RS O T P U R R ND CO A S R O AT NCE A N I THE CRE F N AMERICA OF IS R R O M E D WA R D WALL STREETERS Columbia University Press Publishers Since 1893 New York Chichester, West Sussex Copyright © 2015 Columbia University Press All rights reserved Library of Congress Cataloging-in-Publication Data Morris, Edward L Wall Streeters : the creators and corruptors of American finance / Edward L Morris pages cm Includes bibliographical references and index ISBN 978-0-231-17054-3 (cloth : alk paper) 978-0-231-54050-6 (ebook) 1 Capitalists and financiers–United States Finance–United States–History I Title HG181.M67 2015 332.092'273–dc23 Columbia University Press books are printed on permanent and durable acid-free paper This book is printed on paper with recycled content Printed in the United States of America c 10 Cover design: Noah Arlow Cover image: Top photo: New York Stock Exchange, Jin Lee/Getty Images Bottom photo: Curb Market, Archive Photos/Getty Images References to Internet Web sites (URLs) were accurate at the time of writing Neither the author nor Columbia University Press is responsible for URLs that may have expired or changed since the manuscript was prepared For Peggy contents Acknowledgments Preface ix xi J Pierpont Morgan: Jupiter Part I: Reformers 13 Paul M Warburg: Daddy Warbucks 19 Carter Glass: Unreconstructed Rebel 37 Ferdinand Pecora: Hellhound of Wall Street 55 Part II: Democratizers 85 Charles E Merrill: The People’s Capitalist 91 John C Bogle: Saint Jack 111 Part III: Academics 133 Georges F Doriot: Dream Builder 139 Benjamin Graham: Dean of Wall Street 161 Myron S Scholes: Professor of Derivatives 183 viii CONTENTS Part IV: Financial Engineers 201 10 Alfred Winslow Jones: Financial Hippie 205 11 Michael R Milken: Junk Bond King 223 12 Lewis Ranieri: Father of Securitization 251 Part V: Empire Builders 265 13 William H Donaldson: Entrepreneur 269 14 Sanford I Weill: Conglomerateur 287 Conclusion Notes Suggestions for Further Reading Index 307 313 327 331 acknowledgments Many at Lindenwood University played an important role in the creation of this book The students in my January-term course—my beta site for teaching the history of modern finance through mini-biographies—were a patient audience and provided much constructive criticism Several of my colleagues at the university, especially Ray Scupin and Peter Griffin, offered invaluable first-reader reactions to and editorial insights into the early manuscript The staff at the library never tired of my many interlibrary requests for out-of-print books, and Carl Hubenschmidt showed a magical ability to track down obscure articles published many years ago And I am profoundly grateful to Dean Jay Hardman and Presidents Dennis Spellmann and Jim Evans who, some fifteen years ago, helped restore my damaged psyche by opening a wonderfully fulfilling second career in academia The editors at Columbia University Press provided a rookie author with more support than ever expected Bridget Flannery-McCoy combined an unrelenting cheerfulness with exacting editorial standards; she could request a full rewrite of a chapter in such a positive manner that I felt as though I had been given the opportunity of a lifetime Her able associate, Stephen Wesley, diligently rounded up a posse of fact-checkers whose remarks gave more nuance to the book, as well as saving the author from index academics, xiii–xiv, 134–136; Benjamin Graham, 160–180; Georges F Doriot, 138–158; Myron S Scholes, 182–200 An Adventure in Constructive Finance (Glass), 47–49 Aetna, 284 Aetna Property and Casualty, 288 A G Edwards, 282 Albright, Archibald, 229 Aldrich, Nelson, 14, 19–22, 24, 27–33, 41, 44 Aldrich Plan, 19–20, 22, 24, 28–33, 314n16 Aldrich-Vreeland Act of 1908, 24, 37 Alleghany Corporation, 65–66 A L Williams & Associates, 294, 298 American Bankers Association, 22, 30, 44 American Car and Foundry Company, 67 American Express Company, 292–293, 296, 308 American National Bank of Chicago, 126 American Research and Development Corporation (ARDC), 134, 139–140, 144–155, 157–158, 309; criticism of, 147–148; decline of, 151–155; Digital Equipment Company, 148–151; formation of, 145–146 American Smelting, 167 Amherst College, 92, 94 Amingues, Marie Louise, 180 Anderson, Harlan, 148 Andrew, Abram Piatt, 19 Ante, Spencer, 142 arbitrage, 167–168, 177, 196, 240 ARDC See American Research and Development Corporation Arthur D Little, 185 “Asian flu”, 194, 197 Associates First Capital Corporation, 303–304 AT&T, 66, 187, 189 Atkinson, T R., 227 332 AVCO, 227 A W Jones & Company, 209, 212–216, 218–219 A W Jones Associates, 209 