CHAPTER FIVE
BANKERS AND CENTRAL BANKERS
YOU CAN’T HAVE INVESTMENT BANKING WITHOUT BANKERS
The history of Wall Street chronicles the history of banking, because ultimately, the history of banking is tied to securities prices through both direct and indirect methodologies. Directly, there is an inverse relationship between interest rates and bond prices. Indirectly, this affects stock prices, too.
When the Federal Reserve decides to increase the money supply, it buys U.S. bonds, shrinking the bond supply. As the money supply increases, interest rates—sometimes referred to as the “price” of money (actually, the price of renting money)—are lowered. So now, if you had a stock and bond that both yielded 10 percent, for instance, the bond’s price would rise so that its yield would decrease along with the interest rate to say 8 percent. The stock with the same 10 percent yield now looks a lot better than the 8 percent bond, and hence, it will be in greater demand than it was before, relative to the bond. The law of supply and demand translates this into higher stock prices. Thus, as the Fed loosens its purse strings, stock prices rise.
The bottom line is this: Central banking controls the money supply and thus, the interest rates, and interest rates very much affect Wall Street. Therefore, the following stories, which trace the histories of both banking and central banking, are key to Wall Street’s evolution. It is like the relationship of the central nervous system to emotional feelings—it is all tied together.
Today central banking is a notoriously trustworthy concept. When you bring a $20 bill to the store, you trust you’ll be able to buy $20 worth of goodies. Your short-term trust in the currency is absolute. But in the days before central banking was institutionalized here, currency was less than stable and the economy was much different. “Money” meant different things in different places and was seldom trusted universally.
Ironically, at its conception, central banking was anything but trustworthy. John Law, the father of central banking, was the epitome of flamboyance. He was a wild womanizer, outrageous dresser, and big spender who once slew a man in a duel over a shared mistress and was twice nearly hanged for it. Quite content to sleep with the wives of men with whom he did business, he was a born gambler who lived by his wits. In bringing the world central banking, Law sparked the infamous speculative Mississippi Bubble in France, which burst right in his face, leaving him a poor, lonely old man when it was over. But he changed the banking world forever.
Law left a legacy that would eventually reach the U.S. via Alexander Hamilton. Hamilton was another less-than-trustworthy character who was willing to take on the task of supporting the controversial concept of central banking. An illegitimate son, he took on a married mistress whose husband later blackmailed him, and in 1804 he was killed in a duel. Who would expect that someone with such a wild personal side would lead the American charge into today’s staid field of central banking?
Nicholas Biddle, third in the legacy, actually was a trustworthy gent, but wasn’t perceived as such in his day. Biddle was an aristocrat—wealthy when no one else was. He was intelligent, scholarly, handsome—and he single-handedly controlled the money supply. People were jealous and suspicious, and there was no way he could win their favor. So when the central bank he controlled went under in the Panic of 1837—after he retired—Biddle still bore the brunt of the blame and went down in financial history as yet another central banking scalawag. As a rich and sophisticated urban banker he made a great scapegoat for the eclectic populism of the Jacksonian era.
The condemnation central banking received in the Hamilton and Biddle eras was so devastating that it wasn’t until the early 1900s that central banking could surface in the U.S. again; this time, in its present, staid and trustworthy form. And without modern central banking as we know it, Wall Street would be drastically different. First, to put the whole thing into play, the Panic of 1907 scared most folks into believing the U.S. needed a unified banking system. Few wanted to be dependent in the future on a single soul like J.P. Morgan, who might or might not be available and willing to bail America out should the need ever arise again. The question was how to do it. Paul Warburg had a plan, and it became the blueprint for the Federal Reserve Act of 1913, which created today’s Fed.
In 1914, Benjamin Strong became the first to head the Federal Reserve Bank of New York, the largest regional bank in the system. He too was the epitome of confidence—dedicated, driven, even approved by the House of Morgan. Strong transformed the Fed into an influential force in world economic policy-making. Sadly, he died a year before the Crash; had he lived, the Fed might have performed less foolishly during the Crash, and the consequences might have been less severe.
Mild-mannered and flat-footed, George Harrison was left to fill Strong’s shoes during the Crash. Following the course Strong probably would have taken, Harrison initiated an easy-money policy, pumping billions into the depleted money market and restoring some confidence in the market. It was the right thing to do. But Washington’s decision to tighten the purse strings reversed Harrison’s actions and led to drastic monetary contraction, imploding a serious recession into dire Depression. Harrison was not strong enough to lean into the wind and buck the political breeze, which is ultimately what the Fed is supposed to do at critical times. Still, Harrison is remembered for opening up the important relationship between the Fed and Wall Street in times of crises.
The middlemen between the central bank and Wall Street are the bankers. They provide the financing to buy the securities and determine the cost of financing via the Fed’s current interest rate. James Stillman, Frank Vanderlip and George Baker headed Wall Street’s biggest commercial banks before and during the Crash. Directly and indirectly they encouraged the 1920s bull market by involving their banks in securities underwriting and sales for 20 years or so prior to the Crash.
Personally eccentric, Stillman was a solid, conservative banker responsible for making National City Bank the largest commercial bank in the early 1900s. Too conservative to actually deal in securities himself, Stillman left his vice president, Vanderlip, with the money and influence to do so.
Vanderlip was a lot less conservative and, as a result, more willing to do what was previously considered taboo—to increase the bank’s profits and influence by doing the things others wouldn’t: more aggressive new account solicitation and mass securities sales and underwriting. He solicited new accounts with the fervor of a broker and gave the bank a personalized touch. An outgoing, dynamic salesman, he was one of the first to involve his bank in the securities business. This was so unconventional that it worked and, in fact, became all the rage with every major commercial bank. George Baker of First National personally capitalized his bank’s securities affiliate in 1907 with his own $3 million!
Charles Mitchell and Albert Wiggin are the reasons why combining investment and commercial banking were outlawed in 1933. The heads of Wall Street’s two biggest banks, they each expanded their securities affiliates to the point that it caused gross abuses of insider information, high-pressure, and deceptive sales tactics, and stock manipulation and wild speculation on the part of the banks! This continued through the Crash until the government interfered, inserting its New Deal Reformers.
Not all bankers were giants on Wall Street. There were underdogs like Natalie Laimbeer, the first notable woman banker on Wall Street who opened the door for other women to enter. And there was A.P. Giannini, who built up his San Francisco-based Bank of America and Transamerica empire by courting “the little fellow.” In exchange for Giannini’s achievement, Wall Street sent him a veritable time bomb, Elisha Walker, who attempted to dismember Giannini’s organization. Walker returned to Wall Street without success; he just didn’t have the grass-roots support Giannini had.
Ultimately Giannini was right. Banking is about the little guy, not the banker. It is providing intermediation between the masses with their small amounts of savings and borrowing needs and their counterparts, the large institutions with the financial credibility to be able to borrow and lend in big bites to build our industries and technologies. The banker is just the tool in the trade. But these bankers built the trade of banking, molding it over the decades into a format that at times accommodated Wall Street and at times made it bend.
It is impossible to separate banking or central banking from the evolution of Wall Street. Even today there is a move underfoot to allow the reuniting of banking and brokering under the same firm. If Wall Street is the way it is today, it is partly because of the way banking evolved. These are the leading bankers that drove a major part of Wall Street’s evolution.
JOHN LAW
THE FATHER OF CENTRAL BANKING WASN’T VERY FATHERLY
John Law didn’t know the meaning of mediocrity—when he went after something, he went all out. When he rolled the dice, you knew the stakes were big. When a man lay dead—killed in a duel over a shared mistress—you knew Law was the culprit. And when France leapt from bankruptcy following Louis XIV’s rule, to sheer decadence in just four years, you had to figure Law was behind it. This was the infamous Mississippi Bubble—and Law was its instigator! While this was quite a feat for the native Scotsman, who was twice nearly hanged for dueling, it wasn’t really surprising. Law, a math whiz, had gallivanted all over Europe for 20 years in hopes of bringing to life his mastermind scheme: the central bank.
An attractive figure and outrageous dresser, Law fit in well in flamboyant times when wigs were in vogue and men rouged their cheeks. Born in 1671, the son of a goldsmith-banker, he worked in his father’s counting house at 14 and studied banking principles in school. At 17, his father died, leaving him an estate and title—so, John Law of Lauriston set out to see the world. After surviving the duel and two scheduled hangings because of it, Law—good at manipulating both women and cards—opted for what he expected to be a safer profession, banking. Living by his wits and profitable ploys, he gained banking knowledge while wooing bankers’ willing wives. One woman, captivated by Law’s lusty looks, led the rascal first to her bedroom and then to the heart of her husband’s livelihood, his bank’s international contacts, which later proved key to Law’s fortune. With information in hand, Law sought new opportunities throughout Italy, Belgium, Scotland, and France—far from the banker’s forlorn wife!
Constantly scrutinized by police envious of his licentious lifestyle, Law simmered down in Scotland, married, and observed his homeland’s pathetic economy. The Scottish economy was broken by speculation brought on by a failed Central American expedition in which the entire country had invested (known as the Darien scheme), so Law figured this was the perfect place to test his theories. He advised the government to develop trade with capital obtained from taxing the wealthy, thus enhancing national wealth, but the Scots swiftly rejected this plan, and Law was out a test site. But not all was lost. When you don’t get what you want, what you get is experience, and Law got a healthy dose.
After collecting his thoughts in pamphlets such as Considerations on Legal Tender and Trade, Law picked up his family and left for London to found a bank based on land. But when someone likened his “land-bank” to a “sandbank” in which the economy would surely sink with the changing tides of fortune, his system was doomed a second time. Meanwhile, Law made a killing speculating on the exchange, via his inside informants who leaked France’s plan to melt down its currency to remake new coins laced heavily with base metal. Once again, Law caught the public eye and was forced to flee from police.
Ever smug, Law was finally called to France—where he was sure of success—just as the King lay dying in 1715. Assured of support from the new monarchy, Law proposed a royal bank to manage France’s trade, collect taxes, and rid the country of debt—incurred by Louis’ love of palaces, mistresses, and wars. If such a bright picture for such a bleak country were not enough to attract support, Law’s promise to donate half a million livres of his own, should it not work out, pushed the deal right through, and in 1716, Law’s “Banque General” began.
Capitalized at 6 million livres, in 1,200 shares, Law’s bank performed the usual duties: issuing notes payable on sight to the bearer, discounting commercial paper and bills of exchange, accepting deposits from individuals and merchants, transferring cash or credit. But what made the bank outstanding was that its notes had fixed value, unlike state notes valued at a quarter of their face value. His currency grew so popular that by 1717, the government made taxes payable in bank notes, causing a boom in note issue and raising state credibility by absorbing much of its depreciated coin. Everyone began to prosper, including Law, who was hailed on the street, “God save the King and Monsignor Law!”
But trouble brewed—though it seemed quite the opposite at first—when Law was asked to find further use for the vastly depreciated state paper. Perhaps overly confident, Law formed the Mississippi Company in 1717 to mine treasures that supposedly awaited explorers in America—like a gigantic emerald requiring 22 men to seize it! Forgetful of his homeland’s ruin via the Darien scheme, Law obtained exclusive trading rights over the Mississippi basin and capitalized the firm (a separate entity from the bank) at 100 million livres in shares of 500 livres apiece. A giant publicity campaign claimed “savages exchange lumps of gold and silver for European manufactures.” An old soldier, who had been to the area, claimed the stories false; but he was shipped off to the Bastille before arousing too much suspicion!
