King of the Club
Richard Grasso and the Survival of the New York Stock Exchange
Author: Charles Gasparino (Harper Collins, New York, $27.95)
Richard Grasso was driven to succeed at the New York Stock Exchange. He fought his way up from a Queens working-class neighborhood straight out of Archie Bunkerland. Grasso came from a modest Italian-American home and had few advantages. He did not attend an elite high school, university or business school.
Actually, he was a Pace University dropout. Grasso quietly seethed against those who had every advantage, men like his former boss, NYSE chief executive William Donaldson, whom Grasso would eventually call “the empty suit.” (See sidebar)
His underdog background, which nearly led him to work as a mover or to obtain an appointment as a city cop, made him fanatical in his pursuit of success, according to the author of this fascinating biography. Charles Gasparino is a former reporter with The Wall Street Journal, the publication that, more than any other, brought about Grasso’s downfall.
Horatio Alger
But before Grasso’s fall, there was a relentless climb. Here is a Horatio Alger story. Grasso began at the Big Board with an entry-level position in the listings department. Soon, he was more than a clerk. He became a master of the listings universe, advising corporate bigwigs about takeover rules. It was a remarkable achievement, given that Grasso was not a lawyer.
“In the listings department,” writes Gasparino, “Grasso began by reading the job manual cover to cover. He sought out and read several books that described the history of the exchange from its beginnings. He read company documents that provided details of stock listings and began to gain a vast knowledge of some of the NYSE’s biggest customers.” (p. 41).
His listings expertise would not only help Grasso climb up the corporate ladder, but later, when he became the NYSE’s chief executive, he developed a remarkable ability to pirate companies away from competing exchanges. These skills would put money in the pockets of NYSE members. They were also why many members voted to give Grasso more power and money, even though many of them hated his imperious ways. Eventually, as NYSE chairman, he would be paid like a sports star, with close to $200 million in accumulated cash.
Grasso’s Case
Was the head of an investment utility worth it? This tough biography makes a mixed case for Grasso.
Yes, he protected the floor, preserving the specialist system for longer than many thought possible, and making a lot of people who also didn’t have elite degrees very rich. Yes, Grasso was brilliant in selling the NYSE, keeping it ahead of Nasdaq and making the case for human intervention. Yes, he took the NYSE through incredibly difficult times, keeping the exchange afloat after September 11 and staving off would-be electronic competitors for a while (By the end of the book, the author says electronic trading firms like Goldman Sachs triumphed. Specialist firms-like LaBranche & Co. that were also fighting with Grasso and his arrogant ways-were on the run and facing a difficult business model that could lead to their extinction, Gasparino writes.)
On the other hand, Grasso is often depicted as insolent and avaricious, winning in a business jungle in which animals eat their young. His regulatory oversight group is staffed with people whose qualifications are based more on loyalty than competence. There are numerous cases of specialist skullduggery, happening right under the noses of Big Board regulators. In short, Gasparino says, NYSE regulation under Grasso was often a joke. But few people seemed to care. That is as long as the Big Board, using a human-based auction trading model that appears to be living on borrowed time, prospered.
“King of the Club” raises relentless questions about how the NYSE regulated itself under Grasso and how a pliant board gave him a huge pay package. At the same time Gasparino also casts aspersions on Big Board critics, questioning their motives. He argues that some critics were just trying to steal a march on the NYSE because they realized that Grasso was a formidable adversary. Some just couldn’t abide Grasso’s explosive personality. Other critics were looking for political gains.
Spitzer & Grasso
Examples of the latter are Eliot Spitzer, the New York state attorney general who would run for governor and who saw Grasso’s huge pay package as an issue he could ride to the statehouse, and a New York State Supreme Court judge, Charles Ramos. Ramos ruled in favor of Spitzer, who tried to force Grasso to return his special pay package of nearly $200 million. Ramos ordered Grasso to return part of his pay package: The author suggests he ruled this way for a personal reason. He figured a future Gov. Spitzer would reward him with a promotion.
