       
Eyewitness to Wall Street 
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  Nothing changes: New York was founded by a publicly-traded company that encouraged colonists to buy stock with debt. Everything changes: In 1999, Merrill Lynch, by most accounts the most powerful firm on Wall Street a couple of years earlier, was struggling to compete against upstart Internet brokerages. Most of this book covers recent history: the easy money of the "Go-Go" 1960s; the treacherous 1970s, which sank dozens of brokerages; the 1980s, when greed was good (how quaint those mere multi-million-dollar fortunes seem today); the Internet boom of the 1990s; and the shape of things to come. Yet the early years are just as revealing and relevant. Eyewitnesses to the first stock exchanges, centuries ago, noted the distinct mindsets of bulls and bears. In the 1600s, a savvy trader achieved the first "corner" of a financial market in America by hiding barrels of wampum beads–the general currency even among European colonists–making the beads so scarce their value quadrupled. Throughout, one discovers the story of the country is linked closely to the financial markets. For instance, the nation’s capital is in Washington, D.C. because New York City and Philadelphia traded away the honor in return for Congress’s agreement to borrow money–at a stiff interest rate–from local financiers. It’s also apparent that the getting and spending of the Street typifies America’s national character in a way the financial centers of other countries do not. For instance, London’s "the City" does not symbolize England. The casual explanation is that Americans worship wealth. But few cultures can claim otherwise. The particular American emphasis requires a more thoughtful explanation. Touring America at the beginning of the twentieth century, English author H.G. Wells wrote, "America is still, by virtue of its great Puritan tradition and in the older sense of the word, an intensely moral land. Most lusts here are strongly curbed, by public opinion, by training and tradition. But the lust of acquisition has not been curbed but glorified." Another Englishman, James Bryce, who visited a couple of decades earlier, told his countrymen, "The share market of New York is the most remarkable sight in the country after Niagara and the Yellowstone Geysers." Bryce’s explanation is more subtle than Wells’s: "It can hardly be doubted that the pre-existing tendency to encounter risks and ‘back one’s opinion’, inborn in the Americans, and fostered by the circumstances of their country, is further stimulated by the existence of so vast a number of joint-stock enterprises, and by the facilities they offer to the smallest capitalists…. The habit of speculation is now a part of their character." I learned as a child that my mother has "the habit of speculation." Her car radio seemed constantly tuned to market updates. (This was during the bear market of the 1970s, so the reports seemed dismal to me; only later did I learn that Mom, a natural skeptic, correctly saw the slump as more than a quick correction and was shorting the blue-chips brilliantly.) I can still hear the radio announcer’s emphatic sign-off: "The name of the game is In-formation." That announcer identified a pattern in the story of Wall Street. Two hundred years before my mother listened to stock prices broadcast over radio, speculators established an ingenious system to speed information from New York to Philadelphia, the other great trading center of the century. They built a series of towers between the two cities, manning them with signalmen who relayed price information. (The process took about half an hour.) During the Civil War, Jay Cooke used the telegraph to organize a nationwide sales force for Treasury bonds. The new technology allowed him to raise money faster than the government needed it. Today few people trade without real-time quotes, an advantage that only a few years ago was reserved for professionals and subscribers to expensive services. Other patterns also appear: –Emotion and intellect are in constant conflict. "Opinions change from moment to moment," observed one of the eyewitnesses. "Hope and fear are equally vehement and equally irrational; men are constant only in inconstancy, superstitious because they are skeptical, distrustful of patent probabilities, and therefore ready to trust their own fancies or some unfathered tale." He was writing in 1688. More than three hundred years later, eyewitness Matthew Klam, watching a day trader in action, was confused when the trader suddenly cancelled an order placed just a moment earlier. "Why did you cancel?" Klam asked. "It was spooky," the day trader said. "I don’t get this stock." –Readers will notice a familiar phrase, "New Era," appears a few times, only to be discredited. There certainly have been truly new eras on Wall Street, important changes in commerce and the economy. But when the phrase is heard often, one can bet that people are projecting unrealistic dreams onto the market. Investor Bernard Baruch, lucky enough to sit out a 1901 panic, observed coldly, "As with most financial panics the stage had been set in advance by extravagant hopes and talk of a ‘New Era.’ Varied factors contributed to this surge of optimism. Our victory over Spain had stirred fantastic dreams of imperialism and dazzling predictions of new foreign markets. The public was in the stock market as never before." In 1928, Frederick Lewis Allen recalled, "The new era had arrived, and the abolition of poverty was just around the corner." Are we in a "new era" of commerce now, at the dawn of the Internet age? Certainly. Have all natural laws been repealed? Not yet. –Professionals play follow the leader. In bull markets, professionals pile on to the best-performing stocks, until a select few companies are carrying the burden of market performance. Edward Johnson III of Fidelity Investments, recalling the quick decline of the "Nifty Fifty" stocks that defied gravity in the mid-1970s, said the mob mentality was unavoidable. "It was a performance game," he said, "and if you didn’t own the Nifty Fifty, you were behind." By the late 1980s, Johnson said, the stocks had changed but the principle had stayed the same: "Instead of its being the Nifty Fifty, it’s the Nifty 500, whatever is in the S&P. All of the geniuses have figured out that the best way to have a glorious party is to all join the index. And the only problem is that all of the money is flowing into a limited number of securities and the index is no longer an index. It’s making its own market." –Just as they pile on, professionals panic. As the eyewitnesses here reveal, professionals and institutions are usually the first and the biggest sellers during any sharp market drop. That makes sense, of course. They sell because they can. They’re closer to the information, and to the trading floor. And as Johnson pointed out, they’re being publicly judged against the performance of others. They can’t lie to their neighbors about selling stock at its peak. The focus here is on people, not numbers. These eyewitnesses share a knack for revealing the human side of business: the brilliant successes, the con men, the tycoons and robber barons, the rivalries, mob mentality of the Street and investors, the corporate battles. As Commodore Vanderbilt once telegraphed to some double-crossing partners: "Gentlemen: You have undertaken to cheat me. I will not sue you, for the law takes too long. I will ruin you." He did. Following the pattern of Eyewitness to America and Eyewitness to the American West, I’ve drawn material from diaries, private letters, memoirs, and reportage, to bring the story of the Street to life as only first-hand reports can. One difference in this book is what constitutes an eyewitness. Many of the accounts come from business reporters who pieced together the whole story from several firsthand sources. This points to a difficulty all business historians face. Business, by its competitive nature, is generally conducted in private by people who don’t want the public to know precisely what happening. For instance, one must assume, simply because the law of averages applies to all of us at times, that convicted felon Ivan Boesky has once or twice lapsed into truthfulness. But for the full story of the 1980s insider trading scandals we need to read reporters such as James Stewart, author of Den of Thieves. Do not confuse that human focus with the celebrity journalism that occasionally seeps into the business pages. What it reveals is often essential. Veteran business writer and author Stanley H. Brown tells the story of an assignment he gave a class of journalism students in 1981. He wanted, as concisely as possible, the crux of the story about the newly-merged Shearson and American Express. The one student who passed the assignment wrote just a single sentence: "A man named Sandy Weill will not stay in business long with a man named James Robinson III." Three years later, Robinson, the classic "Southern gentleman," had pushed out the Brooklyn-born Weill. No one questioned that it was a clash of ego and personality. (Everything changes: In 1998, Weill transformed the financial services industry with the Travelers-Citibank merger. Nothing changes: As part of that bargain, Weill agreed to be co-chairman with Citibank chief John Reed, a buttoned-down technologist: but less than two years later Reed was out.) A final thought: Without denying that "the lust for acquisition" or "the habit of speculation" are central to Wall Street story, or that greed and selfishness are evident throughout this book, one should appreciate that Wall Street has been a hub of constructive enterprise for centuries. For example, no stocks were ever manipulated more than the railroad stocks of the 19th century; yet the companies they supported were often more than mere corporate shells. Wall Street is intimately connected with building the nation, helping allies win two world wars, and funding municipalities across the country. Consider this story from Travers Bell, a founder of the first black-owned investment bank to be a member of the New York stock Exchange: "We thought our best hope [for becoming an underwriter of municipal bond issues] would be to try to find some black mayors. The only place we could find them was down in rural towns in the South. Mound Bayou, Mississippi, was a classic because it was the oldest black municipality in the U.S. It had never had a financing, and here we came, knocking on doors and saying, ‘We want to do a bond issue.’ And this guy says, ‘What’s a bond issue?’ And this guy says, ‘What’s a bond issue?’ So we did a housing issue there. As a result, Mound Bayou is a very progressive town today. Maynard Jackson [later mayor of Atlanta] was a lawyer in his own Atlanta law firm at that time, just a lawyer. We made him co-bond counsel in the Mound Bayou deal. It was the first time a black firm had ever been a bond counsel in a bond issue." That’s yet another pattern you’ll discover. Wall Streeters, while enriching themselves, have also improved and enriched the nation. |
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