Thread by @ReformedTrader

1/ The Go-Go Years: The Drama and Crashing Finale of Wall Street's Bullish 60s (John Brooks)

“As a people, we would rather face chaos, making potsfull of short term money, than maintain order and sanity by [turning away new business] and profiting less.”

amazon.com/Go-Go-Years-Cr…

2/ "Interest rates were at near-record highs, strangling new housing construction and making industrial expansion impractical. The dollar was in trouble, worth many billions more than the national gold hoard. One hundred or more Wall Street brokerage firms were near failure.

3/ "In May 1970, an equally-weighted portfolio was worth half of what it would have been worth at the start of 1969.

"The high flyers that had led the market of 1967 and 1968—conglomerates, computer leasers, far-out electronics companies, franchisers—were precipitously down.

4/ "Nor were they down 25%, like the Dow, but 80-95%. This was vintage 1929 stuff, and the prospect of another great depression, this one induced as much by despair as by economic factors as such, was a very real one.

5/ "Before the crash in 1929, financial sages had insisted there couldn’t be another 1907 panic because of the protective role of the Fed; before the crash of 1969–70, a later generation observed repeatedly that there couldn’t be another 1929 because of the Fed & the SEC." (p. 2)

6/ 1968: "Investment bankers had offered to sell Ross Perot’s stock, Electronic Data Systems, at 30x current annual earnings, then at 50x, then at 70x. Langone, however, offered 100x.

"The offering price finally agreed upon was at 118x current earnings." (p. 16)

7/ "The wonder shares were those of new, all-but-untried companies with which investors were just then having an intense love affair. A few, like Polaroid, Xerox, and Litton Industries, would go on to greater things; most would be forgotten before the end of the decade.

8/ “There still seems to be a preoccupation with low-priced shares because they are low-priced, 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 disaster.” (p. 27)

9/ "The bull market led life of its own, independent of underlying reality.

"Goaded by underwriters eager for commissions or a cut, family businesses—laundry chains, soap-dish manufacturers—sold stock in their enterprises on the strength of little but bad news and big promises.

10/ "The bad news was in the prospectus: the company had never made any money and had no real prospects of making any.

"The effectiveness of warnings is limited by the preconceptions of those being warned. Stock was snapped up, leaving the underwriter with his easy commission.

11/ "The gains in 1961 seemed substantial indeed.

"In the over-the-counter market, where the new issues bloomed, gains for the year of 4,000% to 5,000% were not unknown. No wonder John F. Kennedy was popular in Wall Street." (p. 27)

12/ "The stock market collapse of 1962 broke the 1961 bucket shops and their eager patrons, sent the Dow industrials down more than 25%, and taught a whole new generation of investors and gamblers alike that it is possible to lose.

13/ "But experts who, a year earlier, had been sounding warnings of the dangers of speculation, were now victims of that same euphoria. In Jan/Feb 1962, they pointed out that business was good, spoke of a “healthy correction,” and recommended the cautious purchase of stocks.

14/ "Stock Exchange and brokerage communications broke down completely. Many orders were lost in the shuffle. Customers who did get trades executed found later that they had paid several points more than they had bargained for or had received several points less on a sale.

15/ "The hot-issue boys, the penny-stock plungers, the bucket-shop two-week millionaires of 1961, who had been operating on the thinnest of margins in the most volatile of stocks, were wiped out either before May 28 or during the first hours of that disastrous day." (p. 57)

16/ John Kenneth Galbraith: “Regulatory bodies have a life cycle. In youth, they are vigorous, aggressive, evangelistic, even intolerant. Later they mellow; in old age—after a matter of 10-15 years—they become either an arm of the industry they are regulating or senile.” (p. 83)

17/ Mutual funds "with large front-end commissions, sometimes amounting to half of the initial investment, were unfair to the small investor—whom the funds were supposed to benefit most. Wall Street replied that such contracts were necessary incentive for the salesmen." (p. 101)

18/ "Americans of both sexes have always tended subconsciously to equate financial deals with physical fighting—the latter a form of competition in which the hardest-shelled feminist admits that women are usually ill-equipped to compete equally with men." (p. 110)

19/ "Hetty Green, who once threatened the notoriously ruthless Collis P. Huntington with a revolver when she thought he was cheating her in a deal, stands almost alone as an American woman of unquestioned financial genius." (p. 107)

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20/ "By 1969, half of Wall Street’s salesmen and analysts would be persons who had come into the business since 1962, and consequently had never seen a bad market break. Probably the prototypical portfolio hotshot of 1968 entered Wall Street precisely in 1965." (p. 113)

21/ “If this is good enough for U.S. Steel & the Ford Foundation, how can you lose?”

