Tuesday, December 18, 2007

Gerald Tsai


Gerald Tsai is a Wall Street investment strategist who first came to prominence in the late 1950s as a stock analyst with an aggressive style of quick, profit-taking trading that shook up the rather conservative mainstream of institutional traders then dominant on Wall Street. Since that time, Tsai has regularly achieved high-status, high-profit positions in asset management concerns, many of which were largely of his own making.

Gerald Tsai was born in Shanghai, China, on March 10, 1928. He was educated at Boston University, where he received a bachelor's and a master's degree. Following his graduation in 1951, Tsai went to work for Bache & Company, a brokerage firm, as a securities analyst. He stayed with Bache until 1952 when he was offered a job with Fidelity Investments in Boston as a junior stock analyst. It was with Fidelity that Tsai first began to make his presence in the financial markets known. In a profile in Business Week Ron Stodghill II wrote, "Tsai wowed Wall Street with an unprecedented method of picking speculative stocks for short-term appreciation and selling them the moment their growth slowed. The method shook up the conservative money-management establishment and inspired a whole new breed of portfolio manager."


Investment Manager to Investor

Tsai was named vice-president of Fidelity in 1960, director in 1961, and executive vice-president in 1965. In 1966 he left Fidelity to form his own investment management firm. Using his reputation as a keen trader Tsai was able to raise $247 million in initial investments for the Manhattan Fund, which he managed for the next two years. It was during this period of Tsai's career that he earned a reputation as one of the key players in what was to become known as the "go-go sixties" in the stock market, a time of high profit-taking, an expanding economy, and international domination of American industry.

In 1968, Tsai sold the Manhattan Fund to a giant insurance company, CNA Financial Corporation, for $27 million in CNA stock. Tsai then took a seat on the board of CNA and essentially took control of the company as one of its largest stockholders. Writing in Forbes, Tatiana Pouschine and Carolyn T. Geer described this series of transactions as "a brilliant deal, superbly timed. Tsai had parlayed control of a hot but untested mutual fund [the Manhattan Fund] into virtual control of a giant insurance company." In 1973 Tsai sold his CNA stock when it was valued in the twenties, reaping a huge profit. (Within the year CNA stock had plummeted to under four dollars a share.)


G. Tsai & Company is Born

Tsai took his profits and bought a seat on the New York Stock Exchange, trading under the auspices of G. Tsai & Company. In 1978 he bought a small insurance company called Associated Madison for $2.2 million, with the idea that he could sell insurance through the mail and save huge amounts of money on seller's commissions. He was able to persuade investors that this idea would take off and investment in Associated Madison, largely on Tsai's assurances of profit and his history of providing them, surged. He once again began investing the company's assets shrewdly and also began acquiring other companies. Four years later he sold the company to American Can Company for $162 million. American Can's chairman had wanted to get into financial services and saw the deal with Tsai and Associated Madison as his ticket. Tsai, for his part, saw a subsidiary mail order business of American Can's as a way to expand his mail order insurance business. As part of the deal, Tsai took a position as executive vice-president and, as their largest stockholder, a member of American Can's board. A few years later, Tsai sold to American Can his brokerage business, G. Tsai & Company, for another $3.8 million in stock and a controlling interest in American Can. In 1986, he was named chief executive officer.

Tsai renamed the company Primerica and began building its assets. In 1987 he acquired Smith, Barney, Harris, & Upham, a moderate-sized investment house. Tsai paid nearly double the firm's assets for control, a move that might have proved successful had the stock market not crashed in October of 1987, when brokerage firms throughout Wall Street were devastated by steep losses. In 1988, Tsai sold Primerica for $1.5 billion, or roughly $30 a share--down from the 1987 high of $54.

In March of 1992 Tsai launched his latest investment strategy. He led a group of investors in purchasing a closely held insurance company in Memphis, Tennessee, Delta Life Corporation. Business Week reported that Tsai believes that "financial woes and bankruptcies among larger insurers will cause flight toward safer, untainted companies such as Delta Life. About 75% of its $751 million in assets is invested in U.S. government securities and it has few bad loans." They go on to quote Tsai as saying that in the present cautious investment climate, Delta Life assets "will grow at least 20 percent a year."

William Zeckendorf


Forbes, Oct 24, 1983 v132 p121(2)

Living with a legend. (William Zeckendorf Jr.) Rudnitsky, Howard.

Full Text: COPYRIGHT Forbes Inc. 1983

Living with a legend

WILLIAM ZECKENDORF Jr. is not likely to loom as large in the real estate game as his controversial father. Few could. A great salesman, a master at getting media attention, William Zeckendorf Sr. conceived and developed grandscale projects like Century City, Kips Bay, Roosevelt Field, Mile High Center, Place Ville-Marie, to name only a few. But he went broke, too, taking a lot of investors with him when his public company, Webb & Knapp, Inc., also went under in 1965, and he declared personal bankruptcy four years later. He endured a few years as a small-time developer and died in 1976. In the end his reach exceeded his grasp.

Today his son, William Zeckendorf Jr., carries the name and plays the game far more quietly, developing projects mostly in his native New York City. Back then, he lived through all of it, working up to president in his father's shadow, watching the glorious ride up, sitting helpless through the awful ride down, when Marine Midland Bank's calling in an $8.5 million note brought the company into involuntary bankruptcy. How has the experience affected the son?

He meets a visitor in his modest, almost spartan office in the building where he lives--an office utterly unlike his father's grandiose headquarters --and he speaks softly, so softly it is sometimes difficult to follow what he is saying.

"Today we have a very small, tight organization,' he says. "It's basically myself, my two sons and ten other people.

"In my father's heyday, with many major projects across the country and in Canada, we had lots of vice presidents and a large staff.' He falls silent a moment. "Because of that large chain of command,' he remembers, "things started getting away from us. We got out of touch.'

Control is important to Zeckendorf Jr., who knows firsthand it's better to be small and successful than famous and broke. On going public like his father did: "Who wants to have the pressures of generating earnings for Wall Street and all the attendant publicity? I prefer the anonymity to the notoriety. I started out way up at the top with publicity. It's a double-edged sword.' Bill Jr. doesn't criticize his father's flamboyance, but clearly he will have none of it.

Beyond the excessive publicity and the excessive leverage, there was clearly substance to the elder Zeckendorf. When it came to picking up the pieces, Zeckendorf Jr. points out, it was the investing institutions that put his father back in business again, albeit on a much smaller scale. "Equitable Life Assurance Society and the Manhattan Savings Bank financed my father's first project after the bankruptcy. They realized that over the years my father had done enough for them, and they were willing to help.'

Investors today remember little and care less about what happened 20 years ago, he finds. "What counts,' he says, "is a good track record since 1975, which is what we've had.'

He pulls out a few examples, and then for the first time the old Zeckendorf flair for salesmanship begins to show through.

Not many developers could have put a 33-story condoscum-commercial-space building on the controversial site at 96th Street and Broadway on Manhattan's Upper West Side, which had been sitting empty since the early Seventies. In fact, several developers before him had tried it. A proposed department store and low-income housing had been killed by community opposition and the lack of financing.

Then Zeckendorf endowed the community with a gardenlike park on the big garage roof, and has plans for a restaurant in the building. Not exactly as dramatic or beneficial as offering the site for the U.N. building, as Zeckendorf Sr. did in 1946, which certainly couldn't have hurt his subsequent city projects. But it worked. The same shrewd appraisal of what the other side will jump at showed through where others had failed, particularly since he was now working with higher-income buyers.

