THE LAST PARTNERSHIPS Inside the Great Wall Street Money Dynasties phần 2 doc

was the most daunting of the nineteenth century. Cooke was born August 10, 1821, in Sandusky, Ohio, to Eleutheros Cooke and Martha Carswell. The original Cookes emigrated to America from Britain in 1638 and settled in Massachusetts. Cooke later recalled that his father named him Jay, after Chief Justice of the Supreme Court John Jay, for a very specific reason. Eleutheros believed that his long first name had cost him an election to the Ohio legislature because voters could not fit his name on the write-in ballot. Determined that the same fate should not befall his progeny, he gave them relatively short, and sometimes historical, first names. Jay’s older brother was named Pitt and his younger brother Henry. Two other offspring died early— Eleutheros Jr. and Catherine. Originally, he proposed to call Henry “Fox” instead, after Charles James Fox, a popular British politician at the time. But his mother created such a fuss about a child being named after a British statesman that Eleutheros relented and settled on Henry, in keeping with the strong family tradition of fierce Amer- ican independence. The family had a long record of military service in the Revolutionary War and the War of 1812. The Carswells had a sim- ilar history. Martha Carswell’s father was a prisoner of the British in Canada during the War of 1812, so her fondness for the mother coun- try was somewhat limited. 7 Eleutheros Cooke went on to become a member of the Ohio legislature and eventually the House of Repre- sentatives. He was a member of the House when Jackson effectively dissolved the second Bank of the United States. Jay Cooke joined Clark and Dodge in 1839, being invited to join by a friend working for the firm. Within a year, he had already made his mark as a valued employee, being referred to as the “counterfeit clerk.” Like Clark before him, he had become expert in detecting bogus banknotes, and his keen eye made him invaluable to Clark Dodge almost from the outset. He also took up a part-time journalism career. The editor of the Daily Chronicle, a Philadelphia newspaper, invited him to write a daily money market column for the paper, which he did gladly. He wrote mainly about the condition of the bond markets along the East Coast and on conditions in the exchange mar- ket. Although the enterprise gave Clark Dodge good exposure in the market, Cooke gave up the effort after a year because it was consum- ing too much of his time. The experience did, however, mark him as THE LAST PARTNERSHIPS 22 one of the first financiers to display a journalistic flair—a trait that many others would pursue part-time after the Civil War with greater fanfare. During his early retirement from Clark Dodge after Enoch Clark died, Cooke busied himself with occasional railroad financing and looking after his own private affairs. He kept a desk at his old firm so that he would not be totally divorced from the banking business. The late 1850s proved to the last period of railroad expansion, because the Civil War would soon intervene, putting most projects on indefinite hold. When South Carolina seceded from the Union, Cooke rapidly decided to form his own firm and return to what he knew best— raising bond issues for government bodies. He founded Jay Cooke & Co. when he was only thirty-nine. Although Cooke worked for Clark Dodge and the firm became well known on Wall Street, Cooke remained a Philadelphia banker for his entire career. 8 His flair for financing and his strong patriotic bent made him a natural to raise money when it was becoming more and more difficult to find. The war scared away many of the traditional foreign investors, and Cooke realized that the funds would have to be raised mainly from domestic investors. Opportunity came when Pennsylvania needed funds at the outset of the war. The job was not easy, for Cooke or anyone else. Pennsyl- vania had been one of a handful of states that defaulted on its debt in the municipal bond crisis that roiled the markets when the second Bank of the United States failed, causing the Panic of 1837. In the interim, its reputation had not improved. One British writer sarcas- tically wrote before the Civil War, “We all know the Americans can fight. Nobody doubts their courage. I see now in my mind’s eye a whole army on the plains of Pennsylvania in battle array, immense corps of insolvent light infantry, regiments of heavy horse debtors, battalions of repudiators, brigades of bankrupts with Vivre sans payer ou mourir on their banners.” 