Heady with confidence, Law charged ahead with his firm, buying the government’s tobacco monopoly for a generous amount, delighting the stockholders. He bought the right to coin money for nine years. He successively bought rights to collect salt mine and farm taxes, the East India Co., and a Senegalese slave-trading firm. By 1719, he had a virtual monopoly of France’s entire foreign trade—and stock prices were skyrocketing! To keep the ball rolling, Law upped capital to get controlling interest in each new concern, issued over a million new shares on the market at 500 livres each and declared 6 percent dividends for the next year. To absorb the abundant amount of state notes, he refused payment in specie, while enthusiastic crowds paid up to 5,000 livres for shares worth one-tenth that sum!
Meanwhile, few efforts were made to develop Mississippi—and even fewer people were willing to go. So, prostitutes, beggars, and vagrants—about 400 couples forcibly matched—were swept out of French prisons and tossed into Law’s lark, the Mississippi. At the same time, the Laws were treated royally. High-ranking folk flanked to Law’s house, paying enormous bribes just to have their names announced, though Law would see few of his flock of visitors. One woman had her coach driver head into a wall in order to attract John Law’s attention, if not his sympathy. There wasn’t a woman in Paris who wouldn’t do anything to get her hands on Mississippi stock—and Law took advantage of the fact often! It was sheer bedlam and sheer decadence. There was massive trading and gambling—anything to squander money! Even household items were produced in silver and gold.
As the speculative bubble escalated and company stock was feverishly traded at 40 times its original value, Law—noting the drain on specie—declared a gold premium and debased the currency. But the government forced Law to unite the bank and company—even though the bank’s capital was scarcely large enough to cover its own notes. So Law forbade anyone to own more than 500 livres in specie and tried to call off bank loans, but the bank was insolvent by August, 1720. Panic ensued when he tried to lower the price of stock, causing wild crowds—the same that once revered him—to throng at bank doors, inciting a stampede that killed 15. Still confident, Law retorted, “You are all swine!” and retreated to one of his country estates in hopes of being recalled. But that never happened. His property confiscated, Law was forced out of France, accompanied by three soldiers for protection—his wife was forced to stay.
Retiring to a cheap Venice flat and relying on gambling for a meager income—high stakes were no longer feasible—Law yearned for his French system and wrote Comparison of the Effect of Mr. Law’s Scheme With That of England Upon the South Sea Company, about the English version of the Mississippi Bubble.
When Law’s flat froze for lack of fuel—and fuel money—he donned thin-soled slippers, sauntered to the local gambling hall and returned with funds and a cough that led to pneumonia. He died one week later in 1729, alone—but not forgotten. To his death, he was hounded by those after the “secret” to his system.
Of all the unique individuals in this book, none would so well form the central character for a titillating movie as Law. His complete inability to separate his business risk-taking from his personal lifestyle made him colorful, bigger than life, and, thereby, more effective in his radical endeavors than more staid souls might have been. Had he been personally more conventional or conservative, he might well have avoided the boom-bust cycle that eventually proved his undoing. Yet, at the same time, had he been more conventional and less ready to push life to the limit, he probably wouldn’t have had such ultimate impact on finance—an impact that was simply staggering! As much as any modern Federal Reserve Chairman would hate to admit it, Law is the father of central banking everywhere around the world. From the impish ways of this wild womanizer and his to-the-limits lifestyle came the seeds which would grow into the unendingly conservative and conventional presence which is today’s central banking.
ALEXANDER HAMILTON
THE GODFATHER OF AMERICAN FINANCE
Some people think all central bankers should be shot. Alexander Hamilton actually was—killed deader than a doornail by Aaron Burr in an 1804 duel. Hamilton was more than political. His impact on our financial markets, in a spiritual sense, is epic. And yet the man’s life is immensely ironic. Imagine that the spiritual godfather of our present day Federal Reserve System, our central bank, should have lifted his ideas almost straight from the seminal thinking 75 years earlier of the scandalously profligate European central banker and scalawag, John Law. Where is the irony? Hamilton himself was an illegitimate son!
But before lying cold on the ground due to Burr’s bullet work, Hamilton laid the groundwork for America’s economy, financial markets and even our industrial revolution. Without him or his equivalent, everything that came in the 19th century economically would have been impossible.
Leaning on Law’s legacy, he almost single-handedly created the wildly controversial Federal Reserve-predecessor, the Bank of the United States (B.U.S.), establishing the country’s credit and advocating strict tax policies. Known as our economy’s Godfather and America’s first Treasury Secretary, Hamilton was a visionary, coddling capitalism and foreseeing the evolution of predominantly agricultural America into what it would become decades later—a great industrial nation and again, decades before the industrial revolution.
Hamilton’s most impressive task, forming the B.U.S., came from his 1789 proposal boosting public credit. Following the Revolutionary War, America owed some $79 million. American credit was shot—and ambitious Hamilton dictated fiscal policy as Treasury head. So, using debt instruments as a foundation for credit, Hamilton called for payment of the entire war debt—foreign, domestic, and state—through a program of foreign loans, customs duties, wartime Continental dollar refunds, and uniform currency circulation via a national bank. His plan was based on the notion that public debt would benefit the economy and, in turn, the people—straight out of Law’s earlier European notions.
Inevitably, though, folks found the central bank concept controversial—not surprising since it had already taken a severe beating in Europe tied to the disastrous results of the central bank-fostered South Seas Bubble and the Mississippi Scheme (see John Law for further detail). Liberals condemned a government-chartered bank as unconstitutional. (In those days they called liberals what we now call conservatives, and what we call liberals now they called “federalists.” Hamilton was a federalist, Jefferson was a liberal.) But Hamilton convinced former army-buddy President Washington of the B.U.S.’s key role in America’s fledgling government.
“This general principle is inherent in the very definition of Government and essential to every step in the progress to be made by that of the United States,” he urged. Hamilton envisioned a bank making loans to the Treasury, depositing government funds, circulating a uniform, elastic currency, aiding in tax payments, and stimulating trade and labor via commercial loans. Although a staunch supporter of Uncle Sam, Hamilton demanded a privately-run B.U.S. By 1791, the bank was operating just as he had hoped. Chartered for 20 years, it was capitalized at $10 million—$2 million of which was subscribed by the government via foreign funding. The remaining $8 million in B.U.S. stock was bought by citizens who oversubscribed within an hour!
Prior to the B.U.S., speculation in America was almost nonexistent. It was universally thought appropriate to invest in land or ventures which might add to the future common good of society; but to buy covetously pieces of paper for resale at higher prices seemed, to most upstanding folks like Thomas Jefferson, to be greedy, nonproductive, and vaguely un-Christian.
But Hamilton sparked a flurry of speculative activity based on his promise to refund drastically depreciated Continental dollars to establish America’s credit. Savvy, in-the-know greedsters scrambled to purchase “Continentals” cheaply from those ignorant of Hamilton’s intentions (news traveled slowly). They then traded them with the government for substantial profits. Both Continentals and B.U.S. stock provided outlets for America’s first true financial speculators. (By the way, those speculators, including Hamilton’s assistant secretary of the Treasury, William Duer, culled nice profits via insider information.) This separation from those who previously operated in land, Treasury bonds and joint stock companies marked the fountainhead launching of our financial markets. The markets then set the stage for our emerging bond market, followed by our stock market, all of which were necessary and preparatory to our Industrial Revolution.
Note that our Industrial Revolution lagged behind England’s by over 50 years. Ever wonder why? The main reason is that when theirs began, we didn’t have the financial markets here to finance the previously unimaginable magnitude of industrialization that burst forth upon the world. Hamilton’s actions laid the early seed for their evolution. He could see what was going on in England and saw no reason it couldn’t flourish here as well.
Masterminding his plan for America’s economy, Hamilton also established a modest mint to eliminate foreign coinage such as Spanish dollars. Coinage of cents and half-cents would also enable poor folks to make small purchases. With his B.U.S. and mint underway, Hamilton set out to unleash America from the hand-to-mouth survival aspects and constraints imposed by its purely agricultural society. Clearly a man ahead of his time, he preached industrialization feverishly, convinced of its benefits for the economy and population. Combining farming and factories, he proclaimed, would create an independent nation by decreasing imports, enhancing population by attracting immigration and employing more workers—including women and children. In that regard he may have even been a spiritual father of feminism. As to whether he was a brute for helping to create a system that would later exploit child labor, he would have thought not.
Born on a British West Indies island five miles in diameter in 1755, Hamilton was the illegitimate son of Rachel Faucette Lavien, who lived with his father, merchant James Hamilton, for 15 years until he picked up and left. (John Adams often called him the “bastard brat of a Scotch peddler.”) Young Hamilton began working for a sugar exporting firm in St. Croix at 13. Four years later, his boss was so impressed with his work that he sent the boy to attend Kings College (now Columbia University) in Manhattan. Exploitation of child labor in an early industrial world? It wouldn’t be possible if all children had half the heart of Hamilton.
This tough, self-made master predicted new cities would arise to house factories and workers and act as additional markets for farmers, thereby eliminating overproduction. To create the system, Hamilton, the capitalist, favored government backing of entrepreneurs to encourage risk-taking.
Mired in irony, this illegitimate son took a married mistress of his own, whose husband later blackmailed him—the only black spot on his otherwise life-long distinguished character. As to his fatal duel with Burr? We leave that to the many conventional history books, or any encyclopedia, all of which can adequately tell the tale. The lesson of this man’s life is simply that it takes an environment that tolerates speculation to allow for the financial markets—to allow for the industrial world in which we live. Maybe another lesson is: Don’t be a central banker if you want a long, healthy life.
NICHOLAS BIDDLE
A CIVILIZED MAN COULD NOT BEAT A BUCCANEER
You can say this about central bankers: They evolved in a steady stream from scalawags to refined and restrained statesmen. The original central banker, John Law, was wild. Then came Alexander Hamilton, an illegitimate son. Nicholas Biddle was the third important central banker in the evolution of Wall Street, but he was as strait-laced as they come. He was well bred, well-spoken, intelligent, handsome, and patriotic. For such a proper and scholarly type, he defended central banking amazingly well, despite its some what ragged public image. Biddle almost created for us a permanent central bank, similar to today’s Federal Reserve, but 100 years before America could permanently institutionalize the concept.
Biddle’s struggle began in 1823, when he became the third president of the Second Bank of the United States at age 33. Born in 1786 to a prominent Philadelphia family, he graduated from an Ivy League college at 13, married an heiress, studied law, served diplomats overseas, edited the Lewis and Clark expedition journals, and served as a state senator and a director on the Second Bank’s board before he became its president. But nothing could have prepared him for the battle he was about to face.
At the time, the Philadelphia-based Second Bank of the United States had a virtually nonexistent public image—its first leader had perverted its power for political purposes. Its second leader, in trying to reverse the damages, called in too many loans too quickly, causing branches to close. This was definitely not a user-friendly bank.
Biddle tamed the Bank to serve the Treasury, commercial banks and the financial community, performing most duties of today’s Federal Reserve. Within six months of his election as president, business loans increased by over $2 million, though he was picky with loan applicants, sometimes refusing loans to friends. He maintained high standards when it came to the bank, making an “invariable rule” not to borrow from the bank himself and not to endorse discounted notes at any institution. He was a creative banker, but on a day-to-day basis, he was fiercely conservative.
The Bank sustained the national economy most importantly by issuing and regulating a national paper currency. Through Biddle’s regulation of the money supply, the Bank could regulate supply rates of domestic and foreign exchange and guide state banks with their issues of money, pleasing the government. Without this concept. Wall Street as we know it today could never avoid tremendous boom-bust cycles. Even the people came to like the bank, since its money was good throughout the entire U.S. Both Biddle and the Bank, which by supplying credit eased America out of its 1825 financial strain, enjoyed popularity for a few years. But just when it looked as if his struggles were over, politics poked its ugly head into the picture—via President Andrew Jackson’s election.
