The Go-Go Years Read online

  The E.D.S crash and Perot’s dizzying personal loss were symbolic, in magnitude and unreality, of the 1970 panic. They are its single event that stands out in memory, like Richard Whitney’s appearance on the Exchange floor to bid 205 for Steel on behalf of the bankers’ pool, at the height of the panic on October 24, 1929—Black Thursday. Nor is it without symbolic importance that the larger market calamity of which the E.D.S. crash was a part resembled in so many respects what had happened forty years before—what wise men had said, for more than a generation, over and over again as if by way of incantation, could never happen again. It had happened again, as history will; but (as history will) it had happened differently. The nineteen sixties in Wall Street were the nineteen twenties replayed in a new and different key—different because the nineteen sixties were more complex, more sophisticated, more democratic, perhaps at bottom more interesting.

  CHAPTER II

  Fair Exchange

  1

  On the last day of 1960 Wall Street was in a euphoric New Year’s Eve mood, and volume on the New York Stock Exchange set a record for the year of 5,300,000 shares traded. It was a promising red sunset after a long stretch of leaden skies; the last Eisenhower administration was expiring amid general stagnation and a mild business recession, and the market, then as nearly always reflecting hope or fear about the future rather than current facts, was clearly reacting to the go-ahead spirit created through both instinct and intention by a young President-Elect, John F. Kennedy. People felt that now there would be action, movement, indeed forward movement; good things, never mind what, were bound to be ahead. A statistic no one in Wall Street could then imagine was that eight years later the average daily Stock Exchange volume would be two and a half times that 1960 record.

  The new mood persisted and grew; very soon, in fact, it grew ominously from cheerfulness to something near mania. It was fed by the Kennedy inaugural on that well-remembered cold day in January—a speech that now appears conventional in its cold-war rhetoric and its hackneyed call for self-sacrifice to the common good, but animated by the Biblical elegance of its language and the fierce dignity with which it was delivered. By mid-February the stock averages were up some 15 percent from their October lows, and there began to be talk of a “Kennedy boom.” Not even the Cuban Bay of Pigs disaster in mid-April could stem the tide; a week after Castro’s men drove out the C.I.A.-backed invaders, the market was up almost 25 percent, the fastest recovery since the end of World War II. The attention of buoyant investors was turning from blue chips to more speculative issues—Brunswick, Sperry-Rand, Hupp, Ampex, Transitron—and already some of Wall Street’s horizon scanners were beginning to express alarm and urge caution. On April 4, Keith Funston, president of the Stock Exchange and ordinarily, in his carefully restrained way, the nation’s leading backer of common stocks, reversed his field and began emphasizing the dangers of speculation. Gerald M. Loeb, the venerable Polonius of brokers, who would live to be one of the last men on Wall Street to have vivid memories of 1929, was saying a couple of weeks later, “If you want to sleep and smile when the wonder shares return to reality, now is the time to break away from the crowd.” (The wonder shares were those of new, all-but-untried companies with which investors were just then having an intense love affair. A few of them, like Polaroid, Xerox, and Litton Industries, would go on to greater things; most of them would be forgotten before the end of the decade.) In mid-May Funston was back on the same theme, this time more forcefully. “There still seems to be a preoccupation with low-priced shares because they are low-priced, and an unhealthy appetite for new issues of unseasoned companies merely because they are new. … Anyone who invests on a vague tip from an uncertain source is courting financial disaster.”

  Still seems to be? The preoccupation and the appetite, it developed, were just beginning to build up. In the second quarter there came a sharp business recovery, but that promising development was almost beside the point to avid stock purchasers. The bull market, in the classic way of bull markets, had begun to lead a happy and profitable life of its own, independent of underlying reality. The week of Funston’s second warning the Welch Scientific Company of Skokie, Illinois, makers of laboratory equipment, offered the public 545,000 common shares at $28. It is pretty safe to say that of the people who bought all of the shares on opening day, and those who on the very same day bid the price for them up to $52, only a small minority were well informed about or particularly interested in Welch’s profits or asset position. What they knew, and all they needed to know, was that at that particular moment in time new issues in the scientific-technical field were like found money, and the man whose broker would be so kind as to cut him in for a few hundred shares could count himself blessed.