9 Clearly, money for the Union war effort would not be coming from Britain. Some British newspapers even suggested that the Confederacy had as much right to secede as the original thirteen colonies had years before. But Jay Cooke’s genius for raising funds won the day. It also gave a new twist to the term “Yankee banker.” The Yankee Banking Houses: Clark Dodge and Jay Cooke 23 Pennsylvania commissioned him to raise a bond of $3 million, not an easy task for a state already in debt by more than $40 million. Pennsylvania needed the money to defend its southern border against attack. It named Drexel & Co., a well-established Philadelphia bank- ing house, and Cooke as agents for the issue. (Drexel was to become a familiar name in investment banking over the next century and a quarter, especially when the young J. P. Morgan took an interest in the firm after the Civil War.) Being joint agents raised eyebrows in some quarters, because Cooke was new to the banking scene as an independent although his reputation at Clark Dodge preceded him. He organized a massive selling effort. The bond was oversubscribed and rated a great success. No stranger to advertising and a bit of self- promotion, Cooke then turned and sent the list of subscribers to all the major newspapers in the country. He even sent a list by post to Jefferson Davis in Richmond to show that the population of the North was fully behind the effort. Individuals and banks on the subscribers’ list included all of the major banks in Pennsylvania, Drexel and Jay Cooke & Co. themselves, as well as F. A. Muhlenberg Jr., the son of the first Speaker of the House of Representatives. Cooke found that patriotism sold well in Pennsylvania. A precedent had been estab- lished for the next round of fund-raising for Washington. Salmon Chase was Secretary of the Treasury in the Lincoln admin- istration, charged with raising money for the war effort. Cooke trav- eled to Washington, hoping to become involved in the financing effort. His brother Henry, previously the editor of the Ohio State Journal in Columbus, offered to introduce him to Chase. Cooke seized the opportunity to meet the secretary. In 1861, he participated in a small part of a Treasury issue that was not going well and suc- ceeded in selling it. The way was now paved for further participation, but it was certainly not automatic. Cooke took it upon himself to gather subscriptions for Treasury bonds and then hand them to Salmon Chase, who could not but take notice of the Philadelphia banker’s dexterity in raising subscriptions so easily. But Cooke was sure to tell Chase at every opportunity that he was doing it at no com- mission for himself. The same was not true of the rest of the Treasury bond offerings that Cooke helped sell to the public. Chase was duly impressed with THE LAST PARTNERSHIPS 24 Cooke’s ability to sell public debt and enlisted him to participate in future offerings, which grew larger and larger as the war dragged on. Chase offered Cooke a job in the Treasury as an undersecretary, but he refused it after some serious thought. Cooke clearly thought that the best way to serve his country was by selling as many bonds as possible, not by becoming a bureaucrat tied to Washington. He con- tinued to gather subscriptions nevertheless. The Treasury’s tenuous position and Cooke’s rising importance were evident in the aftermath of the Battle of Bull Run. Sounds of the battle could easily be heard in Washington itself, but the city was stunned by the unexpected news that the Union army had been routed and was in disarray. Fearing that Confederates would overrun the city in the near future, Cooke became even more intent on raising as much money as the govern- ment needed to defeat the rebels. He opened an office in Washington and, upon hearing of the rout, began to make the rounds of the banks in Washington to line up even more potential subscriptions. His forti- tude and determination began to show in what he considered his patriotic duty to defend the Union. Naturally, there was also a finan- cial side. Some of this fund-raising would have to repay the tireless efforts of the fund-raisers themselves. Cooke’s role in the Civil War financings became a model for bankers of the future, who would use it to become even more suc- cessful in their own right. One was J. Pierpont Morgan, who would note the adulation that Cooke received because of his closeness with Salmon Chase and the indefatigable effort he put into selling bonds nationwide. In fact, Morgan would eventually try to capture the mar- ket for Treasury bonds from Cooke’s houses after 1865. 