At the end of the 1700s, European-style bourses and trading centers were beginning to coalesce in major cities like Boston, Baltimore, and Philadelphia. In lower New York, trading began down by the wall that Peter Stuyvesant had built during the previous century as a defensive barrier for the island of Manhattan (or New Amsterdam). This location would come to be known as Wall Street, the financial capital of the world. The activities and ethos of this otherwise insignificant street would go on to transcend geography: Wall Street is no longer just a physical place; it is its very own globally recognized culture, and it can exist anywhere someone is engaging in stock or bond wheeling and dealing. In fact, anywhere you go in this world, you can use the term The Street and businesspeople will know exactly what you’re referring to.
I came up in the business working “on Wall Street” even though I never worked in a building with a physical Wall Street address. But my own story begins in the relatively recent past. To understand how Wall Street became part of the broader culture, we need to start at the very beginning.
By 1790, there was already a healthy amount of land speculation and bond trading in the colonies, but stock trading was first starting to come into its own. There were two types of traders running around Wall Street in those days, the auctioneers who set the prices for securities and the dealers who bought and sold them among one another. The broker-dealer system of the modern age has its roots in exactly this arrangement.
The “history repeats itself” crowd will be delighted to hear that, even in that early era, the auctioneers were constantly manipulating and rigging their securities prices. In fact, the first bailout occurred when a New York merchant named William Duer blew himself up with leveraged speculative positions and Alexander Hamilton himself had to step in to help all the parties unwind their exposure. Some things will never change.
By the mid-1800s, railroad shares and shipping stocks were all the rage in the unregulated marketplace that came to be known as Wall Street. In typical boom-bust fashion, the Civil War’s aftermath and its effect on securities markets began bankrupting some of the very first brokerage firms and trading concerns, among them Jay Cooke & Co, Clark, Henry Clews, and Fisk & Hatch.
It wouldn’t be until the 1890s that Charles Dow’s namesake index (the Dow Jones Industrial Average) would be published on a daily basis by the Wall Street Journal. Dow was both founder and editor of the Journal, and his trackable indexes (there was also one for transportation stocks) made the daily goings-on of the stock market more accessible to outsiders. This, combined with the war bond efforts of the World War I era, had a seductive effect on the new, emerging middle class. Over the next two decades, participation in markets began to blossom to match the new era of consumption and consumerism that had taken hold of the American populace. Not coincidentally, it was at this time that the banks began acquiring brokerages and dealers in order to begin selling stocks to their new clients—the everyday American citizen. What was once a market for traders, robber barons, and the speculative few had become more welcoming to the newly moneyed East Coast “civilian.”
The response to various war bond sales through 1916 and 1917 kicked down the door for the sale of corporate bonds, a gateway drug if ever there was one. In fact, the brokerage houses helped sell these war bonds with zero commissions (or barely discernible profits), essentially using them as a loss leader to establish relationships with millions of individual investors who simply hadn’t existed before then. Once the brokerage houses had war bond buyers, converting them to corporate bond buyers would be a cinch. According to Charles Geisst’s A History of Wall Street, there were only 350,000 individual investors in the bond market in 1917, but by 1919 that number had ballooned to 11 million! As these bonds matured, the principal was only headed in one direction—toward whatever securities the brokerage houses wanted to sell next.
By the 1920s, the securities markets were booming, and the business of business had exploded from the corner of Wall and Broad, radiating outward across the country along with our burgeoning communications capabilities. Investors were hungry for investments in radio, telephony, automobiles, and Florida real estate. The brokerage firms would find a way to satiate that hunger if it killed them.
When the party ended in October 1929, that blessing of communication turned into a curse. Wirehouses were able to transmit the horrible headlines and prices as quickly as they had previously been able to spread the decade’s joy. People were to learn of their ruin instantaneously. The great irony of the Crash of 1929 was that the brokerage firms themselves had weathered it in fine form—not one of the major brokers of that era was bankrupted or forced to liquidate. They had been able to purge their inventories ahead of all the sell orders coming in from customers in the time-dishonored tradition that we now call “front-running.”
The crash and resulting Great Depression brought serious regulation and reform to the Wall Street free-for-all that had enabled the bankrupting of half the nation. There was little vocal opposition to the new rules coming from the brokerages, as many of them were attempting to avoid being blamed outright for the mania and resulting chaos. I’ll pause here to allow you to remember that we’re talking about the 1930s and not the events of 2008. Quite an eerie coincidence, huh? OK, let’s continue.
