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Been working.
Here is something interesting for now. (Might an more to this entry later,
after I finish the article I am working on.)
From Google Books:
The
Unseen Wall Street of 1969-1975
How the Central Certificate System Was Introduced and Other Early Bumbling
with Computers
… Lee and his superiors also labored to make the transfering of the
ownership of stocks more efficient. A big obstacle was the stock certificate.
For centuries, Investors who bought shares of stock in corporations had
received handsomely engraved certificates as evidence of ownership.
Filling in the names, transferring the certificates from one brokerage firm
to another, and mailing them to customers was time consuming. The certificates
of stocks transferred from customers at one brokerage firm to customers at
another were trundled through the streets of downtown
…
So as to eliminate the need for stock certificates, officials of The New
York Stock Exchange had proposed back in the 1950s that a central certificate
depository be established. Stock certificates would be kept in the depository
while the proof of their ownership would be recorded in the books of member
firms. This would make it easy to transfer stock ownership from one investor
to another.
But: Many investors liked possessing stock certificates as proof of
ownership. Many states required, by law, that stock certificates be
issued. Bankers opposed the idea. Predating the anxieties about privacy of
the 1990s, bankers didn't want an intermediary possessing the knowledge of
ownership of stocks in portfolios of securities they managed. Similarly, insurance
companies said they wouldn't insure loans based on stocks as collateral
unless certificates proved ownership. And not all brokerage firms were
enthusiastic.
…
An opposite political bugaboo caused some socialist-fearing investors to
protest. They feared that lodging stock certificates in one convenient
place would make it all too easy for the Federal government to seize ownership
of corporations [this was a more realistic fear than they realized].
(Remember, this was the fifties and sixties, when country after country was
becoming socialist, when many influential Americans believed the ultimate
triumph of socialism was inevitable, and protests over the US. war against
Communist North Vietnam were mounting.)
…
By 1966, stock prices were five times what they had been in 1949.
Corporate profits after taxes partly justified this rise in stock prices.
Corporate profits tripled in the 17 years 1949-1966. (Some of these gains
resulted from inflation, however. The consumer price index increased 36
percent from 1949 to 1966.)
But something besides more money in the hands of individuals, higher
corporate profits, and inflation pushed stock prices up.
As wages rose in the 1950s and 1960s to levels that provided a comfortable
living for most unionized workers, unions increasingly emphasized
retirement in their bargaining. Corporations complied by setting up
and increasing the benefits from private pension plans. By 1966, more than 26
million workers (half of all those employed in private, non-farm enterprises)
were covered. Pension plans accumulated billions of dollars which they had to
invest.
Theoretically, managers of the pension plans could have invested the billions
in bonds, but studies made at the time showed that common stocks provided a
better return over the long term. The better a pension plan performed, the
less money the corporation needed to contribute. Stockholdlngs by corporate
pension plans zoomed from half a billion dollars in 1949 to nearly $52
billion in 1970.
Insurance companies responded similarly. They invested more of their reserves
in common stocks and sold insurance products whose return would benefit from
a rise in stock prices. The value of stocks held by insurance companies
increased from less than $3 billion in 1949 to more than $22 billion in
1970.6
The accelerating demand for stocks by individuals and institutions caused the
volume of trading on The New York Stock Exchange to increase at a rate nobody
in the investment business had anticipated.
Wall Street just couldn't handle the volume, even though by this time-the
late sixties-The New York Stock Exchange and most member firms that dealt
with the public were using computers.
…
The need for a central certificate system became even more imperative during
Bob Haack's first years as president. In April 1968, the volume on an average
day reached nearly 15 million-more than double 1966's overwhelming volume!
Many member firms of the New York Stock Exchange failed to perform their most
important function: They failed to promptly deliver a tremendous number
of shares of common stock to investors who had bought them. By April
1968, the first month "fails" were reported, the value of shares
not delivered within four days totaled $2.7 billion! And even those not
delivered within 30 days amounted to nearly half a million dollars!1'
…
John and the remaining data processing people worked furiousiy over the
next several days finding and rectifying the glitches that slowed up the
system. They got the Central Certificate System working more or less smoothly
by the end of April.
Fails declined during the next few months, but not as a consequence of the
Central Certificate System. Fails had already begun to decline before
the Central Certificate System began to ftmction properly. From a
peak of over $4 billion in December 1968, fails had declined to $3.3 billion
in January 1969, to below $3 billion in February, and to about $2½
billion in March.