B&O (Baltimore & Ohio) Railroad, 25, 47 Baby Pompadour (Graham), 179 Bache, 103, 282 Bache Halsey Stuart, 292 Bache Halsey Stuart Shields, 298 Bacon, Francis, 38–39 Bair, Sheila, xv Baker, Charles, 66 Baker, Newton, 66 Baldwin, William, 132 Baltimore & Ohio (B&O) Railroad, 25, 47 Balzac, Honoré de, 246 Bankers Trust Company, 19, 56 Bank of America, 108, 256, 287, 308 Bank of England, 21, 26, 29 Bank of Manhattan, 47–48 Banque de France, 26, 30 Barber, Brad, 115 Barclays Bank, 52 Barings Bank, 198 Bear, Stearns & Company, 289 Beasley, Norman, 38 Beatrice Foods, 237 Belmont, August, 40 Berkshire Hathaway, 196, 200, 299 Bernanke, Ben, 52 Biddle, Nicholas, 21 Biggs, Barton, 175–176, 179, 213–214 “bimetallism” doctrine, 22 Black, Fischer, 135, 185, 187 Black-Scholes option pricing model, 135, 183–189 Block, Anna, 205 Blyth & Company, 83 BNP Paribas, 52 Boesky, Ivan, 239–242, 244–247 INDEX Bogle Financial Markets Research Center, 130 Bogle, John C., 88, 110–132, 219, 308, 312, 318n14; background of, 113–114; Bogle rule, 108; cost matters hypothesis, 125, 131; education of, 114; efficient market hypothesis, 124–125; flywheel-type growth, 126–128, 131; founding of Vanguard Group, 112, 117–118; health problems, 129; index fund investing, 121–125; investment costs and fees, 111, 119–121; involuntary resignation, 130; love of mutual funds, 114; Mayday end of fixed-commission schedule, 112; post-Vanguard years, 130–132; “proscriptions and prescriptions” ideas, 118–121; speeches of, 127; Wellington Management Company, 116–117 Booth, David, 126 Born, Brooksley, xv Bracken, Michalah, 248 Brennan, John, 129–130 Brooke, Peter, 153 Brookings Institution, 104 Brooks, John, 62 Brown Brothers Harriman, 273–274 Bryan, William Jennings, 22, 33–34, 39–40, 43–44 Buffett, Thomas Graham, 179 Buffett, Warren, xii, 196, 200; association with Weill, 293, 299; view of derivatives, 183–184, 199; view of Graham, 135, 175–176, 179–180, 214 Burch, Robert, III, 216 Burch, Robert, IV, 219–220 Burnham & Company, 229, 289 Burnham, I W., II, 229, 234, 289, 295 Burr, George, 94 Business Roundtable, 238 call options, 185–186 Carlyle, Thomas, 307 INDEX Carnegie, Andrew, 8–9 Carnegie Endowment for International Peace, 284 Carnegie Steel Company, Carter, Mary Elizabeth, 206 CBOE (Chicago Board Options Exchange), 188–189, 195 CBWL (Cogan, Berlind, Weill & Leavitt), 266, 289–291 CBWL-Hayden Stone, 291–292 CCNY (City College of New York), 163 Center for Responsive Politics, 310 central bank: development of Aldrich Plan, 19–20, 22, 24, 28–33; early attempts at, 21; Morgan as de facto, 10, 14, 21, 23, 29, 55; opposition to, 21–23, 30–31, 33, 37, 43, 50, 314n16; recognition of need for, 14; Warburg's view of, 25–29 See also Federal Reserve Chamberlain, Lawrence, 164 Charles Merrill & Company, 95 Chase National Bank, 56, 58, 66, 69, 76, 78, 83, 100 Chase Securities Corporation, 76–78 Chevron Corporation, 237 Chicago Board Options Exchange (CBOE), 188–189, 195 Chino Copper, 167 Circo Products, 146 Citibank, 300, 302 Citicorp, 288, 300–302 Citigroup, 266–267, 288, 301–304, 312 City Associates, 213 City College of New York (CCNY), 163 City Investing, 227 Clinton, Bill, 301 CLOs (commercial loan obligations), 263 CMH (cost matters hypothesis), 125, 131 Cobb, Sumner, 97 Cogan, Berlind, Weill & Leavitt (CBWL), 266, 289–291 333 collateralized mortgage obligations (CMOs), 258–259, 261, 263 Collins, Jim, 126 Columbia University, xiii, 131, 161–163, 174–175, 178–179, 206 Commercial Credit Corporation, 293–295, 298 commercial loan obligations (CLOs), 263 Common Stock and Common Sense (Donaldson et al.), 275 Compton, Karl, 139–140, 148 consolidation, 7–9 Control Data Corporation, 293 convergence trades, 193, 218 Coolidge, Calvin, 66 Cornell University, 288 Corporate Bond Quality and Investor Experience (Hickman), 224 corporate restructuring, xiv Corsair Pact, 1–2 Corsair (yacht), 1–2 cost matters hypothesis (CMH), 125, 131 Council of Economic Advisers, 51 The Creature from Jekyll Island, 50 credit default swaps, 190 Credit Suisse, 267, 283–284 Cuban Dominican Sugar Company, 74 Davis, John, 66 Davison, Henry, 19 Davis, Polk and Wardwell, 66 Dean Witter, 103, 126, 282 Decline and Fall of the Roman Empire (Gibbon), 162 “Defects and Needs of Our Banking System” (Warburg), 26 de Kruif, Paul, xii Democracy in America (de Tocqueville), 13 democratization, xiii, 85–88; Charles E Merrill, 90–108; John C Bogle, 110–132 Depew, Chauncey, 1–2 334 deregulation, xiv, 208, 301, 307–308, 312 derivatives, 135, 182–200; Buffet's view of, 183–184, 199; collateralized mortgage obligations, 258–259, 261, 263; convergence