"Those invested in Atlantic included Morgan Guaranty and First National City Banks; Chesapeake & Ohio Railway; General Council of Congregational Churches; Pennsylvania & Princeton Universities.

22/ "The list of Atlantic investors eventually included Moody’s Investors Service, whose function is to produce statistics and reports designed specifically to help people avoid investment pitfalls of the sort of which Atlantic would turn out to be an absolutely classic case.

23/ "In the early 1960s, Atlantic seemed to exceed the wildest hopes with its almost unbelievable rate of growth. Its reported sales for 1960 were $24.6 million, for 1961 $45.6 million, for 1962 $81 million, for 1963 $176 million—a consistent improvement approaching 100% a year.

24/ "The growth rate itself might well have been a danger signal. In the loan business, the easiest way to expand faster than your competitors is by consistently making loans others consider unsound. That was precisely what Atlantic was doing, intentionally and systematically.

25/ "But the presence of the Steel fund, the Ford Foundation, and the rest on the investor list served as an effective smoke screen; any cautious critics were easily dismissed as flatulent grumps; and the bandwagon rolled on.

26/ "Atlantic used Wall Street capital to make new loans its own major officers knew to be unsound; the unsoundness was camouflaged in the company’s reports in order to mislead investors; the spurious growth represented by ever-increasing loans lured in yet more investment money.

27/ "Morgan intervened personally each year in the work of his firms’ accountants—some willing to commit fraud at their client’s request—to ensure that a satisfactory rise in profits was shown through overstatement of assets and understatement of allowances for bad debts.

28/ "For 1964, it would come out later, Atlantic’s announced $1.4 million profit, under proper accounting procedure, should have been reported as a *loss* of $16.6 million.

29/ "The New York Hanseatic Corporation, a $12-million investor in Atlantic paper, received a favorable credit check on Atlantic from Toronto-Dominion Bank. If the bank had been able to penetrate the accounting mystifications, it would have discovered that Atlantic was insolvent.

30/ "The Madison Fund, a large institution, bought one last million dollars of Atlantic paper.

"Atlantic shortly went into formal receivership three weeks later.

"The Old Establishment members had followed each other blindly and paid the price for their folly." (p. 123)

31/ 1966: "The 'go-go' method was characterized by rapid in-and-out trading of huge blocks of stock, with an eye to large profits taken very quickly. The term was specifically applied to certain mutual funds, none of which had previously operated in such a manner." (p. 127)

32/ "Tsai operated Fidelity Capital Fund in a way that was at the time considered almost gambling. He concentrated money in a few stocks that were then thought to be outrageously speculative and unseasoned for a mutual fund (Polaroid, Xerox, and Litton Industries among them).

33/ "His annual turnover exceeded 100%, or a share traded for every one held—unheard of in institutional circles at the time.

"He bought huge blocks of 10,000+ shares, notifying his brokers that if they couldn’t assemble the block without pushing the price up, the deal was off.

34/ "He came to be known and feared in corporate circles. The sudden dumping of ten thousand shares of one’s stock was not to be taken lightly, and the man capable of doing it on a moment’s whim was worth cultivating.

35/ "This emphasis on growth stocks, the concentration of his purchases in a few issues in which he took huge positions, implied maximum exposure in a crash; after the carnage of May 1962, Fidelity Capital Fund looked like a punctured balloon. But Tsai was quick to recover.

36/ "In 1965, the fund achieved a rise of not quite 50% on a turnover of 120%.

"As “Jesse Livermore is buying it!” had once been the signal for a general stampede into any stock, so now it was “Gerry Tsai is buying it!” These prophecies came to be, to an extent, self-fulfilling.

37/ "Federal securities laws, which had not been on the statute books to bother Livermore in his heyday, now categorically forbade manipulation of stocks. But what could the securities laws do about Tsai? Was it his fault that everyone else wanted to follow his bets?" (p. 136)

38/ "Half of the first year’s investment often went for the original sales commission; in late 1966, the S.E.C. would declare this to be excessive.