Fails declined because the volume of trading declined. Fails continued to
decline, to $1.4 billion in August as the volume of trading fell, but started
climbing again in September when the volume of trading in- creased, reaching
$1.8 billion in December.'4
…
No matter what Norm did, however, he couldn't reduce Glore Forgan's fails to
zero because Glore Forgan couldn't escape the chaos in the back offices of
other firms. Nearly every firm, at one time or another, denied it owed
Glore Foran some securities or money?° Most did so, not maliciously,
but because their own back offices were such a mess. But some firms
denied they owed Glore Foran securities or money because they used a slick
accounting trick never publicly revealed before [NETTING!]. Merrill
Lynch was one of those shrewd firms.'1
Merrill was so big its books often showed fails that could offset each
other. Merrill might, say, owe 200 shares of General Motors to one
broker and be owed 200 shares of GM by another broker. The Merrill accountant
would just cancel them both-as if one fulfilled the other. Two fails on
Merrill's books were thus disposed of. But two fails were left on the
books of other brokerage firms-one to buy 200 shares of GM, another
to sell 200 shares of GM. Two irreconcilable fails!
The giant firms, even the the ones with well-run back offices, thus
increased the number of fails at smaller firms. A small or
medium-sized broker, such as Glore Forgan, suffered whether it had sound back
office practices or not.
…
--------------------------------
The Hair-Raising Way Brokerage Accounts Came to Be Insured
… the volume of trading-and accordingly members'
commissions-declined precipitously from the record levels of 1968.
From nearly 20 million shares on December 19, 1968, volume abruptly declined
to 16 million the next day, and 13 million the day after that. And it stayed
near or below that level, with few exceptions, for many months afterward.2
The abnormal volume of trading in the early and middle sixties- and the
boom in stock exchange commissions-had been caused in large part by two
simultaneous wars: the Vietnam War and President Johnson's War
Against Poverty. The federal government's spending on these wars put
billions of dollars into the hands of consumers and investors- which
the government did not take away in taxes.
Inflating the money supply did not push consumer prices up much, however, in
the early and middle sixties because the Federal Reserve, then chaired by
William McChesney Martin, raised interest rates.
But in fiscal 1968-that is, from July 1, 1967, to June 30, 1968-federal
expenditures ballooned. The deficit reached a post-World War H record
high of $25 billion. It was twice the previous post-World War II record
deficit. Twenty-five billion doLlars may seem small compared to
deficits incurred in the eighties and nineties, but the dollar was worth much
more in the sixties and gross domestic product was much smaller.
The big jump in government spending without a commensurate tax increase
scared not only economists but even members of Congress. They feared that
interest rates couldn't be raised high enough to prevent an unacceptable rise
in the rate of inflation. The economy was already producing nearly as much as
it could, so most of the additional money in the hands of consumers would be
used to bid prices up.
Congress and President Johnson panicked. The Congress passed and
President Johnson signed a bill that increased taxes in fiscal 1969
enormously. That year the federal government collected more than it
spent. And Federal Reserve Chairman William McChesney Martin raised interest
rates even higher.
The higher taxes took money out of the hands of investors, thus
reducing the demand for securities. At the same time, higher interest
rates made stocks relatively less attractive than bonds. In 1965, lower grade
corporate bonds had paid less than 5 percent. In November 1968, they paid 7
percent. And in succeeding months even more.4
Equally important, the higher taxes took money out of the hands of consumers,
reducing the demand for the products and services corporations sell.
Investors saw corporate profits fall slightly in 1969 and anticipated profits
would fall even further in 1970.
It was virtually inevitable that the volume of trading on the New York Stock
Exchange-and consequently the commissions members received- would decline.
Individuals, pension funds and other institutional investors had less money
to invest, arid common stocks became less attractive, tarnished by lower
corporate profits, the anticipation of even lower profits, and interest rates
that increased the attractiveness of bonds.
Profits of member firms were further squeezed by high costs; many firms
had increased their costs of operation in order to process the huge order
volume of 1968. The volume of trading needed by the average firm to
break even more than doubled from 1966 to 1969.
Very early in 1969, several firms approached bankruptcy.5
…
A large number of fails had also depleted the firm's capital. Often when
McDormell sold a stock to a customer, it was unable to deliver the stock to
the customer promptly. Sometimes McDonnell's back office had not received the
shares from the broker McDonnell was buying from. Sometimes McDonnell's back
office had simply mislaid the shares. In either case, McDonnell was
then forced to go into the open market and buy the shares so as to fulfill
its sale to its customer, depleting McDonnell's capital.'
…
Investors were responding to actions taken by the Federal Reserve govemors.
Taxes had continued high-the deficit was only $3 billion- but galloping
inflation, still responding to the sharp 1968 deficit, could not be
reined in quickly. Consumer prices continued to rise at an unacceptable
5½ percent annual rate. So the Fed kept interest rates high;
lower-grade bonds paid dose to 9 percent during the early months of 1970.
As a consequence, many investors chose to buy bonds instead of stocks. More
and more brokerage firms came dose to bankruptcy as their costs exceeded
their incomes.
Bob curbed the activities of 47 member firms in 1969 and threatened to curb
the activities of dozens more."