trades, 193, 218; credit default swaps, 190; equity vols, 195, 197; exchange-traded funds, 190; interest-rate swaps, 190, 196; misconceptions regarding, 189; mortgage-backed securities, 251, 255– 258, 260–263; stock options, 185–189 See also Scholes, Myron S de Tocqueville, Alexis, 13 Digital Equipment Company, 134, 140, 148–151, 155 Dimensional Fund Advisors, 126, 190 Dimon, Jamie, 294, 297 Dingell, John, 243–244 “The Discount System in Europe” (Warburg), 28 DLJ See Donaldson, Lufkin & Jenrette Dodd, David, 135, 175 Dodd-Frank Act of 2010, 312 Dominick & Dominick, 75 Donaldson, Lufkin & Jenrette (DLJ), 190, 247, 266–267, 269–271, 273–284; capital levels, 278–279; commission arrangements, 276–277; formation of, 273–275; making case for small-company investing, 275–276; personnel arrangements, 278; public offering, 269–271, 279–283 Donaldson, William H., 266–284, 312; background of, 271–272; capital levels, 278–279; commission arrangements, 276–277; education of, 271–272; end of fixed-commission schedule, 282; formation of Donaldson, Lufkin & Jenrette, 269, 273–275; making case for small-company investing, 275–276; personnel arrangements, 278; postDLJ career, 284; public offering, 269–271, 279–283 INDEX Donham, Wallace, 143 Doriot, Edna, 143 Doriot, Georges F., 133–134, 138–158, 283, 309; American Research and Development Corporation, 134, 139–140, 144–155; background of, 141–143; compensation problems, 151–152; consulting career, 143; Digital Equipment Company, 134, 140, 148–151; education of, 141–142; personality of, 140–141, 153–154; private equity firm, 155; teaching career, 143; venture capital, 134; war years, 144–145 Dow Jones Industrial Average: during 1960s, 210; during 1970s, 215; during Hoover administration, 58; inclusion of financial services companies, 298, 308; stock market crash of 1929, 56 Draper, Gaither & Anderson venture fund, 149, 152–153 Drexel & Company, 225 Drexel, Anthony J., 5, 10, 224 Drexel Burnham & Company, 229, 231–232 Drexel Burnham Lambert, 202, 233–246, 295 Drexel, Harjes & Company, 5, 10 Drexel Harriman Ripley, 223–225, 228, 232, 252 Drexel Morgan & Company, 2–3, 5–6, 10, 224–225 DuPont, 168 Durbin, Richard, 311 Eagle, Joe, 33 E A Pierce & Company, 98–99 Eastman Dillon & Company, 95 Edison Electric Illuminating Company, Edison, Thomas Alva, efficient market hypothesis (EMH), 124–125 E F Hutton, 103, 213, 232, 282, 296 Elfers, William, 152–153 INDEX Ellis, Charles, 115, 124–125 EMH (efficient market hypothesis), 124–125 empire builders, xiv, 265–267; Sanford I Weill, 286–305; William H Donaldson, 268–284 employment: aftermath of stock market crash of 1929, 57, 59; expansion of Fed's mission, 52 Employment Act of 1946, 51 End the Fed (Paul), 50 Enron, 303 Enterprise Associates, 144 equity vols, 195, 197 Ewing, William, 67 exchange-traded funds (ETFs), 190 Executive Life Insurance Company, 241 Explorer Fund, 117 factoring, 94–95 Fairfield Partners, 213 Family Life Insurance Company, 107 Fed See central bank; Federal Reserve Federal Home Loan Mortgage Corporation (Freddie Mac), 260–261 Federal National Mortgage Association (Fannie Mae), 256, 260–261 Federal Reserve Act of 1913, 15, 40, 42, 46–49, 52–53 The Federal Reserve System: Its Origin and Growth (Warburg), 48–49 Federal Reserve (the Fed), xiii, 16, 38; Depression-era mistakes, 51, 57; emergency loans to investment banks, 52; first hundred years of, 50–53; governance of, 44–45; holding company regulation, 53; margin accounts, 208; “mission creep”, 50–53; quantitative easing, 52; rescue of LTCM, 197–198; Warburg's tenure on board, 45–47 See also central bank Fenner & Beane, 99 Fidelity Funds, 113, 131 335 Fidelity Management & Research, 289–290 financial engineers, xiv, 201–203; Alfred Winslow Jones, 204–220; Lewis Ranieri, 250–264; Michael R Milken, 222–248 financialization: advantages of, 308–309; disadvantages of, 310–311, 326n1 Financial Services Modernization Act of 1999, 301 financial supermarkets, 287–288, 304–305 See also Weill, Sanford I Fink, Larry, 255 Fireman’s Fund Insurance Company, 293 First Bank of the United States, 21, 30 First Boston, 255, 280 First Index Investment Trust (Vanguard 500 Index Fund), 113, 125–126 First Investors Fund for Income, 230 First National Bank, 40, 47, 66 fiscal policy, 51 Fischbach Corporation, 241–242 Fisk, James, Fitzgerald, F Scott, 164 Flanders, Ralph, 144–145, 158 Fletcher, Duncan, 61, 64 Ford, Gerald, 292 Ford, Horace, 140, 148 Ford Motor Company, 231 401(k) plans, 87–88, 115, 128 Freddie Mac (Federal Home Loan Mortgage Corporation), 260–261 Friday, John, 231, 233 Friedman, Milton, 51–52 front running, 212 