"But that was after the market had dropped. Reform is a frail flower that languishes in the hot glare of prosperity.

39/ "You got what you paid for—assuming, of course, what everybody else assumed, that the Dow would appreciate annually at 15% and the performance funds, 40-50%. It was the sort of assumption widely made only in times when people have taken leave of their senses." (p. 139)

40/ "The factors that had worked in Tsai’s favor now turned against him. He was on the spot, watched by a nation of investors and expected to make 50% profit a year on his customers’ money. Less would be failure, and the fickle public would convert its hero overnight into a bum.

41/ "He happened to start his own fund only a few weeks after the bull market of the 1960s, as measured by the Dow industrials, had reached a peak that it would not reach again. In 1966, he rode unawares toward his fall, and his adoring public toward disillusionment." (p. 146)

42/ "If Tsai no longer knew when to cash in the investments he made for others, he cashed in his own. In 1968, he sold to C.N.A., an insurance holding company, for a high executive post and $30 million of stock.

"He was failing at his calling when he got rich from it." (p. 149)

43/ "In 1968, forty-five hundred mergers of U.S. corporations were effected—far more than in any previous year.

"Merging enabled a company to capitalize on its current stock-market value. Never before had a company’s reported earnings meant so much in terms of its stock price.

44/ "When a company with a high multiple buys one with a lower multiple, a kind of magic comes into play even though neither company does any more business than before. There is an apparent growth in earnings that is entirely an optical illusion." (p. 157)

45/ "The accountant, through the choices at his disposal, was often able to write for the surviving company practically any current earnings figure he chose. Without breaking the law or the rules of his profession, he could mislead the naïve investor practically at will." (p.158)

46/ "Accounting's first fall from grace had come during the boom of the 1920s, when many accountants found devious and misleading ways of writing up companies’ book value to inflate stock prices.

47/ "Afterward, the American Institute of Certified Public Accountants enforced accountancy’s self-regulation. All through the 1930s-50s, the A.I.C.P.A. chipped away at the 1920s' old abuses and progressively tightened the lax rules that had permitted them." (p. 158)

48/ "But with an expanded market full of novices, truthful disclosure could be made to lie to the unwary. As early as 1960, the A.I.C.P.A. commissioned a University of Illinois professor to research merger accounting. The professor's stringent recommendations were ignored.

49/ "Accountants came to think legalistically rather than conscientiously and to do what they were told to do by corporate management.

"They began to think of themselves no longer as independent, critical examiners but as part of management, members of the “team.” " (p. 162)

50/ "Through the conglomerate era, British accountants seem to have preserved their traditional standing as the consciences of private business management.

"Seidler asked British stockbrokers, security analysts, and Stock Exchange officials,

51/ “Assume that, after an audit, there were disagreement between a large firm of accountants and the management of a large corporation over accounting principles… under what circumstances, other than by sheer logic, might the client influence the auditor to accept its view?”

52/ "The unanimous response was, “None.”

"A comparable group of Americans almost all replied that accountants would usually yield to the client’s wishes regardless of the accounting principles involved. “Accountants are unable to bite the hand that feeds them.” " (p. 162)

53/ "Ling's crucial discovery was that people like to buy stocks; their overpayments for stock can be capitalized by the issuer to his advantage. His basic tool was leverage—capitalizing with long-term debt to increase current earnings." (p. 165)

54/ "Nearly all of Gulf and Western’s acquisitions were made with debt/convertibles: this year’s net profit was inflated at the cost of next year’s. Until belatedly prodded by the S.E.C., it neglected to point out the potential dilution inherent in issuing that paper." (p. 169)

55/ "The best defense against a hostile takeover was to persuade investors to bid up the price of the target's stock, thus achieving the same sort of defensive effect that a blowfish achieves in the presence of a hungry striped bass.

56/ "The executives, particularly the top executives, of the captured companies were subjected, at worst, to summary dismissal and, at best, to reshuffling and serious loss of morale." (p. 174)

57/ "No expert on Litton, whether in Wall Street or in the company itself, dared dream that profits might not continue to rise in 1968. But that January, when Litton’s top officers met at the company’s headquarters, a totally unanticipated state of affairs was revealed.