Then come the numbers. Zeckendorf Jr. quickly sold most of the apart ments at an average price of $200,000, or $200 a square foot, modest by New York standards. "Since you don't have a permanent takeout loan available for condominiums, you have to be sure you sell your units out pretty quickly. Otherwise you could be eaten up by a surge in short-term rates. We're paying 1 1/2 points over prime.'

Building without takeout on floating loans during 1981 and 1982, when rates were going through the roof and the housing market was drying up? The son is not wholly averse to risk. Zeckendorf sacrificed some profit on the apartments, but now he has signed up commercial tenants to long-term leases at high rents: roughly $50 a square foot per year on 40,000 feet of commercial space, vs. a comparable $27 per square foot for residential tenants. That's where the real profits will come from. Nothing grandiose, just profitable.

The next deal: In July Zeckendorf paid over $1 million to Rapid-American Corp. (whose eccentric CEO Meshulam Riklis' son-in-law is a Zeckendorf partner) to acquire an option on the abandoned S. Klein department store property, located in New York's seedy Union Square. Rezoned, it could become a $150 million, 700-to 900-unit apartment complex plus commercial space. There flickers the spirit of the father again: He would aim to transform the 14th Street neighborhood, where low-income buyers shop and drug users cop in broad daylight, by overwhelming it with his upscale creation. This is what Zeckendorf Sr. once attempted for larger sites.

So far that's only a real estate option and chancy plans. But Zeckendorf pulls out another unusual project that's already under way: the Delmonico Plaza, a $75 million, 24-story office building for 59th Street in midtown Manhattan that Zeckendorf plans to market as a condominium, the first office condo in a prime New York office location.

Practicality reigns there, too. "What we're looking for mainly are foreign banks and corporations who may be interested in buying,' he says. What if the buyer needs more space in a couple of years?

"Simple, he buys an extra floor now and he does a leaseback with us. We rent it out until he's ready to use another floor.' In their own countries, according to Zeckendorf, most foreign companies deliberatley buy more office space than they rent. "If we can't line up more than one-third of our tenants in the next four to five months as purchasers, we'll revert to a rental.' The project is a bit risky.

Still, he has managed to line up a $60 million, five-year construction loan from Manufacturers Hanover, in addition to $10 million in equity and loans from the Beverly Hills Savings & Loan.

Then there are the hotels, mostly in New York, that have turned a nice profit for Zeckendorf and his investors through renovation and/or conversion into apartments--the 1,733-room New York Penta (formerly the New York Statler), the May-fair Regent, the McAlpin House and the Delmonico.

But large hotel deals are not always lead-pipe cinches. "Sometimes they can turn out to be bottomless pits,' Zeckendorf notes. "No matter how much you pour into them, it seems they need more money to fix up.' Zeckendorf and his investors have already spent $10 million, and will spend more, to upgrade the Shoreham Hotel in Washington, D.C. with no profit currently in sight. They will need plenty more to build the 200 or so condo units next door. Zeckendorf is selling off part of his Shoreham investment to reduce his own risk and to bring in more money to help complete the project.

Zeckendorf Jr. allows the talk to drift back to his father. The banks let other REITS work out their problems, he says. If they hadn't pulled the rug out from under Webb & Knapp, Zeckendorf speculates, his father "would have built the greatest real estate portfolio in the world.'

Zeckendorf Jr. is 54 now, as old as his father was in the heyday of his construction period. He has clearly learned a lot from his father--not the least from his father's fall.

---

Worldwide Plaza bailout sought by Zeckendorf: partners seek help to buy loan from Deutsche Bank and retain control. (William Zeckendorf Jr.) Feldman, Amy.

Full Text: COPYRIGHT 1996 Crain Communications, Inc.

Partners seek help to buy loan from Deutsche Bank and retain control

William Zeckendorf Jr. is searching for a financial angel to help him maintain control of Worldwide Plaza, one of the most important developments built in the boom years of the 1980s.

His partnership - which includes Japanese construction firm Kumagai Gumi, World Wide Holdings Corp. and New York developer Arthur G. Cohen - has so far been unable to find a deep-pocketed investor to help it buy its $600 million loan from Deutsche Bank.

If the group can't come up with the funds, Deutsche Bank is likely to try to sell the debt before the end of the year. Already, the German bank has hired an adviser and very quietly approached a number of potential buyers.

"(The partnership) would like to buy the mortgage," says Mr. Zeckendorf. "The way it would probably happen would be in partnership with someone else. But Deutsche Bank has the complete right to sell (the mortgage) itself."

Worldwide Plaza is only one of many buildings overleveraged during the 1980s real estate bubble and currently under intense financial pressure. But it is important because of the fanfare with which the mixed-use development went up, because the 1.6 million-square-foot project is now Mr. Zeckendorf's flagship property, and because his company receives substantial management fees.

About six months ago, the Zeckendorf group did line up an investor to repurchase the debt from the bank. But Deutsche Bank, which will have to take a big write-down to unload the debt, balked. At the last minute, the German bank raised the amount it wanted for the mortgage, and the deal fell apart.

Deutsche Bank declines to comment other than to confirm that it holds the mortgage. But informed sources say the bank has now hired Hines Interests LP to begin marketing the debt as early as this fall.

"I don't believe that Deutsche Bank will get more from this process than what it originally said it would take," says Andy Singer, chairman of the Singer & Bassuk Organization, which is acting as the Zeckendorf group's investment banker in its attempts to repurchase the mortgage.

Real estate sources estimate the mortgage may be worth as little as half its current face value. "Deutsche Bank," says one such source, "has a real problem on its hands."

In the late Eighties, when Mr. Zeckendorf and his partners were developing the property, the real estate market was booming. Cash was easy to come by, and if the project ran over budget, so be it. The group had a vision of creating a so-called midtown west in the once-desolate area of Eighth Avenue.

Worldwide Plaza itself, at 825 Eighth Ave. - the site of the old Madison Square Garden - was to be the anchor. And, to many people's surprise, it did attract name tenants: the law firm Cravath Swaine & Moore; ad agencies Ogilvy & Mather (and later, other divisions of parent WPP Group) and N W Ayer; and Polygram Records.

Changing outlook

But when the market collapsed, development in that area stopped, and the rosy assumptions about ever-increasing rents no longer held.

The debt has already been restructured once and is not in default, but the terms allow for payments far lower than a debt of that magnitude would typically command.

Although the building effectively is filled today, and the tenants are all large and have long-term leases, Worldwide Plaza's asking rents have fallen with the market. The average asking rent for the building's office space is now in the high $20s per square foot versus the mid-$40s four years ago, according to the real-estate tracking firm RE/Locate.

When the building's long-term leases roll over, they will be renegotiated downward. Polygram, in fact, is now concluding a renegotiation of its lease that will include an expansion from 260,000 square feet to more than 300,000 at a reduced rent. Real estate sources say that an expansion by this financially strong tenant could help the building's credit worthiness and make the mortgage easier to market.

Opportunity funds shun deal

But the biggest buyers of real estate loans, the opportunity funds, are said to have seen the deal and passed."The problem is, when you invest a large sum of money, you have to know that there's going to be an exit," explains Jimmy Kuhn, a broker at Newmark & Co.

No one expects an openly hostile conclusion, such as a foreclosure or an outright sale of the building, both of which would force the owners to take a tax hit and would create a public relations nightmare.

But the development group is likely to be squeezed if it can't buy back the mortgage. in one possible scenario, a new owner of the mortgage could insist on an equity position in return for debt forgiveness. The effect could even be to lower the developer group's stake in the building to the minimum level that would allow it to avoid any tax hit.

