As End Neared, Grasso Held On
In Hopes Pay Furor Would Ebb

Over Labor Day weekend, Dick Grasso got an earful from an old friend over egg-white omelettes at a diner in Southampton, N.Y. Francis Maglio, a New York Stock Exchange seat owner, says he told the Big Board chief that the budding furor over his $139.5 million deferred-compensation package was sure to damage the world's premier stock exchange.

"Frank, you don't understand," Mr. Grasso insisted, according to Mr. Maglio. "This is going to blow over in a week or two." Mr. Maglio retorted: "You're in denial. You've stopped listening to the people who love you." Less than three weeks later, Mr. Grasso finally listened -- triggering the boardroom showdown that resulted in his ouster on Sept. 17 after eight years as chairman and chief executive.

It all occurred so suddenly that no one at the Big Board had mapped out succession plans for an involuntary departure. Here is some of what has happened in the past 10 days at the Big Board -- among the most tumultuous periods in its 211-year history -- pieced together from interviews with exchange officials, directors, regulators and members. Mr. Grasso declined to comment.

This behind-the-scenes account makes clear that Mr. Grasso badly misread the growing anger over his pay and the harm it has caused the exchange. He also erred in listening to high-profile supporters -- including former New York Mayor Rudolph Giuliani -- who urged him to tough it out. It was only after a moderate NYSE director told him his time was up that the 57-year-old Mr. Grasso decided to act.

NYSE directors have scrambled to name an interim chief, veteran banking executive John Reed. The course of the Big Board thus will be set by a man selected in a single day, who expects to stay on no more than several months. In his first move, Mr. Reed is scrapping a draft report on corporate-governance changes prepared by NYSE directors and ask for tougher recommendations. He also is expected to ask for the resignations of the remaining members of NYSE's 27-seat board. Thursday, NYSE director H. Carl McCall was the first to resign. (See related article¹.)

By Tuesday, Sept. 16, calls for Mr. Grasso's resignation had come from all sides, including NYSE floor traders, some NYSE directors, institutional investors and politicians. Critics were enraged because the NYSE appeared to be ignoring standards it had been setting for U.S. corporations on good governance, and because the markets were just rebounding from a seemingly never-ending series of corporate scandals, accompanied by sky-high pay for some executives. Members were furious because their costs of doing business on the floor were skyrocketing. Even some NYSE directors were angry because they contended they didn't know the full extent of Mr. Grasso's pay plan.

That morning, Mr. McCall and Henry Paulson Jr., the CEO of Goldman Sachs Group Inc., discussed the mood of the board over breakfast at Goldman's private dining room on the 30th floor of its lower Manhattan headquarters a block away from the Big Board.

"I don't think he can survive this," Mr. McCall said to Mr. Paulson, according to a person familiar with the conversation. Mr. Paulson agreed. For days, he had been working the phones, hearing complaints from other NYSE directors about Mr. Grasso's reluctance to take action. By now, at least four Wall Street CEOs on the board believed they could oust Mr. Grasso if a vote were called.

A director enlisted Mr. Maglio's help gauging the sentiment of members, to "make sure everyone was on the same page," Mr. Maglio says. He spent the day talking to traders on the NYSE floor and at the exchange's exclusive Luncheon Club. After gathering dozens of home addresses and phone numbers from people who said they wanted Mr. Grasso to resign, Mr. Maglio says he met for 15 minutes with Mr. Grasso in his sixth-floor office at the Big Board.

Mr. Grasso, who keeps his work space at extremely high temperatures, was cool, even as a large TV screen showed California State Treasurer Phil Angelides calling for Mr. Grasso's resignation. "This will be OK," Mr. Maglio says Mr. Grasso told him. Mr. Grasso added that critics would be assuaged by an upcoming report prepared by NYSE directors on corporate-governance changes at the exchange, according to Mr. Maglio.

Besides, he says Mr. Grasso argued, he shouldn't be blamed for his own high pay: "It's not my fault -- I didn't do it. The compensation committee did it."

The next morning, Sept. 17, Mr. Maglio faxed a one-page letter to at least one NYSE director, summing up the sentiment of the floor. The NYSE board, the letter urged, should take "swift and immediate action" and ask for the resignation of Mr. Grasso and members of the compensation committee. And they should direct an audit of the compensation committee and other parts of the exchange.