58/ "Several divisions were discovered, apparently for the first time, to be in serious trouble; profits for Q1 would, it now became clear, were headed substantially down. Business was decidedly off, and top management—so vast and various was the empire—hadn’t seen it coming.

59/ "Management control had been lost. After the public earnings announcement was made—21¢ profit a share against 63¢ for the same quarter the previous year, Litton stock dropped 18 points in a week, and within a month or so it had lost almost half of its peak 1967 value.

60/ "Gulf and Western and Ling-Temco-Vought also slumped, and the first tremors of panic shook the conglomerate world.

"The root theory of conglomeration might simply be wrong, its temporary success founded on the gullibility of the public and its professional advisors." (p.180)

61/ "In 1968 was the great garbage market in which the leaders were neither old blue chips like GM and American Telephone nor newer solid stars like Polaroid and Xerox, but instead, Four Seasons Nursing Centers, Kentucky Fried Chicken, United Convalescent Homes, & Applied Logic.

62/ "The fad, as in 1961, was for short, profitable rides on hot new issues. The underwriter known as “Two-a-Week Charlie” Plohn for the number of new low-priced issues he brought out described his philosophy: “I give people what they want: risky deals most firms wouldn’t touch.”

63/ "New investors were coming in torrents. During the first five months of the year, Merrill Lynch opened over 200,000 new accounts: that winter and spring, one American in every thousand—counting men, women, and children—opened a new brokerage account with a single firm.

64/ "Brokers, of course, were reaping the harvest in commissions. Some of them had personal commission incomes for the year running to more than $1 million. One million dollars income in a year, with no capital at risk—merely for writing orders for stock!" (p. 183)

65/ "It was coming to be believed, in the absence of evidence to the contrary, that almost any man under forty could intuitively understand and foresee the growth of young, fast-moving, unconventional companies better than almost anyone over forty.

66/ "This was partially due to Wall Street’s missing generation (from the disinclination of young men of talent to work there from 1930-50). But something else was involved—the confluence of great worldwide trends during the late 1960s toward youth-fear and youth-worship...

67/ "...urging students to set attitudes for their elders; a belief that only the young were equipped to understand the new world that the old had created but could not control; rejection of irrelevant experience and uncritical acceptance of intuition unsullied by fact.

68/ "Wall Street, which lives on dreams and fashions, was, for all of its pretensions to rational practicality, precisely the milieu within which the new gospel of youth could proliferate.

69/ "The traditional levers of success, personal contacts and privileged information, now worked in favor of the young. Would the 30-year-old president of a fast-moving firm prefer to break bread with a Wall Streeter of 60 or with a self-anointed swinger very much like himself?

70/ "In 1970, most of those glamour stocks fell out of bed. Many of the gunslingers who had touted them would leave, or be fired from, the securities business. As John Kenneth Galbraith remarked in the spring of 1970, “Genius is a rising market.” " (p. 213)

71/ "The matter on which the Wall Street Ministry found the jumpiest conscience among brokers—and, concomitantly, struck the tenderest nerve among their employers—was that of the overtrading of customers’ portfolios by brokers to increase commissions.

72/ "Illegal though it was under S.E.C. rules, and unethical though it almost always was in terms of service to the customer, churning had become a brokerage way of life by the second half of the 1960s.

73/ "Brokers felt they were under pressure to disserve their customers in order to increase their and their firms’ profits. No amount of formal management caveats against investment without investigation could eliminate the conflict of interest; it was built into the business.

74/ "It was in the nature of stock brokerage as practiced in the 1960s that a man, without changing either his job or his way of doing it, might earn $25,000 one year, $80,000 or $100,000 the next, and then perhaps only $15,000 the third.

75/ "These fluctuations often left him confused and unhappy. In a bonanza year, he would feel grossly over-rewarded and consequently guilty. Schooled to believe in financial success as the direct reward of hard work, he would find the annual fluctuations profoundly unnerving.

76/ "The money and status rollercoaster was unsettling to the spiritual stomachs of many of the strongest; the ride often left the riders with shattered lives and marriages." (p. 221)

77/ "The ultraconservative policies of fire-and-casualty companies resulted in cash-heavy reserves far in excess of those required by law to cover policy risks.

