There was an invisible spirit that crept through our lives on Wall Street in the
1980s. LBOs were a part of it. I could never quite put my finger on what was
wrong. It was as if there was too much dirty money and, as it grew more and more powerful
in invisible ways, the way companies were financed, bought and sold grew progressively
more out of control. The common sense and humanity seemed to drain out, and as personal
wealth of the insiders grew, so did the lies.
Part of what was happening within Dillon Read was the difference in styles between
Nick Brady and John Birkelund. When Nick wanted me to do something, he would come
and say something like: Look, I need you to do this and stop doing that and
I cant tell you why. I just need you to be a good soldier and do it. And
his candor had a certain charm to it and so in the spirit of being a good soldier
you would give up on some deal or idea you thought was going to be a moneymaker. For
some reason, Birkelund did not feel comfortable taking this straightforward approach
and so situations would get caught up in complex pretzels of office politics.
|Catherine Austin Fitts, Managing Director and Member
of the Board of Directors of Dillon, Read & Co. Inc., 1988. (Photo courtesy Catherine
For example, when the Dillon Read partners sold the firm in 1986 to Travelers,
three years after buying our stock back from Bechtel, Birkelund came to my office
to ask me what I thought of the deal. I told Birkelund that it was a done deal and
that my opinion as one of the newest partners was irrelevant. Birkelund insisted
he really wanted to know. I told him that I was disappointed that we were no longer
owners and that I thought a large insurance company would not prove to be a good business
fit. He exploded with rage and stomped out of the office. Minutes later, my husband
Geoffrey a successful Wall Street attorney called to tell me that he
had just had a call from Fritz Hobbs, one of the senior Dillon partners, saying that
Birkelund told him that I had resigned from the firm and that he, Geoffrey, needed
to exercise some control of his wife. I explained that I had not resigned. I then
advised Geoffrey to call Fritz and persuade him that he had managed to get me under
control, to assure him that I had not and had no intention of resigning and that he,
Geoffrey, could be counted on to make sure that I supported the sale and the changes
contemplated. Hence, my partners could look to my husband to manage me. I then spent
several weeks collaborating with Geoffrey on the manipulation of me which turned
out to be a remarkably effective, though unorthodox, communication vehicle.
My back channel
was compromised several weeks later when Ken Schmidt, the head of Dillons municipal
department who Birkelund had also assigned to manage me while I managed
a large and profitable client and deal flow, broke down one night after several drinks
and confessed that he and my other partners were using my husband to manipulate me.
Perhaps he would not have felt as guilty if he realized where Geoffrey was accessing
|Senior Dillon Partner Peter Flanigan, shown
here at the Rainbow Room with Catherine at Christmas time in 1988, later became the
one of the largest personal Dillon investors in private prison company Cornell Corrections.
(Photo courtesy Catherine Austin Fitts)
After the sale of Dillon to Travelers, we put together significant Travelers financial
support for our LBO business. Birkelund called me to his office to ask me if I would
take the lead on marketing our LBOs to bond buyers. This request caught me off
guard, as I was confident that this was a role in which I would not be successful.
I asked why he thought I was appropriate. He described my success at designing and
marketing $4 billion of New York City transportation systems bonds. This was a deal
that nine firms had said could not be done but that had gotten done quite successfully
with Dillon Reads leadership, making the first page of the New York Times
and the financial press. I explained to John that I could sell deals that I had personally
structured and which I believed to be sound credits because they were based on some
fundamental wealth-creating purpose that would ensure the bond buyers were paid back.
However, a lot of the LBOs flowing through Wall Street were not based on sound financial
engineering and involved companies that were of dubious value. I was terrific with
Dillons investment clients when I believed in a credit. Unless I was personally
confident in the investments long-term viability, I was not effective at selling it.