Fulbright, James W., 174 fund of funds approach, 216, 219 F W Woolworth, 94 General Electric, 8, 24, 52, 66 General Host, 227 General Motors, 52, 168 George H Burr & Company, 94–95, 102 G H Walker & Company, 272–273 336 Gibbon, Edward, 162 GI Bill, 145 Gibson Greeting Cards, 156, 236 Gifford, Walter, 66 Gimbel Brothers, 94 Giuliani, Rudolph, 244–245, 248 Glass, Carter, 15–16, 34, 36–53, 310–311; Aldrich Plan and, 37–38, 44, 47; background of, 38–39; efforts to win populist support for reforms, 43–45; Federal Reserve Act, 40–46; Fed's expanding mission, 50–53; Pecora hearings, 63–64; political views of, 39; Pujo hearings, 40–41; recognition of need for reform, 41–42; as secretary of the Treasury, 49–50; view of Mitchell, 70; view of origins of Federal Reserve, 47–49; view of stock market crash hearings, 59 Glass-Steagall Act of 1933, xiv, 15, 40, 50, 64, 79, 100, 225; opposition to, 68–69, 311–312; repeal of, 299–301 Goldman Sachs, 24, 52, 94–95, 265, 279, 282, 289 Goldsmith, James, 237 gold standard, 22, 50 Good to Great (Collins), 126 Government Employees Insurance Company (GEICO), 169–173 Graf, Lyla, 64–65 Graham, Benjamin, xii, 133–135, 160–180, 214; as academic, 173–176; annual rate of return, 172; arbitrage, 167–168, 177; background of, 161–163; changes in marketplace, 176–178; education of, 163; founding of Graham-Newman, 167–168; GEICO investment, 169–173; good investment as good speculation, 171–172; intrinsic value and value investing, 164–173, 178; introduction to bond investing, 164–165; investment as business proposition, 169–170; personality of, 179–180; INDEX shutting down Graham-Newman, 176–177; stock market crash of 1929, 135; writings of, 135, 174–176, 178–179 Graham-Newman Corporation, xiii, 134–135, 167–173, 176–177, 214 Great Depression, 86; Doriot's career as consultant, 143; Graham's currency stabilization plan, 179; Merrill's involvement with Safeway Stores, 97–98; mistakes made by Fed, 51, 57 The Great Gatsby (Fitzgerald), 164 Great Recession, 52, 262 Greenspan, Alan, 52, 300–301 Greylock Capital, 152–153 Grossbaum, Louis, 162 Groupe Bruxelles Lambert, 233 Guaranty Trust, 56 Guggenheim Exploration Company, 166–167 Gulf Oil, 237 Gutfreund, John, 259–260 Haack, Robert, 280–281 Hamilton, Alexander, 21 Harley-Davidson, 52 Harriman Ripley & Company, 225 Harvard Business School, xiii, 134, 139, 142–145, 147, 220, 231, 266, 269 Harvard College, 106, 205, 231 Hayden Stone & Company, 291 hedge funds, xiv, 192, 201–202, 311; assessment of performance, 210–213; “children” of Jones, 213–214; contraction, 215–216; development of, 207–210; front running, 212; fund of funds approach, 216, 219; mediocre performance of, 218–219; performance fees, 214; reenergizing of market, 216–217 See also Jones, Alfred Winslow; Long-Term Capital Management; Scholes, Myron S Heilbroner, Robert, xii Hemingway, Ernest, 206 INDEX HFRX Global Hedge Fund Index, 218 Hickman, W Braddock, 224, 226–227 High Voltage Engineering Corporation, 146, 148 Hilles, Charles, 66 Hoover, Herbert, 51, 57–59 House Banking and Currency Committee, 11, 37–40, 310 House Committee on Financial Services, 310–311 House Foreign Affairs Committee, 39 House of Morgan See J P Morgan & Company Humphrey-Hawkins Full Employment Act of 1978, 52 IBM, 150 Icahn, Carl, 237, 239 indexed mutual funds, xiii, 88, 112–113, 121–125, 189–190 inflation: bond-backed banknotes, 28; effects on debtors/lenders, 22; Fed and, 50, 52; Volcker's austerity program, 254 The Intelligent Investor (Graham), 135, 176–177 interest-rate swaps, 190, 196 International Acceptance Bank, 47 Interstate Commerce Commission, intrinsic value and value investing, 164– 173, 178 See also Graham, Benjamin Investment Company Act of 1940, 120, 152–153, 170 Ivest Fund, 117 Jackson & Curtis, 282 Jackson, Andrew, 21 J C Penney, 96 Jefferson, Thomas, 21 Jeffers, Robinson, 127 Jekyll Island Club, 20, 31–32, 48 Jenrette, Dick, 269–270, 273–274, 276, 278, 281–284 Johns Manville and Standard Brands, 66 337 Johnson, Edwin, III, 113 Jones, Alfred Winslow, 201–202, 204– 220; assessment of fund performance, 210–213; background of, 205–206, 322n1; “children” of, 213–214; contraction, 215–216; development of hedge funds, 207–210; education of, 205–206; front running, 212; management style, 211–213; margin accounts, 208–209; performance fees, 214; short sales, 207–209; technical analysis, 206–207; Tiger Management, 216–217; writings of, 206 Joseph, Fred, 231–236, 238, 245 J P Morgan & Company (House of Morgan), 2, 10, 24, 73, 83, 85, 95, 266; inclusion in Dow, 298, 308; investment banking offshoot, 225; passage of Glass-Steagall Act, 68; Pecora's