"State regulations restricted the free use of such reserves so long as they belonged to a fire-and-casualty company...

78/ "...but the regulations could be circumvented, and the redundant capital freed for other uses, if the insurance company were to merge with an unregulated holding company.

"Many diversified companies were to acquire insurance companies over the following years." (p. 233)

79/ "The Cravath law firm, on retainer from Chemical, drafted laws specifically designed to prevent or make difficult the takeover of banks similar to Chemical by companies that resembled Leasco - and to introducing them as bills in the State Legislature and the U.S. Congress.

80/ "Is it odd that a proposed law, hand-tailored by a chief party at interest, should be accepted without question? Gov. Rockefeller urged the NY Legislature to enact a law to stop any takeover of a bank by a non-bank in any case that might impair the bank's safe/sound conduct.

81/ "It passed and became law in mid-May.

"Leasco also got a letter from the Dept. of Justice: “Although we do not suggest that such a transaction would violate the antitrust laws, questions under these laws are raised thereby, particularly under Section 7 of the Clayton Act.”

82/ "Section 7 prohibits combinations that may reduce competition; its applicability to a Leasco-Chemical merger, as generally interpreted at that time, was questionable. Just how the Justice Dept. came to send such a letter at that particular moment has never been explained.

83/ "Legislators were in an anticonglomerate, antitakeover mood.

"The knowledge that a lawyer on Chemical retainer was functioning as an unofficial legislative assistant to the chairman of the Senate Banking and Currency Committee deepened Steinberg’s gathering despair." (p.256)

84/ 1969: "The Dow, after peaking in May, went into a steep three-month decline. The Federal Reserve, worried about accelerating inflation, kept constricting the money supply, driving interest rates through the roof without apparently accomplishing its purpose.

85/ "There came to be the specter—confounding to classical economists—of a recession accompanied by runaway inflation. The advance guard of the former high flyers were already crashing, not 20% like the Dow, but 50%, 75%, or more." (p. 261)

86/ "Brokers learned how to bring together conglomerates and mutual funds in a way that was nearly a conspiracy to deceive the public.

"The deal-maker would propose and promote a merger, in the process salting away for himself large blocks of the stock of the merging companies.

87/ "Next, he would sell the companies’ stock to funds on the basis of the secret merger plans. When the merger was announced, accountants would work their bottom-line magic.

"The public would bid up the stock, insiders would unload, and the public would be left holding the bag.

88/ "The SEC's accounting department, which by statute enjoyed almost dictatorial powers over corporate accounting practices, nevertheless continued to trust the myopic vigilance and the checkered integrity of the accounting profession itself." (p. 263)

89/ "Jay Perry would shout into the phone a bid a little under the current market, but—and here was the nub of the matter—not nearly so far under it as would be the case if the shares were thrown directly onto the mercy of a capital-weak floor specialist.

90/ "Then, working at a telephone console connecting them to all the major funds (an amenity denied to the floor specialist, who was forbidden to deal directly with institutions), Salomon would begin trying to round up buyers for parts of the huge block available for sale.

91/ "Quite often the number of shares they could find bids for would fall short of the offered block. Salomon Brothers would obligingly buy those residual shares for its own account, completing the deal, and collecting commissions from both the seller and the various buyers.

92/ "Then would come the hairy part: unloading those shares over a period that might drag out to as much as a couple of months, with tens of millions of capital at stake. “We’ll bid for almost anything, and we take many baths.”

93/ "The risks Salomon took through seat-of-the-pants plunges in stocks of companies it knew little about was balanced, and more than balanced, by the enormous commissions it could count on from both sides of its executed deals." (p. 263)

94/ "Many mutual funds indulged a sleight-of-hand—legal at the time—that gave their asset value the same kind of instant boost as merger accounting could give to conglomerate earnings. Asset value was to a mutual fund what EPS were to a conglomerate: its bait for new capital.

95/ "A tiny conglomerate called Omega Equities privately sold the Mates Fund 300,000 shares of common stock at $3.25. Omega was then selling on the OTC market at around 24, so the price was apparently an almost unbelievable bargain. But only apparently.