  By the end of May the blue chips were beginning to lose ground—evidently because people were digging their old certificates out of bank boxes, selling them, and putting the proceeds into the new-issues market. By autumn, when the over-the-counter averages reached an all-time high, the money-coining machine was working at full capacity. Goaded by stock underwriters eager for commissions or a piece of the action, owners of family businesses from coast to coast—laundry chains, soap-dish manufacturers, anything—would sell stock in their enterprises to the public on the strength of little but bad news and big promises. In conformity with the law, the bad news would be all spelled out in the prospectus: the company had never made any money and had no real prospects of making any; the president had a record of three business failures in succession; the competition had the market for the company’s sole product all sewed up; and so on. But the effectiveness of warnings is limited by the preconceptions of those being warned, and the stock would be snapped up, leaving the underwriter with his easy commission and the owner of the company with more cash than he had ever seen before in his entire life. To top it all off, the heedless buyers of the stock would come out ahead, too; they would ride it up while waiting for the six-month tax-holding period to expire, and then they could sell, take their profits, and buy a new car—or a new issue.

  When the accounts for 1961 were added up—after a final day when the Stock Exchange tape ran ten minutes late because of heavy volume, once again promising good things for the future—the accomplishments of the year, quite apart from the new-issue killings, seemed substantial indeed. Trading on the Big Board had totalled just over a billion shares, the greatest for any year since 1929. (1929? A myth of ancient horror, like the Black Death.) An analyst with a computer calculated that during 1961 all Stock-Exchange-listed issues had risen on the average 23 percent, for a dollar-value appreciation of seventy billions. Eighty-six Big Board stocks had cheered their owners by splitting two-for-one or more. Korvette had almost tripled, Certain-teed had doubled and a half, Interstate Department Stores had doubled. And in the over-the-counter market where the new issues bloomed, gains for the year of 4,000 or 5,000 percent were not unknown. No wonder John F. Kennedy was popular in Wall Street.

  And yet, not quite all was euphoria and gratified greed. The year 1961 also brought a major scandal, involving not just a man or a firm but a key institution—the American Stock Exchange, Wall Street’s second largest. It was, of course, the successor to the old Curb Market, roofless and raffish like the world’s first stock exchange in Amsterdam in the seventeenth century; conducted outdoors, in one or another part of the Wall Street area, from long before the Civil War until 1921; a ragtaggle gang of brokers haggling daily in all weathers and wigwagging the results of their trades to office men perched in the windows of surrounding buildings. Over the loud objections of some of its members, the Curb had moved indoors in 1921, establishing itself in its present building (later modernized and enlarged) at 86 Trinity Place, behind Trinity churchyard. In 1953, under the leadership of its new, modern-minded president, Edward T. McCormick, it had renamed itself the American Stock Exchange and been quickly nicknamed the Amex. It had become a pillar of Wall Street, serving the necessary function of providing a ready market for stocks o
f companies too small and unseasoned to qualify for listing on the Big Board. In 1961, however, this financial pillar almost fell in disgrace, perhaps dragging a good part of Wall Street with it, but was redeemed just in time by the steadfastness and courage of a few of its members.