Jackson hated and distrusted all banks—especially Biddle’s and his paper money. So naturally, he couldn’t sit still while the Bank thrived. He initiated wild accusations that the Bank was not only unconstitutional, but also an irresponsible monopoly using public funds to enrich a few wealthy men. By the 1830s, Jackson was fighting an all-out war on the Bank, which annoyed Biddle—he had voted for the man!
Biddle, perhaps being too rational, and assuming that a similar rationality permeated Washington, thought he could easily win the battle. He appealed for the Bank’s re-charter four years before it was to expire—mistake number one. Though most of the government supported his cause, Jackson had the power to veto the charter—and did. But Biddle didn’t buckle. Instead, he began contracting loans. Jackson, in turn, halted government deposits at the bank. Then Biddle contracted more loans and Jackson withdrew all government deposits. Mistake number two—he took on the President! Biddle felt that he had to try for the sake of central banking, but his effort failed and left the U.S. in a credit crunch known as Biddle’s Panic.
Based on the faith and deposits of creditors, banks cannot withstand a continuous stream of negative publicity, and nothing can generate more negative publicity than a fight with a President, even if the President is obviously wrong. Dwindling faith in the Bank, coupled with the loss of its federal charter, caused deposits to decrease by $17 million (27 percent) within a year. En route, the central currency collapsed while money rates climbed, firms failed, wages dropped, and unemployment rose. The whole situation left people with a bad taste in their mouths—an impression that maybe Jackson was right and maybe the Bank was too powerful. Of course the Bank didn’t disappear. It was now a big “regular” state bank. Biddle relaxed the Bank’s “tight” position, and even without government deposits, loans reached their former level the next year.
But every good central banking story has at least one twist. Biddle’s continuation of the Bank via state charter in 1836 operated under the title: The United States Bank of Pennsylvania. At the same time, because of Jacksonian policies and the suspension of specie payments, the Panic of 1837 hit. Biddle wielded his new weapon, the U.S. Bank, and almost single-handedly swept America out of panic—for a while. Using the bank’s resources to restore market prices, he provided the means for payments and collections. He formed a syndicate to corner cotton, since its price was then crucial to the American credit abroad. His plan worked, and his cotton pool earned an $800,000 profit! Feeling pretty good about himself, and justified in his prior banking activity by the panic’s course of events, he then resigned from the bank at 53, believing it safe and secure. But a second and later corner failed, and the bank lost $900,000, which ultimately led to the bank’s closure!
It is important to note that the Panic of 1837 led to one of the very largest and longest economic declines of American history. Basically the economy moved downhill steadily until 1844, ironically, the year of Biddle’s death. A seven-year decline makes it the second longest recession in America’s history, exceeded in length only by the decline of the 1870s and early ‘80s. It is hard to tell how bad the decline was in magnitude. Records were poor then, and it would be virtually impossible to quantify differences, for example, between the primitive economy then and the more sophisticated post-industrial revolution recessions and depressions that would later occur. But it was clearly huge and created a very bad impression in the public’s mind.
The U.S. Bank’s failure reflected badly on Biddle—and on central banking. Someone had to be blamed, and Biddle bore the brunt of it. He died in public disgrace—but financial comfort, which only fueled the public’s hate for him. Because of all this bitterness associated with Biddle and the second central bank, central banking didn’t make another comeback for almost 100 years. While you can’t measure the significance of what never happened, the absence of a central bank during that period, in this observer’s mind, cost Wall Street and America a great many times what was lost in Biddle’s Panic.
JAMES STILLMAN
PSYCHIC HEADS AMERICA’S LARGEST BANK
Reporters might have had a field day with James Stillman, had he allowed himself the spotlight, but because of his responsibilities—heading a national bank—he kept to himself. Too bad—he would have made great headlines—“Banker Believes He Is Psychic.” When Stillman looked at a man with his impenetrable dark brown eyes, he claimed he could read the man’s mind and that a sixth sense detected truth from lies. While his “sixth sense” probably was mere keen observation and ability to listen, Stillman gained the reputation of an omniscient banking god. Men trembled in his grave presence as he transformed an insignificant bank into a major powerhouse that rivaled the House of Morgan.
Despite many idiosyncrasies, Stillman was ultra-conservative in running Manhattan’s National City Bank. A banker has two customers: depositors and borrowers. He was a depositor’s banker rather than a borrower’s banker. When he took over in 1891 at 41, the impeccably-dressed Stillman, wearing a large, square-cut emerald ring on his right hand, steadily took the safe road of conservative lending practices. In this manner, he increased the bank’s surplus cash on hand, increasing its credibility. Thereby, he reasoned, merchants could feel safer depositing with him. And they did—in droves.
The strategy derived from his stubborn pride. In his beginnings in banking, he somehow couldn’t get himself to do the one thing all salesmen must do to get business—to ask for it. Asking “for the order” is basic to selling. But Stillman thought it tacky. Frank A. Vanderlip, a vice-president at Stillman’s bank commented: “To get a good account for the bank, Mr. Stillman would have risked his life, but he never would have stated his purpose in words . . . the convention was that no one could, with dignity, ask for an account.”
Within two years, after making a killing loaning millions during the 1893 panic, his integrity paid off—deposits nearly doubled. National City Bank had become the largest commercial bank in New York with the greatest cash reserve in America. Thomas Lawson, in a fit of jealousy, once called it “Stillman’s Money Trap.” Of course, it wasn’t the underwriting powerhouse that the House of Morgan was.
A real cold fish, Stillman was nicknamed “Sunny Jim” by his competitors at Morgan. The dour mustached banker was so dedicated to National City that he rid himself of all distractions, including his wife. He had no need for her. To Stillman, women just got in the way. He used to say, “Never consult women, just tell them.” So, after 23 years of marriage and five kids, Stillman, without remorse, shipped his wife to Europe to avoid a sensational divorce suit (or, as a former servant once said, to avail himself of the children’s attractive nurse). Whatever the reason, when the social circuit discovered his wife’s disappearance, Stillman concocted rumors of a supposed drug habit and mental illness. He then forbade her to contact their children, and forbade the children to ever mention their mother—one of the rare times he ever spoke to them when they were young.
With such a dour demeanor, you’d expect Stillman to be more like robber barons Daniel Drew or Cornelius Vanderbilt, ruthlessly profiting and using people and property. That was true in his personal life, but not in business. What saved Stillman from a ferocious reputation was the required civilized nature of commercial banking. Prissy-neat, composed, and quiet, he was a banker, and kept his emotions and eccentricities under wraps during business hours, so few paid much attention to him—that is, until he associated with the big names and bigger deals.
His first big-name deal was backing the Union Pacific Railroad for Morgan rivals Kuhn, Loeb and Edward Harriman in 1897. As the possessor of America’s largest cash reserve, National City Bank was perhaps the only bank, outside of the House of Morgan, capable of financing the required $45 million. This rankled kingpin J.P. Morgan for years, though the two later made amends when their respective railroad interests were combined in 1907 (see James Hill for further explanation).
Amazingly, for being in such a cutthroat business, Stillman never made long-term business enemies. He had two related rules:
1. “A man is never so rich that he can afford to have enemies. Enemies must be placated.”
2. “Competition must never grow so keen as to wound the dignity of a rival man or institution.”
But business bonding could be based on his willingness to subordinate his family. For example, Stillman expanded his business to include investment banking, underwriting stocks for the Rockefeller clan. To secure the relationship, he arranged to marry off both his daughters to Rockefellers. Women, after all, weren’t worth much to Stillman and were easily sacrificed to move further on the chessboard of life. For the Rockefellers and Harriman, he bought undigested stock issues at depressed prices, participated in the Rockefellers’ bull pools and manipulated stocks, running up their prices, then unloading them on the public—all the standard stuff of the day. Ironically, he never bought stocks for his personal account. In good conservative-banker style, he owned only bonds of companies with solid personnel, future prospects, and earnings potential.
Born to a New England cotton merchant, Stillman began his career at 16, bypassing college to work for his father’s firm. He later took over the firm and earned millions, with which he bought a Newport, Rhode Island mansion and a yacht—all the necessary possessions of a rich young Wall Streeter of the era. More important, those millions, coupled with his respectful, quiet demeanor and ability to listen, earned him a spot on the Chicago, Milwaukee and St. Paul Railroad board of directors. It was there that he first met fellow director, William Rockefeller, who was undoubtedly the key to his consequent success.
After dabbling in railroads, Stillman was vaulted to a director’s seat at National City Bank where Rockefeller was a major stockholder. He was soon its president. Stillman knew he had made it to the top when, in 1894, the U.S. Treasury unexpectedly called on Morgan for $50 million and Morgan turned to Stillman for aid in putting the deal together! When the big guy turns to you, you must be pretty big yourself.
Ironically, another milestone in Stillman’s life was again helping Morgan—this time in bailing Wall Street out of the 1907 Panic. While Stillman was overshadowed by Morgan, he was influential in the bailout, advocating support of the weaker banks via the stronger ones. Two years later, Stillman—a director of 41 firms—retired as president of National City Bank. For the remainder of his life he lived in France. He died in 1918 of heart disease the same year National City’s assets first reached $1 billion. An important point to note, and the only sign of potential family closeness in Stillman’s life, was that National City reached the $1 billion mark under the direction of his son, James A. Stillman.
Stillman was a quirky character during his banking career. For example, he felt it was so important to keep bank affairs secret that he kept his papers under the protection of a secret code and cipher key held exclusively by his vice president, Frank Vanderlip, and himself. When he traveled, Stillman never parted from the valise in which the code was kept secure.
But at home, he was absolutely eccentric. He shaved three times a day and took an hour to dress. He was vain about his small feet, which he thought were refined. He nibbled at meals, ranked each dish by percentile—and flew into a rage if the rating was too low! At breakfast, he sometimes returned dozens of eggs to get the four that met his standards!
As for his psychic concoction and claimed ability to read minds, well, it doesn’t take the world’s shrewdest person to notice obvious traits—just a perceptive one. The mind reading schtick may have just been PR that Stillman cooked up to intimidate flaky borrowers. It is unlikely such a successful conservative banker actually heard voices in his head—that would make him crazy and prone to do crazy things during work hours. My guess is that, a little like a would-be Sherlock Holmes, he just observed well and drew astute conclusions. For example, Stillman used to claim that men wearing pompadours were vain and crafty—well, he was probably right, but that doesn’t mean he was psychic. Bankers who don’t take the time to notice things like hair cuts, body language, and say, shifty eyes are easy targets for a bad loan—Stillman wasn’t.
FRANK A. VANDERLIP
A ROLE MODEL FOR ANY WALL STREET WANNA-BE
Frank Vanderlip never expected to become a great banker. Born on an Aurora, Illinois farm in 1864, he supported himself with everything from machine shop work to newspaper reporting until the age of 33. It was then, after a stint as a financial editor, that he was appointed assistant to the Treasury Secretary. From then on, his financial genius flourished. Highlights from his career include financing the Spanish-American War while at the Treasury and building Manhattan’s National City Bank (today’s Citicorp) into America’s largest commercial bank by 1919. He was innovative, creative and, most important, bold enough to put his then-revolutionary theories into action.