96/ "The shares were not registered with the S.E.C. and therefore could not be resold; for practical purposes, they were unmarketable. They had been sold to Mates—legally—through an investment letter (“letter stock”) in which the buyer agreed not to resell pending registration.

97/ "Mates might have carried them at $24 a share, the price of registered shares. Or he might have valued them at his cost.

"He followed common practice for letter stock % marked the market price down by one-third to allow for the shares’ nonregistration, carrying them at $16.

98/ "On the books, it proudly displayed an investment yielding an instant profit of nearly 500%.

"This was done all the time by mutual funds and hedge funds. Not until late 1969 did the S.E.C. get around to a mild crackdown on the arbitrary up-valuations of letter stocks.

99/ "The S.E.C. suspended trading in Omega on grounds that it was being traded “on the basis of incomplete and inaccurate information.” Mates shareholders demanded redemption. This demand, because of the unmarketability of all Omega shares, was one that the fund could not meet.

100/ "The S.E.C. granted Mates permission to suspend redemptions for an indefinite period. The fund industry shuddered: the right of share redemption at any time was the cornerstone of the business, analogous to the right of a bank depositor to draw from his checking account.

101/ "Now the cornerstone was cracked, the letter-stock deception stood exposed, and dozens of other funds came under suspicion.

"Early in 1972, the Mates Fund still had the shares and was carrying them at a value of one nickel each." (p. 267)

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102/ 1968-9: "The hot new issues (“shooters”) shot up on their first day of trading from 5 to 14, then later to 75 or 100, oblivious of the fact that the companies were often neither sound nor profitable.

"The new-issues craze is always the last stage of a dangerous boom.

103/ "Investors repeat their mistakes; the lure of easy money blanks their memories.

"What a promoter needed to launch a new stock, apart from a resourceful accountant, was a “story,” an easily grasped concept related to a current fad that sounded as if it would lead to profits.

104/ "Wasn’t a universally shared illusion as good a money maker as a reality?

"Bankers Trust, Morgan Guaranty, Continental Illinois, and State Street bought N.S.M.C. stock; so did the Harvard and Cornell endowment funds, the G.E. pension fund, and the University of Chicago.

105/ "After predicting tripled earnings, Randell had to resort to creative accounting to make the prediction come true. Then he was compelled by to predict that those earnings would be tripled again the following year.

"The first serious test of his credibility came in 1969.

106/ "N.S.M.C. showed net profit of around $3.5 million. But to achieve the figure, its accountants had been obliged, among other strokes of creativity, to defer until a future year product development & start-up costs of $533,000, even though the money had already been spent...

107/ "...to include as income $2.8 million of “unbilled receivables” (money that had not been received because it had not even been asked for) and to include >$3 million from the profits of subsidiaries N.S.M.C. had not yet acquired at the close of the year being reported on.

108/ " With the elimination of that single item, which was explained to investors in a small, mumbled footnote, N.S.M.C.’s 1969 profit would have been all but wiped out. N.S.M.C. stock dropped briefly after the report appeared—only to rise again to the 100-times-earnings range.

109/ "In November 1969, he predicted that earnings for fiscal 1970 would be almost triple those for 1969. That he and his colleagues had different private notions is suggested by the fact that in December, the company and its principal officers had unloaded >325,000 shares.

110/ "In January 1970, Randell—over the frantic objections of his colleagues, some of whom would have liked nothing better than to silence their president with adhesive tape—made a nationwide speech tour during which he constantly reiterated his 1970 earnings projection.

111/ "In February, N.S.M.C.’s financial V.P. gave a dumbstruck group of company executives the news that the actual result for the recent quarter would be a loss. Randell’s ebullience was somewhat dampened; he said merely that N.S.M.C.’s first 1970 quarter would be “profitable.”

112/ "Amid panic in the councils of N.S.M.C, Randell resigned as president; a week later, a first-quarter loss of $1.2 million was announced, and two days after that, the company admitted that there had been an error and that the actual loss was more like $1.5 million.

113/ "By July, the stock was down >97% from its peak.

"How could he have fooled the Morgan Guaranty, Bankers Trust, Harvard and Cornell, the whole brains trust of institutional investing, for as long as he did—and, of course, taken the innocent investing public along with them?