But Mr. Grasso still was fielding calls from supporters who urged him to stay. Among them was Mr. Giuliani, who phoned Mr. Grasso from Ireland. The message, according to Mr. Giuliani: Hang in there. "I was in a better position than most to understand the job, and how the frenzy can affect people," Mr. Giuliani says of his call.

Meantime, NYSE director Kenneth Langone, who had been head of the compensation committee during some of Mr. Grasso's fattest paydays, was confronting directors he viewed as Mr. Grasso's critics. In a call to Philip Purcell, CEO of Morgan Stanley, Mr. Langone said: "What is going on is a disgrace," according to a person familiar with the call. Several other directors, including Mr. Paulson and J.P. Morgan Chase & Co. Chairman and CEO William Harrison, received similar calls from Mr. Langone, who told them they must take responsibility for their role in shaping Mr. Grasso's pay and support his leadership, according to people familiar with these calls. Mr. Langone declined to comment.

Mr. Langone also counseled Mr. Grasso, who the night before had told directors he would meet with them -- but not for another week, betting that the pay flap would die down. "We need to take a vote of confidence," Mr. Langone told Mr. Grasso, according to people briefed on the call. "We need to deal with this today."

The turning point came in a call made around 1 p.m. to Mr. Grasso that Wednesday. It came from a friend, NYSE director Laurence Fink, who also is chairman of BlackRock Inc., an investment-management firm. Mr. Fink had the ear of both camps of the divided board and had supported Mr. Grasso. Now, his view had changed. "I told you I'd be very straight with you," Mr. Fink told Mr. Grasso, according to people familiar with the call. "The tide has turned. I want you to take control of this now."

There was a long pause. "I'll set up a phone call," Mr. Grasso replied, these people say. Fifteen minutes later, directors received an e-mail notifying them that Mr. Grasso had called for an emergency board meeting by phone at 4:15 p.m. At 1:35, Mr. Grasso reached Mr. McCall, alerting one of the NYSE's key directors that if the board voted him out, he would go.

Meanwhile, Mr. Grasso conferred with several lawyers and set plans to structure his departure as a "termination," entitling him to $57.7 million in deferred pay and severance, in addition to the $139.5 million deferred-compensation package he already received. Mr. Grasso earlier this month said he would forgo $48 million of the future deferred compensation, following concerns from NYSE directors. Mr. Grasso had never put that agreement in writing.

At 4:15, the board gathered for what turned into a raucous meeting. "You guys should be ashamed," barked Mr. Langone, according to directors at the meeting. His comments were directed primarily at the Wall Street CEOs, whom he suspected of talking to the media. J.P. Morgan's Mr. Harrison urged the other directors to vote to remove Mr. Grasso. "This is about the integrity of the exchange," he said, according to attendees. By 6 p.m., the board voted 13 to 7 to accept Mr. Grasso's resignation.

Mr. McCall phoned Mr. Grasso as several directors listened in. "The board has voted to accept your resignation," he said. Mr. Grasso asked him to hold on. Minutes later, Mr. Grasso returned to the phone. "Carl, that is not what I said," he told Mr. McCall. "I didn't offer to resign. What I said is that if the board votes me out, I will go." Mr. McCall responded: "Well, the board has voted you out, Dick."

Now directors were hustling to find a new leader. Earlier in the day, some directors had quietly approached Herbert Allison, a newcomer to the NYSE board and former Merrill Lynch & Co. president. But Mr. Allison, now head of pension giant TIAA-CREF, declined.

The directors turned to Larry Sonsini, an NYSE director and chairman of California law firm Wilson Sonsini Goodrich & Rosati. He was caught off guard, according to directors, and asked for time to consider. "We need to know tonight," said Mr. Paulson, according to directors listening to the board-meeting call. With the NYSE leaderless, directors ended the conference call and set up another meeting by phone at 9 p.m.

Mr. Sonsini huddled with close advisers at his offices in Palo Alto, Calif., according to people familiar with the matter. At the same time, The Wall Street Journal's Web site had disclosed news of the board's offer to Mr. Sonsini -- and the early reviews weren't promising. Commentators on CNBC began questioning Mr. Sonsini's credentials for the job, considering the NYSE's governance flap. Mr. Sonsini serves on the boards of several high-tech companies that pay his law firm millions of dollars a year in total for legal services. (Mr. Sonsini had defended his role, saying they were companies he helped build.)

