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  In a series of private meetings between SEC enforcement staff and Mobil lawyers, a deal had been cut, or so the SEC side led now by David Doherty believed. Rather than publicly charge Mobil with wrongdoing in an SEC enforcement action, the commission staff accepted a compromise. Doherty would draft a report of the SEC’s investigation—a report of the facts only, not of legal conclusions about whether Mobil had violated any laws. Assuming the report was approved by the five SEC commissioners, Mobil would publish it in a public statement at SEC headquarters. The facts would be laid out for all to see.

  Now the meeting had arrived to secure the SEC’s approval for this deal. Doherty was on his own to face the new Reagan-appointed chairman. Many SEC staff attorneys—the keepers of the bureaucracy’s traditions, what Sporkin called its “institutional memory”—were still trying to figure out John Shad. There were the obvious questions about his ideology, his loyalty to Reagan’s program of immediate and drastic deregulation. Even more basic at this early date were concerns about his work habits and his personality. There were some commissioners who passed through the SEC whom the staff regarded as less than serious, commissioners who didn’t read the staff’s memos or study the legal issues to be debated, who enjoyed the trappings of their jobs but paid little attention to the substance. Would Shad be one of those? Would he respect the staff?

  That Thursday, Barbara Thomas and Phil Loomis flanked Shad on the commissioners’ side of the table—only three of the five SEC commissioners were present. Thomas was not a favorite of the staff; some in the enforcement division considered her more interested in her own self-promotion than in the serious work of the commission. Loomis, on the other hand, was respected for his intelligence and was seen as a friend of the bureaucracy.

  Doherty would carry the burden of the meeting for the enforcement division. Here would be the first evidence for the Sporkin loyalists of what was ahead at the SEC.

  “David, my question was,” Shad began, “when one deals with the absence of violations, why are we, in effect, exercising sanctions against Mobil to file a report …?”

  “I have the same, precise question,” added Thomas.

  “First, I don’t think we have necessarily found nothing,” Doherty answered. “… As we explained in our memo, we had originally received allegations of a possible conflict of interest, which is an area which all of us are significantly concerned about.… We think we could take the position that … [the shipping company] was, in effect, a subsidiary of Mobil under these circumstances because of the control exercised. And, accordingly, disclosure would have been required.”

  Shad jumped in.

  “On that point, it seems to me that you would not be able to argue that on the basis of equity ownership.”

  Shad had cut to the heart of the matter. The SEC staff’s position was that the shipping company was a “de facto subsidiary,” and therefore had to be disclosed by Mobil, even though there was no equity, or stock, ownership.

  “No, it wouldn’t be equity ownership,” Doherty conceded. “It would be a—”

  “Under managerial direction,” Shad said.

  “That’s right. It would be under, basically, a control theory but not control by virtue of the equity ownership.”

  “Have we sustained that argument in the past?” Shad asked.

  “Yes, we have, I believe, without—”

  “No, I think in fairness, Dave, this would be what you might call a novel interpretation,” interjected Lee Spencer, director of the SEC’s corporate finance division, with the first attack from another staff member.

  And so it went. Argument on argument piled up on Doherty.

  “Well, you haven’t sold me,” Shad declared at one point.

  Shad made clear that he thought the case was a stretch by any standard. The enforcement staff had conceded that it was not prepared to file a lawsuit against Mobil. If it wasn’t ready to fight Mobil in court, Shad asked, how could the SEC justify a decision that would force the oil company to publish the staff’s investigative report?

  The answer was that this was Stanley Sporkin’s deal, his settlement, just like the others that had come to the commission from his corner office and been approved. Only occasionally in the past seven years had the SEC rejected a recommendation from the enforcement division. And here, in John Shad’s first month on the job, it was turning down a modest settlement involving Sporkin’s compromise with the second biggest oil company in the world.

