayfair supermarkets, while retaining the upscale grocery chain Gelson’s, which showed very good profits and potential for growth. Arden-Mayfair pioneered the concept of the luxury supermarket chain.

When they initially hired me, I bought a block of their stock at two dollars a share. Three years later it was worth about nine dollars per share. As soon as I saw the chance to buy my dream home in Malibu, I sold my block at seven dollars per share.

Eventually, the Arden stock would reach well over $100 per share, but by then, I had made even more money from the appreciation in value of my dream home—which I still own.

TENNENBAUM CAPITAL PARTNERS

If what excites you lies beyond the horizon, set sail!

Leaving the cavernous urban landscape of New York with its merciless steel walls, its smog-laced air, and its teeming hordes of stressed-out, overworked strivers to live instead in this paradise on earth was one of the best decisions I’d ever made.

I’d had a great run at Bear Stearns for the last thirty-two years. My career had flourished on both the East and West Coasts. But the Blue Cross deal had provided me with a worthy capstone to my years on Wall Street. Now it was time to move on from that phase of my life, too. My deeply adventurous spirit had always found an outlet in the challenges Bear Stearns could provide, but now it grew restless, eager to achieve something more.

What’s more, with the ousting of Ace Greenberg by such a petty, conniving, backstabbing contingent of mediocrity, the heart had gone out of it for me.

The only thing that remained was to figure out what I would do next. At age sixty I was still pushing the envelope, spending a hearty chunk of the year skiing the racecourses in the US and in Europe, as well as playing competitive games of tennis several days a week. I worked out three days a week at the gym, and I relished it when my doctor informed me I had the health and vigor of a forty-five-year-old. And I was already making time for travel and the philanthropic activities I loved. There was no question of retiring.

To continue to thrive, what I needed was a greater challenge, the kind of risk that took me far enough away from what I’d already accomplished that it made my mouth a little dry. What I needed was a feasible yet breathtaking venture.

At home, I heard the doors opening behind me. When I glanced back, Salvador was bringing in the luggage. Suzanne had just gotten home from the spectacular Cartier diamond exhibit at the Grand Palais in Paris, where her own magnificent collection had been featured. Jet-lagged but vibrant as ever, she breezed through the house with our three ecstatic dogs at her heels, tumbling over each other to be near her. She joined me on the deck, leaning her head against my arm as we shared a welcome-home kiss.

We talked about her trip as the sun began to move out of sight and the scattered clouds turned crimson red. “You look like something else is on your mind,” she said. “What is it?”

“I’m tired of always making money for other people at Bear Stearns,” I confessed. “I want to be my own client now.” The idea had been taking shape for months, but I’d never said the words out loud. They hung in the air with a level of confidence that made it sound like I’d already made up my mind. But had I? Suddenly, the finality of it hit me. An edgy, nervous energy crept into my veins. Was I really going to do this?

Sitting on the bench along the edge of the deck, Suzanne put her feet up and calmly wrapped her arms around her legs. She’d always been conservative about making decisions, which I felt slowed her responses when important changes needed to be made. Over the years I’d learned to anticipate spending a little extra time convincing her before a plan could be put in place. This time, she didn’t need convincing. She looked at me for a long moment, then said quietly, “Okay.”

I’d expected more resistance. She’d acceded so quickly that it didn’t give me time to reroute my argument. “It’s just not fun to work at Bear Stearns anymore,” I explained, continuing the debate that had been playing out in my head. “The political environment disgusts me. With Ace gone, I see no future there.”

“I know,” Suzanne readily agreed. It threw me. Didn’t she realize what a risk we’d be taking? Staying and riding things out was definitely the more reasonable choice.

“Look, I probably have a job at the Bear for life,” I said, taking up the counterargument myself. “I get income. No big expenses. And I don’t have to risk our capital.”

Suzanne nodded. With her advanced degrees in economics, business, and law, she knew exactly what a change like this would mean. It would upturn the life we’d built together. Why wasn’t she putting up more resistance? “Not only that, but I’m sixty years old. Replacing their health benefits will be tough.”

“Yes, but it’s obvious that you need a big change. Maybe this is it.”

My brief bout of anxiety was suddenly displaced by a flush of eagerness. For a moment I savored the frisson of excitement that came from arguing against the very thing I now fully intended to do. “You have to realize, I’d be giving up the security of a comfortable job for a very speculative new career. It would put our entire estate at risk!”

Suzanne stood up and looked me in the eye. “I trust your instincts,” she said. “If you want to leave, then that’s what you should do.”