investigation of, 62–69; preferential treatment of high-ranking customers, 65–67; proposed merger with Travelers, 300–301; stock market crash of 1929, 55; value-at-risk technique, 193 JPMorgan Chase, 294, 308 J S Morgan & Company, 4–5, 10 junk bonds, 202, 243, 247; liquidity issue, 228; making case for, 226–230; new-issue, 231–233 See also Milken, Michael R J W Seligman & Company, 24 Kahn, Irving, 172–173 Kennecott Copper, 167 Kennedy, John F., 82 Kennedy, Joseph, 82–83 Keppel, Frederick, 161–163 Keynes, John Maynard, 171, 214 Kidder, Peabody & Company, 216 Kidder Peabody, Dillon Read, 95 Kissick, John, 223 Kissinger, Henry, 283 Kleiner Perkins Caufield & Byers, 158 338 Knickerbocker Trust Company, 23 Kohlberg Kravis Roberts, 156, 237 Kuhn, Loeb & Company, 73, 95–96, 289; Doriot and, 142–143; Glass-Steagall Act, 68; rise of, 25; Warburg and, 15, 19, 24–25, 27, 32, 45 Lahey, Gerry, 188 Lamont, Thomas, 55–56 Lasker, Bernard, 280 Lautaro Nitrate Company, 74 Lazard Frères, 282–283 Lefevre, Edwin, 122 Lehman Brothers, 24, 94–95, 150, 233, 289 leveraged buyouts (LBOs), xiv, 155–156, 236–240, 243 Levine, Dennis, 244 Levy, Gustave, 280 Lewis, Michael, 256–257, 259, 298 Liar’s Poker (Lewis), 256–257, 259, 298 Liberty Bonds, 46, 72, 85–86, 91–93, 253 Life, Liberty and Property (Jones), 206 limited partnerships, 153, 155 Lindbergh, Charles, 66 Lindbergh, Charles, Sr., 50 Lindner, Carl, Jr., 230 Ling-Temco-Vought, 227 Little Orphan Annie (comic strip), 20 Livermore, Jesse, 122 Loeb, Nina, 25 Loeb, Solomon, 25 Long-Term Capital Management (LTCM) hedge fund, 135, 184, 191–199, 310; collapse and rescue of, 197–198; disastrous diversification initiatives, 194–197; early outsized returns, 193–194 Loomis, Carol, 209–210, 281 Lowell, A Lawrence, 142 Lowenstein, Roger, 197–198 LTCM See Long-Term Capital Management hedge fund LTV Corporation, 233 INDEX Lufkin, Dan, 269–274, 278, 280–284 Luthringshausen, Wayne, 188 Lynch, Edmund, 95–98 Madison, James, 21 Magowan, Robert, 105 Malkiel, Burton, 123–126 Marcus Aurelius, 127 margin accounts, 93, 208–209, 211 Martin, Thomas S., 50 Massachusetts Institute of Technology (MIT), 139–141, 144, 146, 148, 185, 191 Massachusetts Mutual, 230 Mazur, Hazel, 167, 179–180 MBSs See mortgage-backed securities; Ranieri, Lewis McAdoo, William, 44, 66 McCrory Stores, 95–96 MCI Communications, 224, 235 McIntyre, Thomas, 123 McMaster University, 184 McNabb, Bill, 131 Meehan, Michael, 80 Mellon, Andrew, 51 Memoirs (Graham), 179 Mercantile National Bank, 23 Merger Mania: Arbitrage, Wall Street’s Best Kept Money-Making Secret (Boesky), 240 Meriwether, John, 191–192, 194, 196, 198 Merrill, Charles E., 86–87, 90–108, 114, 158, 308; advertising, 102; background of, 94; compared to Mitchell, 92–93; democratization of stock ownership, 104–105; formation of Merrill Lynch, 95–96; health problems and death of, 103; “investigate, then invest” philosophy, 86, 93, 101; involvement with Safeway Stores, 97–98; Merrill Lynch after, 105–108; pre-crash advice, 93, 96–97; responsible approach of, 92–93; retail INDEX investment banking, 94–96; securities retailing for small investor, 98–102; training and compensation for account executives, 101–102 Merrill, Charles, Jr., 105 Merrill, Doris, 105 Merrill, James, 105 Merrill Lynch, 52, 86–87, 92–94, 114, 282, 316n1; diversification, 107, 287; formation of, 95–96; under O’Neal, 108; promote-from-within strategy, 105–106; under Regan, 106–107; securities retailing for small investor, 98–102; under Shreyer, 107–108; wartime growth, 103 Merton, Robert, 135, 183–184, 187, 191, 195 Mesa Petroleum, 237 Messing, Estelle, 180 Metallgesellschaft, 198 Metropolitan Club, 30 The Microbe Hunters (de Kruif), xii Mikhailovich, Simon, 251, 263–264 Milbank, Albert, 66–67 Milbank, Jeremiah, 273 Milbank, Tweed, 66 Milken, Lori, 225–226, 234, 241 Milken, Lowell, 241, 243, 246 Milken, Michael R., 202, 222–248; association with Drexel, 224–226, 228–241; background of, 223–225; compared to Ranieri, 252; downfall, 241–243; education of, 223–224; guilty plea, 246–247; indictment of, 246; investigation of, 243–245; as investment advisor, 230; leveraged buyouts, 236–240; liquidity issue, 228; making case for junk bonds, 226–230, 257; move to California, 233–236; new-issue junk bonds, 231–233; postrelease career, 248; recipe for disaster, 238–241 Miller, Merton, 185 Milne, Robert, 172–173 339 Mitchell, Charles, 56, 66, 85–86, 288; background of, 69–70; bonus system, 71–72; compared to Merrill, 92–93; investment pools, 74–76; Latin American securities, 73–74; Pecora hearings, 58, 69–76, 78; rehabilitation of, 83; sales tactics with