The SEC soon weighed in. SEC Chairman William Donaldson had "back channel" communications with some NYSE directors, telling them he believed the board should hire an interim CEO from outside the exchange with no ties to the NYSE board, according to a person familiar with the matter.

Mr. Sonsini had his own concerns. It didn't look right for the board to come to a snap decision about who should lead the Big Board, he told his advisers, the people familiar with the matter say. He also believed, given the public pressure on the board for its role in the pay flap, that an outsider would lend more credibility, according to these people. Shortly after 9 p.m., he turned down the offer to step in as interim chairman and CEO.

The next day, about 500 seat owners packed a meeting in the sixth-floor boardroom with some directors, including Mr. McCall, to figure out where the Exchange was headed. Robert Fagenson, a floor trader and NYSE director, dominated the 2½-hour discussion. He began by saying he knew nothing about Mr. Grasso's pay. "We were kept in the dark just like you," he said, according to attendees.

Mr. Fagenson was cut short. "We're upset and we need accountability," someone shouted from the back. "Stop giving us the party line already!" somebody else shouted.

Mr. McCall told the crowd, "I want to be the reformer of the New York Stock Exchange," according to several people who were there.

On Friday morning, Mr. Fink -- the NYSE director and head of a new search committee appointed by the board -- made a key call. He reached Mr. Reed, the banking executive who once was co-chief of Citigroup Inc., as he was eating dinner at a vacation spot off the coast of France.

"If we were to offer you this job, would you take it?" asked Mr. Fink. Mr. Reed said he would.

Besides the call to Mr. Reed that day, Mr. Fink spoke from his New York office on Friday afternoon with two other prospective candidates who had called him to inquire about the job. But by Saturday morning, Mr. Reed topped Mr. Fink's own list.

After 9 a.m. Saturday, Mr. Fink was joined in his mid-Manhattan BlackRock office by a number of other NYSE directors, either in person or by phone. At the start of call, there was a list of 12 potential candidates, four of whom were submitted by Mr. Fink. Topping the list was someone with independence, extensive managerial experience, a strong corporate-governance reputation and familiarity with the Big Board's constituents. By 11:30 a.m., Mr. Reed's name topped the short list.

Shortly after noon, Mr. Fink contacted Mr. Reed and offered him the job, subject to the board's approval. Mr. Reed accepted and suggested he work for just $1. He had walked away from Citigroup as a wealthy man after losing a boardroom struggle with his co-chairman, Sanford Weill, in early 2000.

Mr. Reed, 64, ushered in significant changes at Citigroup, including the push of automated teller machines. He has a reputation for being personally distant, a contrast to Mr. Grasso's penchant for rubbing elbows with floor traders.

Mr. Reed found himself under the gun in 1999, when he was grilled by a Senate committee about problems at Citigroup's private-bank unit that embroiled the firm in overseas corruption scandals. He also had to answer questions about the bank's relationship with Raul Salinas de Gortari, the jailed brother of former Mexican president Carlos Salinas de Gortari.

Mr. Reed returns to the U.S. Friday. He says he expects to leave the job by year end, but has wasted little time calling for action. He is dumping a draft report of corporate-governance changes prepared by the NYSE board for the SEC in favor of a new review that promises to recommend tougher changes. One of the main issues being reviewed, according to people with knowledge of the matter, is whether issues such as pay, corporate governance and audits should be reviewed by board committees, as they now are, or by the full NYSE board.

A number of broader issues facing the Big Board remain on the table. Among them: whether to split the chairman and CEO posts; whether to split off the NYSE's regulatory function; and whether to issue shares to the public. The scandal also has intensified the debate over whether the NYSE can continue as a human-dominated system, after most exchanges around the world have replaced people with match-making software.

Meanwhile, Mr. Reed soon is expected to appoint a committee to search for a permanent chief.

Write to Susanne Craig at susanne.craig@wsj.com⁴, Ianthe Jeanne Dugan at ianthe.dugan@wsj.com⁵, Kate Kelly at kate.kelly@wsj.com⁶ and Laurie P. Cohen at laurie.cohen@wsj.com⁷

Updated September 26, 2003 1:17 a.m.