So in June of 1996 I agreed with Bear Stearns that I would give two weeks’ notice, then leave after having spent thirty-two years there—most of my adult life. I briskly got my colleagues up to speed on the clients I was handing off to them. I kept my office while I looked for space, but it felt very different than before. It’s astonishing how quickly things can end.

So I resigned from Bear Stearns & Co. to start an investment firm. My first hire, Mark Holdsworth, had to borrow an office at Bear Stearns while I found a new space.

“Would you like to make a joint press release?” I asked the firm, as a courtesy, but they disdainfully said they didn’t see the need. Some had always underestimated my value. Why should it be any different now? Thanks to the great work of Mike Sitrick, a public relations genius, my press release about my big change got three columns in the Wall Street Journal, and I was on my way.

I strode out of the office into the gleaming sunlight of Beverly Hills with one thing on my mind: This was my chance to show the world that my previous successes were not because I was at Bear Stearns. Whatever I did next, I considered would be my unequivocal report card.

The challenge was that I was starting an investment firm with no audited track record to give investors confidence in my advice. It was a major risk. In the past, I’d made money for a number of clients by buying bargains, then selling when they were fully valued. I knew that the only way to pull off that trick was by becoming a contrarian investor, a stance I particularly relished. So my first order of business was to raise joint venture money for investments that would generate high returns.

Once I homed in on a few of the more promising, if unconventional, possibilities, I started making calls. My assumption was that if I’d made high returns for these clients with novel ideas in the past, they’d gladly do a joint venture on the new ideas I had now. To my surprise, they all declined.

When I started Tennenbaum & Co., I planned to peak at eight people.

I commissioned this wine-tasting table for the conference room. I was wrong. When I retired in 2015, there were ninety of us.

Contrarians are, by definition, those who go against the prevailing opinion. And in this case, the prevailing opinion held sway in every one of my prospective investors! I should’ve seen it coming. My great adventure was turning out to be much tougher than I had anticipated. It clearly was necessary to raise a fund I could control, so I could make contrarian investments without having to rely on consent from joint venture partners.

“Hire some bright, young talent, too,” my generous friend Sheldon Lubar advised me. “And let the investment banks do a lot of work for you on spec. It’ll keep your costs down.”

In 1977, the same year I moved to Malibu, Sheldon had started his own firm specializing in private equity deals. He’d been the assistant secretary of HUD, the commissioner of the White House Conference on Small Business, and an adviser to three United States presidents. I followed his advice. The first two young men I hired at TCP, Mark Holdsworth and Howard Levkowitz, turned out to be excellent choices. They were key partners of mine for the next nineteen years.

The tougher job was to decide on the firm’s business strategy. For a few years, we went off on some fruitless tangents, but our investments worked out so that we still managed to be profitable every year. Then we got our first break.

A former colleague reminded me about collateralized loan obligations (CLOs). These funds would enable us to borrow up to 90 percent of their value with low interest rates, and for seven to ten years. They could be invested in almost any kind of debt instrument. It was an ideal way to put together quickly the money we needed in order to invest in a few contrarian opportunities, then make high returns to build a track record.

We were at the front of the wave of raising CLOs. The early CLOs, developed fifteen years before, had been a way for banks to vary the degrees of risk and return in an investment package of leveraged loans. It wasn’t until TCP started to use them in the mid- to late 1990s that the modern format was developed to include loans as well as high-yield bonds.

Because CLOs generate profit from the difference between the cash inflows and the cash outflows of fees and costs, they are considered a form of arbitrage. Today the international market for CLOs is approaching $521 billion.44

In 1999 we pioneered changes to the CLO format by reducing the borrowed amount from 90 percent down to two-thirds of the assets. We then expanded the investment beyond loans and bonds. This gave us some attractive upsides: stock investments with 67 percent margin debt!

All we needed was a placement agent for this innovative fund to be run by first-time managers. With this type of fund, we had to invest mostly in debt instruments. If we were going be a high-performance manager, we could buy only high-return debt (which usually meant speculative debt). We focused on turnaround businesses and active participation in insolvency proceedings for bankrupt issues.

We had hit upon the strategy that was best for us. Very few funds were using CLOs in this way, so we had the field mostly to ourselves. Even better, the process was very complex, so any competition would be slow to develop and some would fail, giving us even more deal supply. Once we built our staff to support this new direction, we were a leading firm in this sector. We optimistically aimed at 20 percent annual returns. Our first two funds exceeded that rate of return. Our funds under management almost doubled every year for the first few years.