The Depression only put the American investor on the sidelines temporarily. Now that the public had a taste for stocks and bonds, it would be but a matter of time before people would come back. And you better believe that they were going to need some brokers at the ready to take their orders when they did. Many of the brokerage giants we know today are the very firms that were standing ready for exactly that call.
Charles Merrill and Edmund Lynch, both born in 1885, become acquainted out of necessity in 1907—they each needed a roommate for the YMCA on 23rd Street in Manhattan. Seven years later Merrill would open a brokerage firm on Wall Street, the ambitious optimist ready to carve out his piece of the expanding securities explosion. Lynch, his cautious and risk-averse friend, would soon join him as a partner in the firm.
They initially focus on investment banking and spin the brokerage off into a subsidiary that Merrill reacquires when it runs into trouble during the Depression. Combined, the brokerage and investment bank make for a juggernaut. Unlike Morgan Stanley and other investment banking firms, Merrill has a built-in brokerage sales force. This means that Merrill can underwrite and place its own securities directly with the firm’s brokerage customers. This potent combination helps the firm become one of the most well-known and powerful brokerages in the nation.
Eddie Lynch dies in 1938, but Charles Merrill will live until 1956. That same year, the firm they had created together takes the Ford Motor Company public and has its first year of over $1 billion in underwriting revenues. I should remind the reader that in the 1950s a billion dollars was still real money, not just the amount that we now automatically pay every first-year analyst at Goldman Sachs. Anyway, a year later Merrill Lynch goes on to become the largest retail broker in the world; by the 1960s it has 121 offices, many of them staffed with Irish American brokers, earning the company its unofficial nickname, the “Catholic firm.”
The company explodes into the 1970s, brimming over with innovation and ambition to spare. This is ironic because at exactly that time, many retail investors began abandoning stocks and bonds due to an ongoing bear market and a stagflationary economic environment. Merrill comes public in 1971, the first Big Board member firm to trade on the Big Board itself. It is now operating in 40 countries around the world and has adopted the famous bull logo along with the tagline “Bullish on America.” The firm ends up having so much customer cash sloshing around in its brokerage accounts that it invents the Cash Management Account in 1977, the world’s first money market fund. Many brokerage firms have come and gone over the years, but none have so completely epitomized the maturation and evolution of the industry alongside its ever-growing customer base.
In the meantime, paralleling the ascendancy of Merrill and Morgan and Smith Barney, a new and less Wall Street–centric type of brokerage firm is incubating. The “white-shoe” firms would not have the American investor (and that money) all to themselves for much longer.
In 1943, lawyer Edward C. Johnson II takes over an investment fund called Fidelity and starts the complementary Fidelity Management & Research Company (FMR) to manage its holdings. Johnson is a staunch advocate of research and the belief that investors could (and should) outperform the market as a whole if they worked hard and knew how to analyze stocks. He runs the company for 25 years and is known simply as “Mr. Johnson” everywhere he goes. The company sticks to its plan to remain private, even as every one of its competitors over the years does an IPO. Mr. Johnson wants to be impervious to short-term pressures and maintain control in the face of those regular storms that play havoc with markets and public companies. In 1973, Mr. Johnson’s son Ned takes the reins and leads the newly formed FMR holding company further into the brokerage business and beyond.
That same year, an innovative renegade by the name of Charles Schwab raises $100,000 in seed money from his uncle and changes the way stocks are bought and sold by retail investors forever. He ultimately invents a new type of firm out of thin air—the discount brokerage house. It takes a few years before the Securities and Exchange Commission (SEC) even allows him to zag while the full-service guys are zigging. While the competitors of his brokerage firm are negotiating higher commissions, Schwab goes the other way, driving the cost of doing business with him to the bare minimum. He has set up shop in San Francisco and Sacramento, as far from Wall Street and its traditions as is geographically possible in the continental United States. He embraces technology to bring structure and efficiency to a very clubby and too-comfortable industry. Within five years, he is opening his twenty-third retail branch and offering 24-hour stock quotes to America’s individual investors. Three years later, his firm opens its 500,000th customer account and sells itself to Bank of America for $57 million. By 1994, everyone in middle-class America is an investor, and the baby boomers begin coming into their peak earning (and investing) years. Charles Schwab & Company will hit $100 billion in customer assets under management that year and then over $1 trillion in 2002.
The American investor is now both blessed and cursed by an endless array of choices for how and with whom they want to invest. There are full-service brokerages, investment companies like mutual funds and hedge funds, asset managers, investment advisors, and discount brokerages. The amazing and ironic part of all that choice is in how similar all the marketing is for all the different options. The messages and images that all these different firms project are almost universally interchangeable.