BUSINESS Lord of the Lowball

EACH TIME THE WALL STREET JOUR nalreports that Richard Rainwater is leading another group of investors or proposing to invest hundreds of millions of dollars in this bank or that airline, my phone starts ringing. People want to know what he is up to and what they should do about it. After all, I do live in Dallas, which is only forty miles from Fort Worth, which is where Rainwater is headquartered. I must know something.

Well, a little. Rainwater, as you might suspect, is the kind of investor who anticipates trends. His personality and work habits are fascinating, and he seems to be uniquely a creature of the times. If a mad scientist wanted to genetically engineer the ultimate financial animal, he would want to consider Rainwater’s unusual combination of heredity and environment. Rainwater’s mother is Lebanese and his father is part Cherokee, a fact that accounts for his name. The idea that Rainwater grew up in a middle-class Lebanese neighborhood in Fort Worth, Texas, seems amazing to me. I would not have guessed that there was such a thing. Skipping quickly through the basic biographical facts, Rainwater attended Paschal High School (class of 1962), The University of Texas at Austin, and then received an M.B.A. from Stanford, where he and another Fort Worth native, Sid Bass, were classmates but not close friends.

After business school, Rainwater worked briefly as an institutional salesman for Goldman Sachs before joining his classmate at Bass Brothers Enterprises. The four Bass brothers were great-nephews and heirs of Sid Richardson, a legendary Texas oilman who died in 1959. According to all reports, Sid Bass was dissatisfied with the way the family money was being managed and believed that he, with Rainwater’s help, could do a better job. This brings us up to the early Seventies.

Every organization has its own mythology that sets the tone for how those within it approach their work. One story told of Sid Richardson yields, I believe, a key to the minds of all his professional descendants. At one point Richardson instructed a longtime associate to buy a property that was for sale and to offer the seller “X” amount. The associate said, “Mr. Richardson, I can’t do that, the property is worth 2\. If I make that offer, the seller will be insulted and we will all be embarrassed.” Sid Richardson exploded, “Get your ass over there and offer what I’m telling you to offer. Now git.” Naturally, through ignorance or desperation, the seller sold for “X.” Whether Rainwater would admit that this story made a strong impression on him I do not know. I believe it did. The wall paintings of early cave dwellers are to the works of Michelangelo as Sid Richardson’s low-ball offers are to the business style of Richard Rainwater.

In the early Seventies, Rainwater and Sid Bass were in their late twenties and still feeling their way in the investment business. Their activities ran the gamut from stocks and real estate to high-tech start-ups and even an Italian restaurant, all without great success. Gradually; the idea of finding ways to get into business with world-class niche players began to emerge.

I can remember the first time I called on Rainwater. It was 1975, and I was a salesman. Rainwater listened politely to my pitch for about eleven seconds and then started raving about how much he liked the chicken fried by Church’s. As he talked about how much better Church’s tasted than Col. Sanders’, he grew more animated. Every few sentences he would jump up and enter orders to buy more Church’s stock. Then he talked for a while about how excited he was about the real estate trusts he was buying. Finally, he excused himself and practically ran out of the conference room. I can remember thinking that he radiated an energy level that I found overpowering.

For the rest of the decade, the Bass brothers, with Rainwater as the front man, backed money managers, venture capitalists, oilmen, and others who had great track records. Each time they were very generous in giving equity to their partners. As the quality of the people they bet on improved, their results also improved. By 1980, the Basses and Rainwater had made the progression from being rich to enormously rich.

There is little point in rehashing the Bass and Rainwater investment coups of the Eighties. The 9.9 percent of Texaco they held and sold back to Texaco at a premium to the market was the first gigantic example of what came to be called “greenmail.” The Basses acquired Arvida, a real estate development company, from Penn Central, putting up a minute amount of cash and borrowing the rest of the money-nonrecourse-with the real estate serving as the collateral for the balance of the loan. When Saul Steinberg went after Disney, the Basses swapped Arvida for Disney stock, thereby blocking a predator. The cash at risk for Arvida (maybe $10 million) has translated itself into Disney stock worth more than $2 billion. But notice the pattern: big-time greenmail before the tactic had a name, financial intervention using very little cash, and “assisting” desperate people. Penn Central was assisted because it did not understand the value of Arvida’s real estate holding; Disney, because it was terrified of Saul Steinberg.

In 1985, Rainwater “went on his own.” He apparently is still involved in deals with the Basses but is, in fact, his own man. As Rainwater’s reputation as the consummate financial engineer soared, I acquired a modest reputation as a stock picker, long and short. About a year ago, I made a pilgrimage to Fort Worth to share my (I hoped) valuable insights with Richard Rainwater.

His office setup is unusual. The twentieth floor of First City Bank Tower is occupied by Rainwater, a very few assistants, and a couple of secretaries. The square footage not thus occupied is devoted to conference rooms, each with white plastic walls that you can write on with Marks-a-Lots. The time of my appointment had gotten confused. I waited by myself in a conference room, its walls decorated with cash-flow estimates and asset values apparently provided by the last patient. I eventually joined Rainwater at his desk, where he was eating and talking to a couple of partners.

I was introduced as a famous stock picker from Dallas, a fact that made little obvious impression on Rainwater. He listened to me while simultaneously carrying on at least three other conversations with the partners in the room, people on the phone, and people in other conference rooms. “Look at the great fortunes in America. Where do they really come from? Founding ownership in major industrial enterprises . . .What we are doing here is gratifying. We are helping people whose lives have been shattered.”

As an investor, if 1 really focus on one investment idea once every two weeks, I am doing well. I believe that Rainwater really focuses twenty times a day. He strides from room to room much in the manner of a very busy supervising dentist. When he senses a deal, he will concoct some absurdly low-ball proposal that you or 1 would be embarrassed to mention. But you and I do not have the spirit of Sid Richardson hovering over us.

As financing standards have become more lax, even a fool can get money (Texas real estate types excluded). Rainwater is no fool. As charismatic, successful, and energetic as he is, if he feels challenged, he could borrow $100 billion to acquire who knows what.

There is a passage in Dominick Dunne’s last novel, People Like Us, in which a crude tycoon sets the tone for the current financial times. Asked why he can’t settle for what he has, the character says that he can’t stop. Making money, he explains, is “just too [bleepingi easy.”

That seems to be the case with Rainwater, who has a knack for staying ahead of the financial game-and for reinventing the rules when he needs to. Not only does he have a great deal of money of his own, but he has virtually unlimited access to the money of others, and the current financial games being played offer him little challenge. Almost as an act of virtuosity, it seems to me, he is trying to engineer enormous deals without putting in any cash at all, either borrowed or equity. He is charming and famous and the recipients of his low-ball proposals are seldom insulted. Certainly Rainwater is not embarrassed to make them. And, occasionally, the recipients are desperate or crazy enough to accept.

Whenever 1 am asked to speculate what”Texas investor Richard E. Rainwater” hasin mind with regard to his latest proposal “toinvest hundreds of millions of dollars of freshcapital” in the federally assisted acquisitionof a troubled Texas bank, S&L, or airline, Ialways reply along these lines: Rainwaterwill provide management and oversight, andthe federal government or the Japanese orwhoever will provide $2 billion. Rainwater’sgroup will receive a 55 percent interest in thenew venture. Rainwater will absorb theoverhead associated with thousands ofphone calls and shuttling hundreds of bankers and bureaucrats and other interestedparties between his conference rooms. Andif the government or the Japanese don’t likethat deal, well then, it never hurts to try.Isn’t that right, Mr. Richardson?