Gasparino’s tough reporting also rips former New York State Comptroller Carl McCall, who, like so many of the other celebrities appointed to the NYSE board, comes across as a human blank. Yet there is a brutal irony to this. McCall, responding to pressure, eventually asked Grasso to resign, though Grasso, years before, had been delighted to appoint McCall, hoping that his political credentials would provide protection.
However, McCall was someone with little understanding of markets or trading. That, of course, begs the question of how he had been the state’s comptroller, although one should remember we are speaking of New York State, a state with one of the highest debt levels and lowest bond ratings in the nation. That seems to matter very little to today’s taxpayers, but some day it will matter to their children.
Worth Every Cent?
The author describes how McCall blindly approves Grasso’s large pay package and yet seems to have no idea what has been happening at the exchange. More than once the book makes the point that, if Grasso were guilty of hoodwinking the NYSE compensation committee and board, McCall was also guilty of being asleep at the switch. Gasparino also suggests that many board members believed Grasso was entitled to every cent, but started to cave in to a new political environment that was hostile to high-paid executives.
The author suggests that politics also played a prominent part in the Grasso affair, noting that Spitzer deliberately refrained from going after fellow Democrat McCall. Spitzer’s top investigator comes across as a ferocious bulldog. In the course of trying to make a case against Grasso, the investigator intimates that Grasso was having an affair with a member of his staff. But that was a sleazy dead-end that goes nowhere. Grasso did, however, play fast and loose with his expense account, the author says
So there are no heroes among the major characters in this book. Spitzer is now governor. And, by the way, he is currently a supremely unpopular one who seems to be self-destructing just like Grasso. Grasso, at the book’s publication date, was appealing the loss of part of his pay package. Given how often Judge Ramos’ decisions have been reversed, Grasso might have a good chance of winning.
A Disappearing Floor
And meanwhile the NYSE floor is in danger. It is becoming smaller and smaller. Big Board’s electronic competitors now seem to be triumphant. NYSE’s dominance now almost seems a distant memory.
Indeed, at the end of the book even Grasso’s critics wonder if this bright, volatile little man with iron determination didn’t perform a miracle. He appeared to keep the forces of electronic trading at bay for years. Grasso, for all his critics and for all his arrogant ways, helped preserve a mode of trading that seemed dead the moment he was shown the door.
“King of the Club” is a compelling read. Anyone even distantly associated with the trading world will have difficulty putting this work down. The book provides substance in explaining how trading works, but it also has plenty of gossip on the rivalry between firms, exchanges and personalities.
But the book also asks the reader to accept numerous blind quotes from people who were likely looking to even the score in their own version of the Grasso wars. Still, with all its potential faults, the book is likely a realistic depiction of the trading wars of the last quarter century. It is also a cynical book. It is book without admirable characters, about an era now gone.
Defending Specialists
To be sure, Grasso believed in the floor and the efficiency of the specialist system with all his heart and soul, but he wasn’t just protecting it for the good of the small investor. He was also protecting his turf and power. He had recently set up a series of meetings with the brokerage firms’ biggest customers-mutual funds and pension funds, the ultimate sources of trading orders that pass through the brokerage firms and onto the floor. Executives at Fidelity Investments in Boston laid into him, accusing him of defending an outdated trading system and ignoring outright fraud among his traders. (p. 145)
The Empty Suit
Grasso couldn’t always keep his contempt to himself. One afternoon Donaldson asked Grasso to contact executives from the leading specialist firms for a little meet-and-greet in the exchange’s dining room. It was too tempting: Donaldson had been on Wall Street for more than 30 years, yet he barely knew a trader on the floor of the place he was supposed to be running. Grasso came up with a perfect way to show how out of touch Donaldson was with the inner workings of the exchange. Before cocktails began, a line of twelve leading executives from specialist firms formed to shake hands with the chairman. Grasso stood by his boss’s side as Donaldson shook hands in a stiff, robotic fashion. Before the line cleared, Grasso slipped out of place to grab one of the executives. “I’ll make you a bet,” Grasso said. “Go back there and shake hands again. He won’t even recognize you.” The executive gave Grasso a quizzical look. Sure enough Donaldson put out his hand as if the two had just met for the first time. Grasso came out with a new nickname for his boss: the empty suit. Before long, it was all around the exchange. (p. 77)
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