It is also impossible to tell whether the partnership that developed the building will continue to hold as the financing is restructured. None of the other partners would discuss the building. Mr. Zeckendorf maintains that the members of the group have equal votes - though not necessarily equal equity stakes - and act as one.

Saul Phillip Steinberg


Saul Phillip Steinberg is founder and chairman of New York-based Reliance Group Holdings Inc. Prior to serving as chairman, Steinberg also functioned as Reliance's chief executive officer, director, and chief operating officer. One of the nation's wealthiest people, Steinberg's career began in 1961 when, according to Fortune, he borrowed $25,000 from his father to found Leasco, a computer leasing company, and became an industry pioneer. He acquired Reliance Insurance Company in 1968 and then engaged in a hostile attempt to acquire Chemical Bank the following year. In doing so, according to Institutional Investor, he became the first modern-day corporate raider, and his subsequent investments, which included an attempt to acquire Walt Disney Productions in 1984, "brought fear to corporate managers." In 1993 Business Week criticized Steinberg, stating that his company "routinely granted generous salaries and perks on the Steinberg family, as well as helped fund their other businesses and granted generous personal loans." In 1987 Barron's said Steinberg "has spent his career exploiting the incongruity between what is legal and what is fair. Although he talks about enhancing shareholder value, he built his own net worth through money taken up front in the form of large salaries, bonuses, perquisites, and side business deals made with companies under his control."

Steinberg has made large donations to leading charitable organizations and has served on the board of trustees for several organizations, including the New York Public Library and the University of Pennsylvania. He also has served on the boards of Symbol Technologies Inc. and Zenith National Insurance Corporation. Steinberg, 61, graduated from the Wharton School at the University of Pennsylvania in 1959. Divorced twice, he married his third wife, Gayfryd McNabb, on January 22, 1984. Steinberg has six children: Laura, Jonothan, Nicholas, Julian, Rayne, and Holden.

Peter G. Peterson


For over ten years, Peter G. Peterson, a Wall Street investment banker and former U.S. secretary of commerce, has warned that a rising national debt will destroy the U.S. economy unless drastic action is taken. Peterson has presented his case in articles in the New York Review of Books, Current, and New York Times Magazine, and in such books as 1988's On Borrowed Time: How the Growth in Entitlement Spending Threatens America's Future and 1993's Facing Up: How To Rescue the Economy from Crushing Debt and Restore the American Dream. In On Borrowed Time, coauthored with Neil Howe, Peterson asserts that the rise of entitlements for the elderly is in part responsible for current fiscal problems and offers advice on how to change the nation's course. George Harmon of the New York Times Book Review called the authors' suggestions "detailed and practical," maintaining: "Economics books often are turgid or strident; this is neither."

Facing Up: How To Rescue the Economy from Crushing Debt and Restore the American Dream continues Peterson's suggestions for restoring the U.S. economy. Peterson argues that the problems in the American economy are due to sluggish productivity growth since 1973 and a slow increase in public and private capital. To improve American productivity, he asserts, more capital is necessary. Peterson cites declining savings among individuals for some of the capital strictures, and argues that deficit spending by the federal government requires that billions of dollars that might otherwise be used to fire industry instead be spent to finance the debt. According to Peterson, to make capital available for renewed economic growth, the federal budget deficit must be conquered. To do this, he proposes a twenty-four point plan to redistribute income to the poor while balancing the federal budget by the year 2000. Peterson's proposals include cutting Social Security and Medicare benefits to the wealthy elderly, raising taxes on the wealthiest of the middle class, and increasing taxes on such items as gasoline, tobacco, cigarettes, and alcohol.

Facing Up elicited much debate among financial analysts. "If the argument of Facing Up sounds familiar, that's because it is," remarked David E. Rosenbaum in the New York Times Book Review. "But don't fall asleep yet," he added. "This book is worth reading, studying even, because in remarkably clear prose Mr. Peterson takes the decidedly unfamiliar step of describing just how painful rescue would be. It is the political equivalent of saying the emperor has no clothes." Henry Owen in his review for Foreign Affairs described Facing Up as "detailed and comprehensive probing," adding, "Peterson's book describes our problems perceptively: our high budget deficits, our low savings rate, and their consequences. He offers drastic and useful remedies and describes the coalition that he hopes will create political support for them. . . . Peterson's program is a giant first step toward strengthening the world economy." According to Charles W. Kadlec, writing for the Wall Street Journal, Facing Up "is an important book because it begins to make comprehensible and understandable the dimensions and implications of the federal budget deficit over the next ten years."

Michael J. Mandel, economics editor of Business Week, described Peterson's language in treating the deficit as "fiery" and the work itself as "closer to a moral tract than an economic treatise. In the course of exhorting Americans to sacrifice, it glides over several key economic problems, including the possibility that big budget cuts could slow the economy and actually reduce investment in the short run," he continued. Other commentators debated the foundation of several of Peterson's arguments and the efficacy of his proposals. "Peterson's strategy to accelerate productivity growth by increasing investment is not directed to the right disease," asserted Jay R. Mandle in Commonweal. Stated Ken Miller in Nation: "Peterson's plan is based on an incorrect analysis of the problem. There is no reason to believe that America is in any sense capital-constrained." Writing in the National Review, William A. Niskanen found fault with Peterson's proposed "sin taxes": "Mr. Peterson is correct in arguing for a reorientation of federal fiscal policy to promote private savings and investment relative to consumption. He does not make an adequate case, however, for promoting specific types of investment or for penalizing specific types of consumption."

Several critics remarked on what they perceived as serious omissions on Peterson's part. "What is missing from the Peterson Plan are policies that would expand the tax base through increased private sector jobs, incomes, and profits," Kadlec pointed out. Added Miller in Nation: "Nowhere do we find any concern that the top 5 percent of households earn more than the bottom 50 percent . . . to say nothing of a complete absence of discussion on the sensitive topic of household net worth inequalities." Critics also warned of possible unforeseen negative consequences to Peterson's plan. "Peterson offers a program that is unacceptable because the risks associated with it far outweigh its likelihood of success," maintained Mandle in Commonweal. "Unleashing a massive deficit-cutting program could further overwhelm the poor, trigger a recession or worse, and still not solve the productivity problem." Miller asserted, "Elimination of the deficit, however it is financed, would probably exacerbate our social problems, and Peterson's proposal falls short of creating the groundwork for a just society. This book's clarity, readability and passionate recognition of the need for change are all laudable. But if Peterson offers a `solution' as politically impractical as a broad tax on the middle class, why not conjure up more fundamental change?"

The influence and significance of Facing Up was signaled by the amount and intensity of the criticism it generated. As Owen asserted in Foreign Affairs: "If there is any new book that every American should be urged to read, this is it." Kadlec concluded in the Wall Street Journal: "In spite of . . . [its] flaws, Facing Up is a useful starting point in a national discussion over restoring balance to the federal government's fiscal affairs."

Paul Volcker


Paul A. Volcker is widely recognized as the most powerful and effective central banker in U.S. history. As board chair of the Federal Reserve System (or the U.S. central bank, commonly called "the Fed") from August of 1979 to August of 1987, Volcker manipulated bank interest rates and the national money supply in an effort to end the double-digit inflation that plagued the nation during the late 1970s. The cost of Volcker's determined anti-inflation campaign was the deep economic recession of 1981 and 1982--the biggest such contraction since the Great Depression of the 1930s--which led to widespread business failures and high unemployment, making the Fed chair an unpopular figure among many Americans. But critics have indicated that Volcker's policies also contributed to the unprecedentedly long economic expansion with low inflation that followed, an apparently remarkable achievement in light of the growing trade and federal budget deficits, the unstable dollar, and volatile financial markets that defined this period. Considered a masterful economic psychologist as well as an adroit monetary technician, Volcker is credited with a remarkable talent for predicting the complex economic reactions to sudden shifts in monetary policy. His 1978 book The Rediscovery of the Business Cycle presents some of his observations on economic policy.

