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Lunch at The Four Seasons with: Henry Kaufman

Published by The New York Sun on 2006-03-15

Henry Kaufman says he regrets not having been a baseball player, or an opera singer, or a pianist.

Coming from an iconic analyst who has been variously known as the oracle of Wall Street, its high priest, its crystal-ball gazer, its savant of statistics, and its most influential market mover, that disclosure immediately raised the question: Really?

The president and founder of Henry Kaufman & Company chose to course past the astonishment of the reporter.

"I once aspired to be not only a great baseball player, but the greatest one," Mr. Kaufman said yesterday. "I aspired to be an opera singer - not just a great one, but the greatest one. Only the other day, I heard a Russian pianist perform - and what went through my mind was, 'This is exquisite talent, this is perfection.' As for me, I mainly dealt in money."

That, of course, is like saying Babe Ruth played a sport, or Faulkner had something to do with literature, or Jonas Salk mixed elixirs. Mr. Kaufman's place in the financial firmament is secure, not the least because his comments about long-term interest rates helped ignite the bull markets of the 1980's and 1990's.
What, then, was it that made him sui generis?

"As I grow older, I often think of the good things that happened in my life," the 78-year-old Mr. Kaufman said. "I often wonder to what extent randomness played a role. To what extent did Providence say 'He goes here, and not there'? I might have landed up in Hitler's gas chambers."

Some of his relatives perished during the Holocaust, including his paternal grandmother, Fanny Kaufman. Mr. Kaufman, an only child, fled with his parents Gustav and Hilda from their ancestral town of Wenings, not far from Frankfurt. The group included his mother's parents, Daniel and Fanny Rosenthal, and they landed in New York in 1937, when Henry was 10 years old.

"We were fortunate to escape the Holocaust - I still remember being huddled in my parents' bedroom when Nazis were ransacking our living room downstairs, while outside a torch-lit parade was being held denouncing Jews," Mr. Kaufman said. "Something like that cannot but leave an imprint on you."

What also left an imprint on him was hearing stories narrated by his grandfather, Daniel Rosenthal, about the horrifying economic circumstances in Germany - the inflation that demoralized its middle class and, among factors, helped pave the way for the rise of Hitler and his Nazis.

"For a young boy growing up in New York, those stories made me very sensitive to the problems of inflation," Mr. Kaufman said. "America itself was still reeling from the effects of the Great Depression. Could the idea of being in finance have somehow been planted in my subconscious then? Possibly."

But finance was not his chosen career when Mr. Kaufman was breezing through George Washington High School, the same institution that his contemporaries Alan Greenspan and Henry Kissinger attended. It was not on his radar when he got into New York University.

"I had wanted to be a doctor," Mr. Kaufman said.

This was at least partly because his parents and grandparents, who emphasized the importance of a sound education, held - as, indeed, did many immigrants to America at that time - that medicine or the law offered the most reliable route to financial and social status.

Mr. Kaufman, however, found himself unhappily lacking in enthusiasm for such pre-med requirements as chemistry. So he enrolled in economics classes - and found his metier.

"I found that it was important in life not only to study what you really liked, but also to seek good advice," Mr. Kaufman said.

One of those whose advice he sought was Marcus Nadler, a professor at New York University, where Mr. Kaufman had got a doctorate after obtaining a master's degree from Columbia University. The freshly-minted Ph.D. had entered commercial banking and then served as an economist at the Federal Reserve Bank of New York. A private-sector job was being offered; it required him to spend time in Turkey, and help set up a structure for a Turkish money market.

"When you return home from Turkey after three years, how many people will want an expert on the Turkish economy to work for them?" Nadler said to Mr. Kaufman.
That was the younger man's cue to accept a job with Salomon Brothers. Over the next 26 years, Mr. Kaufman rose to senior partner, member of the executive committee, vice chairman, and led the venerable firm's four research departments.

His leadership in research soon brought dividends for Salomon Brothers, and fame to Mr. Kaufman. His reports were in great demand, and he was inundated with invitations to make speeches around America and internationally.

"I realized that what was happening in finance was different from the past - that while business cycles was a neat way of classifying economic activity, interest rates held the key to the outcome of that activity," he said. "I always questioned why interest rates go that way? What's different now from the earlier period?"

The difference was accounted for by innovations in technology, structural changes in the financial markets, and the rush of globalization - the freer flow of capital, goods, services, personnel and ideas across more porous borders. Increasing deregulation also helped bring about greater changes in the American financial markets, and elsewhere around the world.

What enabled Mr. Kaufman to understand the economic scene keenly was the time he'd put in at the Federal Reserve. Its role is mostly to listen and observe - and occasionally do transactions in the market, but not on a daily basis as Wall Street firms do.

"My experience allowed me to better understand the interplay and dynamism of financial markets," Mr. Kaufman said. "I was also fortunate to be in a period where I caught a wave of change. It's sometimes difficult to pinpoint change, but by and large my judgments held up - even though some of my reports cost my firm money because it had held contrary positions. I even got a couple of threats on my life at one point. But it is important to recognize change, and to put safeguards in place to maintain the stability of the economy."

"If you want to be effective, you must be able to not only assess the immediate factors affecting the market but also tell people things that are somewhat more lasting," he said. "One of the things I kept stressing was that markets and financial institutions had a fiduciary responsibility. They were involved with other people's money, which they reallocated in order to make gains for everybody. If that's not done efficiently and ethically, then the economy is hurt. I believe that strongly."

"As a child of the Holocaust, I always had the deep conviction that one ought to do the right thing," Mr. Kaufman said. "That's why I'm a bit dismayed that very few of the current crop of financial leaders and professionals seem to have learned from history. Their orientation seems to be much more near-term. There's been a failure in the academic community, which is good at teaching about models but doesn't pay sufficient attention to teaching history."

After a lifetime of extraordinary accomplishments, are there still mountains left for him to climb?

While Mr. Kaufman did not become a baseball or opera star, he said there's plenty to do in philanthropy as well as the financial markets. Already a philanthropist of repute, he hopes to give away $100 million through his foundation during his lifetime. He's writing a book about his concerns about the concentration of financial power. And he's sponsoring music schools and other educational programs along with his wife Elaine.

Pranay Gupte,
Senior Writer and Global-Affairs Columnist

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