114/ "The answer appears to be painfully simple: that he was plausible and they were gullible as well as greedy; that, in times of speculative madness, the wisdom and experience of the soundest and soberest may yield to a hysteria induced by the glimpse of fool’s gold." (p. 285)

115/ 1970: "Brokerage firms were now running such high expenses that some of them needed 12-million-share Stock Exchange days to break even on commissions. They were losing money so fast that the S.E.C. consented to the a $15 commission surcharge on small transactions." (p. 292)

116/ "Galbraith, one of whose books is a study of the 1929 crash, authored a newspaper article drawing parallels between 1970 and 1929: excessive speculation, overly leveraged holding companies, inflated investment funds, funds that invested solely in other funds." (p. 294)

117/ "Early in June, a fresh decline threatened to turn into a rout when the supposedly unshakable Penn Central Railroad Company, suffering from management that in retrospect would appear to have been inept beyond belief, suddenly collapsed into bankruptcy.

118/ "What was at stake was the survival of the “commercial paper market,” a revolving credit system among corporations in which they borrow money short-term and unsecured, usually from each other, and in which in June 1970 there was involved the vast sum of $40 billion.

119/ "The unfortunate companies that had lent tens of millions to the Penn Central might themselves be unable to meet their obligations, and other commercial-paper lenders might suddenly refuse to renew their loans, leading to a chain reaction ending in a classic money panic.

120/ "The Federal Reserve, warned in advance, applied the classic remedy, opening wide its usually restricted loan window and suspending the banks’ usual interest-rate ceilings, releasing a flood of money into the market and preventing the chain reaction from starting." (p. 302)

121/ "From the September 1929 peak to the nadir of the Great Depression in the summer of 1932, the Dow dropped just over 90%.

"From the December 1968 peak to the May 1970 bottom, it fell 36%.

122/ "But the Dow accurately reflected the 1929-1932 market when house painters and office girls were making plunges in Dow stocks like GM and Standard Oil. It failed to reflect 1969-1970, when similar plunges were far more likely to be made in Control Data or Ling-Temco-Vought.

123/ "The average 1969-1970 decline of the ten conglomerates had been 86%; of the computer stocks, 80%; of the technology stocks, 77%. The average decline of all thirty stocks in Max Shapiro's handmade neo-Dow had been 81%." (p. 304)

124/ "In spring 1969, when stock prices and volume sank in unison, the squeeze on brokerage profits left the firms’ rickety capital structures increasingly exposed. Partners and backers made things worse by availing themselves of the ninety-day rule to pull out their money.

125/ "For a firm operating on the borderline of capital compliance, every dollar thus withdrawn required a debt reduction of twenty dollars.

"It was not just marginal firms, but some of the conservative, well-established brokerage giants, that were in bad trouble." (p. 317)

126/ "Firms concealed the truth from the exchange.

"In April 1970, answering a query from Senator Muskie, Haack wired: THE EXCHANGE’S SPECIAL TRUST FUND IS NOT NEAR DEPLETION… SITUATION WITH RESPECT TO OPERATIONAL AND FINANCIAL PROBLEMS OF NYSE MEMBER FIRMS HAS VASTLY IMPROVED.

127/ "Five Stock Exchange firms were at that moment in liquidations that would cost the Special Trust Fund $17 million of its $25 million total; another member firm, Dempsey-Tegeler, was in its death throes: its liquidation would eventually cost the trust fund over $20 million.

128/ "Worst of all, Hayden, Stone & Company, an eighty-four-year-old giant with some 90,000 brokerage customers and a major share of the underwriting business, had lost nearly $11 million the previous year and was now losing money at a rate in excess of a million dollars a month.

129/ "Exchange staff men really knew remarkably little. Brokerage firms that the Exchange had supposed to be above reproach were revealed, under even superficial investigation, to be walking zombies, carrying assets on their books that did not exist and never had existed.

130/ "As early as spring 1969, investors in Hayden, Stone began withdrawing their capital.

"Its treasurer, Walter Isaacson began protesting that, with revenues going down, costs going up, and the capital base eroding, operations ought to be cut back drastically. He was fired.

131/ "It made extravagant claims to prospective investors as to its future.

"But the firm started 1970 in technical capital compliance only on the basis of such gossamer assets as a tax refund claim that, far from having been approved by the IRS, had not yet even been filed.

