For Rhyme and Reason

By William R. Doerner.

When Ronald Reagan decided to ask Donald Regan to serve as Treasury Secretary, the President-elect knew his choice only by reputation, as a Wall Street stockbroker and G.O.P. fund raiser. At the start of their first telephone conversation, Reagan made the mistake of pronouncing Regan's name exactly like his own. "It's Ree-gan," corrected the just invited Cabinet official. Apologized his about-to-be boss: "I guess I'll have to learn to pronounce it properly."

In the four years since, Reagan has learned not only the correct pronunciation but also that he and the ambitious, blunt-spoken Regan have more in common than rhyming first names and frequently confused last ones. Both believe that almost any economic problem can be solved by unfettering the forces of the marketplace, and both view with skepticism the advice of professional economists, even conservative ones. The two men also have an innate optimism about the underlying strength of the American system. These shared beliefs helped make Regan, an outsider in a clique of Californians and a political novice to boot, the Administration's chief economic power as well as one of the few advisers to meet privately with the President on a regular basis. In his new job as White House chief of staff, these sessions will turn into daily events, as no doubt will the trading of salty stories, yet another common habit. |

Regan's appointment to the sensitive West Wing position, at age 66, climaxes a stint in Washington marked by ups and downs as jagged as any appearing on the stock charts he analyzed at Merrill Lynch for 34 years, the last ten of them as chief executive. Though never out of favor with the President, Regan saw his credibility on Capitol Hill and in the business community plunge after the recession of 1981-82, when he stubbornly insisted that the economy would come "roaring back" in the near future and stage "one of the greatest recoveries in history." Critics charge that he accepts any economic nostrum that strikes the President's fancy and sells it as one more way of getting "bullish on America," the corporate slogan that was instituted while he was president of Merrill Lynch. Says Congressman Fernand St. Germain, chairman of the House Banking Committee: "Donald Regan faithfully implemented whatever Reagan Administration economic policy was in vogue at whatever moment."

As recently as last February, Regan stunned members of the Senate Budget Committee by literally trashing the annual report of the chairman of the Council of Economic Advisers, Martin Feldstein, which warned that soaring budget deficits threatened to stifle the economy for years ahead. Scowled Regan: "As far as I am concerned, you can throw it away." He has blamed high interest rates on the monetary policy of the Federal Reserve Board, not the heavy federal borrowing requirements created by high deficits, the culprit cited by most economists. At one point he went so far as to assert that "there is no necessary cause-effect link between deficits and interest rates." Asked last year if he agreed with Regan's assessment of the deficit situation, Exxon Corp. Chairman Clifton Garvin Jr. responded tartly, "It depends on what hour of the day he said it."

Yet Regan won high marks from the President for his work on behalf of Reagan's three-year, 25% tax cut. When the cut was passed in August 1981, a jubilant Reagan told colleagues, "I had some outstanding help from a number of people, but particularly from a very fine salesman named Don Regan." Regan's loyalty and persistence have helped him overtake more Washington-wise players in the Administration, notably Budget Director David Stockman.

More recently, Regan startled even his harshest critics with his proposal for the most sweeping reform of federal tax laws since World War II. Among those who have endorsed the proposal are Economist Joseph Pechman of the Brookings Institution and Consumer Advocate Ralph Nader--a following that prompted Regan to quip, "What have I done wrong?" The President has not embraced the whole package, but he did call it "the best proposal for changing the tax system that has ever occurred within my lifetime."

Regan has been impressing superiors for close to four decades. Son of a Boston railway employee, he attended the city's prestigious Cambridge Latin School and Harvard College. After dropping out of Harvard Law School to join the Marine Corps, he saw action in four South Pacific campaigns in World War II, rising to the rank of lieutenant colonel. He joined Merrill Lynch, then as now the nation's largest brokerage house, as a 27-year-old trainee in 1946; by 35 he had become the youngest partner in the firm's history. The fact that Regan's uncle by marriage happened to be a senior partner was hardly a hindrance, but not even his detractors claim that his rise was based on nepotism. An important mentor was Robert Magowan, son-in-law of Co-Founder Charles Merrill, who described Regan as "the brashest little bastard I've ever seen." When that billing got back to Regan, the 6-ft. ex-Leatherneck protested, "I'm not little."