Behind the statistics were days and nights of horror for hundreds of
partners of brokerage firms. Many had invested all their money in
their brokerage firms. They had few other assets or none at all They feared
not only that they would lose all their own money, not only that they would
be forced into immense debt, but that they would also Lose the money that
relatives, friends, and clients had lent their firms-people who had trusted
them. They, who had always been looked up to, would be disgraced.'5
One evening 30 years later, a self-made partner of one of these firms was
asked In the main dining room of the University Club in New York to recall
those days. He was a well-poised man, always well-contained. He had fought
the Japanese in World War II without flinching. But as he started to recall
those days and nights-when he talked about "Bob Bishop calling us at
home just as we're about to go to bed to tell us that if we didn't get more
capital by the next day, he would put us out of business,"-his eyes
filled with tears, and he couldn't continue.
As more and more firms came dose to collapse, Bob tried, and often succeeded,
in preventing bankruptcies by ordering the partners to take steps that
angered them. When the partners of a firm with a liabilities- to-capital
ratio exceeding or approaching 20 to 1 did not raise sufficient capital, Bob
often ordered the partners to close offices and/or reduce the number of their
customers, and/or not underwrite any securities.' Bob thus reduced their
hopes of profits.
Exchange members had a direct interest in preventing any of their fellow
members from actually declaring bankruptcy. The effect would have been
traumatic not only for the customers of the bankrupted firm but for the
partners of other member firms of The New York Stock Exchange as well. The
news would cause customers who had left cash and securities with
other firms to realize the risks they were taking.
An even more important incentive for well-managed firms to prevent the
bankruptcies of poorly managed firms was this: The businesses of the firms
were (and are) so intertwined that the bankruptcy of one firm could cause the
bankruptcy of several other firms. A trade most often consists of one
brokerage firm selling securities to another firm and vice versa, each on
behalf of customers. If one firm fails to deliver the cash or securities it
owes other firms, it could cause the bankruptcy of those other finns.
This had happened in 1873. The failure of Jay Cooke & Co. caused
the demise of 57 other brokerage firms in a few weeks.'7
Yet investors didn't rush to withdraw their money and securities from
brokerage firms in 1969.
In January 1969, a Wall Street Journal story warned investors, "A
spectre haunts Wall Street-and if the nation's 26.4 million
shareholders are unaware of it, that's only because the securities
industry finds It too frightening to discuss openly.
…
… The problem in 1969 was trading volume so low that many brokerage
firms were not profitable.
Furthermore, many stockbrokers, at the behest of their managements,
urged their customers to leave their securities with their firms so that the
Central Certificate System could function more efficiently.
Investors who bought stocks on margin were required to leave the stocks with
the firms that lent them the money, and many other investors left money and
stocks with brokerage firms just for convenience. In 1970, Merrill
Lynch, for example, held $18 billion worth of customers'
securities in so-called safekeeping. Merrill Lynch's capital was a
taith of that-about $1.8 billion.
Some investors were "subordinated lenders"; they agreed to leave
their money and/or securities with a firm and not withdraw it without, say, a
six-month notice. The investors received interest on their capital on top of
the dividends and interest they received on the securities.
Bob Bishop and his boss, Lee Arning, skififully fenced with reporters, leaving
them and investors ignorant of the terrifying dimensions of the
truth." If a firm went bankrupt, many of its customers risked
losing not only much or all of the money they had Left on deposit with the
firm but also the securities they had left in the firm's
"safekeeping."
Bob and Lee knew panic would make matters worse. If brokerage firm customers
withdrew their assets, the capital positions of brokerage firms would be
weakened even further. Like a run on a bank before bank deposits were
federally insured, mob psychology could bring on the very result feared by
individuals making up the mob-the loss of their money.
…
As of March 1, 1970, more than half the 572 member firms of The New York
Stock Exchange that dealt with the general public were in danger of
bankruptcy.2° They were losing so much money that, if they
continued to do so, they'd be out of business in six months. Six of
these firms were among the ten largest.
To prevent failing firms from declaring bankruptcy or liquidation, Chairman
Bunny Iasker devoted his abilities, his considerable energy, and his power to
arranging for weaker firms to merge with strong ones. In
so doing he was following a practice of the thirties when a number of firms
approached bankruptcy. E. A. Pierce & Co., for example, took over so many
badly managed firms that it became the country's largest brokerage firm. Eventually
E. A. Pierce & Co. itself became so weak that it had to be taken over
by the much smaller Merrill Lynch & Co.
…
En 1970, brokerage firms were on their own, yet most operated with minimum
capital-thin and shaky.24 Only the willingness of well-managed, financially
strong firms to prevent the bankrupcy of poorly managed firms protected
investors who had left cash and/or securities on deposit.