10 But the road to Chase’s heart—and the Treasury’s pockets—was not easily traveled. Chase was a conservative, hard-money man who accepted change only when forced to do so. The Battle of Bull Run became the lightning rod for change in the Lincoln administration and for Cooke’s own personal fortune. Chase packed off for New York to raise a new bond issue of $50 million, dubbed “the 5-20s” (an early callable bond issue). He asked Cooke to accompany him, to fortify him, when he asked the New York banks for such a large sum. Cooke did accompany him, and the money was raised after some initial arm-twisting. Among the participants were Clark Dodge; Fisk & The Yankee Banking Houses: Clark Dodge and Jay Cooke 25 Hatch; Livermore, Clews & Co.; and Vermilye & Co., the predeces- sor of Dillon Read. Cooke and Chase had formed a bond that would make future financings much easier. When Cooke sold the 5-20s to the public, he required payment in specie or by banknotes backed by collateral. But specie was in short demand. The Treasury subsequently suspended specie payments and issued greenbacks, one of the most controversial parts of the war financing. The green printed money bore no backing and was the brunt of fierce attacks by hard-money advocates for years to come. Salmon Chase himself was not in favor but clearly recognized that if some method was not devised to create money the war could well be lost. The U.S. Treasury was almost empty in 1862, so arguments against the issuance of greenbacks became academic. After their issue, credit conditions returned to normal and the public and busi- nesses accepted the new money without any apparent hesitation. One useful side effect of the greenbacks was that they helped cut down on the old Clark Dodge habit of bankers negotiating a Treasury issue by knocking down government debt to a substantial discount before sell- ing it, netting a handsome profit for the bankers, who then sold it for face value, but netting less proceeds for the government itself. Greenbacks became accepted and the shortage of money eased, so there was no longer any need to sell the new, large government bond issues at a discount. The new currency had an unanticipated, benefi- cial side effect. Cooke would still be able to profit handsomely from the new environment despite the lack of deep discounts. Even if the new bond issues were sold to the selling agent at only a 2 percent dis- count, a large issue would still compensate well. When Cooke was appointed sole agent for new Treasury issues shortly thereafter, all of that percentage—less associated selling costs—was his to keep. Cooke also found himself enmeshed in Washington politics. Dur- ing the early war years, he and his brother Henry helped organize the first streetcars to serve Washington. They organized the Washington & Georgetown Street Railroad Company and bought stock in it, as did the other major banking houses involved with the war financing. The company became very successful and was hailed as a success. But Salmon Chase objected that men of color who were serving in the Union army were not allowed to use the service, that it was confined THE LAST PARTNERSHIPS 26 to whites only. Chase wrote the directors of the company an impas- sioned plea to allow Negroes to use the service, but the board of directors refused. The Cooke banking house then promptly sold its stock in the company and returned to selling bonds, leaving the stick- ier issue of the streetcar and racial discrimination to others. In 1862, the war was not going well for the Union, and Cooke felt the heat. Cooke’s bank came under some scrutiny from the Treasury for being too slow in dispensing funds already raised, suggesting that a bit of floating was taking place again, as it had during the Mexican War financings. Cooke protested but managed to keep busy with other matters, mostly involving railroad financing, which he had been engaged in for some years before the war. Some of those railroad dealings became difficult because the government frequently moni- tored telegraph messages. Cooke’s bank devised an elaborate cipher system so that it could transmit messages to its branches without fear of government snooping. It routinely substituted banking terms and other bankers’ names for political and military ones, and what appeared to be standard banking transmissions were actually reports sent between his branches of military news to which the government censor might have objected. 11 Doing business with Washington did not mean that the government was going to call the tune on otherwise private matters. The Napoleon of Finance Jay Cooke had achieved some notoriety by 1862, but the events in the latter part of that year were to bring accolades and fortune. Despite sanguine predictions, the war showed no signs of abating, and the sec- ond battle of Bull Run again brought it tantalizingly close to Washing- ton’s door. More money was needed to bolster the troops, and Salmon Chase again would call Cooke to the Union’s side to aid in the financ- ing. Their brief falling-out over the disbursement of funds was only an interlude in Cooke’s fund-raising attempts. Chase again needed him badly, and it was not long before a new bond issue was planned. Critics of Cooke trace the planning of what became known as the 