To get to a position where his ideas could make a difference took ambition and a strong dedication to his work. After about four years with the Treasury, during which he floated a $200 million Spanish-American War bond, Vanderlip caught the eye of National City Bank President James Stillman, who saw in Vanderlip a hard and dedicated worker like himself. In a biographical Saturday Evening Post piece titled, “From Farm Boy to Financier: My Start in Wall Street,” Vanderlip admitted, “I did not play. I never have learned how to play. I would go abroad, but always with a driving purpose to find out more about the currents of world commerce.”
Vanderlip’s drive paid off. In 1901, looking like a typical banker—distinguished, bespectacled, and mustached with his hair parted in the middle—he became Stillman’s protege and the bank’s youngest vice-president. Here was his opportunity to shine. National City was then a modest, old-fashioned bank run according to Stillman’s quirky beliefs—a man like Vanderlip with new, imaginative ideas could make it a world power!
He first set about building City Bank by soliciting new accounts, which doesn’t sound too revolutionary, but it made a world of difference for the bank’s assets. Stillman was too timid to solicit new accounts, instead relying upon City’s solid reputation to attract customers. Vanderlip, on the other hand, felt a solid reputation should be flaunted, so he solicited new accounts with pride. Though it was considered unorthodox, Stillman never raised an eyebrow, because Vanderlip got results. In his first year, Vanderlip pulled in 365 new accounts—“one for every day of the year!” The savvy whippersnapper said proudly, “Before I finished with the bank, deposits of $20,000,000 had been increased until they could be written in the form of an incredible sum of money—$1,000,000,000!”
Vanderlip also brought City Bank into the investment field, beginning with government bonds. Previously, the bank had rejected such business—and the commissions that went along with it. So Vanderlip organized the National City Company, a general bond firm that earned as much are the bank itself! “This, too, was a thing no national bank had done in that period. It was a thing the private banking houses wished we would not engage in.” (Ultimately, in the 1930s during Charles Mitchell and Albert Wiggin’s era, Uncle Sam would come to the same conclusion.) Later, he put out a monthly circular explaining and advertising City’s government bond business, which became a sort of voice for City, since Stillman never said a word regarding the bank.
Living in upstate New York with his wife and six kids, Vanderlip led City Bank into foreign markets, paving the way for today’s American investors. He stimulated foreign trade and international financing while lobbying to change regulations preventing banks from opening overseas branches. As a result of his efforts, he helped author the Federal Reserve Act of 1913, and the next year, City Bank became the first American bank to open a foreign branch in Buenos Aires.
Although he violated just about every banking taboo initiated by Stillman, Vanderlip did well for the bank—and Stillman respected that. So when old-school bank officers complained about Vanderlip to the boss, the boss simply said (while secretly chuckling), “I can’t control that young man.” Vanderlip said, “There was a tinge of pride in his voice when he said that. Largely I did what I believed was proper and helpful, using my own judgment, which was what he wished me to do, for he wished me to grow.”
Vanderlip, bank president since 1909, resigned in 1919 due to a falling out with his board of directors. His 1937 New York Times obituary repeated Wall Street rumors that the board blamed him for large losses suffered in foreign ventures, specifically in loans to Russia, which had just undergone its revolution. Other rumors blamed Vanderlip for too-rapid expansion in areas that weren’t ready for it. Both Vanderlip and the board denied all rumors, and the agreed-upon reasons for his leaving were ill health and a needed rest.
But rest wasn’t on Vanderlip’s agenda—he kept busy until his death in 1937, plunging into everything from foreign policy to repealing prohibition. Vanderlip traveled extensively throughout Europe and Japan after his resignation, advocating an end to American isolationist policies and urging friendly relations with Japan. Later he organized the Citizen’s Federal Research Bureau to investigate graft. He had been away from the business world for eight years when he joined a Wall Street firm as a special partner, dabbling in automobile stock and making $3 million. Vanderlip also dabbled in real estate with two of his sons, including Frank A. Vanderlip, Jr., reconstructing slums in upstate New York and developing Palos Verdes, California. Vanderlip died at 72 of intestinal complications.
He was an aggressive salesman, a corporate builder, a world-wide visionary, a good “deal” man, a devotee of civic duty—even at the federal level—and a family man. While every single thing in his business life didn’t work out perfectly, most worked pretty darn well, and Vanderlip is perhaps most representative of the kind of quiet yet dramatic success which is possible in the financial world where a break with convention becomes convention if it is truly conservative and makes money. For anyone with a flair for finance, Vanderlip is a good role model to compare with the bad role models of flamboyant hedonists. Those who tailor their personal and business lives to Vanderlip-like style rather than that of a Jim Brady or F. Augustus Heinze will improve their odds of success, whatever their initial financial and mental assets.
GEORGE F. BAKER
LOOKING BEFORE LEAPING PAYS OFF
Remember the tortoise and the hare? The hare, recklessly speeding and blindly confident, raced ahead, but then fiddled around and napped, while the tortoise crawled on sluggishly to victory—as the hare dozed. Sometimes it pays to move slowly but surely. George Baker operated much like the turtle: patient and persistent. Baker was the driving force behind New York’s First National Bank from 1877 until his death in 1931, always relying on his faith in the American economy and always optimistic. In an era plagued with wars and panics, Baker withstood the worst by being prepared—and looking before he leaped.
Stout, with muttonchop whiskers, Baker became a venerable N.Y. banker—and occasional business associate of J.P. Morgan—because of his surefooted, reliable manner, and squeaky-clean character. After his death, even the New York Times noted his “unchallenged” personal integrity “in days when scandal walked unashamed in the street.” No wonder he was considered an “old-fashioned” banker! Equally characteristic of Baker was his silence, perhaps explaining why his fortune far exceeded his fame. Asked once to wield his power in support of a particular cause, Baker declined, acknowledging, “I do have a lot of power so long as I do not attempt to use it.”
Born the son of a Troy, N.Y. shoe-merchant-turned-state legislator in 1840, Baker began his banking career at 16 after finishing school, clerking for the N.Y. state banking department for seven years. His financial flair raised the eyebrows of John Thompson, a N.Y. financier looking to form a bank in 1863 when America needed funds to finance the Civil War. Invited to join the venture, Baker, 23, invested his entire $3,000 in savings for 30 bank shares, a teller’s position and seat on the board of directors. Immediately, the bank undertook the lucrative business of selling government bonds to finance the Civil War, a task that provided the bank with a firm foundation for credit. Just two years’ time saw the First National become America’s largest underwriter of government and corporate bonds—and Baker, the bank’s acting leader. In 1869, he married, insisting that he and his wife live on half his income, in order to invest the rest! Later, they raised three children, one of whom—George, Jr.—followed in his dad’s exact footsteps.
The first feather in Baker’s cap came in 1873, when leading bankers, Jay Cooke & Co., failed, causing a run on banks. Threatened with the closure of the Wall Street-quartered First National, Baker kept his cool—amidst failing banks and closing factories—and kept the dollars flowing, claiming a panic could be cured if banks paid out their reserve. “When we stop paying it will be because there isn’t a dollar in the till, or obtainable.” From then on, Baker never panicked—he instead vowed to never sell out any borrowers and to constantly accumulate profits in good times, in order to glide through the bad. He declared, “It is cheap insurance to keep strong!”
By 1877, Baker, 37, was First National’s president, which he remained until becoming board chairman at 61. The bank netted $750,000 that year and declared dividends of up to 60 percent. Stockholders rejoiced, particularly Baker, who had been steadily increasing his bank holdings! Unabashedly supporting the profit motive, he boosted dividends steadily over the years and increased bank surplus and capital regularly.
Meanwhile, as was then all the rage, Baker invested in railroads—joining syndicates, acquiring control of run-down lines, then improving and selling them for profits. He rejuvenated the Richmond and Danville line (later, the Southern Railway system), bought for $51 per share in 1882, and sold seven years later for $240. Of course, before buying anything, Baker religiously attended inspection tours on the line and afterwards, if new owners went broke, his group rebought and reorganized the line. In 1896, Baker—quite railroad-savvy—bought out the Jersey Central for $30 per share and sold at $160 to Morgan, who then transformed it into the Reading line. Being consistently successful in his ventures, Baker and his golden touch were often sought by company boards—in fact, he served on over 50 (about half of which were railroads), including Morgan’s U.S. Steel and several competing N.Y. banks. His key to success? Carefully take the long view, build up a property as an investment and never milk it for short-term, speculative profit!
George Baker ruled the First National with an iron fist—with foresight and constructive planning. Some said that Baker was the bank, as the two were seemingly inseparable. In his dark attire and flat-top derby, he handed over to his bank more than $3 million of his own in 1907 when capitalizing the First Security Co., a holding company for securities held by the bank. His nerves of steel assured the bank’s strength during panics—which led to others’ strength as well. During the 1907 Panic, for instance, he met with J.P. Morgan each night in Morgan’s library-turned-office to plan the economy’s bailout.
But the 1929 Crash caught Baker off-guard or unaware. At 89, he was somewhat set in his ways and refused to heed his son’s warnings to liquidate overvalued stock, saying that the young just “didn’t understand.” As with almost everyone of his generation, his over-70-years’ experience told him that an advance in market value was followed by a decline, and then by another advance to a higher level. (Later, Baker came to realize that “every time is different.”) So, while his securities tumbled, Baker remained optimistic about a quick recovery, though he supposedly admitted at a U.S. Steel board meeting in 1930, “I was a damn fool.” Continuing to operate on the premise that “It is better to wear out than to rust out,” Baker remained First National’s chair right up until the very end at the ripe old age of 91, leaving some $73 million, mostly to his son, though in his last few years about $22 million had gone to various charities. Reputed to be America’s third richest man in his heyday, Baker found solace in giving to the Harvard Business School and the Red Cross, among others; hence his later reputation as a man with “the hardest shell and the softest heart.”
While 91 is a ripe old age by anyone’s standard, it is not inconceivable that Baker’s life was shortened by the tragedy of the Crash; he caught pneumonia and died in his sleep. The magnitude of the Crash may have dampened his otherwise optimistic spirits. Most of the biggest fortunes ever built were assembled as Baker’s was, through slow, careful planning. Perhaps the lesson is that, while it pays to be a long-term investor and builder and not be shaken from the good things you own due to fear of economic downturn, it is also wise to be watchful and wary for the rare secular turning points that catch society unaware. Baker may have been the tortoise, but it wouldn’t have hurt him any to be able to cut and run.
AMADEO P. GIANNINI
TAKING THE PULSE OF WALL STREET OUT OF NEW YORK
When fire swept through San Francisco following the 1906 earthquake, local legend has it that one man leapt ahead of the flames to salvage his bank’s currency and securities. Quickly loading the goods on two vegetable wagons, A.P. Giannini galloped across his smoldering hometown eagerly distributing loans that helped rebuild the city. At 36, the son of Italian immigrants was at the very bud of a magnificent banking career. In the years to come, until his death in 1949, Giannini controlled over 500 chain banks from California to New York via what later became the worldwide Bank of America.
Standing 6 foot 2, weighing over 215 pounds with white hair and mustache, Giannini became a true banking legend in the 1920s, when his original Bank of Italy—barely salvaged from the fire—grew by leaps and bounds. Riding the coattails of California’s booming movie, oil and real estate industries, A.P. made one acquisition after another, seeking to build the first nationwide branch-banking system. He was a true visionary, placing San Francisco on the map as a financial center for the first time since the Gold Rush, and revolutionizing banking. “The bank of tomorrow is going to be a sort of department store, handling every service the people may want in the way of banking, investment, and trust service.” A proud man—and never greedy—he wanted his system for reasons other than fame and fortune: He wanted to help “the little fellow.” Whereas Wall Street catered to the elite few, the Bank of America served millions of customers—“the little man who needed a little money.” And rather than fill the pockets of “twenty thousand small unit bankers,” he sought “a more general distribution of wealth and happiness.”