Mismanaged McDonnell & Co. again presented the most imminent danger early
in 1970. The losses had continued, and when Murray McDonnell again asked his
rich relatives to contribute money to his firm, his relatives refused.2'
The bankers at First National City, afraid they would never get back the
$1.6 million they had lent McDonnell, pressed for immediate liquidation of
the flrm? As they observed the deteriorating situation, the sooner McDonnell
was liquidated, the more likely they would be repaid.
But Bob Bishop feared, from his analysis, that if technically bankrupt
McDonnell actually declared bankruptcy, its customers would lose $10 million.
The "Crisis Fund" was virtually depleted. The previous year nearly
$8 million had been taken out of the fund to prevent the customers of two
insolvent firms-Gregory & Sons and Ammot Baker-from losing money and
securities.
…
At the Senate hearing on Muskie's bill held April 16, 1970, Don Regan,
CEO of Merrill Lynch, diplomatically but strongly opposed not just the bill
but its concept. Senator Harrison A. Williams, Jr., Chairman of the
Securities Subcommittee, asked Don, "Do you prefer self-regulation to
the FBDIC?"
Don answered with a flat, "Yes, sir."
Don Regan's opposition was understandable. The bill required brokerage firms
to contribute to establish a fund to indemnify customers if a brokerage firm
became bankrupt. If more money were required than was in the fund, the
U.S. Treasury could be drawn on-with surviving brokerage firms being assessed
to repay the Treasury.
How much each firm would be assessed to build up the fund was vague at this
point-but it was dear that each assessment would be based on each firm's
size. Merrill Lynch might be forced to pay nearly two million dollars
to keep competitors in business.
Don used the Senate hearing as a forum for urging the Securities and Exchange
Commission to apply tighter rules regarding the capital of investment firms.
He objected to other firms stretching the use of their capital beyond the
bounds of prudence, with the result that Merrill Lynch was taxed when
they failed.
Many other powerful men in the investment business opposed Muside's bill. The
cost, after all, was considerable, limitless, and would fall on investment
firms, not on taxpayers.
NYSE ex-Chairman Gus Levy, who still exerted considerable influence,
opposed the bill. So did Crisis Chairman Felix Rohatyn." Why
should government bureaucrats be able to administer a rescue fund better than
people in the investment business?
Many Senators and Representatives may not have liked the idea because it
might give the appearance that the U.S. government would be bailing out the
rich?
…
Bob Haack couldn't have made a bigger public relations blunder. Suddenly a
bigger threat to the reputation of The New York Stock Exchange appeared-one
much bigger than Blair's liquidation or that of any other troubled firm. Goodbody
& Co. was ten times bigger than Plohn, First Devonshire, and Robinson
& Co. combined. It was the fourth largest finn, with 225,000 customers.
And it needed many millions of dollars if it were not to become
bankrupt.'
…
From Google Books:
At the
start of December, WaIl Street hung by its fingertips. Roughly one hundred
Stock Exchange firms had vanished over the past two years through merger or
liquidation. Forty thousand customer accounts were involved in the thirteen
cases of liquidation, and most of them were still tied up, the customers
unable to get their cash or securities. Commitments to the Stock
Exchange’s trust fund from its member firms were approaching the
$100-million mark, and some member firms had had about enough; a sauve qui
peut sentiment was beginning to spread. Legislation to
create a federal Securities Investor Protection Corporation, on the model of
the Federal Deposit Insurance Corporation to protect bank depositors, was
before Congress; it had no chance of passage until the present mess in Wall
Street was cleared up, and thus, while it might help in future crises, it was
powerless in this one. Worst of all, the Goodbody and du Pont deals were
interrelated. In its contract to take over Good- body, Merrill Lynch had
insisted on a provision to the effect that, should any other major firm fail
before the Merrill Lynch— Goodbody merger became final several months
later, then the Merrill Lynch—Goodbody merger would automatically be
cancelled.
So a du Pont failure would mean a Goodbody failure; the arch deprived of its
keystone would fall, more than half a million customer accounts would
be tied up, many perhaps never to be redeemed, and public
confidence in Wall Street would end for years to come, if not forever.
In the retrospective opinion of those best situated to know, the fall of
the arch would have meant much more than that. Haack said at the time that the
consequence of Goodbody’s failure alone would be “a panic
the likes of which we have never seen.” Lasker said later:
“If du Pont and Goodbody had gone down, a market crash would have
occurred, but that would have been only the beginning. There
would have been a run on the resources of brokerage firms— partners
wanting their capital, customers wanting their cash and
securities—causing many new failures. There would have been no federal
investor-protection legislation. Mutual fund redemptions would have been
suspended, putting fund investors in the same situation as customers of
bankrupt brokerage houses. Undoubtedly the Stock Exchange would have been
forced to close. All in all, millions of investors would have been wiped
out…
It
did not happen.
…
Eric de Carbonnel
Market Skeptics
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