5-20 loan, or bond, to the beginning of his wealth. This was the largest bond issue in American history to date, and it would require all of his The Yankee Banking Houses: Clark Dodge and Jay Cooke 27 resources to be successful. The 5-20s were actually 6 percent bonds that matured in twenty years but could be redeemed after five years. Cooke was appointed sole agent for the issue, which had actually been selling poorly for some time. But when he entered the picture, the effort changed. All sorts of sales techniques were mobilized, from using his extensive network and employing traveling agents to having journalists write favorable articles about investing in government bonds. The articles were very effective, appealing to the average citizen’s patriotism and pocketbook. They also had an educational function, pointing out the virtues of “putting out money at interest” and emphasizing that the government needed help in the vast war enter- prise that only solid citizens could satisfy. The technique worked. Subscriptions poured in from all over the country. Cooke had 1,500 agents in the field who sold bonds to anyone who could afford as lit- tle as $10. Unlike previous Treasury bonds, the denominations were made small so that the average citizen could subscribe. Journalists cranked out articles in a continuous stream, and the prose ranged from the technical to the floral. One from the Philadelphia Inquirer in April 1863 began by stating, “It would rejoice the heart of every patriot if he could witness in person the daily operations at the [Cooke] agency of the national loan in this city. The people are there to give aid and comfort to the government by investing their savings and their capital in the Five-Twenty bonds.” Anyone attempting to sell securities after the Civil War had to take notice of the precedent that Cooke established with the 5-20s. But not everyone considered Cooke the unselfish savior of the Union. He was being compensated for selling the 5-20s at about a 1 percent commission rate—less than in the past but still enough to make an enormous profit given the size of the total issue. The bonds were being sold at about $2 million per day in the beginning, totaling more than $500 million by the time the sale was complete, suggesting a commission of $3.5 million before costs were subtracted. Cooke himself claimed he made only $200,000 net, but the numbers were suspect. In 1863, the New York World took him to task in no uncertain language when it stated, “If, however, Jay Cooke and Com- pany receive from the government one-half of one per centum on all THE LAST PARTNERSHIPS 28 the notes funded, we can readily see a powerful motive for that house to procure as large a sum to be converted into bonds as possible.” 12 The newspaper did not do the math for its readers, but the numbers were indeed large. Eventually, one half of one percent of $500 million would have netted Cooke $2.5 million. Regardless of the costs, the public outcry could be expected to be shrill. But the World also noted that “our people seem to delight in being cheated. The serenity with which they swallow the false statements of the success of our arms . . . the repudiations and cunning contrivances of the Treasury Depart- ment leave little doubt that the luxury of being humbugged is only equaled by that of being imprisoned without law, wasted by war, and impoverished by taxes.” Similar attacks on Cooke came from the Senate, where his detrac- tors claimed that he made millions at the Treasury’s expense. Salmon Chase, a man of high conscience, was uncomfortable with some of the attacks, but after reassuring himself that Cooke was acting mostly in the national interest, he stepped in to defend his agent and the books were closed on the 5-20s. Cooke was a national hero and had amassed a small fortune as a result. Cynics would later say that the day the war ended he began a grandiose project to build the palatial home of his dreams, which would cost more than $1 million. But the financings were not yet finished and more bond issues were on the way. The next Treasury financing that Cooke led were the 7-30s (7.30 percent interest maturing in three years). Chase had left the Treasury, and Cooke had to deal with a new secretary, William Pitt Fessenden. He quickly recognized Cooke’s past service and enlisted him to sell the new bonds. But Fessenden was not a secretary of the caliber of Chase and the new bonds did not fare well under his supervision. Many of those not taken by Cooke remained unsold. Fessenden reported the problem to Cooke and asked for his guidance. Cooke’s recollection of the conversation was revealing: “What do you want for them?” Cooke asked without hesitation. “I want par and your commission will be the accrued interest,” the Secretary answered. “I will take them myself,” said