Posted on 8-10-2002

Back To (Old) School For New Economy
By ROBERT D. HERSHEY Jr. NY Times 6 Oct02

Wall Street these days often seems a place of utter venality in the service
of executive greed. So it is refreshing to read of a successful American
financier whose interests range far beyond making money. What's more, the
self-effacing manner of that financier, Leon Levy, makes you wonder how he
could have succeeded. Characteristically, he muses about this himself. "My
own meager achievements," writes Mr. Levy, no doubt baffle new
acquaintances. "I can even sense the question forming in the person's
mind," he says. "How does a guy who can't find his pipe when smoke is
coming out of his pocket manage to do so well?' After talking to me awhile,
I'm sure people are even more mystified and leave the conversation
convinced that it must be luck, that the heavy lifting has been done by my
partners, or that I'm due for a fall."

This is a man who, though nominally retired, predicted the current market
meltdown years before it happened, drawing heavily on conceptions inherited
from his father, Jerome, of how the economy works. It is corporate profits,
he contends, that govern not only stock prices but economic performance as
well.

Mr. Levy, who joined Oppenheimer & Company in 1951 as partner and research
director, was a pioneer in mutual funds and leveraged buyouts. He
particularly favored spinoffs and bankruptcies as he bet heavily to unlock
hidden value. His most spectacular success was in developing the strategy
for the revival of the thrice-bankrupt Chicago, Milwaukee, St. Paul &
Pacific Railroad in the late 1970's.

This memoir, "The Mind of Wall Street", written with Eugene Linden and
appearing in bookstores next month, is more illuminating than the typical
blow-by-blow recounting of a lifetime of deals. It combines tales of
encounters with flamboyant promoters like Bernard Cornfeld, who paid
salesmen bonuses in shares of his Investors Overseas Services fund in the
1960's, with wry observations about the nature of man and markets.

Mr. Levy argues that psychology — one of "two loves" of his life, the other
being the stock market — is still underappreciated as an investing force
despite the recent emergence of what is called behavioral analysis, which
elevates emotions as a determinant of stock prices. The stock market is
less rational than long supposed, Mr. Levy said, which is why it can't be
mastered with a system or neat theory.

He criticizes the argument, made mostly by academics, that markets are so
highly efficient that no one can outperform them consistently. "Markets may
be inherently unpredictable — the efficient-market theorists are right
about that — but there are always clues in the actions of government and in
the behavior of major economic actors that offer guidance for the attentive
about developments that offer opportunities," he writes.

For lessons in patient and visionary investing, he scrutinized monthly
reports on stock trades by two of the canniest businessmen he'd ever come
across: J. Paul Getty and the virtually unknown Sy Scheuer, a financier.
Mr. Scheuer's grand strategy, executed over many years, produced a fortune
from West Virginia Coal and Coke.

The bull market of the 1990's, Mr. Levy said, was "collective madness,"
floating "almost entirely on illusions" that included bookkeeping sleight
of hand, the acceptance of stocks as the only securities worthy of the
savvy and the notion that a new economy could grow forever. Similar views
could be found in the 1960's as well, but Mr. Levy points out that the Dow
Jones industrial average advanced just one point, to 875, from 1964 to 1981.

He places part of the blame for the 90's bubble on the shoulders of Alan
Greenspan, the Federal Reserve chairman, who chose not to make it harder to
buy stock with borrowed money and who supported legislation that gave banks
more leeway to do business in the stock market.

But Mr. Levy is particularly hard on those he calls "overreachers," whom
the market typically rewards for a spell but then inevitably punishes. He's
not afraid to zing establishment peers like Felix G. Rohatyn, then a senior
partner at Lazard, the New York investment bank, who, Mr. Levy said, used
his privileged position to try to lure away Oppenheimer employees when
Oppenheimer hired Mr. Rohatyn to broker the sale of the firm to Mercantile
House in the early 1980's.

On another occasion, Goldman Sachs signed on to defend the Trans World
Corporation from a breakup promoted by Mr. Levy. Goldman had previously
advised clients to buy Trans World stock on the grounds that the company's
nonairline assets alone were worth more than its market capitalization. Mr.
Levy calls the turnabout a precursor of the 1990's, "when events revealed
with brilliant clarity whom investment bankers really represent."

Not all of Mr. Levy's anecdotes are as amusing or pointed as he seems to
hope, and the book is slightly marred by inattentiveness to the spelling of
some names. In addition, he does not distinguish between percent and
percentage points, calling a climb to 6 percent from 3 percent in the
savings rate an increase of 3 percent; it is, in fact, 100 percent. The
investment tips are useful, mainly eternal verities but with a sprinkling
of the unorthodox: sell losers rather than winners, but don't obsess about
portfolio rebalancing; get on the same side of a trend as the government
and develop outside interests like, in his case, archaeology to provide
perspective and to exercise imagination.

But those seeking stock market comfort won't get much from Mr. Levy. "My
instincts, refined by 50 years of experience in finance, tell me that we
are in but the third act of a five-act Shakespearean drama that portends a
bad ending." he says, "Stock prices may have plummeted from their dizzying
heights, but neither consumers nor investors have yet realized the perils
of the suffocating pall of debt hanging over the financial world."

He also points to intensifying global competition and sees danger to a
consumer-oriented economy in the inevitable rebuilding of depleted savings.
"Count on it," he said. "When the savings rate rises, my father observed,
corporate profits fall." Slimmer profits mean less investment, fewer new
jobs, more layoffs, depressed stock prices and perhaps even a reversal in
the soaring price of real estate.

Lately, he's bought euros.