132/ "The Exchange’s governors, on recommendation of the Crisis Committee, now voted to lend $5 million of their constituents’ money, entrusted to them specifically to save the customers of failed firms, to Hayden, Stone to keep it in business." (p. 322)

133/ "In mid-August, the Exchange finally provided the names of ten brokerage firms in bankruptcy or liquidation and claimed that the augmented trust fund was adequate to make their customers whole. Nevertheless, by the last week of August, the fund was again depleted." (p. 324)

134/ "After the resolution of the Hayden, Stone crisis, the Exchange’s executive V.P. assured the board of governors that this was the end—no more problems with member firms’ finances could be expected.

"Only about a week later, the next problem burst into flame.

135/ "Goodbody had been in capital trouble for more than a year. The company had pledged $34 million of customers’ fully owned securities, which were legally required to be carefully segregated, as collateral for loans and had simply lost track of $18 million of other securities.

136/ "Merrill Lynch would supply $15 million to Goodbody in exchange for all Goodbody assets. It would be indemnified by the Exchange to the extent of $20 million on possible securities losses and another $10 million to cover possible litigation coming out of the arrangement.

137/ "The Exchange didn’t have $30 million. The board of governors voted an amendment to the constitution authorizing charges on membership, making Special Trust Fund open-ended.

"The money to save Goodbody would come from not just ML but the member firms as a group." (p. 332)

138/ "At the start of December, roughly one hundred Stock Exchange firms had vanished over the past two years through merger or liquidation. 40,000 customer accounts were involved in the 13 cases of liquidation, with most customers still unable to get their cash or securities.

139/ "Commitments to the Stock Exchange’s trust fund were approaching the $100-million mark.

“If du Pont and Goodbody had gone down, there would have been a run on brokerage firms' resources—partners wanting capital, customers wanting cash and securities—causing new failures.

140/ "There would have been no investor protection legislation. Mutual fund redemptions would have been suspended. The Stock Exchange would have been forced to close. Millions of investors would have been wiped out, and the government would have moved in and taken over.”

141/ "Far from putting up more capital, in the early months of 1971, the F.I. du Pont partners and investors took millions more of their previously committed capital *out.*

"Meanwhile, further errors in the du Pont books were found.

142/ "By Feb. 1971, it appeared that the amount needed from the Perot group was not $5 million but considerably more. By April, the rescue would require more than $50 million.

"The miscalculations in the account books of du Pont would eventually amount to $100 million." (p. 343)

143/ "The spirit abroad in the land at the time allowed conglomerates to buy profits with convenient mergers and mutual funds to write false assets with letter stock. It had spread to the core institutions of Wall Street, the huge old brokerage houses." (p. 345)

144/ "Even for hedge funds, genius turned out to have been a rising market. Their managers, carried away by the go-go spirit, had forgotten to hedge.

"One of the most heralded of them began large-scale short selling on May 27, 1970, the day the market turned around." (p. 348)

145/ "A 1970 study by the faculty of the Wharton School concluded that “equally-weighted NYSE stocks had a higher return than that achieved by mutual funds in 1960-68.”

"The pin-the-tail-on-the-donkey system would have worked better than trusting in expert portfolio management.

146/ "In 1970, Congress and President Nixon created the Securities Investor Protection Corporation—a federally chartered membership corporation, its funds provided by the securities business, which would henceforth protect customers against losses when their brokers went broke.

147/ "In midsummer, 1971, some eighteen thousand customers of liquidated firms were still waiting for their securities and money. By the end of 1972, virtually everyone had been made whole." (p. 350)

148/ Related reading:

Roger Lowenstein on the Go-Go era

https://twitter.com/ReformedTrader/status/1312453136368328704

and the subsequent Nifty Fifty aftermath

https://twitter.com/ReformedTrader/status/1312475214177955841

Bubble stock anecdotes

https://twitter.com/ReformedTrader/status/1312440353241264128

Questionable calls made by market experts

https://twitter.com/ReformedTrader/status/1316380442765914115

149/ Written on Jan. 18, 2000:

"Parallels between 1990s and 1960s: a tech-driven IPO boom, concentration on a narrow number of high-flying growth stocks, a surge in takeovers, & the unshakable feeling that good times would go on forever."

h/t @Glen_S_NY

wsj.com/articles/SB948…