A.P. was California’s hero, resembling the little fellow he often spoke of—but on a grander scale. He was affable, fair, empathetic, enthusiastic, and a local boy, living in small town suburban San Mateo. Born in San Jose, he began working for his stepfather’s San Francisco produce firm in 1882. Just 12, he worked from 2 a.m. until schooltime. Seven years later, despite a poor education, he made partner. At 31, he was married and rich enough to retire. Instead, this bundle of energy dabbled in banking, opening his first bank in 1904 with $150,000 and three partners. Based in a remodeled tavern in San Francisco’s Italian district, North Beach, the bank served primarily local merchants and working men. Using then-unorthodox methods—soliciting depositors on the streets, displaying eye-catching ads, and pioneering small loans—Giannini’s bank proved successful. Convinced (by the numerous bank failures of the 1907 Panic) that big banks were safe banks, he built the first statewide chain, operating 24 branches by 1918.
Ever resourceful, Giannini financed his branches as easily as he operated them. He simply sold stock in holding companies, then used the capital to buy stock in future branches—and those always came to him on his terms. Never a major stockholder in his firm, Giannini first formed the Bancitaly Corp., which invested in American and European banks, then replaced it with the Transamerica Corp, in 1928. Merely by coincidence, but perhaps ironically, the two tallest buildings in today’s San Francisco are the Bank of America Building and the Transamerica Pyramid. Giannini was an expert pyramid builder of his own. In many ways, this guy was a visionary of finance. Whether it was a little truck farmer’s inventory or the water system for Northern California, whether a local stock brokerage firm or a statewide chain, Giannini financed California, and he did it locally.
By 1929, his empire exceeded 400 branches, with resources exceeding $1 billion. Most important, Giannini built it all on his own, always taking two steps at a time—staying one step ahead of Wall Street. Whereas Wall Street took control of America’s railroads, and en route much of the west, Giannini’s efforts, for the most part, kept control of California businesses within state lines, breeding the spirit of entrepeneurship that is central to capitalism and that has also been successful. On Giannini’s heels, following his structure of localized finance, came an unprecedented state growth rate, such that today California’s economy is actually larger than England’s.
At a time when major corporations almost always had Wall Street’s seal of approval, Giannini’s phenomenal success wasn’t exactly applauded in New York, especially when Bancitaly invaded New York’s banking scene. Wall Street was so bitter, in fact, it sent a representative to seek revenge and raise hell within Giannini’s organization. Elisha Walker succeeded Giannini as Transamerica chairman in 1930 and right away began dismembering the firm, distributing severed branches to his Wall Street allies at severe losses to Transamerica! When he realized what was happening, A.P. charged out of retirement, armed with supporters. The Giannini camp gathered enough proxies to oust Walker and salvage the remains of his empire. Despite Wall Street shenanigans and new government monopoly regulations, Giannini kept on as strong as ever. Not even the Crash got in his way, as the Bank of America won the bid to finance the massive dam-building projects under A.P.’s new friend and co-supporter of the masses, Franklin Roosevelt.
Always modest, A.P. made way for his equally modest son Lawrence Mario Giannini to run the firm after he was certain his empire was again sturdy. The chairman of the board, who had announced “retirement” at least twice before, said in 1936, “I’ll stand on the sidelines in a fatherly sort of watchfulness, the family watchdog ready to growl at any sign of danger from without and ready to bark at you if I find any turning away from the ideals on which the institution was founded.” Starting as a clerk with his father’s firm in 1918, at 24, Mario—largely responsible for the bank’s overseas facilities—made senior vice-president in 1932, president four years later and took over when his father died.
A.P. Giannini was one of America’s greatest bankers, applying the age-old concept of national banking to today’s society. While bankers and businessmen may remember him for his holding companies, marketing strategies, bold expansion, and sure-fire success secret (“Enjoy your work and bypass part-time ventures”), the customers surely remember him for his magnetic personality. There is perhaps no other banker who ever received a steady stream of fan mail. Contrary to his New York rivals, he cast aside the heavy wooden doors of the House of Morgan to work out in the open—both in his office and publicly. Unlike other bankers, he saw between 50 and 100 visitors per day—mostly “little fellows”—and spoke freely to the press in his loud, crackling voice. He preached, “Avoid the speculative, grow with your work and have less worry and more fun out of life!”
A key point to remember about Giannini is that even when Wall Street was more clubby than it is today, a person with a vision and an independent streak could make good without selling out to the club. Scandal-free his whole life, loving his work and loving his customers, Giannini represents the best of banking in terms of its ability to bring power to people who otherwise wouldn’t have had it. Once Wall Street pulsed from New York only. While today it pulses around the world, every bit as much outside of New York as in it. Giannini was a key part in taking the pulse to California, and keeping it there.
Oh, by the way, when he died he was worth only $600,000. He had given the rest of it away. I guess he knew he couldn’t spend it in heaven.
PAUL M. WARBURG
FOUNDER AND CRITIC OF MODERN AMERICAN CENTRAL BANKING
When Paul Warburg arrived in America from Germany in 1902, he viewed our banking system as archaic and desperately in need of reform. It was scattered, disorganized and unable to withstand the demands of a growing industrial nation. Serious-minded and determined, Warburg set about promoting a plan derived from his native Europe—central banking. About a decade later, the investment banker saw his efforts pay off in the passage of the Federal Reserve Act of 1913, which created our current central banking system, the Federal Reserve. En route, Warburg was at times ballyhooed as the “father” of the Federal Reserve System and as the foremost banking authority in America.
Born in 1868 to a family of bankers, Warburg grew up the sad, picked-on ugly duckling of his family. To compensate, he dove into his books with a fury, studying banking, and eventually became a confident, scholarly banker—with an inferiority complex. At age 23, he joined the Hamburg firm his great-grandfather had founded 70 years earlier, M.M. Warburg and Company. Eleven years later, he left the family firm to marry the daughter of recently deceased American banking giant Solomon Loeb. He promptly joined his wife’s father’s former firm—the infamous and almost all-powerful House of Kuhn, Loeb.
As an investment banker, the visionary Warburg floated major railroad bonds and government issues for Japan, Brazil, China, Argentina and Cuba. But as a concerned citizen, Warburg became obsessed with reforming American banking, writing pamphlets, courting editors and speaking to anyone who would listen—at the time, mostly banking scholars. In his detailed, two-volume 1930 history of the Fed’s creation, called The Federal Reserve System , Warburg said one of the banking system’s major defects was its lack of leadership. The book, written mostly in the late 1920s, was perfectly timed to coincide with the largest economic debacle of modern capitalism. The system was so loose and decentralized that, when financial calamity struck, he predicted there would be no governmental or private authority to assume leadership. He claimed no one “had the actual power to put on the brakes if the car were moving too fast and heading for the precipice.” By 1932, everyone would know he was right, whether they knew who he was or not. By most modern accounts, the Fed actually worsened the Great Depression.
But originally, at the turn of the century, Warburg and his plan for reforming banking had three counts against them. First, bankers were reluctant to admit there was a problem in need of attention; second, they were dubious of central banking; and third, as a relative newcomer to America, Warburg’s criticisms were not welcomed. Warburg recalled that, at the time, central banking critics worried that a centralized system would inevitably fall into the hands of either the government or Wall Street. Enemies of central banking tended to fall onto one side or the other, either friends of Wall Street and enemies of government, or proponents of governmental regulation and enemies of the Street. So neither side would pledge its support.
What finally swayed everyone concerned was the Panic of 1907, and just as Warburg had previously predicted, there was no leadership to prevent the resulting calamity. Yes, J.P. Morgan stepped into the breach to bail out the world, but had this old walrus been unable or unwilling to do so, everyone knew there was no one else with the power to prevail in a time of madness. Soon afterwards, Warburg had the ear of bankers and politicians alike, and his plan quickly gained momentum.
A kindly man, with a sad face, dark complexion, walrus mustache, partially bald head, and a penchant for writing sad poetry, Warburg drew up an initial blueprint for a “United Reserve Bank of the United States” from which legislators drew up, in part, the Federal Reserve Act. Although Warburg would have opted for a central bank with regional branches, he gave his blessing to the Americanized version consisting of a dozen regional banks governed by a central board.
The only gripe he had with the newly-created Fed was that the President was granted the ultimate power in choosing heads of the Federal Reserve Board. Warburg, like all central bankers preceding him, felt politics represented “the gravest danger confronting the system.” He feared politics would ultimately taint the Fed’s independence and turn it into “the football of politics” so that a “splendid instrument of protection might thus become an element of dangerous disturbance.” What would result would be disastrous: “A Federal Reserve System turned into a political octopus, a national Tammany Hall, would infest not only the counting houses but every farm and hovel in the country.” Still true!
Warburg was able to keep his eye on the Fed when President Wilson appointed him one of five original board members and vice-chairman. One account said Wilson wanted him to serve as chairman, but Warburg, being as modest as he was, would accept a position only as high as the vice-chairmanship.
Serving on the first board was an incredible responsibility, and Warburg did not take it lightly. He retired from his immensely profitable Kuhn, Loeb position and resigned from various directorships to concentrate on his work. Since the Board united the regional banks into one central bank, Warburg felt its members had the job of upholding its integrity and keeping it free from special interests, especially politics. Sadly, after his four-year term ran out during World War I, Warburg felt the heat of resentment as a German-born American in a prestigious position. So, he resigned his position in 1918, declining assured re-appointment. Of course, that didn’t stop him from staying active in finance. Only 50 years old, Warburg returned to the private world, creating no headlines but specializing in international banking, while keeping abreast of Fed issues by serving on its advisory council until the mid-1920s.
A year before the 1929 Crash, insightful Warburg predicted gloom and doom to follow what he called an “orgy of unrestrained speculation.” This, he predicted, would “bring about a general depression involving the entire country.” Wall Street, still high from a bull market, laughed at his prediction—for a while, anyway. While Warburg could have bragged, “I told you so,” he chose his characteristic, constructive route and campaigned for further interdependence within the Fed and closer cooperation among its banks.
Warburg was a man way ahead of his time. He was probably never understood, because from day one the Fed had a political tone to it that Warburg never wanted. Still, his impact on America’s financial markets via the creation and early direction of the Fed is immense. A lesson is to be learned from Warburg. The Fed would be more effective if it were stripped completely of political appointment and meddling. With the problems the banking system has recently gotten itself into, aided by political meddling, we should all wish the Fed were free to do its job better, leaving us with a better banking system. Warburg would have liked that.
BENJAMIN STRONG
HAD STRONG BEEN STRONG THE ECONOMY MIGHT HAVE BEEN, TOO
Despite barriers of all kinds—ill health, a tragic family life, political rigmarole, and volatile economic times—Benjamin Strong became one of America’s greatest modern-day central bankers before his untimely death in 1928. He headed the Federal Reserve System’s New York branch when the Fed was still an unproven concept, and with it, created an influential force in world economic policy-making during the 1920s.
Strong was a man of many achievements. Born in upstate New York to a modest family, central banking was in his blood. His great grandfather had clerked for Alexander Hamilton at the beginnings of central banking in America. Strong started out working his way up Wall Street’s rungs managing bank trusts. Then, seven years before reaching his Federal Reserve post at just 42 in 1914, Strong assisted J.P. Morgan in reviving the American economy during the fierce 1907 Panic. Because of his ties with influential Morgan partner Henry P. Davison and his position at Bankers Trust Company, he was chosen to head a small committee deciding which banking institutions were worthy of Morgan money. Typically, Morgan ignored details, and instead relied on Strong’s bottom line in making decisions.