While that was very encouraging, it made it vital to secure the best staff. In the investment business, people are your major asset. In the high-performance investment business, those people are like thoroughbreds—high intensity, driven, and super competitive. Finding, hiring, mentoring, and retaining such people are the principal tasks of management. If you strive for a diverse group that had to work together in that environment, the challenges rise to another level of difficulty.

To my mind, the low-grade debt business is the most complex of all investment sectors. It requires sound judgment about both the general economy and the capital markets, knowledge about the relevant industries, evaluation of the companies involved, expertise in the securities being bought, and command of any insolvency proceedings that might ensue. And, despite all of these complexities, you have to act more quickly than your competitors!

As Wyatt Earp, the famous gunslinger, said, “Fast is good, but accuracy is everything.”

As a result, I decided that single portfolio managers would be too risky. An investment committee would be safer. We would sacrifice speed for thoroughness. By having a diverse group of talented people with a common objective and requiring participation from everyone with something relevant to say, then taking an open vote by the most senior members, we would make fewer really bad investments.

The task of management is to encourage the members to state their real views, even if they are minority views, and to avoid playing politics. We kept track of the outcomes and the votes, though some were afraid that this would chill any frank discussion. The approach usually worked beyond all our expectations.

We developed systems, such as comprehensive checklists and postmortems for bad mistakes, in the hope of avoiding them in the future. Everyone makes mistakes, but our goal was to narrow the reason for those mistakes to wrong collective judgments on our part, rather than individual missteps.

I wish I could say I invented it, but the Delphi method was inspired by a rich historical tradition and grounded firmly in science.

While the concept is solid, the problem in enforcing so rigorous a method is that it is confining for creative people. To keep the talent we needed, it was essential to provide a satisfying firm culture, one that rewarded participation in open meetings and encouraged everyone to take contrarian risks. In the hopes of making the high-pressure environment acceptable, we created bonding and educational activities that supported our distinctive culture.

• Teach-ins. We offered teach-ins by great experts on insolvency legal processes, corporate restructuring techniques, financial accounting fallacies, industry overviews, decision techniques under high-uncertainty conditions, and descriptions of the role of emotion in decision making.

• Off-site meetings. We held periodic off-site meetings to share developments, review past mistakes, and discuss ideas for future growth.

• Open office. We designed offices that encouraged interactions, including a free lunchroom and an open layout.

• Events. We sponsored firm sports events and charitable events, such as our popular gift-wrapping day for kids who weren’t getting gifts for the holidays.

Our educational efforts went so far as to teach our professionals successful methods for making decisions in times of uncertainty. In our business, the future results from a transaction can vary over a wide range of possibilities. The best methods for predicting these results involved future scenarios. At off-site meetings, we often engaged in exercises such as these to teach and reinforce those approaches:

• Postmortem. When a project they advocated turned out to be disaster, participants discussed what may have occurred to cause the disaster. The exercise ran counter to the natural tendency to cover up lapses.

• Devil’s advocate. One senior team would make the case for doing a transaction. The other team would make the case against it. The exercise revealed that, when both points of view were presented simultaneously, emotions were less likely to dominate the decision. (We didn’t use this enough!)

• Quarterly postmortems. For each great deal and each disastrous deal completed, the deal teams would list five important steps that, in the future, they would repeat, as well as five important mistakes that they would seek to avoid.

• Backward analysis. Teams would list the future key variables and the future valuation ranges needed to produce acceptable results, then predict what was likely to go wrong if these did not obtain. Then subjective probabilities would be assigned to each of these key variables and valuations. We then would decide if we were willing to bet that these probabilities were high enough to justify the investment. This analysis put a spotlight on the important issues.

Since its inception, TCP has consistently been a leader in innovation. To accomplish that, we had to take intelligent, well-informed risks every step of the way. We raised one of the first market value, collateralized debt obligation funds. We pioneered a 35 percent equity capitalization at a time when conventional wisdom was to use 10 percent to 15 percent. We wanted to avoid liquidating a fund in a bad market environment. Two principles—diversified strategies and financial flexibility—served us well as we watched other managers being forced to liquidate.

In our third fund, we pioneered the separation of the placement agent from the senior financing source. We did that because we noticed that none of the placement agents had the appetite to commit the senior financing amounts. With our contacts and reputation, we were able to go to big lenders directly. We then continued in a tradition of innovation with funds that were the first private registered investment companies. (The law was designed for public funds, but we liked the added protections for everyone.) This structure provided exceptional protection for our investors. It was a great success in raising the amount of Employee Retirement Income Security Act (ERISA) money that was attracted to us.