  “I don’t know,” said Barbara Thomas when the 3 to o vote in favor of Mobil was over. “All this sympathy to Mobil. It just seems to me that they’re—I mean, obviously the vote is taken, but it seems to me that we’re doing better by them than they expected.”

  “I won’t guess the answer,” Shad said. “I agree with that.”

  When Sporkin heard what happened, he couldn’t understand it. He didn’t think the commissioners had acted in bad faith, he said. It must have been some kind of misunderstanding.

  There was a deal. Stanley Sporkin had made a deal.

  “I had been the architect of this sort of resolution,” Sporkin explained afterward. “I had left before it got to the commission.… Something gets lost here and I think the unfortunate part here was that everything was aboard, and I just think it was misunderstood.… Mobil was on board.… Mobil was on board. There would have been no reason why the commission would not have accepted this.”

  No reason—except that Stanley Sporkin didn’t work at the SEC anymore.

  Doherty, Levine, and the other lawyers in the celebrated enforcement division were beginning to understand: the Securities and Exchange Commission belonged to John Shad now.

  2

  The Man from Wall Street

  When John Shad met Ronald Reagan for the first time, they had the kind of instant rapport that men of like values often find. They shared a common philosophy about limited government and America’s rightful place as a world leader. Though one had been a politician and the other a Wall Street financier, both believed that private enterprise nearly always provided the best solution to problems. They also shared conflicting impulses about government: They wanted Washington off the backs of the people, but they wanted to go to Washington and hold office themselves. Similarly, they believed sincerely that the basic American virtues of hard work and ingenuity could overcome any evil and were the bases of success; yet they were both white, middle-aged men who had prospered at times in their own lives because of connections. They understood that to get ahead in America, it helped to break into the inner circle. The setting for their initial chance meeting, and the profound impact it would have on John Shad’s life, reinforced that notion.

  The Bohemian Grove, where Shad first met Reagan, seemed as improbable a setting as any in Shad’s life.

  “Cast your grief to the fires and be strong with the holy trees and the spirit of the Grove,” a voice decreed before the altar of the giant owl in the night air by the lake. “The owl is in his leafy temple; let all within the Grove be reverent before him.”

  There Shad stood, one summer’s night in the northern California wood, surrounded by similarly pale, flabby businessmen and politicians. Only hours had elapsed since they had been wearing business suits, but the uniform of commerce and governance had no place here. Some of the men wore bizarre costumes and hoods; the public, especially women, was strictly forbidden at Bohemian Grove. Some of the guests had marched through the trees of their encampment bearing torches and a coffin—part of the Grove’s “Cremation of Care” ritual.

  The Bohemian Grove was an all-male summer camp for the rich and powerful. It thrived on its exclusiveness. It attracted overgrown boy scouts in government and business who relaxed and let loose by regressing in each other’s company. To protests about the exclusion of women, the members responded that if the opposite sex were permitted, the men would have to cease urinating on trees, thereby destroying the ambience of the place. Shad wasn’t a member, but he was invited to attend during the la
te 1970s by Hutton executives on the West Coast. It was, among other things, a good place to meet people who could help one’s career. The annual Cremation of Care ritual, wherein a high priest sacredly invoked Shakespeare’s proscription against intrigue—“Weaving spiders come not here”—was among the Grove’s more obvious hypocrisies, since it was precisely their thirst for power and their immersion in worldly cares that drew men to the camp each year. Shad was no exception.

  When they met, in the summer of 1978, Reagan was wearing cowboy boots and sat perched on a railing, absorbed in a performance by the ventriloquist Edgar Bergen. In the initial yet important conversation, Reagan was his usual, congenial self. After the show, the two men chatted and took a walk to another campsite within the Grove called the Hillbillies, where Shad ate lunch. (His waiter was a former U.S. ambassador to China named George Bush, who was taking his turn serving tables at the Hillbillies.) The tone of the Shad-Reagan conversation was more important than its substance; it was enough to establish that they were kindred spirits.