Volcker's early career prepared him to assume the nation's top monetary policy post. As undersecretary of the treasury for monetary affairs during the early 1970s, Volcker played a leading role in designing and executing the momentous shift from fixed to floating international exchange rates initiated by President Richard M. Nixon's administration. The erosion of international confidence in the dollar under the inflationary pressures of the Vietnam War forced the United States to withdraw the dollar as the world's stable benchmark currency. Volcker was given the difficult and delicate task of negotiating major devaluations of the dollar in 1971 and 1973 with the United States's principal economic partners in Europe and Japan. His success earned him international respect that would serve him well later in his career.

In 1975, after teaching for a year at Princeton University, Volcker was appointed president of the New York Federal Reserve Bank. The most important of the twelve regional branches of the Federal Reserve System, the New York Fed lends hundreds of millions of dollars every day to New York's big private banks to cover temporary shortages in their reserve requirements; it also operates the Open Market Desk, where the central bank buys and sells U.S. Treasury securities on the open market. The New York Fed chief sits with four of the other regional bank presidents and the central bank's board of governors on the Federal Open Market Committee, which sets the nation's broad monetary policy.

The Federal Reserve System was created by Congress in 1913 to protect banks from failure by requiring them to keep a portion of their deposits in reserve to cover any temporary cash shortages. In addition, the central bank was intended to stabilize and unify the nation's monetary system, a system which, at that time, was a virtual hodgepodge of metal coinage issued by the U.S. Mint and paper bank notes backed by private regional banks. These bank notes would become worthless if the issuing bank failed. The Federal Reserve System was organized as a privately owned but publicly controlled central monetary authority that would provide member banks with a common bank note, lend them funds to ensure that their reserves met their demand deposits, and oversee a rate of monetary expansion intended to keep the currency stable.

In 1935 President Franklin Delano Roosevelt restructured the Fed to give it broad regulatory authority over the nation's banks. Historically, the Fed has used two principal methods to regulate the nation's money supply. One of these is to manipulate short-term interest rates by raising and lowering the discount rate at which it lends money to its member banks and by adjusting the quantity of money that it lends to them. A higher discount rate or a tight Fed lending policy is reflected in higher bank lending rates, which discourage general borrowing and consequently tend to reduce the amount of money in circulation. Lower bank interest rates act in contrary fashion. The Federal Reserve System also controls the money supply directly by buying and selling U.S. Government securities. To create money, the Fed buys treasury bonds and other securities from banks and bond dealers and pays for them with a credit convertible into cash. To take money out of circulation, the central bank sells its bond holdings for cash and holds this cash in its reserves; any major withdrawal of money from the private economy generally raises bank interest rates, or the price of money, as supply falls to demand.

In the late 1970s, as inflation jumped into double digits under the shock of huge price hikes by the Organization of Petroleum Exporting Countries (OPEC) oil cartel, the Fed sought unsuccessfully to bring prices under control by raising the discount rate. As explained by Nicholas von Hoffman in the New York Times, this strategy was premised on the monetarist assumption that a main cause of inflation was "too much money chasing too few goods" and that prices could be brought down if the money supply were tightened. But under chair G. William Miller, the Fed was reluctant to keep the discount rate high for any sustained period of time for fear that doing so would trigger an economic recession. The result was that inflation continued to climb while gold prices soared and the value of the dollar declined in international exchange markets.

On August 6, 1979, President Jimmy Carter called in Volcker, who still headed the New York Fed, to take over as Federal Reserve Board chair. Volcker's appointment was apparently fraught with political risks, as the new chair favored a tight money policy that might cause a downturn in the economy and damage the president's reelection prospects. According to critics, few economic experts in Washington anticipated the extent to which Volcker would stand behind his professed policies. In October, the new central banker virtually forced the Fed's board of governors to take an unprecedented step: abandon short-term interest rate manipulation as a major inflation fighting weapon in favor of clamping down directly on the money supply by selling treasury bonds. The new policy would allow the market to set commercial bank lending rates and the Fed would no longer intervene to stabilize rates for the sake of economic growth. Several critics noted Volcker's later acknowledgment that he adopted this dramatic new initiative less out of any doctrinal monetarist conviction than a pragmatic objective of braking inflationary expectations in the public psychology.

Volcker's monetary clampdown had a powerful effect, shooting the short-term prime rate (the rate at which commercial banks lend money to customers worthy of credit) up to 21.5 percent by December of 1980; it remained in that range for months, sharply depressing the economy. Long-time interest rates also rose to their highest levels in this century. Farmers found themselves unable to borrow against their crops, and tight credit contributed to thousands of business failures in 1981 and 1982, throwing five million more Americans out of work and raising the national unemployment rate to a postdepression high of almost 10 percent. Popular resentment against Volcker and the Fed grew proportionately: car dealers and building contractors, for example, reportedly mailed the central banker thousands of car keys and two-by-four planks to symbolize unsold cars and unbuilt homes. The public furor eventually prompted the federal government to give Volcker Secret Service protection.

Despite the unanticipated depth of the 1981 to 1982 recession, Volcker held his tight money course, convinced that the ultimate benefits of reducing inflation justified even a period of mass unemployment. Observers noted that the publicly cool and unflappable central banker skillfully defended his policy before Congress and the Reagan administration while acknowledging its unpopularity. The Fed's job was to "take away the punch bowl when the party was just getting good," he remarked to a Newsweek reporter, quoting his predecessor William McChesney Martin, Jr. But Volcker's no-nonsense demeanor and frugal lifestyle helped mitigate public resentment toward him to some degree. The Federal Reserve System chair's rumpled, shiny suits and twenty-cent cigars became part of Washington lore and contributed to his relatively high visibility in a traditionally low- profile post. Critics point out that among his government colleagues, Volcker earned a reputation as a formidable bureaucratic infighter and talented consensus builder who never used his towering six-foot seven-inch frame and booming bass voice to bully or intimidate his opponents.

After a year of sharp economic contraction, Volcker loosened the money supply in mid-1982. While the annual rate of inflation in the United States had been driven down to about four percent, the Fed's tight money policy had also helped to plunge western European economies into recession and trigger the Third World debt crisis. When high interest rates forced Mexico to default on its foreign debt payments in August of 1982, Volcker contributed to a crucial package of new public and private credits designed to bail out the country. In the United States the flood of new money quickly brought interest rates down and, by the end of the year, put the economy back on the road to growth. In light of falling oil prices, Volcker voiced a belief that inflation could be kept under control by increasing labor productivity and allowing wages to rise faster than prices.

Volcker's success as an inflation fighter and his popularity on Wall Street encouraged President Reagan to appoint him to a second term as chair of the Federal Reserve System in August of 1983. As the economy grew in the mid-1980s, Volcker confronted a number of new challenges to the country's monetary and financial stability. Low inflation and interest rates and the Reagan administration's permissive regulatory philosophy encouraged a speculative corporate takeover boom in the financial markets that complicated monetary calculations. The budget deficit created by both the Reagan administration's tax cuts and huge increase in military spending obliged the treasury to raise interest rates on U.S. bonds in an effort to attract additional--principally foreign--investors. These new investors drove up demand for the dollar, strengthening its value in relation to other currencies and raising the cost of U.S. exports, thereby worsening the American trade deficit. U.S. economic policymakers were then faced with a dilemma: taking measures to weaken the dollar and reduce the trade gap might drive foreign investors out of U.S. debt financing, since the value of their investment would fall in terms of their own currencies. To keep these investors, interest rates would then have to be raised further, threatening economic growth. On the other hand, doing nothing about the trade deficit undermined domestic production and reduced tax revenues, thus adding to the budget deficit.