Our new fund, the Special Value Absolute Return Fund, boasted the largest equity raise in the industry at the time. Its equity equaled all the equity for market value CDOs raised by everyone else during 2002. Pretty dramatic for a firm that then had only a three-year track record!

As TCP’s reputation grew and as our investment strategies became more widely used, both newly organized firms and well-established firms entered our business segment. Soon they were trying to recruit our people away from us.

The new competition put downward pressure on fees, which we had to match, squeezing our profit margins. In response, we had to spend more time on strategic planning. We also hired outside advisers. One of the best was the famous Charlie Ellis, who advised us on firm strategy and employee policies. We employed his ideas over the years as we grew from a small proprietorship to a midsize business, while successfully retaining our key people, as well as our key investors. Charlie was also instrumental in helping guide my transition, in my seventies, to a new leadership team, managing over eighty experienced professionals.

I’m proud that at TCP we could achieve the rare successful transition from a founder to internal successors. After I fully retired in 2015, TCP was able to partner with an insurance company, which took on my role as capital provider. It is a great tribute to everyone involved that TCP grew from nothing to become a leader in its field, with remarkably few glitches, surviving the financial crises of 1998, 2000, 2002, and 2008!

Today TCP remains a leading alternative investment management firm with about $9 billion of capital committed to direct middle market and special situation lending. Since its founding in 1999, TCP has invested more than $22 billion in 560 companies.45 It is renowned for its ability to respond rapidly, creatively, and flexibly. Over the years, its expertise has expanded to include investments in emerging trends in aerospace, defense, consumer retail, energy/clean technologies, engineering, health care, natural resources, and technology, among many other industries.46

In 2018, TCP was acquired by BlackRock (NYSE: BLK), the investment behemoth that is the largest asset manager in the world. BlackRock manages $6.3 trillion from seventy offices in thirty countries and clients in one hundred countries around the world. The acquisition of TCP allows BlackRock to accelerate its growth, making TCP the perfect complement to their existing clientele.47

As Tim O’Hara, the global co-head of credit at BlackRock, explained, “Investors seeking to generate incremental returns and portfolio diversification are increasingly turning to private credit where both expertise and platform scale can drive returns. This acquisition will enhance our ability to deliver clients private credit solutions that meet their investment objectives across a range of risks, liquidity and geographies.”48

From an early TCP newsletter (Spring 1998).

My thoughts on the euro.

“It’s not the strongest of the species that survive, nor the most intelligent, but the ones most responsive to change.”

—Charles Darwin

In 2015 I decided to retire from TCP and pursue a less demanding career. Suzanne and I were able then to think about living outside a major business center. My friend, the brilliant John Paulson, told me about Puerto Rico. There, one could live on a Caribbean island with sizable infrastructure. Also, as a professional investor, I could participate in attractive tax programs. It sounded great to us. Suzanne and I like warm weather anyway!

At age eighty-three, my adventurous spirit lives on. As does my endless attraction to open water. My childhood was spent mostly on the Atlantic Ocean in southeast Georgia. The majority of my business career was spent on the Pacific Ocean in Malibu, California. It made sense that I would one day gravitate back to the Atlantic.

This time, I was able to be a full partner with Suzanne on the project. Oh, the battles we had! I tend to place a top priority on speed. Having seen too many people dawdle around needlessly, I’ve come to believe that things can usually be completely much more quickly than people expect. So I like to hurry up and get things done. It’s my temperament. Suzanne would argue that some things need time for reflection and pondering. Otherwise, you may rush down a road that doesn’t work out and have to rethink things later. Between my budget, her aesthetic, and the complexity of a seven-building estate with our first effort at serious landscaping, the house was a challenge to build.

Happily (again) the architect, Kristoffer Köster, and Suzanne created a home that is both a marvel to look at and to live in. They found flooring that is as beautiful as Travertine marble, but so light it doesn’t need maintenance. All the walls are white. There’s nothing fancy in the house, with the exception of a few of my rooms, where I enjoyed indulging my vision of my dream house. My library and closets are a good example: they’re bright red.

Overall, the house has twelve-foot ceilings (due to the height limit in Puerto Rico) and lots of space. The doors are wider and taller than usual, which creates a certain stature, contributing to the experience of moving through the space. Walls of glass open to the palms on the beach. All the lines are clean and simple yet elegant.