the banker in his inimitable way. “I will take three millions at once, and you can give me an option on the rest of the ten millions. Which I will close after a visit to New York.” 13 The Yankee Banking Houses: Clark Dodge and Jay Cooke 29 After that encounter, Cooke quickly became Fessenden’s man on the ground. The secretary replied by remarking, “I have heretofore thought you a protégé of Mr. Chase, but I now see that he was your protégé.” Cooke became the sole agent for the 7-30s, and he displayed the same sort of enthusiasm that he had given the 5-20s. And the task was even greater. The new bond would eventually total more than $830 million, making it the largest financing instrument in American history to date. The marketing of this enormous number of bonds proved to be the undoing of the Confederate cause. The bonds also became the indi- rect undoing of Jay Cooke himself. Dealing with such vast amounts of money, often committing for large amounts in very short periods of time, as he had done with Fessenden, gave Cooke the impression that business would always be successful and fast. Once the war ended, however, such huge sums no longer would be the norm and life would begin to return to normal. But at the time, the 7-30s and the 5-20s were so large when combined that Jay Cooke was able to say that he was the first financier to raise more than a billion dollars, a measure new to the finance lexicon. While the war lasted, Cooke ruled the Washington roost. But the wolves were knocking at the door. Several gold panics developed dur- ing the war that severely tested the resolve of the Treasury. Critics attributed them to Jewish interests on Wall Street, usually a not-so- subtle reference to Jay Gould. But some were done simply because it was easy to speculate and make money without much legal conse- quence. In 1863, the young J. Pierpont Morgan “cornered” gold in the New York market, forcing its price up and the price of Treasury bonds down. The result was that selling the 5-20s and later the 7-30s became very difficult. The reasons for the corner were hard to determine. Speculating in gold was a favorite pastime on Wall Street, and many of the established firms had gold-dealing rooms in which they made prices for customers and other houses alike. But speculation at the time that Treasury war bonds were being sold sounded suspiciously like treasonous activity, designed to destabilize the financing while casting doubt over the value of gold and chasing away investors. At best, it sounded like an attempt to discredit Jay Cooke & Company. Cooke was aware of the developments and often made trips to New York THE LAST PARTNERSHIPS 30 when a strong selling effort was required. Potential buyers of bonds resided on Wall Street, as did potential enemies of his financial cause. The heavy financings did not end with the surrender of Richmond or the assassination of Lincoln. The 7-30s, on which Cooke had to constantly renegotiate the commissions with the new Treasury secre- tary, Hugh McCulloch, Fessenden’s successor, finally paid him 3 ⁄4 of 1 percent, an amount he insisted was necessary to pay all of the asso- ciated costs. From that moment, the 7-30s became even more suc- cessful than their predecessors. With the success of the 7-30s, Cooke clearly had become the best-known financier in the country and enjoyed his status. Other ventures were beckoning once the war financings began to quiet down. The private sector again became the place to invest, and in post–Civil War America that primarily meant investing in railroads. The West was calling, and it would prove to be Cooke’s downfall. At the end of the war, Cooke’s banking house remained much the same as it had been before he became involved with Salmon Chase. It sold securities, dealt in bills of exchange and gold, and also accepted deposits. The deposit business was to become the Achilles heel of the firm, as it would for so many other merchant bankers in the nine- teenth century. Taking deposits and dealing in securities often made the depositors nervous. When customers decided to withdraw their funds, the bank could quickly become short of funds necessary to carry on business and would have to shut its doors. It was an age-old problem that was bound to repeat itself again and again. “A Magnificent Undertaking” At war’s end, Cooke began planning a new, palatial home in Philadel- phia called Ogontz (after an Indian chief), which eventually cost $1 million and gave his critics much ammunition as they derided his excesses. Throughout his life, Cooke would be known for throwing lavish dinner parties and treating his guests royally. One of his most famous guests after the Civil War would be Ulysses S. Grant, who stayed at Ogontz on numerous occasions. But he could not remain retired from the excitement that the Treasury financings had brought. He quickly became involved with a new railway project that would The Yankee Banking Houses: Clark Dodge and Jay Cooke 31 [...]