The Panic of 1907 boosted Strong’s reputation among Wall Street’s banking community, and he was well on his way to a Morgan partnership. He was perfect for the job—tall, handsome, intelligent, well-liked, alert, dedicated, relentlessly driven—and he had Morgan’s blessing. Strong was also good friends with Davison, so when the Fed was created and Davison was called to help pick its head, Strong’s Morgan partnership was permanently put on hold in favor of the Federal Reserve post.
But Strong, like much of Wall Street, objected to the Fed’s structure and refused the appointment at first. The system was structured so that the regional banks answered to directors sitting in the heart of bureaucrat-land, Washington! Strong, a central banking history buff, knew this would inevitably lead to political influence, which in turn would lead to the system’s demise. But eventually, because of Davison, he relented, accepted the position, and dedicated the remainder of his life to central banking.
Strong had little else going for him; his home life was literally a tragedy. It started out wonderfully. He married in 1895, had a girl and two boys, moved to Englewood, New Jersey where he made his Morgan connection and did the suburban social circuit with his wife. It was a wonderful 10 years—until his wife killed herself (while weakened by childbirth, one source said). Davison took the Strong children into his own home, and two years later. Strong married a woman 15 years his junior. They had two daughters, but this time, his wife left him in 1916 with the girls, and they divorced in 1920.
Even more heartbreaking, the same year his second wife abandoned him, Strong contracted tuberculosis. It attacked first his lungs, then his larynx and kept him away from his desk for more than a third of the 12 years remaining to him. He offered to resign at least twice because of his health, but his directors refused to hear of it, for Strong “was” the Fed—even while in his sickbed.
When Strong wasn’t bedridden, he was hard at work building a powerful Fed. He often visited European central bankers, soliciting their combined cooperation to give the central banks a stronghold on international monetary matters. He devoutly believed such matters were up to the central banks—not the governments. “Central banks should deal only with central banks, not with foreign governments.” While that is a commonly accepted concept today, it was a groundbreaking notion then, at a time when most classical economists believed that each country was its own economic island. [As I demonstrated in my second book, The Wall Street Waltz, this concept was never true.] Yet it survived in the common mind until fairly recently. Strong saw through the economic island notion long before almost anyone else. Had the world understood then what Strong knew, much of the 1930s Great Depression could have been avoided simply by worldwide monetary cooperation among central banks in providing liquidity.
At the time, however, Strong’s ultimate goal in working for cooperation was to lift Europe from its postwar financial doldrums—he knew the Fed couldn’t do it alone. Sometimes working with his best friend, Bank of England Governor Montagu Norman, or a pool of central banks, Strong helped stabilize Belgium, Italy, Romania, Poland, and France. Often, Wall Street financiers participating in stabilization loans would wait for Strong’s approval before even thinking of floating a loan. He surprised everyone, particularly Wall Street, in making the Fed internationally influential during the postwar period.
As instrumental as Strong was in furthering central banking in international economics, he became more infamous for restoring England to its former $4.86 parity in 1925—and the events which followed this feat. The Fed and the House of Morgan, both at Strong’s prompting, fed England $200 million and $100 million, respectively. Meanwhile back in America, Strong sponsored an easy-money policy, reducing the discount rate from 4 percent to 3.5 percent. Low discount rates in America, Strong figured, would stop the continuing outflow of England’s gold, thereby defending the pound’s new position.
His actions helped restore international liquidity, but by 1927, skeptics blamed his easy-money policy for increased stock market speculation. Strong’s easy-money policy had lowered interest rates, and in turn, the price of call money, which then triggered increased securities purchases. In one year, from 1927 to 1928, brokers’ loans soared a record amount from $3.29 billion to $4.43 billion! The market boomed in 1928, and by the time the Federal Reserve Board raised the discount rate up to 5 percent (Strong was too ill at this point to make decisions), it was too late. Interest rates zoomed from 8 percent to 12 percent, but people didn’t care how much they shelled out for the borrowed money—the profits they anticipated would more than make up for interest charges!
From this point on, Strong’s health prevented him from contributing to the Fed’s policies. Pneumonia, influenza, shingles, and a damaged nervous system continuously knocked him to his knees. Shortly before he died, he wrote a friend, “Facing the past, honestly, I wonder that I am alive. When I review or catalogue what I have had to cover—the inside of the Bank, the Board, Congress. Governors’ Committees and meetings, Treasury, Foreign banks, complicated plans, all the personal equations, our unruly members, hostility, illness—it’s a mental high-speed cinema which staggers me—and in its experience has or had nearly finished me.”
By October, 1928, he was dead at 56. He had been operated on for an abscess due to diverticulitis and seemed to recover, but a week later he suffered a relapse and died from a severe secondary hemorrhage. Shortly before he died, he had said with prescient insight, “I do not think the problem is necessarily one of security prices or of available volume of credit, or even of discount rates. It is really a problem of psychology. The country’s state of mind has been highly speculative, advancing prices have been based upon a realization of the wealth and prosperity of the country, and consequently speculative tendencies are all the more difficult to deal with.”
For a fighter like Ben Strong, death must have been much more agreeable then it would have been had he lived to face the stock market crash incapacitated and unable to do anything about it. What Strong would have done in the face of the booming market of 1927 and 1928 will never be known—the luck of the draw drew him from power and placed it in the hands of George Harrison. Had Strong been given the chance, he might have been able to lessen the fall, especially when you consider his psychological insight. As the market crashed, a healthy Strong likely would have loosened the monetary coffers to cushion the blow, and as the event was worldwide, he would have Strong-armed his foreign central bank buddies to do the same. The worldwide depression could have been much lighter.
GEORGE L. HARRISON
NO, THIS ISN’T THE GUY FROM THE BEATLES
Mild-mannered spot-spoken and affable central banker George Harrison got things done his own way at a time when things were as frenzied as they get—the 1929 Crash. This was Harrison’s time to shine, and he did, working hard behind the scenes—everywhere but the doted-upon Stock Exchange floor. As a long-time deputy governor of the Federal Reserve Bank of New York, he wasn’t the likeliest to become the hero of the day, but he earned the honor while helping ease the load on America’s stressed-out economy. Because Wall Street was so much more powerful then than it is now in relation to non-Wall Street financial institutions, the head of the New York Fed was also more powerful then than now. In those days, Harrison was essentially the entire power of the Fed.
“The day after the market crash of October 24, I knew there was going to be a huge calling in of brokers’ loans and a complete breakdown. Actually, loans were called in on the part of others than banks to the extent of $2,200,000,000. No money market could stand that.” So Harrison leapt into action as best he could, since he walked with a cane after a childhood accident.
At first, he joined in the secret meetings held underneath the Exchange trading floor by Morgan partner Thomas Lamont along with other top New York bankers who pooled $240 million to shore up sliding stocks. But that money wasn’t nearly enough to do the trick, and some New York Stock Exchange firms teetered on the edge of bankruptcy while brokers leapt out skyscraper windows. They all shared Harrison’s fear of a calling in of all bank loans. The bankers met again, and this time Harrison spoke up. “The Stock Exchange should stay open at all costs. Gentlemen, I am ready to provide all the reserve funds that may be needed to permit the New York banks to take over the call items of out-of-town banks if my directors agree.” That’s about as bold as bankers ever get.
Harrison used open-market operations to ease the load on New York’s commercial banks, allowing the Exchange to remain open even in the face of unbridled selling. This meant the Fed purchased Government bonds the banks were unloading, creating book entry credits for the bank with a swipe of a pen, and pumping much-needed currency into the New York money market. Since the Fed wasn’t supposed to bail out ruined speculators, Harrison got his board of directors’ approval late that night and began operations early the next morning, immediately buying $160 million worth of Government bonds.
Harrison bought $100 million chunks of the securities each day, putting the banks “in money”; he increased their credits at the Reserve Banks, enabling some $4 billion to be pumped into the depleted money market. Liquidity was preserved and pre-Crash interest rates, too—he had saved the banking structure. Harrison also lowered the rediscount rate, from 4.5 percent to 3.5 percent over the following months. His short-term “easy-money” policy, together with the open market operations, saved the banks immediately after the Crash and restored as much confidence as possible in the marketplace in the short-term. It set the stage for the stock market rally that ran into the spring of 1930.
Of course, over the long term the world was going over a financial cliff, and no one was capable of stopping it. Harrison and the Fed would later receive flak for what he and it had done—first from Washington, where there was still fear of the notion of central bank intervention and where they thought his easy money policy excessive, and most recently from monetarists who didn’t think he did enough. Washington’s then-conservative view that frowned on central banks and loose money soon led the Fed’s Board of Governors back to a restrictive policy that would cause the money supply to actually shrink in a reversal of Harrison’s thrust—and that actually made the Depression far worse than it otherwise would have been.
But Harrison’s actions were big and generous for the day. This wasn’t J.P. Morgan of 1907 acting for his account. This was a man with fiduciary responsibilities and a board of directors. And he was acting on behalf of an institution that was only 15 years old and still held in high suspicion, without benefit of the trust and power of today’s Fed.
Harrison’s actions set the precedent for later cooperation between the Fed and Wall Street. During the Panic and stock market Crash of 1987, Fed Chairman Alan Greenspan pumped money into Wall Street, preventing the market from continuing implosion. Harrison must have been cheering from his grave, because this time, in somewhat similar circumstances, it worked perfectly.
While the 1929 Crash may have been the hallmark of Harrison’s 20-year stint with the Federal Reserve Bank, he had plenty of other achievements of which to be proud. He was instrumental in stabilizing the dollar during the early 1930s, when Roosevelt—far from being an economics genius—began buying up Europe’s gold. Eventually, Harrison, a “sound money” man, convinced the president to stop his buying, allay the Europeans and leave the dollar alone.
Harrison also saw the Fed through two world wars. Following World War I, he acted as a sort of diplomat, extending the Fed’s credit to stabilize war-ruined countries’ currencies. Prior to World War II, he once again initiated open market operations—this time to keep the price of Government securities from dropping, and thus, to restore confidence in the government.
A San Francisco native, Harrison graduated from Yale in 1910 and Harvard Law School in 1913. He clerked for Supreme Court Justice Oliver Wendell Holmes as a reward for extraordinary scholarship, then moved to the newly-established Federal Reserve Board as assistant general counsel, later becoming general counsel. By 1920, at 33, he was chosen as deputy governor of the New York Fed, becoming head honcho in 1928 (six years later, a title change formally named him president).
A pipe smoker and golf, chess and poker player, Harrison later resigned from the Fed to head the long-time-Morgan-controlled New York Life Insurance Company in 1941. Some speculated Harrison had been a Morgan pawn all along and this $100,000-a-year job was his reward. Sounds to me like bologna from petty critics. There is no hard evidence to that point. In any case, Harrison sparked New York Life into action, greatly expanding the number of policyholders and their average policy costs. Under Harrison, the firm delved into group insurance and began writing accident and health policies for both groups and individuals. During a decade when overall economic growth had been at most, moderate, Harrison boosted the company’s assets from $2.869 billion in 1940 to $6.895 billion in his last year with the firm, 1953.
Ultimately, though, Harrison represents the first link between our central bank and intervention at a time of Wall Street panic. And that is quite enough to be included among the 100 Minds That Made The Market.