  Reagan telephoned Shad the following year and asked him for help in the upcoming Republican presidential primary campaign. But Shad initially deferred; he told the candidate’s aides that they should try to recruit Donald Regan, a more prominent executive who ran Merrill Lynch, Wall Street’s biggest firm. Regan, it turned out, wasn’t interested—he was an early supporter of Bush. Just about everybody on Wall Street supported either Bush or John Connally, Reagan’s other main opponent. Though they would later rally around, Reagan’s extreme ideological conservatism at first unsettled the titans of business and finance—but not John Shad. When the Reagan staff came back to Shad and told him that he was their first choice, he agreed to be chairman of the New York campaign.

  Shad went to work raising money and planning campaign events. He brought Reagan to the bastion of capitalism, the New York Stock Exchange, on March 19, 1980, in the midst of the tough New York State primary—a moment in the campaign when the surge to Reagan was just under way. Shortly before the close of trading that afternoon, Shad escorted the candidate across the boisterous exchange floor, where curious traders and floor brokers crowded around them. The Dow Jones Industrial Average, the most widely followed measure of daily stock market performance, had hardly moved at all that day, losing less than a point to 800.94. The market’s performance was a symptom of the sluggish economy that Reagan promised to reverse with his “free market” policies.

  They fought their way around the floor and up to the exchange’s venerable lunch club, where Shad introduced his candidate to the audience. “Ladies and gentlemen,” he intoned, “I present to you the next president of the United States.” The visit turned out to be Reagan’s second most successful fund-raiser of the month, netting $42,680.

  Shad arranged, too, for Reagan to meet privately at the exchange with a group of influential New York business leaders—the sort of men who summered at the Bohemian Grove and now found their establishment-Republican candidates, Bush and Connally, fading from the race. Shad waited outside the conference room, wondering how things were going. When the door opened, financier Laurence A. Tisch emerged and flashed a “thumbs up” sign. The group approved of Shad’s candidate.

  During the campaign, Shad made it clear that if Reagan were elected, he would be interested in taking a post in Washington. He talked privately with Martin Lipton, a prominent Manhattan takeover lawyer, about how the two of them might go to Washington together to serve under Reagan, with Shad as Treasury Secretary. But after Reagan won, he appointed Merrill Lynch’s Donald Regan to head Treasury. Shad’s reward didn’t come until February 1981, when Reagan personnel chief, E. Pendelton James, called to offer the SEC. James said afterward that Shad was selected because “he was probably the first businessman on Wall Street that came out early for Ronald Reagan.”

  If confirmed by the Senate, Shad would take a cut in pay from about $500,000 a year at E. F. Hutton to $55,000 a year as chairman of the SEC. He would trade the currency of success in Manhattan, money, for the currency of success in Washington, power.

  There were pages and pages of government forms for Shad to fill out—the sort of forms Shad intuitively disliked. And there were decisions to be made about his family’s massive stock market holdings, including more than $10 million of E. F. Hutton stock. There were sure to be questions about a conflict of interest for the SEC chairman if Shad tried to hold on to the Hutton stock, even in some sort of blind trust. Then, too, there was much for Shad to learn about how the SEC operated before he went in front of the Senate Banking Committee for confirmation.

  Shad studied the Reagan transition team’s written report about the SEC in the weeks before his April 6 confirmation hearing. All over Washington, Reagan’s transition team was having its influence, calling, in one form or another, for most federal agencies to be trimmed in size by about one-third over three years. The SEC report was even more far-reaching. It not only called for a 30 percent cut in the SEC’s budget, but also recommended that the SEC’s enforcement division in Washington be dismantled, essentially decentralizing the law enforcement function. In theory, these aspects of the report should have appealed to Shad. He wanted to get government off the backs of the American people and cutting the size of the SEC might be one way to do that. He had seen the benefits of a decentralized management structure at E. F. Hutton and at some of the companies where he served as an investment banker or corporate director.