unsophisticated investors, 72–73; “wash sale” of stock, 70–71 MIT (Massachusetts Institute of Technology), 139–141, 144, 146, 148, 185, 191 Mizuho Securities, 52 M M Warburg & Company, 24–25, 28, 46 monetary policy: European-style currency management, 30; Fed's expanding mission, 51–52; fixed currency, 28–29; government bond backing, 28–29, 43; Great Depression, 51; Volcker's austerity program, 254 Morgan Guaranty Trust, 150 “morganization”, 6–9 Morgan, J Pierpont, xii, 1–12, 40, 224, 237, 309; as America's de facto central banker, 10, 14, 21, 23, 29, 55; assertions regarding his power and influence, 11; Corsair Pact, 1–2; early Wall Street years, 5–6; education of, 4, 133; father's career guidance, 4–5; formation of General Electric, 8; formation of U.S Steel, 8–9; health problems, 4, 6, 9, 12; importance of credibility and reputation, 2–3; “morganization”, 6–9; negotiating strategy, 1; Pujo hearings, 11–12, 40, 63; reorganization of banking companies, 10; resuscitation and consolidation of railroads, 6–7; rise of socialist ideologies, 10–11; view of self-regulated capitalism, 14 Morgan, J P., Jr (Jack), 16; Pecora hearings, 62–65; view of GlassSteagall Act, 68, 83, 311–312 Morgan, Juliet, Morgan, Junius, 4–5, 10 340 Morgan Stanley & Company, 52, 68–69, 225, 229, 265, 278, 283, 312 Morgan, Walter, 116 mortgage-backed securities (MBSs), 251, 263; creation of, 255–257; problems with, 257–258; subprime mortgage crisis, 260–262 See also Ranieri, Lewis Mullins, David, Jr., 191 Munger, Charlie, 183, 199 mutual funds, 87–88, 112–113, 152–153; defined, 114; expense ratios, 120– 121, 131; governance of, 118–119; indexed, xiii, 88, 112–113, 121–125, 189–190; investment costs and fees, 119–121; no-load, 119–120; passive management, 113; retail investing versus, 114–115; Wharton School study of, 118–119, 122–123 National Banking Acts of 1863 and 1864, 28–29, 43 National Citizens’ League for the Promotion of a Sound Banking System, 32 National City Bank, 19, 100; Merrill and, 85–86, 92–93; Mitchell and, 56, 66; panic of 1907, 23, 27; Pecora hearings, 58, 69–75, 78 National City Company, 69–75 National Monetary Commission, 28, 30–32, 37 National Prohibition (Volstead) Act of 1919, 49 National Reserve Association, 31, 34, 49 National Venture Capital Association, 157 Nelson, Horatio, 118, 127 Newburger, Henderson & Loeb, 164, 167, 171, 174, 177 Newburger, Samuel, 164–165 New Deal, xiii, 15, 40, 86, 100, 177 See also names of specific legislative acts New England Council, 144 Newman, Jerome, 168, 174 New York Airways, 272 INDEX New York Central Railroad, 1–2, 24 New York Stock Exchange (NYSE): American Research and Development Corporation listing, 149; capital rules, 265; Donaldson as chairman, 284; limits on advertising, 102; Mayday end of fixed-commission schedule, 112, 212, 266, 282; panic of 1907, 23, 27; paperwork problems, 291; Pecora hearings, 79–81; as pre-SEC watchdog, 15; public ownership, 269–271, 279–281; retail investors, 87; stock market crash of 1929, 56, 58; wartime and postwar growth, 103; Whitney and, 79–81, 84 Norbeck, Peter, 58–61 Northern Pacific Railroad, 24 Northern Pipeline Company, 168–169 Northern Securities Company, 14 notional value, 189 NYSE See New York Stock Exchange Odean, Terry, 115 Olsen, Ken, 148, 151, 157 O’Neal, Stan, 108 Optical Scanning, 152 Owen, Robert L., 42–43 Paine, Thomas, 127 PaineWebber, 103, 282 Pan American World Airways, 233 panic of 1857, 21 panic of 1873, 21 panic of 1893, 21, 225 panic of 1907, 10, 14–15, 23–24, 26–27, 29, 41 Parker, Dorothy, 206 parking, 241–242, 247 Paul, Ron, 50 Pecora, Ferdinand, 15–16, 53–84, 308, 311; background of, 60–62; expansion of investigative scope, 61; investigation of House of Morgan, 62–69; investigation of Mitchell, INDEX 69–76; investigation of Whitney, 79–82; investigation of Wiggin, 76–79; origin of hearings, 58–60; passage of Glass-Steagall Act, 68, 79–80; passage of Securities Act, 79; passage of Securities Exchange Act, 82; post-hearing career, 82–83; revelations of preferential treatment at House of Morgan, 65–67; sensationalism of hearings, 63–65; stock market crash of 1929, 55–57 Pennsylvania Engineering, 242 Pennsylvania Railroad, 1, 24 Perkins, Edwin J., 104–105 Perkins, Tom, 158 Pershing, John, 66 Pew Financial Reform Project, 262 Pickens, T Boone, 237, 239 “A Plan for a Modified Central Bank” (Warburg), 27 Platinum Grove Asset Management hedge fund, 199 pools, 74–82, 165 Posner, Victor, 239, 241–242, 247 Potter, William, 56 price volatility, 187–188, 195 Primerica Corporation, 294–297 Princeton University, 52, 113, 220 The Principles of Bond Investment (Chamberlain), 164 Prosser, Steward, 56 Proxmire, William, 244 Prudential Bache, 292 Prudential Insurance Company, 292 Pujo, Arsène, 11, 40 Pujo hearings, 11, 40–41 Pulitzer, Joseph, 11 put options, 186 quantitative easing, 52 Racketeer Influenced and Corrupt Organizations (RICO) Act of 1970, 245–246 341 Radcliffe, Dick, 213 Radio Corporation of America (RCA), 80 A Random Walk Down Wall Street (Malkiel), 123–124 Ranieri, Lewis, 203, 250–264; association with Salomon Brothers, 251–256, 258–260, 262–263; collateralized mortgage obligations, 258–259; compared to Milken, 252; creation of mortgage-backed securities, 255–257; education of, 252; effect of Volcker's austerity program on S&Ls, 254–255; personality of, 252–253; problems with mortgage-backed securities, 257–258; pros and cons of legacy, 262–264; securitization, 256; subprime mortgage crisis, 260–262 Rapid-American, 227 Raskob, John, 66–67 RCA (Radio Corporation of America), 80 Reagan, Ronald, 106 Reed, John, 300, 302–303 reformers, xiii, 14–16; Carter Glass, 36–53; Ferdinand Pecora, 54–84; Paul M Warburg, 18–34 Regan, Donald, 106 Reichsbank, 24, 26, 28 Reid, John, 312 Reliance Insurance Group, 290, 297 Reminiscences of a Stock Operator (Lefevre), 122 retirement and pension plans, 87; hedge funds, 217; venture capital investing, 157 Revenue Act of 1978, 128 Reynolds, George, 30 Reynolds Securities, 282 R H Macy’s, 94 RICO (Racketeer Influenced and Corrupt Organizations) Act of 1970, 245–246 RJR Nabisco, 237 Roberts, George, 1–2 342 Robertson, Julian, 216–219 Robinson, James, 292–293 Rockefeller, John D., 23, 27 Rockefeller, John, Jr., 20 Rockefeller, Nelson, 284 Rogers, Will, 55, 80 Rohatyn, Felix, 269–270, 281 Roosevelt, Franklin Delano, xiii, 15, 39–40, 50, 58–59, 61, 82–83, 86, 145, 179 Roosevelt, Theodore, 14, 29, 32–33 Royal Dutch Petroleum, 24 Russell 2000 Index, 128 Ryan, Thomas F., 40 S&Ls (savings and loans), 245–246, 254–255 S&P 500 (Standard & Poor’s 500 Index), 88, 112–113, 121, 123–125, 128, 172, 190, 215 Safeway Stores, 96–97, 105 Salomon, Arthur, 253 Salomon Brothers, 190–191, 196, 203, 251–256, 258–260, 262–263, 279, 288, 298–299 Salomon, Herbert, 253 Salomon, Percy, 253 Salomon Smith Barney, 300–301, 303 Samuelson, Paul, 124, 132 savings and loans (S&Ls; thrifts), 245– 246, 254–255 SBIC (Small Business Investment Company) program, 149 Schiff, Jacob, 24 Schloss, Walter, 171 Scholes, Myron S., 133–135, 182–200, 310; background of, 184–185; Black-Scholes option pricing model, 183–189; collapse and rescue of hedge fund, 197–198; convergence trades, 193; derivatives, 135; disastrous diversification initiatives, 194–197; early outsized returns, 193–194; education of, 184–185; exchangetraded funds, 190; Long-Term Capital INDEX Management hedge fund, 184, 191–199; losses, 198–199; Platinum Grove Asset Management hedge fund, 199; private sector activities, 189–191; stock options, 185–186 Schwab, 112 Schwab, Charles, Scottrade, 112 Sears, Roebuck, 94 Second Bank of the United States, 21, 30 Securities Act (Truth in Securities Act) of 1933, 15, 69, 79, 81–82, 177 Securities and Exchange Commission (SEC), xiii, 15–16, 53, 86; action against Drexel, 245; approval of Vanguard plan, 120; disclosure requirements, 177, 241; Kennedy as chairman, 82; Mayday end of fixedcommission schedule, 112, 212, 266, 282 Securities Exchange Act of 1934, 15, 69, 81–82, 208 securitization, xiv, 203, 256, 262–264 See also Ranieri, Lewis Security Analysis (Graham), 135, 175–176, 178 Selene Finance, 263 Senate Committee on Banking and Currency, 42, 58–59, 61, 79, 84, 174, 244 Senate Finance Committee, 14, 20–21, 33, 59 Shakespeare, William, 38–39 Shane, John, 152 Shearson/American Express, 292–293, 296 Shearson Hammill, 232 Shearson Loeb Rhoades & Company, 288, 292 Shellpoint Partners, 263–264 Sherman Antitrust Act of 1890, 14 short sales, 77–79, 207–209 Shreyer, William, 107–108 Siebert, Muriel, xiv–xv INDEX Sikorsky Aircraft, 272 Simon, William, 156, 236 Sinquefield, Rex, 126 Small Business Investment Company (SBIC) program, 149 Small-Cap Index Fund, 128 Smith Barney, 266, 288, 294–296, 303– 304, 312 Smith Barney Shearson, 298–299 Smith, Rixey, 38 Spitzer, Eliot, 213 spreads, 192–193, 197 S S Kresge, 95–96 Stahle, Tom, 282 Standard & Poor’s 500 Index (S&P 500), 88, 112–113, 121, 123–125, 128, 172, 190, 215 Standard Oil, 24, 66, 168 Stanford University, 133, 157, 189 State Savings Bank, 23 Steinberg, Saul, 290, 297 Stiglitz, Joseph, 13 Stillman, James, 27 St John’s University, 252 stock market crash of 1929, xiii, 15, 51, 134–135; aftermath of, 56–57; Black Thursday meeting of top bankers, 55–56; Merrill's