We wanted a tropical paradise, but the hurricane building code required all new structures to be virtual bunkers, with steel-reinforced floors, walls, and rooftops. No thatched roofs or bamboo accouterments. It was all hurricane windows and concrete. Besides, we wanted to see as much of the view as possible. That meant walls of glass with sliding doors. Not really a tropical cabana theme. We ended up with what I call “techno tropical.”

In 2017 we were glad for all the steel reinforcement when two major hurricanes hit Puerto Rico. It was the worst natural disaster there in modern history. When it was all over, we were grateful to discover that the 250-mile-per-hour blasts did no structural damage to our dream home. Even the landscaping survived, though our fruit trees were pretty beat up. The only real damage was caused when the hurricane peeled off our neighbor’s solar panel and flung it through our bathroom window.

Hurricane Maria peeled back some of our roof. We built for bad storms but forgot that living through them was another problem.

Houses in the nearby town suffered more from the worst hurricane in ninety years.

This was the third custom home we had built, but the only one for which we stayed strictly on budget.

Watching our Bahia house being built while living in one of the guest houses.

At first, I planned to work out of our house. I expected to farm out our assets to professional investment managers and to read and to write. A semiretirement. It didn’t work out that way.

The Commonwealth of Puerto Rico is a protectorate that the United States took from Spain to have as a military base along the trade route between the Panama Canal and the East Coast. For decades, populist politicians have run a welfare state there in which social benefits discourage work, government-owned enterprises act as job programs, and increased borrowing funds continuous deficit spending.

In 2016, the cash finally ran out and the US Congress imposed a fiscal board on the government of Puerto Rico. This new board, called Promesa, has final approval over Commonwealth budgets until they are brought into balance.

I knew the history of fiscal boards, having lived under one in New York City during the 1970s and having observed one in Washington, DC, afterward. Basically, they consist of appointed members who take the blame for making the financially responsible decisions that politicians are afraid to make themselves.

As the former European Commission president Jean-Claude Juncker said, “We know what we have to do; we just don’t know how to get reelected after we’ve done it.”

I believe that for democracy to work, it is necessary to have an engaged and informed electorate. Tough to do in our complex world, especially in large countries with diverse constituencies. As Margaret Thatcher famously said, “Eventually, you run out of other people’s money.” And Puerto Rico has done so.

Right after moving here, I began an analysis of the reported $70 billion government debt. These headlines were dead wrong. The debt was owed by several issuers, and much of it was not a direct obligation of the Commonwealth. I began buying up selected bond issues that had been depressed by the hysterical news reports. Then the two devastating hurricanes of 2017 hit our island.

After studying the laws and practices that related to emergency aid, I soon realized that a very large stimulus to our economy would be coming that would almost guarantee a spurt in growth. Most experts were predicting a death spiral. I increased my investments. It has been profitable.

Thus, I failed to retire once again! I am excited about the future profits that my beautiful new area is offering. I started a new company, Caribbean Capital & Consultancy Corporation (CCCC), in order to build a staff who could, over time, take over the investment work from me. As I did when starting TCP, I hired two very smart and driven youngsters, and I began my boot camp for investing.

CCCC has built its own economic model for Puerto Rico, analyzed all of its major debt issues, monitored key economic data series, and investigated promising industry segments. We also benchmarked Puerto Rico against similar entities like Hawaii, Jamaica, and the Dominican Republic, looking for clues to probable large growth potentials. We are proceeding accordingly.

Suzanne and I began building our dream home before we moved, and we’ve been enjoying it since. It has room for our friends to visit and lots of space for the dogs. It’s not like the other houses in the neighborhood. (We’re even more individualistic than our splendid neighbors.) It’s likely to be my final residence.

When I moved to Puerto Rico, my friends at the Boys & Girls Clubs of America asked if I could help out with the Puerto Rico Clubs. Half the kids in Puerto Rico live below the poverty line. And despite the populist bent of the Puerto Rico government, their children’s services are awful: little money for kids’ social programs and dreadful public schools. They are damaging the future of this paradise.

Soon we had a new fund-raising effort. I solicited the most successful business leaders to form the Legacy Council, which now provides an important financial aid as well as the advice of this outstanding group of leaders. Important new supporters, including McKinsey & Co. and UNICEF USA, are providing major new funding that will facilitate improved education, job training, and nutrition, in addition to the basic club programs. Hopefully Puerto Rico kids will be prepared for productive lives as a result, and will stay to build a bright future for the island.