Nor were his ambitions. Called back to New York in 1960 after managing the Philadelphia branch office for five years, he sought and won authority to open a long-range planning section that laid the groundwork for transforming Merrill Lynch from a chain of brokerage offices into an enormous financial supermarket, complete with insurance, real estate and savings services. As a result, Merrill Lynch was able to breeze past the collapse of the '60s go-go market and, as the deregulation era dawned, to become a serious contender for retail-banking customers. Asked in 1979 to describe the financial institution of the future, Citicorp Chairman Walter Wriston replied without hesitation, "Don Regan already runs it. It's called Merrill Lynch."

For all his success on Wall Street, however, Regan was always somewhat contemptuous of its clubby, old-money atmosphere and did not hesitate to defy many of its long-established patterns. He set his sights on the lucrative field of investment banking, traditionally closed to brokerage houses, and within a few years forced old-line firms like Morgan Stanley and Lehman Brothers to accept Merrill Lynch as a fellow major underwriter of new stock and bond issues. Perhaps his most revolutionary gambit was to lead the attack on fixed-rate commissions on the sale of securities in favor of negotiated, or competitive rates, which varied with the size of the transaction. When other brokers howled that the new system encouraged pricing wars, Regan was unmoved. "Wall Street preaches capitalism all day long," he said. "Since one of the major rules of capitalism is free competition, Wall Street should try competition itself."

Just about the only corporate responsibility in which Regan failed at Merrill Lynch was the unwritten rule that a departing chief executive officer must select a successor who leads the firm to even greater heights. Under new Chairman Roger Birk, now 54, the financial giant did prosper in the early '80s but then hit some painful snags, last July reporting its first money-losing quarter since it went public in 1971. Profits for 1984 were a scant $45 million, vs. more than $300 million during each of the two prior years, and the company laid off some 3,000 of its 43,000 employees. Birk surrendered the title of chief executive last summer to President William Schreyer. Typically, when Regan spied Schreyer at a securities dealers' convention in Washington shortly after Merrill Lynch's fortunes had begun to sour, he demanded gruffly, "Tell me, Bill, what the hell went wrong?"

Regan will find it necessary to soften considerably that choleric tone in his new job. While his devotion to the Reagan agenda is beyond question, his capacity for patient persuasion is not. Says a former aide at Merrill Lynch: "If he has a deficiency, and everyone does, it is that he sometimes lectures people a little too much." Regan acknowledges his drill sergeant's manner but insists that he has learned to overcome it. "When I was chief executive and I said, 'Jump,' people asked, 'How high?' " Regan said last week. "As Secretary of the Treasury, when I said, 'Jump,' people said, 'What do you mean by jump? What do you mean by high?' But having entered this milieu, I think I have learned to live in it."

His proven record as an innovative administrator promises to make the White House a more orderly operation. One of Regan's first moves at Treasury was to install computer terminals in his and top aides' offices so they could track financial developments without waiting for reports to come up the line. Though a large part of his junior staff is already in place, Regan is likely to want aides of his own choosing before long. Chances are they will not be independent types who might try to outshine him. When Regan arrived at Treasury, conservative Deputy Secretary R.T. McNamar was constantly in the news, making decisions for the IRS on the Bob Jones University case and popping off about foreign debt. Overnight McNamar disappeared from the newspapers. Says a Regan aide: "Don got his attention by taking away all his duties for a while." (McNamar's name surfaced again last week: he resigned from Treasury, making room for Richard Darman.)

Regan is already one year past the age at which he would have been retired at Merrill Lynch, and virtually anywhere but in Reagan's White House he would be considered conspicuously old for such a demanding job. He and Wife Ann, who have four grown children, built a home near Mount Vernon on property once owned by George Washington; ironically, they had purchased the land for their retirement. With a net worth estimated at close to $30 million, Regan hardly needs gainful employment. Yet friends say that he has thrived in his second career, and Administration insiders would not be surprised to see him hang on as long as his boss. "He wants to be a successful chief of staff," says one. "He could well serve all four years."

With reporting by Christopher Redman/Washington and Frederick Ungeheuer/New York