  2

  Casting a long shadow over the Amex, and indeed over all of Wall Street, during the later nineteen fifties, had been two particularly implausible swindlers, Lowell McAfee Birrell and Alexander Guterma, alias Sandy McSande. Birrell, like Richard Whitney before him, was apparently a scoundrel as much from choice as from necessity. The son of a small-town Presbyterian minister, a graduate of Syracuse University and Michigan law school, a handsome, brilliant, and charming man who began his career with the aristocratic Wall Street law firm of Cadwalader, Wickersham and Taft and soon belonged to the Union League and Metropolitan Clubs, Birrell, if he had not been Birrell, might easily have become the modern-day equivalent of a Morgan partner—above the battle and beyond reproach. He was the sort of man who has everything going for him in America—who can hardly fail to be dowered with both money and respect in return for little more than a pleasing manner and an air of probity and affable reticence. Instead, Birrell left the gilded cage of Cadwalader, Wickersham and Taft to become perhaps the leading wrecker of corporations and deluder of investors in the postwar era. Birrell’s gothic deals with Serge Rubenstein, the Mephistophelian financier who was murdered in his Fifth Avenue mansion in 1955; the cool and efficient way he issued himself huge quantities of unauthorized stock in corporations he controlled, like Doeskin Products and Swan-Finch Oil, and then illegally unloaded the shares on the market; the strong-arm methods he used to keep dissident stockholders in line—such things belong in another chronicle. It is enough to say here that the S.E.C. finally caught up with Birrell in 1957, and that to escape prosecution he fled first to Havana and then to Brazil, where he served a short prison term for illegal entry but thereafter lived in splendor, beyond range of the volleys of indictments and stockholder suits that issued periodically, and harmlessly, from his native land.

  Guterma was in the mold of the traditional international cheat of spy stories—an elusive man of uncertain national origin whose speech accent sometimes suggested Old Russia, sometimes the Lower East Side of New York, sometimes the American Deep South. On occasion he presented himself as a Russian from Irkutsk, at other times as an American named McSande. Whoever he was and wherever he came from, he apparently made his first fortune in the Philippines during World War II, running a gambling casino that catered to occupying Japanese servicemen. After that he married an American woman, survived a charge of having collaborated with the enemy, and in 1950 moved to the United States. During the succeeding decade he controlled, and systematically looted, more than a dozen substantial American companies, including three listed on the New York Stock Exchange and a leading radio network, the Mutual Broadcasting Company. After some sour deals in 1957 and 1958 left him short of cash, he was reduced to taking money from General Rafael Trujillo of the Dominican Republic in return for promises (never fulfilled) to boost the Trujillo regime on Mutual. The law caught up with him; in September, 1959, he was indicted for fraud, stock manipulation, violation of federal banking laws, and failure to register as the agent of a foreign government; a few months later he went to prison and vanished unmourned from the business scene.

  These two rogues out of past time, both offstage—one in Brazil, one behind bars—were only catalysts in the Amex drama of 1961, but without them it would hardly have happened as it did.

  It began at the end of April, with a set of sensational charges by the S.E.C. against Gerard A. (Jerry) Re and his son, Gerard F. Re, who together formed the Amex’s largest firm of specialists. Stock specialists are, of course, the broker-dealers on the floor of every stock exchange who man the various posts at all times during trading hours, taking the responsibility for maintaining orderly markets in the particular stocks in which they specialize, and, when necessary, for risking their own resources in the performance of that duty. As has been widely noted, theirs is a calling with a built-in anomaly, because sometimes situations arise in which a specialist’s private financial interest comes into direct conflict with his stated public responsibility. Pushed in one direction by prudent self-interest, in the other by sense of duty or fear of punishment, a specialist at such times faces a dilemma more appropriate to a hero in Corneille or Racine than to a simple businessman brought up on classic Adam Smith and the comfortable theory of the socially beneficent marketplace. Disquisitions could be written on the moral situation of the specialist, and indeed, they have been. Until recent years—when it has come to be the widely received view that eventually specialists can be replaced entirely by computers backed by a pool of money supplied by investment firms—it was generally accepted that the specialist, with all his temptations, was necessary to supply liquidity on stock exchanges. So long as most specialists were able to make a decent living (and they clearly were) while discharging their public responsibilities fairly well (as they outwardly seemed to do), it was thought best, even by the hottest-eyed reformers in the S.E.C., to leave the system basically alone and rely on strict rules and close surveillance to keep the specialists in line.

