I made the usual statements, that we were willing to arbitrate and we were immediately going to make an effort toward negotiations, and I convinced the media people that the strike was going to cripple us and we wouldn’t recover for another five years.
This was unadulterated crap, because behind the scenes we were thanking God and the pilots’ union. And we shut down the airline. We furloughed all TWA employees for the entire duration of the strike.
That convinced the Board of Directors of TWA that they had to accept my offer or the whole goddamn airline would go up the creek without a paddle. And they booted Frye out, took my ten million, and enlarged the board of directors with a number of my people on it – and from that time on I was the undisputed boss.
But that was not quite the end of it. Because it bothered me all the time that Jack, who was one of the few friends I’ve ever had, and poor Helen, should have to bear the brunt of all this. He’d made mistakes, but it just didn’t seem fair that a man like that should be thrown out on the streets like a common bum. This is where I made what I consider to be my first major management mistake.
Jack called me, and we sat down in one of my cars on a side street in Kansas City. I said to him, ‘Jack, this is killing me, that you’re out.’ He said, ‘Howard, it’s killing me too.’
I came up with the idea that Jack would still work for me. Because of his influence in Washington, he was an invaluable man. We didn’t have anyone in Washington at the time who was what you might call a lobbyist, and I figured Jack would fill the bill perfectly. But he wanted a salary of $100,000 a year, and a plane at his disposal, and an expense account – which Noah quickly pointed out to me, when you figured that Jack would undoubtedly run the expense account up to the sky, came close to three hundred thousand. I didn’t care. Money was not the important thing. The important thing was to do right by Jack. Because Jack had done his best. It wasn’t good enough, in fact it was awful, but it was his best.
Then came the moment of truth. With Noah it was always our money; probably deep down he figured his money. He was older than I was, but I think he believed that one of these days I was going to kill myself in an airplane crash and he would take over and run the whole business, and so he was saving the nickels and dimes. Three hundred thousand dollars a year was a lot of nickel and dimes.
Noah hadn’t liked the idea of my hiring Jack to do this job in Washington. He sent me a telegram: ‘It’s me or Jack Frye. You can’t have us both.’
I mulled it over, made my decision, and my decision was my mistake. I chose Noah Dietrich over Jack Frye. I called Jack and said, ‘It’s no good, Jack, it won’t work.’ I turned down a good man, a friend, for Noah Dietrich, who was nothing more than a glorified bookkeeper. And that’s one of my deepest regrets. I thought at the time I needed Noah more. I made an unsentimental business decision and it was the wrong thing to do. Business decisions are to make money or save money. But why did I need to make more money or save more money? I was rich beyond most people’s understanding. Money was already beginning to corrupt me and I was too blind, or too stubborn, or already too corrupted, to see it. Jack Frye never spoke to me after that.
The $10 million that I then put into TWA was one of the best investments I ever made. That gave me total and absolute control of the company. Not just through my owning more than half the stock, but also through the fact that more than half the guys on the board of directors worked for me. There was one little hook in it – which didn’t seem important then, but made its impact felt years later – and that was an indication that if for any reason TWA got into financial trouble due to my control, Equitable Life could ask me to appoint them as trustees of my stock.
But the big problem at the time was that my $10 million wasn’t a straight loan. There was a clause in the agreement that gave me the right to convert the money into TWA stock at any time I wanted – that is to say, during a specified period, at the current market price. In other words, I had a three-year option, similar to a warrant, to convert $10 million into stock at average closing market price the ten days before my actual conversion. When TWA was selling for nine dollars a share, my ten million would have brought me well over a million shares of the stock. But I didn’t buy. Like an idiot, I waited.
Once I was in control, TWA began to improve. We captured more of the passenger and freight traffic, expanded our routes, pioneered in research, and we made money. Well, when that happens, what happens to your stock? It goes up. By the time it got to fifteen dollars a share, if I wanted to convert my loan then, I wouldn’t have gotten more than six or seven hundred thousand shares of stock. I suddenly found myself caught in a bind. The better the airline did and the more money we made, the more intelligence I applied to improving it, the less my loan was worth in terms of stock and a percentage of ownership. Every time I got them a new route, I was cutting my own throat – not financially, but managerially, which to me amounted to the same thing. My mistake was that I didn’t cover immediately when the stock was at nine dollars.
I want to tell the truth about things even if they put me in a bad light, because truth and not self-glorification is my goal. There I was, in a bind. The stock was moving up on the New York Stock Exchange. I hadn’t looked at the financial pages since 1929, but now every day I grabbed the paper – TWA plus an eighth, TWA plus a half, TWA up a quarter, and every eighth of a point meant that I was losing potential control of my airline. I got gloomier and gloomier about the whole thing, and nobody could understand why.
I conferred with one of my top financial wizards about it and we came up with a time-honored solution – I suppose you can say, reminiscent of Jay Gould and J.P. Morgan. Jesse Livermore would have been proud of it. Jesse Livermore was the king of the Wall Street pirates – they would hire Jesse to drive the price of a stock down so they could buy it cheap, then Jesse would turn around and manipulate the price of the stock up and they would sell it dear.
That’s precisely what was under consideration in 1948. We thought we might open some brokerage accounts in the East, in New York, Washington and Philadelphia – in other names, of course – and then begin to sell the stock short. That is, sell what we had at below the market price and sell other shares short, the purpose being to drive the price down so that I could convert my ten million at a reasonable price.
The price of the stock had gone to twenty-three by then. I finally realized that if we followed this procedure and got the stock down a few points, for every point we got that stock down, I would have had to sell shares, and suddenly I realized I would be robbing Peter to pay Paul. And I was Peter and I was Paul. So I got together with my financial wizard who put me in this predicament, and we came up with another plan, based on some precedents that had recently been set by some other company that offered a new issue, a secondary issue of stock, and had given the rights to certain stockholders to buy that stock at a few dollars under the market price. What I wanted then was to convert my loan at fifteen dollars a share.
I talked to Maury Bent about it. Maury said he thought it might work, except that my conversion rights would be so enormous that the stock issue might have a hard time finding an underwriter, and he tried to press me into converting right then and there.