NATALIE SCHENK LAIMBEER
WALL STREET’S FIRST NOTABLE FEMALE PROFESSIONAL
It used to be that a woman contributed to Wall Street by either supporting her husband’s budding business career, mistressing a mogul’s many desires, or screening a boss’s calls—but by 1925 a woman named Natalie Laimbeer broke through the barriers that had held women back and began the process that led to today’s world where women are steadily building their presence on Wall Street. A widowed socialite, Laimbeer chose banking in which to make her mark, and within a few years, she became the first woman bank officer at one of Wall Street’s largest and most conservative commercial banks. While Hetty Green was powerful on Wall Street long before Laimbeer, Green was both exceptionally weird and a market operator for her own account. Laimbeer was a professional, and in that regard, she trailblazed the path for decades of women to follow.
Laimbeer wasn’t really looking to make her mark on Wall Street. After her second husband, a Wall Streeter himself, died in a car accident in 1913 that left her a semi-invalid for a while, she decided to go to work. Her husband had left them financially well-off, but she wanted to keep her children in the grandeur to which they were accustomed—after all, the Laimbeers were an integral part of New York Society.
During World War I, the New York City native volunteered in the U.S. Food Administration devising plans for canning food, and later lectured about home economics and the usefulness of electricity in the kitchen. The fact that Laimbeer “had never done a stroke of work as a wage earner,” as the New York Times quickly pointed out, never seemed to deter her. She was driven.
“Charm of manner, a quick smile, a pleasing personality, and amiability will take you far, but not unless backed by brains and ambition,” Laimbeer later said. And she should have known—by 1919, she was off to a promising start in banking. Though she never prepared for a business career—or any career, for that matter—Laimbeer’s interest in finance was rooted in her childhood, when her grandmother would take her to the bank and let her clip coupons from bright orange bonds. Later, at 15, she collected $25,000 in dimes for the American Red Cross to help finance construction of a Cuban ice plant!
Her first position in banking was mainly a clerical one, as manager of U.S. Mortgage and Trust Company’s women’s department. Back then, women clients were as rare as women in top management, so women’s departments were formed exclusively to take care of the few female clients that existed. It was Laimbeer’s job to take charge of all the business done by women in the bank, granting secured loans and opening new accounts for them. Within six months, she was appointed assistant secretary in charge of their Manhattan branches’ newly organized women’s departments.
By 1925, Wall Street’s largest bank, National City Bank, offered Laimbeer its first executive title (assistant cashier) ever given to a woman, and she took full charge of its newly established women’s department. While a handful of other women held similar titles, National City was the most prestigious, and the last top Wall Street bank, to permit women to the ranks of bank officer. Ironically, while the New York Times realized the significance of her achievement as front page news, it chose to focus on her ties with society and the way her new office was decorated to suggest “home rather than an office,” rather than detail her banking achievements or describe her business acumen.
“(Women) are on trial,” Laimbeer said. “They feel they must do twice as much as is demanded of them to hold their own in the world they have set out to conquer.” Although she swung the doors open for women on Wall Street and, in other traditionally male-dominated fields, it would be decades before women were truly accepted in the industry. Even now it isn’t clear that they are really accepted. But, way back then, Laimbeer worked at keeping the doors open for other women by co-founding the Association of Bank Women, part of the American Bankers’ Association, for female banking executives.
“I believe that the greatest development in any future phase of banking will be the development of the woman power in banks.” The group had 110 members in 1925. In those days, banking and investment banking were inseparable (Charles Mitchell, for example), so when a woman like Elaine Garzarelli grabs headlines these days for her market views, she owes a lot to the pioneering legacy left behind by Laimbeer and those who followed.
Laimbeer’s position lasted only briefly, as her health forced her to resign in 1926. Instead of fading into the woodwork, however, she again grabbed hold of the reins as a pioneer in financial writing. Between 1928 and 1929, she was editor of the financial pages for The Delineator and often contributed to the New York World. She died in 1929 in New York of a heart attack.
CHARLES E. MITCHELL
THE PISTON OF THE ENGINE THAT DROVE THE ROARING 20S
Investment banking had long been considered the turf of private banking firms like the House of Morgan when Charles Mitchell came along—and maybe it was better that way. But Mitchell cared not for tradition. He was young, gutsy, self-confident, a fighter, and daring enough to invade the holy territory, taking a huge chunk of it for his budding National City Bank empire back in the 1920s. With outrageous expansion, however, came even more outrageous abuses—and by 1933, the commercial-investment banking combination, then inherent in every major bank, had to be dismantled by Uncle Sam.
No doubt about it, Mitchell had a magnetic personality. Tall, heavy-set with broad shoulders, a handsome smile, and a bold jaw, he was ambitious, forever energetic, and popular—even those who disagreed with him liked him. Born in Chelsea, Massachusetts in 1877, the son of a merchant-mayor, the 39-year-old liquidated his own small investment banking firm to reorganize National City Bank’s “banking affiliate”—the National City Company—in 1916. Just five years later, Mitchell seized the presidency of both the Company and the Bank.
The banking affiliate was the key to Mitchell’s success, as well as his ultimate undoing. While private bankers like Morgan and Kuhn, Loeb had long combined investment banking and simple deposits and loans, the independent commercial banks where the little man on the street banked got into the investment banking game only later, in the early 1920s. National City Company was the vehicle through which National City Bank and Mitchell sidestepped the law to operate in securities—since by law, banks were not supposed to do so.
It was the first of many dubious activities National City embarked on under Mitchell, but the profits poured in. Not surprisingly, it sparked a whole wave of banking affiliates across the country—including Albert Wiggin’s Chase National Bank—subjecting the little man on Main Street to the risks of having his bank’s solvency tied to security prices! At first this setup seemed like a good thing. A lot of bad things seem like good things when prices are rising. By the mid-1920s, a great deal of investment banking business was secured by banks. National City alone, by decade’s end, was pumping out between $1 to $2 billion in securities annually!
Being ambitious, Mitchell wasn’t content simply to underwrite bond issues, so he transformed the Company into a veritable securities factory, pushing stocks and bonds on Bank depositors and any sucker his sales force could get its hands on. And with quantity, went low quality—Mitchell floated and sold $90 million in Peruvian bonds that ultimately defaulted, even though Peru was a known risk. As long as the issue sold, Mitchell could wash his hands of it. Note that it is far different and easier for an investment bank to move successfully into commercial banking than for a commercial bank to move safely and well into securities. But Mitchell was not your typical prudent banker.
Selling was the name of Mitchell’s game, and his sales force reflected it. An extraordinarily persuasive salesman himself, he hired hundreds of pushy salesmen, then fueled them with pep talks and cutthroat sales contests. The contests were based on a point system—the more risky an issue, the more points a salesperson could rack up if he unloaded it!
That pressure, of course, trickled down to the customer, as revealed by testimonies during the U.S. Senate Committee on Banking and Currency hearings in 1933. Case in point: A sickly little man named Edgar Brown had $100,000 secure in U.S. bonds when he was lured into a Company branch office by a clever ad claiming to “keep you closely guided as regards your investment.” Not knowing much about investing—except that it was the hottest game around in the 1920s—Brown was told his U.S. bonds were “all wrong,” and consequently, his salesman’s “capable hands” had him leaving the office with a colorful array of Viennese, Chilean, Rhenish, Hungarian, and Peruvian bonds. In fact, the salesman told him, these bonds were such a great buy that it would behoove Brown to invest further.
Brown was persuaded to borrow—conveniently from the mother bank—and wound up with $250,000 in dubious bonds. When the bonds declined, he complained, and they switched his bonds to a rainbow of stocks (particularly National City Bank stocks). When the stocks fell, he requested that they sell out his position. The entire office of salesmen gasped, ran over to Brown, surrounded him—then convinced him he was being entirely foolish! Brown again foolishly listened, and when the Crash came, it wiped out all of his speculative shallow holdings, leaving him plumb broke. Desperate, he applied for a loan at National City Bank—but they turned him down flat in a cold form letter saying he had insufficient collateral!
Mitchell’s game blew up in his face during the post-Crash, reform-hungry period that swept Wall Street. He became a principal target of the sensationalized 1933 Senate hearings, despite the $3 million debt he ran up in an attempt to support National City stock during the Crash. On the stand, he shocked the nation—and even Wall Street—with tales of National City’s million-dollar salaries and its role in speculative copper stock pools and stock manipulation. It was also revealed that Mitchell had avoided $850,000 in income tax in 1929 via wash sales—that is, he claimed a $3 million loss by selling 18,000 shares of bank stock to his wife at a drastically and falsely reduced price. He faced criminal charges, but escaped with having to pay back the taxes plus stiff fines.
Just five days after his testimony, Mitchell resigned from National City, and soon afterwards, the Glass-Steagall Act began dismantling the entire system he had made popular, divorcing commercial from investment banking. Mitchell, meanwhile, worked his way out of debt by setting up his own investment counseling firm at 56 in 1934 and, becoming board chairman of an investment banking firm (Blyth) the next year. He died 20 years later at 78 of circulation problems, leaving behind a daughter and a son and a largely reformed Wall Street.
Mitchell was a pushy salesman at just the time Wall Street needed restraint. Had Wall Street had a little more self-restraint just then, it might not have suffered governmental restraint via regulation. Mitchell became a symbol of what was wrong on Wall Street and a scapegoat for all of Wall Street’s abuses—beyond those his salesmen actually executed. And there is a lesson here throughout history; whether via Mitchell or, more recently, Mike Milken (who actually got nailed for only a very tiny fraction of his huge volume of transactions). The lesson? A little restraint goes a long way. Yet another lesson to learn the power of salesmanship. Even after a terrible public image via very public congressional hearings, Mitchell—the master salesman—could sell his way to a very secure and prominent future on Wall Street. Perhaps more poignant than “A little restraint goes a long way” is the amendment: “A little salesmanship coupled with a little restraint goes a very long way.”
ELISHA WALKER
AMERICA’S GREATEST BANK HEIST—ALMOST
The Bank of America was almost stolen in 1930. It could have been the greatest bank heist in history—the mighty B of A tugged from the ground its founder stood on! While the “heist” never worked out, its mastermind, Elisha Walker, still goes down in history for giving it a mighty good try. And the timing is important to the evolution of financial history.
It all started when A.P. Giannini, the San Francisco-based bank’s aging founder and head of its huge holding company, Transamerica Corporation, started shopping for an investment firm to expand his multimillion dollar banking empire. At the time, Giannini had—by choice—absolutely no ties with Wall Street, but he was in the midst of going national and hoped to go international. He had grandiose plans for his baby—and Wall Street resented that.
On Wall Street, Giannini thought he had found what he was looking for in 49-year-old native New Yorker Elisha Walker, head of Blair and Company, a blue-ribbon private investment banking firm that was right behind Morgan and Kuhn, Loeb in influence. Walker was considered an up-and-coming star on Wall Street, but most important, Giannini liked him. A father of five, Walker seemed agreeable to the Italian Californian who was used to big Italian families. Almost overnight a deal was struck, and Blair was adopted into the Transamerica “family.”
At that instant, Walker’s keen mind began to spin—and Giannini should have run! A rising star, Walker figured, could rise a lot more quickly and maybe even make a few bucks at the same time by securing Transamerica for his Wall Street cronies, who would love to Wall-Streetize its Main Street methods. So, Walker went along with Giannini’s vision for Transamerica, cozied up to the higher-ups and eventually took over the firm when Giannini retired a year later in 1930. That’s a pretty darn big move for an outsider to any corporation in just a year. But Walker was superficially complimentary. “I can promise that we will do our best to try to follow in the footsteps of Mr. Giannini,” he said, secretly crossing his fingers behind his back. “I am not in this for (my) individual gain but for the good of the company.”