... left the White House, especially when he fell upon hard times In 1884, a Wall Street firm in which the former president was a partner went bankrupt, costing Grant almost $25 0,000 The active partner in the firm, Ferdinand Ward, had 53 THE LAST PARTNERSHIPS embezzled more than $2 million from the firm, causing it to close The affair severely affected Wall Street, and the market dropped considerably on the. .. received, only 0 .20 of 1 percent, but it put the Seligmans on a new track that would change their business and introduce them to securities selling Their idea was to use former connections to sell the bonds in Germany, known for its sympathies for the Northern rather than the Southern cause Joseph departed for Europe to sell the bonds and soon was selling Cooke’s 5 -20 s as well In the past, the brothers had... 1873 had no 45 THE LAST PARTNERSHIPS serious effect on their finances, and they survived the crisis intact At the height of the panic, Joseph wrote to the London house, saying, “We have quite a panic in Wall Street and numerous failures, and the end is not yet Jay Cooke & Co suspended yesterday afternoon Let us thank God that we have made no losses. 2 Being able to survive the panic put the Seligmans... because they had discovered that the South had greater potential for profit They remained in Alabama until 1846, when the brothers opened a Manhattan store on William Street Other members of the family continued to arrive, and the men were immediately given jobs in the growing partnership Another store was opened, this one in Watertown, New York, run by another brother, Jesse A frequent customer of the. .. of the New York Stock Exchange when it admitted separate members to its government bond department in 1869 Later, the house also joined the NYSE as a stock-trading member but never had a partner represent it on the floor Unlike the Allens a generation before, the brothers 43 THE LAST PARTNERSHIPS realized that precipitously shifting from one business to the other was a mistake; they maintained their... savvy Woolworth was the best example of the new trend in chain store expansion The Lehmans recognized the potential in having stores throughout the country; it was the same principle that they had practiced on a much smaller scale in their own business a generation before The Seligmans’ history in the last years of the nineteenth century was remarkably similar to that of the Lehmans Their friendship with... old offices as they slowly withdrew from the merchant business The Seligmans’ interests were helped in the latter stages of the war by their close connections to Hugh McCulloch, Lincoln’s last secretary of the treasury Like their role models, the Rothschilds, they quickly recognized the importance of political ties that could advance their commercial interests In America, Jay Cooke was the best example... in the mid-1970s and its operations were folded into the investment management side of Kidder But if traced back to the Allens and Cooke, Clark Dodge can be called the first true dynasty that Wall Street witnessed The three firms proved that when the vision of their founders was strictly adhered to, their success was notable It was when they began to deviate from the well-established path that they... organize around the time of the Civil War opted to avoid the limelight whenever possible This clearly could be traced to the fact that Jews formed a tiny minority of the population But there was also a European connection: Most of the early aspiring Jewish bankers used the Rothschilds as their exemplars, and the baronial European family was the very model of discretion They did not advertise their services,... displayed solidarity with the Confederacy during the Civil War, sharply illustrating the fact that the country was at the mercy of foreign capital again The Jewish firms developed ties with German financiers, sympathetic to the anti-slavery cause, and that connection served the United States well, reducing the need to rely on the British Most of the banking firms that set up shop in the nineteenth century . time. The experience did, however, mark him as THE LAST PARTNERSHIPS 22 one of the first financiers to display a journalistic flair—a trait that many others would pursue part-time after the Civil. confined THE LAST PARTNERSHIPS 26 to whites only. Chase wrote the directors of the company an impas- sioned plea to allow Negroes to use the service, but the board of directors refused. The Cooke. person the daily operations at the [Cooke] agency of the national loan in this city. The people are there to give aid and comfort to the government by investing their savings and their capital in the