pre-crash advice, 93, 96–97 stock options, 185–189 Storage and Stability (Graham), 179 Strauss, Tom, 259 Strawn, Silas, 66 Stroben, Don, 291 Strong, Benjamin, 19 Study of Mutual Funds (Wharton School and SEC), 118–119, 122–123 Styron, Dick, 261 subprime mortgage crisis, 260–262 Taft, William Howard, 33, 41 taxation: capital gains, 156–157; efforts to save S&Ls, 254–255; Mitchell's “wash sale” of stock, 71; Pecora's investigation of House of Morgan, 65 343 Taxes and Business Strategy (Scholes et al.), 191 Taylor, Myron, 66 TD Ameritrade, 112 Teagle, Walter, 66 Technivest Fund, 117 Texas International, 233 Textron, 154–155 Thomson, Frank, 1–2 Thorndike, Doran, Paine & Lewis, 116–117 thrifts (savings and loans), 245–246, 254–255 Tiger Management, 216–217 Tisch, Laurence, 230 too-big-to-fail banks, 198, 265, 304, 311 Total Stock Market Index Fund, 128, 131 Tracerlab, 146, 148 Travelers Companies, 304, 308 Travelers Corporation, 297–298 Travelers Group, 191, 297–302 Travelers Insurance, 288 Troubled Asset Relief Program, 108 Trust Company of America, 23 Trustees’ Equity Fund, 117 Truth in Securities Act (Securities Act) of 1933, 15, 69, 79, 81–82, 177 UBS, 52 Union Carbide, 237 Union Pacific Railroad, 24, 47 United Copper Company, 23 United Corporation, 67 United Enterprises, 271 University of California, 115, 176, 224, 240 University of Chicago, 52, 126, 184–185, 189 University of Michigan, 94 Untermyer, Samuel, 3, 11 U.S Steel, 8, 66 U.S Treasury Department: Aldrich Plan, 32; auction procedures, 191; panic of 1907, 23, 29 344 value-at-risk (VaR) technique, 193–194 value investing, 164–173, 178 Vanderbilt, Cornelius, Vanderlip, Frank, 19, 31 Vanguard 500 Index Fund (First Index Investment Trust), 113, 125–126 Vanguard Group, 112, 117–121, 125–132, 218 VaR (value-at-risk) technique, 193–194 venture capital investing, 134; American Research and Development Corporation, 144–147, 149–150, 152; limited partnerships versus, 155; number of funds, 157 See also American Research and Development Corporation; Doriot, Georges F Volcker, Paul, 52, 254–255 Volstead (National Prohibition) Act of 1919, 49 Voute, Bill, 259 Wade, Carol, 180 Waite, Charles, 152 Walgreen Drugs, 96 Wall Street (film), 240 Wall Street Under Oath (Pecora), 76 Warburg, Max, 46 Warburg, Paul M., 15–16, 18–34, 37–38, 41; as advisor to Aldrich, 30–31; background of, 24–25; book tracing origins of Federal Reserve, 48–49; development of Aldrich Plan, 19–20, 22, 24, 28–33; education of, 133; move to New York, 25; panic of 1907, 23–24, 26–27; personality, 20; political attacks against, 33; post-political career, 47–48; selling message of bank reform, 32; tenure on Federal Reserve Board, 45–47; view of central banking, 25–30 Warner, Douglas, 300–301 Warren, Elizabeth, xv Weill, Sanford I., 266–267, 286–305, 312; background of, 288–289; boutique business model, 289–290; Citigroup, INDEX 288, 300–304; Cogan, Berlind, Weill & Leavitt, 289–290; culture clash, 301–302; financial supermarket failures, 287–288, 304–305; Hayden Stone, 291; Primerica Corporation, 293–295; removal of Glass-Steagall barriers, 299–301, 305; Salomon Brothers, 298–299; Shearson/ American Express, 292–293, 296; state-of-the art back office, 290–291; Travelers Group, 297–299 Wellington Fund, 116–117, 126 Wellington Management Company, 117, 125, 130 Wells Fargo & Company, 25 Wells Fargo Bank, 126, 189 Wesray Capital Corporation, 156 Western Auto, 96 Western Union, 25, 47 Westinghouse, 24 Whalen, Chris, 304 Wharton School of the University of Pennsylvania, 118, 202, 223–224 White, Weld & Company, 107 Whitney, George, 66–67, 79–82, 84 Whitney, Richard, 15–16, 56–59, 83–84 Wiggin, Albert, 56, 58, 66, 76–79, 83 Williams, Art, 295 Wilshire 5000 Index, 128 Wilson, Woodrow, 10–11, 33–34, 37–38, 41–47, 49, 59 Windsor Fund, 116 Woodin, William, 66–67 Woodward, Donald, 212 WorldCom, 303 The Worldly Philosophers (Heilbroner), xii Yahoo, 187, 189 Yale School of Management, 284 Yale University, 271 Yellen, Janet, xv, 52 Young, Owen, 66 Zapata Corporation, 233 ... book My hope is simply that Wall Streeters will leave you with a better understanding of the American system of finance—how it evolved and how it works today WALL STREETERS Photo courtesy of... Press All rights reserved Library of Congress Cataloging-in-Publication Data Morris, Edward L Wall Streeters : the creators and corruptors of American finance / Edward L Morris pages cm Includes... funds, venture capital funds, and “securitizers”—based both on the Street and off The aim of Wall Streeters is to make sense of the world of high finance by telling the stories of those who shaped