Using America’s wilting economy as an excuse (which may have been a pretty darn justifiable one), Walker immediately cut Transamerica’s dividend, a serious no-no in Giannini’s eyes, especially during panicky times. But Walker got his way—he was chairman of the board now. Next, under Walker, real estate mortgages were sold to a Morgan-affiliated life insurance company, abandoning old customers. Earnings and financial prospects appeared worse than previously expected (which may have just been a sign of the times). As a result, the stock fell from about $50 a share to under $30, cutting the firm’s worth in half! Gradually, tension grew between Giannini and Walker, particularly when Walker refused to defend Transamerica stock against a bear raid.
Walker recklessly sold Transamerica assets left and right without stockholder approval at cheap prices to hungry Wall Streeters, of all people! For example, he was quick to cut loose the firm’s New York branch banks, earning brownie points with the Wall Street bigwigs who resented Giannini’s presence on Wall Street—mainly because Giannini hadn’t brought them business and, in fact, had taken some away.
With customers alienated and stockholders ignored, the bank just wasn’t what it used to be under Giannini—and this unnerved the thousands of stockholders who placed their trust and savings with the bank and its founder. So, just as Walker probably expected, stockholders began selling their stock. Transamerica stock plummeted, later hitting an all-time low of about 2! Now Walker could easily afford to buy stock, which he did, becoming the largest individual stockholder in the firm. This horrified Giannini, who never owned large blocks in his firm, but instead controlled the firm through thousands of little investors who trusted him and gave him their proxies.
Bit by bit Walker dismembered the gigantic firm, taking Transamerica further and further from the goals to which he had pledged his allegiance just months before. Giannini was outraged and denounced his successor’s plan as a premeditated conspiracy spearheaded by Morgan. The “corner (J.P. Morgan & Co.) never liked our substantial interest in leading companies, nor our going into Europe for business and issuing travelers checks which Banker’s Trust (a Morgan bank) strongly objected (to).”
Giannini came out fighting, waging all-out war with Walker and his Wall Street backers. Whenever a battle like this takes place, history almost guarantees a Wall Street victory—such was the case for Robert Young, Sam Insull and Charles Morse. Giannini’s case looked equally gloomy since he was nearly broke—remember, he had never been a major stockholder in Transamerica, and the ever benevolent Giannini had given away to charities a lot of the money he had amassed. But what he had that Walker did not was stockholder support, which proved key in the end. Also, it was difficult for Walker to find Wall Street allies in the dismal Depression days of 1932.
Walker, portrayed as the Wall Street “racketeer,” out to swindle his stockholders, proved powerless against Giannini’s popularity with the people and the press. The battle finally culminated in a sort of popularity contest at the 1932 stockholder’s meeting. Walker was voted out of Transamerica when Giannini won the majority of proxies by a landslide. Walker and his supporters were immediately ousted from what was left of Transamerica. And Walker was never heard from again in California.
Hated in San Francisco, Walker fled back to his friends in New York, where his brownie points paid off—he was made partner at Kuhn, Loeb, remaining there until he died at 71 in 1950, tucked away in relative obscurity in Long Island. The good old boys took care of their own. Yet, after the Giannini fiasco, Elisha Walker was never really a force to be reckoned with again. Transamerica is basically his only claim to fame. Wherever you see his name in a book, you’re sure to see Giannini’s soon afterwards—and right on his back.
Here is an instance where the typical top Wall Street executive—Republican, Yale and MIT-educated, energetic, confident and connected—is beaten by the little people’s champion. Surely, this was a sign of the times. Walker represented Wall Street before the 1930s when Wall Street almost always got its way. Almost no one survived its disapproval before Giannini—but by the 1920s, a few clever entrepreneurial types were trying. Insull and Young tried, but in the end they failed without Wall Street’s financial backing. Giannini was one of the first to succeed in dethroning a Wall Street club-king without sharing the victory with equally powerful Wall Street allies. Though it was a very close call, Giannini’s successful attack on Walker was symbolic.
The 1930s whipsawed America’s vision, making Main Street clearly more important than Wall Street and in many ways separating them for the first time. Just as Glass-Steagall separated commercial banking from investment banking and brokering, and just as the 1940s saw the emergence of Merrill Lynch as a giant based on its championing of America’s little investors, the failure of Walker in the Giannini/Walker battle was perhaps the first major symbolic ripple of the shift of power from Wall Street to Main Street and its emerging “little” people that would dominate the financial world for the next 40 years, ended only by the 1980s reappearance of leveraged mega-raiders.
ALBERT H. WIGGIN
INTO THE COOKIE JAR
Albert Wiggin is a great example of why Uncle Sam passed the Glass-Steagall Act (Banking Act of 1933), which separated commercial banking from investment banking. Prior to the act, the two functions were literally attached at the head, like a pair of Siamese twins, sharing top management, their lifeblood—customers, and even insider information. This made it fairly easy for clever, greedy folks like Wiggin—and there were plenty like him—to take advantage of their positions.
Once called the “most popular banker in Wall Street,” Wiggin headed Chase National Bank, having built it into the world’s largest commercial bank by 1930. Simultaneously, he headed Chase’s investment banking affiliate, Chase Securities Corporation, giving him full access to valuable insider information regarding Chase’s stock deals. Had Wiggin not acted on this information and used his prestigious position for his own personal profit, he might well have gone down in history with his prestige intact—but Wiggin simply couldn’t resist dipping his fingers into the cookie jar.
Although the calm, reserved and business-minded Wiggin appeared to run the bank conservatively, he had a wild speculative streak that consumed him when it came to his personal finances. Sometime during the mid-1920s, he got his shady operations underway by forming six personal, family-run corporations—such as his Shermar Corporation—to use as speculative vehicles while keeping his identity under wraps. Speculation wasn’t by any means illegal, but he certainly didn’t want his name tainted by its flamboyant nature! Wiggin was, after all, internationally respected and an important member of Wall Street’s banking elite, who frowned on that sort of thing.
So, while keeping his activities as secret as possible, Wiggin made it common practice for Chase Securities to cut his personal firms in on its own maneuvers, like stock pools. By itself this was neither illegal or immoral, but it represented the start of his path to problems. For example, when in 1928 and 1929 Chase Securities joined a Sinclair Consolidated Oil pool run by celebrated market manipulator Arthur Cutten, Wiggin’s Shermar Corporation was also cut in.
The pool bought about a million shares of Sinclair stock at $30 per share, then waited to unload them at falsely-inflated prices while Cutten manipulated the stock. The stock sold so well that the pool was able to dump an additional 700,000 shares on the public—at prices ranging between $35 and $45. In all, the pool realized some $12 million in profits! Chase, with a 15 percent cut in the pool, received about $1.8 million while Wiggin, under his corporate name Shermar. received 7.5 percent, about $870,000—not bad for simply being who he was! And no one was the wiser. Again, this was not illegal then, and since he put his money equally with everyone else’s in a risky venture, it was not particularly immoral, but it was the beginning of his secret deals.
Those who were wise to Wiggin’s operations were wise enough to keep their mouths shut. Wiggin was highly regarded in Wall Street—and exposing him as a speculator instead of a pious banker just wasn’t considered a courteous thing to do in the community. Furthermore, the shrewd and calculating Wiggin—who never left anything to chance—strategically planted the bank employees who knew of his activities on his firms’ “phony” boards of directors. That way, they were intimately associated with his affairs and, thus, couldn’t rat on Wiggin without condemning themselves!
By far Wiggin’s most horrendous act was speculating in his own bank’s stock—during the 1929 Crash! In just the three months surrounding the Crash, using his Shermar alias, Wiggin sold over 42,000 shares of Chase stock short, reaping some $4 million when he covered his shorts. Again, no one suspected a thing. Outwardly, Wiggin appeared the same reserved and respectable banker he had always been, and he even joined in a ballyhooed banker’s consortium led by Thomas Lamont to support stock prices. Ironically, the spotless reputation of the consortium’s members succeeded in calming the market for a very short while, but of course, the Crash was too much for anyone to handle. The more the market—and Chase stock—declined, the more Wiggin continued to sell short! It is an obvious ethical violation of a fiduciary relationship to be head of a company, and supposedly doing your best to protect your stockholders’ interests, while you short the stock.
Meanwhile, Chase Securities had its own pool aimed at supporting the bank’s stock. So while the affiliate conveniently poured money into Chase stock to keep it temporarily afloat, Wiggin relentlessly sold short—even selling 5,000 shares to the pool itself! Of course, at every point along the way he knew exactly where the bank’s buy orders were placed so he could place his short sales accordingly. Absolutely merciless!
Topping it all, Wiggin wasn’t even speculating with his own money—but with Chase’s! The bank was naturally generous with loans to Wiggin’s corporations, sometimes forking over $5 million in one week—which Wiggin gleefully used for speculation. Now that by itself is a clear ethical violation. Banks aren’t supposed to lend money to their own officers on a non-fully-disclosed basis. As you will recall, it was that same indiscreet fiduciary breach that drove Bert Lance from President Jimmy Carter’s administration.
Anyway, no matter how generous the bank was, Wiggin continued to take advantage of it. In December 1929, he borrowed $8 million to cover his shorts in Chase stock and earned $4 million! By this time, he was a long way from his beginnings in simply participating in hidden but honest speculations. His scruples were nowhere to be found, and Wiggin next dodged the income tax on his gain by juggling the stocks among his wife’s and his own corporate accounts, so that the stocks sold short were never actually traded in his name. This was to be his final undoing.
Wiggin’s wheelings and dealings finally came out during the U.S. Senate Committee on Banking and Currency hearings, which began in 1933, immediately following his resignation from Chase. His resignation had ironically been much celebrated. He received a whopping $100,000 per year pension and multitudes of praise for his selfless dedication. “The Chase National Bank is in no small measure a monument to his energy, wisdom, vision and character,” wrote new management. Actually, Wiggin’s Swiss bank account—if he had one—was a much more fitting monument.
When Wiggin took the stand, remaining his dignified, aloof self, but looking a little haggard, all of his dealings were revealed and his reputation decimated. Ferdinand Pecora, counsel for the Senate Committee, recounted Wiggin’s more memorable testimonies in his book, Wall Street Under Oath. Wiggin, for instance, refused to use the word “pool” because of “that feeling” it provoked. He also refused to apologize for his dealings in Chase stock, saying, “I think it is highly desirable that the officers of the bank should be interested in the stock of the bank.”
After his testimony, Chase washed its hands of Wiggin, and he resigned his pension. Because his tax dealings were also aired during the hearing, he was charged with defrauding the government of taxes and ordered to pay back over $1 million in back taxes and penalties. He fought the case for three years all the way to the U.S. Supreme Court but ultimately lost, settling for an undisclosed amount in 1938.
Wiggin lived out the rest of his life in obscurity away from the financial community with his wife, whom he married in 1892, and two married daughters. Note that in more modern times he almost certainly would have gone to jail. But in those days you just didn’t put Wall Streeters in jail. He died at 83, in 1951. By the time he died, Chase Securities had been long dismantled.
Wiggin suffered from the same basic problem that more recently put Ivan Boesky and others in jail. He failed to separate in his mind short-term greed from what was good for him in the long run. Morals are easier than crooks can ever envision. In the long-run, greed and morals go together, hand in hand. Had Wiggin always placed his stockholders’ interests above his own, this otherwise capable man would have died rich and respected by all. Instead, by placing his own short-term greed above his beneficiaries’ good, he lost everything. Crossover crooks, who begin in respected, powerful positions and then start abusing their power, rarely set out to be bad guys. Like Wiggin, they do a few simple and relatively harmless deals and, slowly over time, one step at a time, evolve into worse and worse abusers of privilege. Wiggin taught America that every fiduciary relationship is a potential conflict of interest and should be handled by all with awe and a complete lack of secrecy.