John thought I was being difficult and I was amazed that he could not understand
that just as fish dont fly, I did not have the ability to do a good job for
the firm at this task. It was as if two parallel universes were trying to communicate
and failed. One was looking to go with the flow of more and more government and corporate
debt without thought for how future generations would pay back all this debt
what some of us called the debt bubble because that was the way to win at the
game of hot money profits. The other thought that money served a strategic purpose
and that flipping people and companies like pancakes for quick profits was risky business.
Things came to a head when I arrived at the weekly banking meeting of the Dillon
Read partners one morning in 1988 and listened to Steve Fenster, one of the partners
who had joined us in 1987 from Lehman Brothers with an interim stint at Chase, make
his presentation on why Dillons LBO group should take the second position behind
First Boston in the Campeau hostile takeover of the Federated Department Stores.
During his presentation, Fenster, later a professor at the Harvard Business School,
presented a sources and uses of funds statement. This is a statement that
estimates where the money is coming from to buy the company and how it will be spent
and in what amounts. Steve described a significant source of funds would come from
productivity improvements a portion of what was needed to fund
the cost of hundreds of millions for golden parachutes for senior management and fees
for lawyers and investment bankers.
The productivity improvements were the increased profits to be generated
by middle management over many years all without partaking of the hundreds
of millions pork fest enjoyed up front by senior management and Wall Street. We would
get rich and get out up front. The guys in the trenches would work like dogs for years
for scraps if the deal were to work. I was stunned. I asked Steve why in the world
middle management would stick around and spend years working to generate increased
profits without adequate incentives. After all, these financials would be disclosed
in SEC filings. The companies middle managers would read the proxy and could
walk with their feet. This meant the company would fail.
If the company failed before we sold new bonds, the Travelers bridge line that
we were using would lose millions. If it failed after we sold the bonds, our customers
who bought the bonds would get left holding the bag. Fenster looked at me in disgust
and said something to the effect of we will be out in December, meaning
if the deal tanks it will be someone elses problem. I responded "Steve,
our bond buyers wont be, meaning that Dillon would be selling the securities
to pension and mutual funds and other bond buyers who would then take what could be
millions in losses. By this time, Brady had left for Washington and Birkelund was
now in command of the firm. Birkelund was trying to build a fortune. Nick had one
to protect. It struck me that the balance that the Brady-Birkelund partnership had
somehow managed to strike between playing to win in the hot money game and not putting
Bradys personal reputation at risk was gone. Dillon anticipated significant
fees and Fenster and the partners around the table were hungry for the quick bucks
of big year-end bonuses.
That was when I decided that we might be losing sight of the line between financial
engineering and financial fraud. I left the boardroom and headed downstairs to make
a call to Washington, D.C. There was nothing else to learn at Dillon Read. It was
time to go I was too much a member of the old school. Other firms had indicated
an interest in recruiting me. However, I had promised Nick I would institutionalize
my clients and not strip the business from the firm. The way to continue to do that
was to join the incoming Bush Administration in Washington, D.C. The corruption was
bad, a crash was coming and Washington would lead the clean up. Besides, the corruption
was being engineered in part through Washington. I wanted to understand how the economy
and markets really worked. It was long my dream to find ways that investors could
profit from activities which increased human and environmental safety and wealth.
I needed to understand how the federal government and credit worked.
When the Federated Department Stores declared bankruptcy on January 15, 1990 as
a result of their takeover by Campeau using an unsound financial structure, Dillon
Read, Travelers and Dillons bond buyers were left holding millions of badly
discounted securities. By that time, I was Assistant Secretary of Housing-FHA Commissioner
at HUD managing billions of defaulted mortgages and coordinating with the group at
the Resolution Trust Corporation who were managing billions of defaulted savings and
loan (S&L) mortgages. While Birkelund and Fenster were explaining the Campeau-Federated
defaults to Travelers, I was learning why Oliver North allegedly referred to HUD as
the candy store of covert revenues.
It took years of cleaning up the mortgage mess to understand that this homebuilding
and mortgage fraud was an integral part of the National Security Councils shenanigans
during Iran-Contra and a U.S. federal debt that was growing at alarming rates.