Volcker's support of immediate budget deficit reduction caused some conflict with President Reagan's economic advisers, who argued that future economic growth primed by tax cuts would furnish the revenues to finance the accumulated deficit. As noted by Eric Gelman in Newsweek and in an article for The Economist, Volcker also clashed with Reagan administration policymakers--principally treasury secretary Donald T. Regan--over the Fed's monetary policy in 1984 and 1985. During this time the central bank tightened the money supply and dampened economic growth to throttle alleged inflationary pressures. Finally, the issue of bank deregulation became a major source of contention between Volcker and Reagan officials during the Fed chief's final years in office. Volcker consistently opposed a Reagan-backed campaign that would allow commercial banks to branch out into other financial services, such as underwriting insurance and trading stocks. In another bank regulatory matter, described by John M. Berry in the Washington Post, the Fed chair helped engineer a commercial bank bailout of the insolvent Continental Illinois National Bank and Trust Company in 1984, believing that to allow the bank to fail--as some free-market economists counseled--would endanger the nation's financial system.

Volcker's cautious approach to economic growth and bank deregulation contributed to President Reagan's decision in 1987 not to reappoint him for a third term as central banker. As documented by Los Angeles Times staff writers Tom Furlong and Jesus Sanchez, the financial community lamented Volcker's departure but applauded his replacement, Alan Greenspan, an economist who also held tough inflation fighting views. Since leaving public office, Volcker has continued to speak out forcefully on the need to take a more aggressive approach to the problems of the Third World debt and the U.S. budget deficit.

Alan Greenspan


Eclectic Talents, Diverse Careers. Born in New York City on 6 March 1926, the son of a stockbroker and a retail salesclerk, Alan Greenspan early displayed impressive mathematical skills. In fact, many considered him something of a mathematical prodigy. After finishing high school, however, Greenspan enrolled in The Juilliard School and played saxophone and clarinet with a touring swing band during the 1940s. In 1945 Greenspan's musical career came to an end when he enrolled in New York University to study economics. He completed a B.A. in 1948, graduating summa cum laude, and earned an M.A. in 1950. He then entered the doctoral program at Columbia University. In the early 1950s Greenspan dropped out of Columbia and went to work for the National Industrial Conference Board (NICB). In 1977 NYU conferred his Ph.D. without requiring Greenspan to complete a dissertation. After leaving the NICB in 1954, Greenspan and bond-trader William Townsend founded Townsend-Greenspan & Company, Inc., a consulting firm that offered economic forecasts to corporations and banks. He served as chairman and president of Townsend-Greenspan between 1954 and 1977, and again between 1977 and 1987, before dissolving the partnership upon his appointment as chairman of the Federal Reserve Board (the Fed).

Dollars and Sense. As chairman of the Fed, Greenspan displayed a rare combination of intellectual acumen and political savvy. He is an erudite economist with a remarkable sensitivity to the shifting political currents. Such characteristics enabled him to serve as chairman under four different administrations: those of presidents Ronald Reagan, George H. W. Bush, Bill Clinton, and George W. Bush. Greenspan got his first taste of public life as director of policy research for Richard M. Nixon's presidential campaign in 1968. President Gerald R. Ford appointed Greenspan chairman of his Council of Economic Advisors, on which he served from 1974 until 1977. Out of politics between 1977 and 1987, Greenspan returned to Washington when Reagan nominated him as the chairman of the Federal Reserve Board, a position he has held ever since.

Greenspan at the Fed. In October 1987, two months after he took office, the stock market crashed. Greenspan took quick and decisive action. A child during the Great Depression, Greenspan got the Fed to pump money into the banking system, thereby avoiding the liquidity trap that magnified the problems of the market in 1929. In so doing, he helped to avert a worse crisis on Wall Street. Given Greenspan's fiscal conservatism and comments about the "irrational exuberance" of the market, it is likely that he interpreted the events of October 1987 as a logical and necessary consequence of a steep and unwarranted rise in stock prices, which took place without due consideration of the true strength of the U.S. economy. Since his earliest days at the Fed, Greenspan has been obsessed with balancing the economy between the cycles of boom and bust. In his first years as chairman, Greenspan raised interest rates with great frequency in an effort to keep inflation to a minimum. He raised rates in 1989 and 1990, easing off slightly during the Gulf War and the recession of 1990-1992. In 1994, the most controversial period of Greenspan's tenure, he raised interest rates six times in order to quell rapid economic growth that he saw as inflationary. Those who were at the Fed remember it as a period of triumph. Alan Blinder, vice chairman of the Federal Reserve Board through 1996, called this period "the most successful episode of monetary policy in the history of the Fed," and other analysts in the financial community were equally free with their accolades. Those in the business community and labor movement, however, saw the increases as reflecting Greenspan's ideological bias toward low inflation even at the cost of higher unemployment and economic contraction. They maintained that the economy could grow at a faster rate than the Fed allowed without sparking inflationary pressures. Greenspan's tight money policies, his critics argued, kept profits down, wages stagnant, and economic expansion paralyzed.

Pragmatism Triumphs at the Fed. To nearly everyone's surprise, during the second half of the decade, Greenspan showed a remarkable lack of dogmatism in setting policy at the Fed. In 1998 and 1999 he became a great advocate of the so-called New Economy, raising interest rates just once. That increase was almost pro forma, a signal to the markets that he was still watching. In his public speeches, Greenspan also increasingly suggested that improvements in productivity and technology have made American business more efficient, thus lowering inflationary pressures and enabling the economy to grow without generating higher prices and wages. Uncharacteristically, Greenspan dismissed official productivity figures as too low, insisting that the difficulties of measuring productivity in a service economy concealed the real gains U.S. business has reaped since 1994. As a result, during the 1990s Greenspan proved more willing to allow the economy to grow without raising interest rates as a hedge against inflation.

Greenspan faced some of his toughest challenges as Fed chair during 2001, as the economy abruptly slowed and the September 11 terrorist attacks further frightened investors. Over the course of the year Greenspan slashed interest rates from 6.5 percent to 1.75 percent, hoping to spur economic growth, but other experts began to second-guess his decisions and to wonder if deflation was inevitable. In 2002 Greenspan cut interest rates again, to a record-low 1.25 percent. Yet he kept his faith in the power of productivity increases to drive economic expansion and maintained that the economy would turn around. By 2004, it had, and Greenspan was once again in the position of increasing interest rates rather than cutting them.

On June 19, 2004, Greenspan began an unprecedented fifth term as chair of the Federal Reserve. He was re-nominated by President George W. Bush and confirmed unanimously by the Senate. In February of 2005, Greenspan said U.S. interest rates are still "fairly low" after six straight increases, and that despite a good economy, fiscal discipline is essential. He continued to act swiftly to correct minor fluctuations in the economy before they spread into larger crises. However, not everyone praised him. Some observers accused him of slavishly following the wishes of the Bush administration, and in his 2006 book Bubble Man: Alan Greenspan and the Missing 7 Trillion Dollars, Peter Hartcher blamed Greenspan for the stock market crash of 2001, noting that the Fed chairman should have taken more action to deflate the excessive enthusiasm in the stock and housing markets that led to the crash.