  If the role of the specialist seemed to make a particular and perhaps even an unreasonable call for men of good character, this call was not always answered. According to the S.E.C. complaint, it was not in the case of the two Res, who had, it seemed, consistently yielded to the temptations while failing to meet the responsibilities. Over a period of at least six years, the S.E.C. charged, the father and son had abused their fiduciary duties in just about ever conceivable way, reaping a personal profit of something like $3 million. They had made special deals with unethical company heads—Lowell Birrell in particular—to distribute unregistered stock to the public in violation of the law. In order to manipulate the prices of those stocks for their private benefit and that of the executives they were in league with, they had bribed the press, given false tips by word of mouth, paid kickbacks to brokers, generated false public interest by arranging for fictitious trades to be recorded on the tape—the whole, infamous old panoply of sharp stock-jobbing practices. Between July 1954 and April 1957, according to the complaint, they had improperly disposed of more than half a million unregistered (and therefore legally unmarketable) shares of Birrell’s Swan-Finch Oil Corporation; in 1959, their operations had been so pervasive as to account for one in every twenty-three shares traded on the Amex for the year. To cover their tracks, they had used the standard dodge of trading through dummy nominees. Two of their nominees were alleged Cubans who, in the S.E.C. men’s opinion, may never have existed. A third, one Charles A. Grande, through whose account the Res had filtered several million dollars’ worth of securities, did exist, though he had no money of his own to speak of; he was a retired horse trainer, and his chief asset as a dummy was his interesting home address—10 Downing Street, which, to be sure, was not the London residence of the British prime minister but an old apartment house in the Italian section of Greenwich Village, New York. Among those the Res had managed to make victims of, the S.E.C. noted, were a number of political figures and celebrities of various kinds, including Vincent F. Albano, Jr., a New York State Republican leader; Abraham J. Gellinoff, a New York City Democratic leader; Toots Shor, the restaurant owner; Chuck Dressen, manager of the Milwaukee Braves baseball team; and—most eye-opening of all—the Amex’s own president, Edward T. McCormick.

  The investigation had been conducted under the leadership of the S.E.C.’s young assistant director of the Division of Trading and Exchanges, Ralph S. Saul, of whom, one way and another, the Amex would hear much more over the coming years; and when, on May 4, the charges—unrefuted by the Res—were presented to the full Commission, the upshot was the fastest punitive action in its history: permanent expulsion of the Res from the securities business, after only two hours of oral arguments.

  3

  Justic
e done, then—the bad apples had been detected and removed, if rather belatedly, from the Amex barrel. Two aspects of the affair remained disturbing. One was the ominously exact way the Res’ methods of cheating had aped those of the manipulators in the bad and presumably gone old days before the New Deal had brought the S.E.C. into being. The other disquieting aspect was the presence on the S.E.C.’s list of Re associates of the name of Edward T. McCormick. If the Amex’s president had been a personal participant in Re transactions, was it not implied that the Amex authorities, or at least the chief of them, may have known what was going on all along?

  Before examining that question we may well take a look at those authorities. To a marked extent, they were a breed. President Ted McCormick, Arizona-born of an Irish father and a Spanish mother, a former S.E.C. commissioner who had jumped the fence from bureaucrat to businessman; Chairman Joe Reilly, slum-bred, one of nineteen children, a tough-talking self-made man who had worked his way up from floor page on the Curb to his present eminence; Vice-chairman Charley Bocklet; Jim Dyer, finance committee chairman; and Johnny Mann, chairman of the important committee on floor transactions—it was they who ran the Amex in 1961 and, with some variations, they who had run it over the preceding seven years during which the Res had romped. By and large, they had the blunt good humor and the disinclination toward fine moral distinctions of men who have bulled their way from nowhere to somewhere. Few, like McCormick, were scholars with advanced academic degrees; few had any degrees, and some had never finished high school. Virtually all of them were hard drinkers who brought indoors an old and honored tradition of the Curb that, in the outdoor days, had at least enjoyed the justification that alcohol helped keep out the cold and the damp.