Serpent on the Rock

CHAPTER 1 Somebody at Bache & Company was out to get them. The lieutenants in the firm's tax shelter department just knew it. They recognized all the old tricks--the sudden audits of expense statements, the false whispers about misconduct, the unrealistic sales expectations. Probably, they guessed, this was the revenge of that skirt chaser, Bob Sherman. But their boss, Stephen Blank, disregarded the signs. A political war was under way, and Blank would not even arm himself. It was the spring of 1979, and a quiet power struggle at Bache was coming to a head. Blank, a handsome, dark-haired thirty-three-year-old, won some dangerous enemies at the firm during his six years running the tax shelter department. His tough standards in selecting deals for Bache had stepped on the toes of the executives whose pet projects he rejected. When certain of his decision, Blank refused to yield in his judgment--he often told colleagues that reputations in the business were built not on the successful deals that were sold but on the flops that weren't. Still, Blank surprised even some admirers when he refused to sell a real estate deal brought in by Sherman, who as the cohead of retail sales stood higher on the Bache corporate ladder. Sherman was a tough, demanding executive who did not like to be turned down. For Blank, the refusal was a fatal move, one that helped set in motion a series of decisions that reshaped the firm forever. Steve Blank wound up running the tax shelter division at Bache almost by default. A former high school teacher, he backed his way onto Wall Street in 1970 as a consultant helping brokerage firms manage their paperwork. The timing was perfect--the back offices of brokerages were being crushed by the huge volume of paper they needed to move each day in a booming market. When the back-office problems started clearing up, Blank took a job at Bache sprucing up its training programs. Two years later, in 1973, Blank's big opportunity arrived. The executive who ran Bache's tiny tax shelter department abruptly resigned, and the firm launched a desperate search for a successor. Blank quickly emerged as the top candidate. He seemed the only one likely to have instant credibility with the sales force--he had already forged strong relationships with brokers and managers from his work in the training program. Until a permanent replacement could be found, Bache turned the business over to Blank. He was twenty-seven years old. The selection of such a young and relatively inexperienced manager to run a division of a major brokerage firm was met mostly with shrugs. At the time, the tax shelter business was something of an unwanted stepchild on Wall Street. The shelters, also known as limited partnerships or direct investments, raised pools of capital from individuals to invest in business favored by the tax code. Many of those preferences were built in by Congress to encourage investments in certain industries, such as construction and oil exploration. Over years of backroom deals, Congress also granted favorable tax treatment to an array of businesses of less economic value, such as horse breeding, movie production, and even Bible publishing. Any of those businesses could be used in a tax shelter. The risks of tax shelters were large, since investors sank huge amounts of cash into a single asset. If a big tenant pulled out of an office building owned by a shelter, for example, investors in that deal could well lose their money. But with high risk came the potential for high returns. The shelters usually allowed investors to defer paying or even reduce their taxes. But the shelters also provided income--such as the rents from an apartment building--and the potential of earning a profit when the asset was eventually sold. The high risks and tax-based rewards attracted only a small cadre of the wealthiest and most sophisticated clients--the people in a high income-tax bEichenwald, Kurt is the author of 'Serpent on the Rock ', published 2005 under ISBN 9780767923842 and ISBN 0767923847.