In 2005, Greenspan was announced as a 2005 Presidential Medal of Freedom recipient by U.S. President George W. Bush; it is the highest civil award in the United States. Treasury. His term ended on January 31, 2006; he was succeeded by Ben Bernanke, who told Michael Wallace in Business Week Online, "One may aspire to succeed Chairman Greenspan, but it will not be possible to replace him." Since leaving his position as chairman, Greenspan has worked as a private advisor, consulting for corporations through his own company, Greenspan Associates LLC. He is working on a memoir.


"The Second Most Powerful Man in America." Alan Greenspan was not elected to his office, but during his long tenure as the 13th Chairman of the Board of Governors of the Federal Reserve from 1987 to 2006, he commanded a constituency larger than that of any politician. As chairman of the Federal Reserve Board (the "Fed"), this bespectacled, owlish economist was granted control of U.S. monetary policy, and in so doing, came to wield a power that stretched well beyond any political or geographic border. If his message, like his countenance, became morose, stock markets tumbled and the value of the dollar overseas sunk; if his attitude became upbeat, markets rallied to new record highs, consumers felt a sense of confidence in buying new products, and a sense of economic well-being descended to pacify investors, mortgage payers, and Wall Street brokers. George P. Brockway commented in the New Leader in 1995 that Greenspan was "as entitled as his predecessor to be called "the second most powerful man in America."

Predecessor Left Big Shoes to Fill. President Ronald Reagan appointed Greenspan as the U.S. top banker in 1987, replacing Paul Volcker, whose imposing physical presence--he was 6'7"--and anti-inflation zeal were legendary. Admitting to Time magazine in 1987 that it would be a "major challenge to fill Volcker's shoes," the smaller, quieter Greenspan took the helm of the Fed, amid concerns that the new Mr. Dollar would not be as hawkish on inflation as his predecessor had been.

Two-Term Appointee. Greenspan was reappointed to a second term in 1991 by President George Bush, even though a recession in the economy caused friction between them. The New York Times explained, "Bush officials wanted Mr. Greenspan to move more quickly to stimulate the economy through lower interest rates, and the President let the chairman dangle in uncertainty for several months before reappointing him." Still, many critics agreed with the Washington Post, which said the first term of the conservative chairman was "marked by outstanding performance."

Clinton Administration. Greenspan began his first term working with a Democratic president in 1992 when the Clinton Administration took the helm. As expected, the Democrats often criticized Greenspan's tight monetary policy. However, there was less friction with the Clinton Administration than there was with the Bush Administration, largely because Greenspan often supported Clinton. He backed the president to the point of agreeing with one of Clinton's campaign issues on middle class wages. When Clinton reappointed Greenspan for a third term in February 1996, he said Greenspan "has inspired confidence, and for good reason."

Tenure Free From Criticism. Greenspan's tenure was largely free of criticism even in the midst of a recession, primarily because economists admit that many factors affecting the long-term economy, most notably fiscal policy, are well beyond the control of the Fed. He also eluded most of the naysayers' barbs because while he knew well how to play the political game, he avoided the image of a policy maker who succumbs to political pressure or presidential bullying. Fortune magazine remarked, "Greenspan, in fact, has run the Fed apolitically and done a better job than nearly all his predecessors." His intellectual integrity is said to prevail over partisan scraps.

Federal Reserve Board. Greenspan became head of the Federal Reserve Board, an institution that was created by Congress in 1913 to manage the nation's money supply, centralize and strengthen the regulation of banks, and provide a flexible currency for a country that was trying to wean itself off the gold standard. The United States was one of the last industrialized countries to establish a central bank; other central banks include the Bank of England, the Banque de France, and the Bank of Canada. In subsequent years, the power of the Fed was expanded to cover such financial issues as margin requirements, the minimum amount of cash that must be put down when a security is bought.

How To Drive the Economy. Greenspan became the powerful chairman of a presidentially-appointed Board of Governors, which sets policy for Federal Reserve district banks and helps determine the lending practices of all deposit-taking institutions throughout the country. There are three basic tools the Fed uses to drive the economy, the most important of which is what is called open-market operations. If Greenspan believed the country was facing a credit crunch, he could lobby the Board to buy government securities from banks, thereby infusing the banks with cash which they could in turn lend to citizens who want to buy homes, cars, and other commodities. On the other hand, if Greenspan sensed a credit glut--that is, if banks were lending too much, which can drive up inflation--he could advise selling securities to banks, which would take money from the institutions and reduce lending. The Fed can also change the discount interest rate of its district branches, which lend money to banks. Lowering the rate encourages a bank to borrow from its district branch and allows that bank to pass the savings on to its customers in the form of lower interest rate loans. By raising the discount rate, the Fed discourages the bank from borrowing and lending. The Fed's third tool concerns reserve requirements, the amount of cash banks must keep on hand but cannot lend. If the Fed lowers the requirement, cash is freed up and banks can increase lending. If the requirement is raised, the banks must lock away more cash, thereby reducing the amount of money they have to lend.

Independent Agency. Although the board, including the chairman, is appointed by the country's reigning politician, it is an independent agency that does not answer to any elected official. The Fed finances itself, so economic pressure cannot be placed on it, and neither the president nor any member of Congress can compel the Board to act in a certain way.

From Music to Economics. Erudite economic theory was not the first love of Greenspan, who was born to divorced parents in New York City in 1926. He studied music at the prestigious Juilliard School, and afterward played tenor saxophone in the well-known Henry Jerome swing band. But his fascination with numbers was insuperable, and as New York's jazz golden age whirled about him, he managed the band's payroll and took time out to read college textbooks on banking. At 19, Greenspan put his musical instruments in their cases for good and began his study of economics at New York University. He did advanced graduate work at Columbia University under scholar and then-future Fed chairman Arthur F. Burns.

Influence of Ayn Rand. The free-market economic theories Greenspan would bring to government work years later were forged in the early 1950s, when he became a disciple of writer and social critic Ayn Rand. Greenspan found an intellectual ally in the conservative Rand, whose famous philosophical novels, Fountainhead and Atlas Shrugged, denounced government regulation and intervention, while stressing the importance of individualism. As a contributor to Rand's publication, the Objectivist, Greenspan wrote: "The welfare state is nothing more than a mechanism by which governments confiscate the wealth of the productive members of society."

First Political Appointment. In 1967, while running the successful economic consulting firm he had co-founded, Townsend-Greenspan & Co., Greenspan took his first step along the political trail, becoming presidential candidate Richard Nixon's director of domestic-policy research. Greenspan was named chairman of the President's Council of Economic Advisors in 1974, a month before Nixon resigned in disgrace following the Watergate scandal, and continued in that position in President Gerald Ford's administration. But while the economist was climbing the government ladder, the pragmatism and savvy that would later emerge as his defining features were still a few rungs beneath him. "Everyone was hurt by inflation," he said at a 1974 hearing. "If you want to examine percentagewise who was hurt most ... it was Wall Street Brokers." He later retracted the statement, having learned the political hazards of a free-spirited tongue. "Obviously, the poor are suffering more," he said.

Freelance Political Work. Greenspan continued with freelance political work after leaving the Ford administration. He advised such disparate politicians as Senator Edward Kennedy, George Bush, and Ronald Reagan on their presidential aspirations for the 1980 election. As chairman of the National Commission on Social Security Reform from 1981 to 1983, he was praised for fashioning a compromise plan to rescue the social security system from insolvency.

