Legendary financier Ted Forstmann, the architect of Wall Street’s big money tool that armed executives to buy out their own companies and changed corporate America , died today. He was 71 years old.
Forstmann had been treated since May 2011 for brain cancer but continued to oversee his financial and entertainment empire. IMG Worldwide, the largest sports and entertainment management firm of its kind, is controlled by Forstmann’s estate and current management.
His greatest accomplishment, friends say, was his talent for amassing a $1.8 billion Wall Street fortune the old-fashioned way, without padding deals with junk bonds which he vilified as “slime” at the root of economic ills for three decades.
He had often warned and lobbied Congress about the danger of junk bonds ahead of the crash of 1987. He also predicted the 2008 meltdown, which he blamed on junk bond’s cousins — toxic mortgage securities.
As his generation’s most vocal critic of the tycoon class for their greed and controversial financial tactics, Forstmann himself was a product of the upper class.
He was born in 1940 in Greenwich, Conn., as an heir to one of the nation’s biggest textile dynasties. Reared amid old money’s rigors, with family yachts, Manhattan mansions, Greenwich estates and the best schools, Forstmann went from being a playboy teen to relative poverty by the time he graduated Yale at the age of 21.
Family setbacks, along with turmoil from an alcoholic father, had wiped out the money. Ted was left to attend Columbia University ’s law school in 1962 on a $150 a month trust fund.
The dashing and athletic Forstmann made ends meet by hustling high-society bridge games, raking in typical high-stakes pots of as much as $1,500 a night.
Armed with his law degree and Social Register connections but little else, Ted took his charms and gamesmanship to Wall Street in 1966. He bounced around several investment shops and small law firms, learning the ways of finance in the trenches.
At 34, he sold his car and belongings to raise $20,000 to launch his own firm in 1978 with his younger brother Nicky and a banker pal, Brian Little.Their three-person firm, Forstmann Little & Co., arrived at time of great upheaval at the staid, old-boy firms of Wall Street. An invasion of brash young wheeler-dealers who used risky borrowed money to finance raids on old line firms, was roaring through boardrooms like wildfires.
Forstmann himself had already made history by creating a novel business model for managers to finance buyouts of their own firms, in effect blocking the out-of-town raiders from scooping up sizable companies overnight with inflated IOUs.
His answer to defend against unwanted takeovers was called a leveraged buyout, or LBO. The deal borrowed money against a firm’s assets and paid it back with real cash flows instead of piling on outside debt at excessive interest — called junk bonds — which were kicked years down the road while raiders plundered assets of companies they had acquired.
Forstmann openly loathed Wall Street shops that scrambled to package junk bond deals with sprinkles of cash and loads of paper derivatives that saddled target companies with expensive debt that often defaulted. That practice foreshadowed the recent Wall Street’s mortgage securities debacle, that caused the 2008 economic meltdown, for which Forstmann loudly sounded alarms that went unheeded.
In a speech following the 1987 stock crash, Forstmann told a conference of the Securities and Exchange Commission that the heads of the 11 big investment of the day were like street walkers in a hurry for big scores. “They are the hookers who make $1 million a night, but pretty soon, what have you got? Eleven hookers.”
Forstmann’s biggest junk-bond battle was against rival raider Henry Kravis in 1988 to block his then-record $25 billion hostile bid for RJR Nabisco. Forstmann accurately predicted the deal’s junk bond debt would eventually kill the consumer giant.
In the highly publicized fight, Forstmann coined the phrase “barbarians at the gate,” which became the title for a best-selling book and flick that chronicled the hardball tactics and reckless greed. He may have lost his fight, but he earned the title as a “white hat” takeover savor, while Kravis was branded as a “black hat” raider.
Forstmann’s firm, which never used risky junk bonds, handled many the top LBOs of the era, including rescues of firms such as Gulfstream, Topps and Dr Pepper. He created $15 billion in profits for his investors over 20 years through deal-making.
Tiring of what he called “the corruption of Wall Street” by backhanded dealing, Forstmann in 2004 turned his wealth and interests to entertainment and sports, paying $750 million for a then-struggling talent agency IMG.
From his 45th floor office at Forstmann, Little & Co. overlooking Central Park , Forstmann turned IMG into one of the world’s biggest powerhouses of global sports teams and assets, including fashion, media and licensing deals for celebrities such as Tiger Woods.
Since his youth, Forstmann has been drawn to sports and celebrities. Ranked nationally as a teen tennis champ, he was cheered as a star goalie at Yale and was invited to join the US national hockey team but turned down the offer.
As a low-key philanthropist who’s given more than $200 million to help poor kids, Forstmann was also one of Manhattan ’s eligible bachelors. He was romantically linked to many beauties of the day, ranging from Elizabeth Hurley to Princess Diana. He was twice engaged to longtime girlfriend Karen Hagerty, and gave her a Matisse painting as a gift when he broke off their last engagement.
Of all his possessions, Forstmann said his favorite was the beat-up tin plate that Nelson Mandela used during his 20-year imprisonment in South Africa . Forstmann obtained the prize when he adopted two orphaned South African boys, Siya and Everest Forstmann, one of whom worked in the family business.