  But Shad was not an ideologue. He thought the SEC’s enforcement division had an important job to do and had carried out that mission pretty well in the 1970s, even if he hadn’t agreed with all of its cases or priorities. He recognized, too, that decentralizing enforcement would weaken the division. On the issue of the SEC’s size, he was a loyal Reagan man and wanted to explore how the agency’s growth could be trimmed without hurting its productivity. But on the most controversial proposal in the transition report, he was not persuaded: Shad would not preside over the dismantling of the SEC’s vaunted enforcement division. It was a decision he made on the basis of judgment and gut feel.

  The immediate problem Shad faced was getting through the Senate confirmation process, and he feared that some senators would be looking to trick him into making a mistake. Such hearings usually constituted a rehearsed endorsement with little substantive questioning, but unpredictable things sometimes happened and Shad was apprehensive. He was a remarkably indistinct and unimpressive public speaker, inclined to mumble words until they were virtually inaudible. Shad planned for the hearing carefully, deciding, for example, not to smoke in front of fellow Utah native Senator Jake Garn, a Mormon.

  For Shad, and for the senior SEC staff who came to watch him, there was an air of anticipation as the hearing began. It turned out to be a lark. The senators told bad jokes about each other’s states and Shad praised the senators. His prepared statement followed a predictable line—Shad said he wanted to ease certain provisions of the Foreign Corrupt Practices Act, the law Stanley Sporkin had helped to make famous, and to eliminate other regulations that he said placed an undue burden on business. But when he came to the Reagan transition team’s report on the SEC, Shad delivered a pleasant surprise to the skeptical SEC staff. He declined to endorse the recommendations.

  One of the only tough questions at the hearing concerned the president’s budget—that was where warfare was being waged in the early days of the Reagan revolution. Reagan’s budget director, David Stockman, was proposing big cuts in the resources of nearly every federal agency. Shad, though, evaded the issue. He said he didn’t know whether the SEC’s present budget was sufficient.

  “I am a total outsider at this point,” Shad explained.

  Two days later, he was confirmed by a voice vote. On May 6, 1981, Vice President Bush swore in John Sigsbee Rees Shad as the twenty-second chairman of the Securities and Exchange Commission. He was an outsider no more.

  When Shad walked into the SEC’s headquarters in Washington for the first time, he felt a
deeper sense of personal fulfillment than anyone on the wary agency staff realized. The staff feared Shad was nothing more than a rich Reagan campaign fund-raiser from Wall Street who had been rewarded with an agency chairmanship and a meat ax to slash the size of the place. They were right about Shad’s wealth but wrong about his political and personal character.

  Shad’s Mormon grandmother had told him that a person should spend one third of life learning, one third earning, and, if possible, one third serving. He had memorized that aphorism, repeating it over and over. He had devoted himself to learning, graduating from the University of Southern California, the prestigious Harvard Business School, and New York University law school. For more than thirty years, he dressed in dark pinstripe suits and suspenders on Wall Street, rising from his first job as a junior analyst to become a top executive of the giant E. F. Hutton brokerage house. Having amassed a fortune in excess of $15 million, it was time now, he felt, at age fifty-eight, to fulfill his grandmother’s credo and turn his attention to government service in Washington.

  He was tall and heavyset, broad-shouldered but slightly stooped. His big, floppy ears and droopy eyes conjured the image of a basset hound, though he possessed the drive of a greyhound. He was not a particularly handsome man, but there was something appealing about him—his clear blue eyes could be soft and sincere, and he had a warm smile that could light up a room.

  Some among the SEC staff saw him as a caricature of Wall Street greed. It seemed to them that Shad was being asked to regulate his old New York pals, and that it was unlikely that he would really leave the elite social club of Manhattan finance even while working at the commission. Prior SEC chairmen had come from academia or law practice or corporate life. Shad’s arrival marked a major turning point: He was the first man from Wall Street nominated to be SEC chairman in more than forty-five years, since President Roosevelt picked Joseph P. Kennedy to be the agency’s first chairman.