Initial Lack of Confidence in Greenspan. When President Reagan tapped Greenspan to become Fed chairman in 1987, several economists worried about his lack of international financing experience. They also feared that Greenspan would not be as aggressive in keeping down inflation--the prices of products--as his nearly mythic predecessor had been, even though Greenspan stated that he had a hard-line zero-inflation goal. It was not surprising that in response to Reagan's announcement that he had nominated Greenspan, the Dow Jones average of 30 industrial stocks on the New York Stock Exchange lost 22 points, and the dollar tumbled against foreign currencies. But the market and the dollar rebounded the following day, as economists and newspaper editorial writers, still slightly shocked at Volcker's imminent departure, came to grips with the succession.

Laissez-Faire Approach to Economy. The independence from partisan politics required of the chairman of the Federal Reserve played to Greenspan's strengths. Norman Jonas wrote in Business Week in 1987, "what drives him as an economist is his conviction that policy-makers must look beyond palliative actions that may please the public in the short run but hurt it in the long term." Being largely free from political pressure allowed Greenspan greater freedom in exercising his Rand-inspired laissez-faire philosophy, which favors letting economic conditions improve on their own without much government tinkering with monetary policy.

"A Free-Enterpriser." As an arch conservative, Greenspan also perceived a danger in relying on monetary policy adjustments to cure the country's economic woes. If interest rates were pushed too low, credit flooded into the economy and inflation could skyrocket. By raising interest rates to cut down on inflation, he faced the prospect of greater unemployment because business owners would not pursue the loans that enabled them to keep existing workers or hire new ones. Of his approach to monetary policy, Greenspan said in 1975, "I'm not a Keynesian. I'm not a monetarist. I'm a free-enterpriser."

Criticism and Praise. Some economists argued that Greenspan took that hands-off principle too far, that he did not act strongly enough when the economy was ailing. But the Fed chairman was praised for recognizing that many of the factors driving the U.S. economy have less to do with monetary policy and more to do with fiscal policy, which is largely the domain of the president and Congress. Greenspan said that changes in tax policy and decisions regarding the U.S. deficit will contribute to the long-term health of the economy far more than any monetary policy ever could.

Controlling Inflation. Greenspan's goal on entering office was to control inflation. His strong conviction may have stemmed from a reaction to recent history, when the Fed's main job in the 1980s was to control inflation brought about in the 1970s. In Greenspan's own words (from the New York Times), the Fed "went through the torture of the damned." Even at a time when inflation was well under control, at rates of less than three percent a year since 1992, Greenspan made it known that he would never let interest rates fall too quickly. Quoted in Money magazine in 1996, Greenspan warned, "Past successes will not count for much if we mistakenly let down our guard." Many economists believe that the rate of unemployment in the country and the price level of products are linked--as one goes up the other goes down. Therefore, Greenspan's strict anti-inflationary policy would imply that he expected a certain unemployment rate. However, in a speech to Congress on 19 July 1995, Greenspan seemed to hint that he refutes this presumption made by so many experts. He said, "I don't believe that any particular unemployment rate ... is something desirable in and of itself." Greenspan followed through on this statement during the economic boom of the late 1990s, keeping interest rates low even as unemployment dropped to previously unheard-of levels.

Obscured Statements. Experts rarely interpreted Greenspan's quotations with certainty. The Fed chief developed the belief that if he spoke too freely or too plainly on any government topic, there would be consequences. A misspoken word could give the appearance of partisan thinking, or harm the central bank's credibility or negatively impact Wall Street. Money magazine stated that Greenspan "has always been able to obscure the simplest thought with ambiguity and jargon." Greenspan himself said to the New York Times in June of 1995, "I spend a substantial amount of my time endeavoring to fend off questions, and worry terribly that I might end up being too clear." Nobel Laureate economist Milton Friedman believes that Greenspan has nothing to worry about. Barron's stated, "Friedman thinks that Federal Reserve Chairman Alan Greenspan's 'talk is lousy, but his performance has been very good.'"

Judging an Economy's Health. The Chairman of the Federal Reserve Board must analyze every detail and statistic of the economy to make decisions--even the most obscure statistics, like a weakness in yearly heavy truck orders. According to the New York Times, Greenspan said in 1994, "What we try to do is to create a body of information which gives us a sense of what the underlying forces driving the economy are." The New York Times commented, "This habit of analyzing everything from gold prices to retail sales does not sit well with monetarists, who believe he should focus on long-term growth of the money supply." Still, there is no doubt that Greenspan's many years as an economist provided him with the experience to judge the economy's health.

Politically Savvy Official. Despite his ability to withstand the political pressure of presidents, Alan Greenspan became known in Washington as one of the most politically savvy government officials. His ability to look beyond partisan infighting and galvanize compromise endeared him to both Democrats and Republicans. Robert S. Strauss, former chairman of the Democratic National Committee and the U.S. ambassador to Moscow, was quoted as saying in the New York Times in 1990, "Alan Greenspan is a great listener, and he exposes himself to people who know what's going on in this town, who are moving around the town, and he knows how to digest that information. His political antenna is always up. He's very sensitive to what's taking place politically on [Capitol] Hill, in the executive branch, in the media, and that's a tremendous strength for a person in his position."

Weathered Storms. Greenspan weathered many storms in his first years as Fed chairman. Reagan appointed him in June of 1987. In October of that same year, the stock market crashed. He was credited with keeping a cool head in showing restraint in monetary policy during that time and others. The Economist raved, "He has steered monetary policy skillfully through the 1987 stock-market crash, the banking and thrift crises of the late-1980s, the recession of the early 1990s and the subsequent recovery."

Ability to Achieve Consensus. Greenspan's ability to achieve consensus not only among rival political parties but also among governors on his board was well-documented. In 1990, speaking in scholarly rather than partisan terms, Greenspan was able to convince the Federal Reserve Board to lower bank reserve requirements, making $12 billion available for new loans to hurting Americans and helping the flogging financial industry by increasing yearly bank profits $1 billion. The vote was unanimous. In February of 1996, Business Week agreed on Greenspan's ability to achieve consensus: "Dissent has all but vanished at meetings of the 12-member Federal Open Market Committee, which sets short-term interest rates." The New York Times agreed that during the Clinton Administration, Greenspan "seems to move comfortably in both the Democratic and Republican camps, all without diverging from his avowed objectives." Greenspan proved to many that a low-key man can successfully lead a high-profile life. He also proved that a politically-minded economist can become one of the most influential non-politicians in the world.

Jump-Starting the Economy. Prior to Greenspan's 1991 reappointment, several political observers criticized President Bush for relying on Greenspan to jump-start the recessionary economy solely with monetary action. "Chairman Greenspan is actually President Bush's biggest economic asset," Paul A. Gigot remarked in the Wall Street Journal in 1991. "Yet having pushed Mr. Greenspan out to sea to steer the U.S. economy with only a single oar--monetary policy--the kibitzers in Congress and the White House are now telling him how to row."

Entering the Partisan Fray. Occasionally, Greenspan was accused of entering the partisan fray. Economist David M. Jones, quoted in Business Week, suggested that Greenspan had fueled the impression that he was influenced by political pressure when the Board cut the discount rate after the embarrassing Republican loss in Pennsylvania's 1991 special Senate election. The normally soft-spoken Greenspan also testified in Congress that he supported a reduction in the capital gains tax and an increase in consumption taxes--politically contentious issues in which, some say, the Fed chairman should not be meddling, because they go well beyond his role at the central bank. During the Clinton Administration, he lobbied Congress to support the President in bailing out Mexico. In 1995, he offered a plan to help cut the federal deficit by recalculating the inflation adjustments paid to Social Security pensioners. He made several comments during the Clinton Administration that showed his desire to see the Republicans and Democrats agree on a balanced budget for the country.

Takes on fourth and fifth terms. On April 6, 1997 Greenspan married NBC reporter Andrea Mitchell. In 2000, he accepted a nomination from Clinton for another four-year term, beginning June 2000. In 2002, with the U.S. economy under the George W. Bush administration facing serious problems, Greenspan told Congress that the prospect of a war against Iraq and the falling stock market had weakened investor confidence. In addition, he noted, corporate scandals had also done their part to weaken the economy. In response, Greenspan cut interest rates to a record low of 1.25 percent to, he hoped, stimulate economic growth. Given that U.S. productivity had continued to grow even during the downturn, Greenspan opined that in the long term, the U.S. economy would remain strong. The tactic worked, according to Greenspan; two years later, Greenspan warned investors that the economy was improving and gradually began increasing interest rates to prevent inflation. Bush approved of Greenspan's performance and nominated him for a fifth term as Fed chair. He was confirmed unanimously by the Senate on June 17, 2004. During this term, he continued his previous policy of acting swiftly to correct minor fluctuations in the economy before they spread into larger crises. Some observers accused him of slavishly following the wishes of the Bush administration, and in his 2006 book Bubble Man: Alan Greenspan and the Missing 7 Trillion Dollars, Peter Hartcher blamed Greenspan for the stock market crash of 2001, noting that the Fed chairman should have taken more action to deflate the excessive exuberance in the stock and housing markets that led to the crash.

Moves on to consulting. In 2005, Greenspan was announced as a 2005 Presidential Medal of Freedom recipient by U.S. President George W. Bush; it is the highest civil award in the United States. Treasury. His term ended on January 31, 2006; he was succeeded by Ben Bernanke, who told Michael Wallace in Business Week Online, "One may aspire to succeed Chairman Greenspan, but it will not be possible to replace him." Since leaving his position as chairman, Greenspan has worked as a private advisor, consulting for corporations through his own company, Greenspan Associates LLC. He is working on a memoir.

Ivan Frederick Boesky


Ivan Frederick Boesky was a U.S. investment banker whose manipulation of the securities market through insider trading led to a criminal conviction and imprisonment in the 1980s. Boesky, who had promoted speculation in stocks through the use of arbitrage, cooperated with federal prosecutors and provided the names of others involved in insider trading, including Michael Milken, another famous securities dealer.

Boesky was born on March 6, 1937, in Detroit, Michigan, the child of Russian immigrants. After graduating from the Detroit College of Law in 1964 and then clerking for a federal district court judge, Boesky joined a prominent national accounting firm in 1965. The following year he left Detroit for New York City, where he became a security analyst. By the early 1970s he had become a general partner of a securities firm yet he wanted to start his own firm. This happened in 1975 when he formed Ivan Boesky and Company.

Boesky was one of the most successful "arbitrageurs," a new type of speculator who bought stock in companies that appeared to be likely takeover targets of other corporations. Typically the stock of a company that is taken over rises substantially, generating a windfall for an arbitrageur who bought the company's stock when it was at a much lower price. Boesky profited enormously from the many corporate takeovers that occurred in the mid-1980s. By 1985 he had become famous in financial circles and had published a book,Merger Mania-Arbitrage: Wall Street's Best Kept Money-Making Secret, that extolled the opportunities in risk arbitrage and the benefits the practice gave to the market.

What the public did not know was that Boesky's fabled skills in picking the right corporate stocks were supplemented by insider information. Since the 1930s, the U.S. government has sought to prevent insider trading, where an insider of a corporation buys or sells stock while in possession of non-public information. Insider trading, if successful, allows a person to reap a large profit or avoid a steep loss, depending on the type of information. The federal Securities and Exchange Commission (SEC) issued rules that prohibit insider trading and made it a criminal offense.

In 1986 Boesky admitted to the SEC that he had illegally traded on information obtained from an employee at the securities firm of Drexel Burnham Lambert, which arranged the financing of many takeovers. He paid the SEC $100 million, half as a fine for insider trading and the rest in illicit profit repayments. Boesky also agreed to provide federal regulators and prosecutors with information about others involved in the scheme. He named Drexel employee Michael Milken as a member of an insider-trading network that had earned hundreds of millions of dollars during the 1980s. This information eventually led to Milken's conviction on insider trading charges.

Boesky did not escape with just the large fine. The SEC barred him for life from the American securities business. In addition, he was convicted of securities fraud and sentenced in 1987 to three years in prison. Boesky served two years in prison and was released in 1990.


Symbol. Ivan Boesky became one of the most famous, and notorious, deal makers of the 1980s. By the middle of the decade Boesky was one of the leading figures on Wall Street and a leading symbol of the prosperity and the corruption of the decade. Boesky was a restless, driven man who found success on Wall Street.

Restless. Ivan's father, William, an immigrant from Russia who owned a chain of bars that featured topless dancing and strippers, became a source of embarrassment for his son as Boesky matured. Boesky never seemed to be accepted by the right crowd. During his teen years Boesky briefly attended the exclusive Cranbrook preparatory school where he had an average academic record, eventually transferring to the public Mumford High School. Boesky attended a variety of colleges and universities before going to Iran with a high-school friend. Boesky's years in Iran are a mystery, but upon returning to the United States he attended law school. Boesky spent five years getting his law degree because he dropped out twice. Upon graduation he went to work in his father's business. Boesky's success came when he moved to New York and entered into the arbitrage business. In 1975, backed by his wife's money, Boesky founded the Ivan F. Boesky Company. Boesky's new business was speculating on corporate takeovers, a fortunate decision that placed him well for the frenzy of mergers and acquisitions that was about to consume Wall Street.

Boesky Day. On 14 November 1986 government investigators announced that Boesky had pleaded guilty to insider trading and had agreed to pay a $100 million fine, the largest fine ever levied for the offense. Even as Boesky was becoming one of the most successful deal makers on Wall Street it was a poorly kept secret that he participated in insider trading. Boesky would use illegally obtained confidential information to gain unfair advantage in stock trading. Still, the news of Boesky's deal with governmental officials shocked Wall Street insiders and the day became known as "Boesky Day." It was even more unsettling to learn that Boesky had agreed to cooperate with further investigations of insider trading. With the news of Boesky's plea bargain the Securities and Exchange Commission, the federal agency that regulates stock trading, issued subpoenas seeking information about the business transactions of Michael Milken, Carl Icahn, Victor Posner, and Boyd Jefferies--all prominent figures on Wall Street during the 1980s. Boesky's business dealings with Milken dated back to mid 1983, and since then Boesky had relied heavily on Milken's firm, Drexel Burnham Lambert, for funds. The government investigators and prosecutors focused on a $5.3 million payment made by Boesky during March 1986. The payment had long seemed suspicious and was even questioned by Boesky's own auditors. Boesky eventually produced a letter from Milken's firm, signed by top executives, supporting his story that the money was for consulting. In reality, Boesky was parking his assets with Drexel, thereby hiding his real worth. Boesky eventually testified against Michael Milken and Drexel.

The Root of All Evil. Boesky went to prison in 1988, and before entering he separated from Seema Boesky, his wife of more than thirty years. In 1991 she formally filed for divorce, and Ivan Boesky sued his wife for $1 million a year in temporary alimony. Although Seema's money had financed much of Ivan's early business ventures, she claimed she did not know of her husband's illegal dealings. Eventually Ivan Boesky received $180,000 a year in alimony. As of 1993 the Boeskys were arguing over how to divide Seema's estimated wealth of $100 million. Boesky's rise and fall demonstrated the potential and the dangers of unregulated capitalism. Traders like Boesky and Michael Milken raised unprecedented sums of money in creative ways, but in doing so they damaged the credibility of Wall Street; Wall Street firms trade not only in stocks and bonds but also in trust.