In the days since the Great Crunch, there have been other threats to peace, serenity, and the stock market, notably in the balance-of-payments crisis and the devaluation of the dollar. Government intervention in the economy increased in the forms of various controls and Phases. While it would be possible to tell some near-miss stories of these events, they occurred after the market had passed its points of greatest vulnerability, both in terms of prices and of structure.

  All the banks have been reminded of the name, address and telephone number of the lender of last resort, and all the bankers’ children know that if the phone rings on Sunday and it is a man from the Fed sounding breathless, it is perfectly okay to go outside and get Daddy without finishing your lunch.

  2:

  THE DAY THE MUSIC ALMOST DIED THE BROKERS SEPTEMBER 1970

  IF there was a lesson learned from the Crunch, it was that illiquidity snuffs out a stock market. People who need money bid the price up, and then bond yields go up, and then other people take their money out of the market and buy bonds, and the market goes down. Nice and simple. So you have to look one page past where your stocks are listed, to the bond page. If well-rated bonds are yielding 7½ percent, that is an amber light. If they are at 8 or 8½ percent, you can start to get nervous. By the time they get to 9 percent, it is probably too late.

  There were people, respectable people, who thought the bear market was going to last for five years or ten years or maybe forever. That was how long it was going to take to get liquidity restored. Corporations needed $50 billion, and states and cities and the Federal Government—well, they would never be through with the money demands at all. But once the cycle was cracked, the treasurers—both public and corporate—who once had hurried to market because next week the rate would be higher, held off. Now if they simply waited a month or two, they were rewarded with lower rates, and that brought back the more normal supply-and-demand flow.

  But the liquidity crunch was not the only near miss in the Big Bear. Wall Street itself almost collapsed from its own mismanagement. We need not go into too much detail, because this story has been told elsewhere, and there are few lessons to be learned by individuals not involved in the business. But it is possible to write a near-miss, equally hair-raising script about the last day of American capitalism, and focus it on good old Wall Street, which itself had been so used to judging the rest of corporate life.

  The middle sixties were a euphoric period for the broker types. It should be said right away that some people kept their houses in order and did not get their names into the paper, and both of them are still happy. One hundred and twenty firms went out of business.

  The center of this drama is a piece of paper, the stock certificate. In the old days, under the buttonwood tree, one Knickerbocker would hand over the coins and the other would hold forth the piece of paper. That was in a time when all the trading was over by morning-coffee time. A century and a half later, the mechanism was still the same.

  The people who got into trouble were the so-called retail brokerage houses. They dealt with the public, and the public was in the market. The name of the game was “production,” which meant “writing tickets.” To do that you opened a new branch office, hired some new salesmen—bored housewives, failed accountants, dropout aluminum-pan salesmen—and told them to call everybody they knew with the hot new stock ideas. The ex-aluminum-pan-salesman’s Aunt Mary and his lodge brothers opened accounts, the production went up, and the tickets went up. That was where the trouble started. For Wall Street, by and large, was like a beautiful, fan-tailed, Detroit Belchfire Eight with leather seats, remote-control windows, color TV in the back seat, and under the hood—six perspiring squirrels running on a treadmill. The branch offices were equipped with beautiful quote machines, that great promotional device, the “tape”—now probably in orange symbols electronically flashing on a black background—and a Dow Jones ticker so demure it went clack muffle muffle clack instead of tocketa tocketa.

  When the lodge brother bought a stock, the transaction would be recorded in the back room by a gentleman wearing gym shoes and a jacket indicating the freshman basketball team of Cardinal Hayes High School, who would lick his pencil as he recorded the trade. With such personnel it was not uncommon to have mistakes. The securities, if they could be found, would be delivered to the brokerage firm by another gentleman in a Salvation Army overcoat, a nine-day growth of beard, and a certain air of muscatel, California 1973. Sometimes he would get where he was going, and sometimes he would not. Sometimes his parcel would get there with him, and sometimes it would not.

  Business was very good. You could walk into a teller’s cage and walk out with securities. They were lying on the floor, on the tables, all over the place. Did not bad people then take the securities away, and never bring them back? Yes, they did. In 1971 they took $500 million worth. Sometimes good people did too. It was commonly assumed that The Mob was responsible for all the missing securities. It was very easy to put in your very own man. You could dress him in a Salvation Army overcoat if you wanted to get the securities that way, and you could dress him in acne and a Cardinal Hayes letter sweater if you wanted them that way. If you wanted to move him up one step in sophistication, you put a man in the clerical department as the bank transfer agent, or in some other record-keeping capacity, and then nobody could figure out the records. One step up from that, you took the securities to a country bank in Limburger, Ohio, put them up as collateral, took out a loan, and then simply left them there forever—why not? Not your stocks. One operator, known as The Paper Hanger, told Congress just how to do it.

  I was having a drink one evening with a governor of the stock exchange who had worked very long and hard hours on the problems.

  “The Mafia couldn’t possibly have stolen that much money,” he said. “Good people had to steal too. The temptation was too great.”

  The FBI—the other Fed—apprehended some bad people and located some missing securities, to wit, some 3,400 shares of IBM belonging to a well-known brokerage firm. Plucky public servants that they are, they called up the firm and told them to be happy, their IBM was found.

  “We’re not missing any IBM,” they were told. (Months later, when the records were a bit more straight, the firm sheepishly asked the FBI if it could have the IBM back. The FBI said yes. It is not recorded what else they said.)

  Not all the securities, of course, were stolen. Many were not there in the first place; they were clerical errors. In fact, most of the discrepancies probably belong in the bookkeeping category. Firms lost physical control of the pieces of paper. But if you think I am kidding, I recommend to you two splendid documents. One is the Review of SEC Records of the Demise of Selected Broker-Dealers, the report of the Securities Subcommittee of the House Committee on Interstate and Foreign Commerce. The other is The Study of Unsafe and Unsound Practices, done by the Securities and Exchange Commission in conjunction with Section 11(h) of the Securities Investor Protection Act of 1970. I particularly recommend the transmittal letter of the chairman of the Securities and Exchange Commission to the President of the Senate and the Speaker of the House, dated December 28, 1971. Here is one pithy summary:This statute was enacted against a backdrop of the most prolonged and severe crisis in the securities industry in forty years. Widespread failures of broker-dealer firms and concern for the funds of their customers had followed a prolonged period of easy business. Rising brokerage income and rising security prices had produced a general euphoria. In this mood, expansion of sales effort and overhead had not been properly supported by more capital and stronger back-office effort. A veritable explosion in trading volume clogged an inadequate machinery for the control and delivery of securities. Failures to deliver securities and to make payment ricocheted through the industry and firms lost control of their records and of the securities in their possession or charged to them. Operation conditions deteriorated so severely that securities markets were required to cease trading one day each week at one point, and later to limit daily trading hours.

  The chairman of the SEC had a very strong sentence to conclude that paragraph. “Those conditions,” he wrote, “should not be allowed to recur.”

  Why was the record-keeping so fouled up? Among other reasons, there is a simple sociological one. In times of prosperity, stockbroking is a prestige profession. You get to talk on the phone, sound important, know what’s going on, and play with expensive electronic gadgets. Underwriting companies is even more prestigious. Being a partner of a firm is best of all. You get to order a splendid new office with books by the yard and a special shower off the men’s room, or, if it is an older firm, an appropriate antique roll-top desk. From there you talk to the giants of capitalism.

  It is not very prestigious to keep records, match up certificates, or in general do the dreary housekeeping known as “back office.” So nobody wanted to be the partner in charge of dishwashing. And in many cases, nobody was.

  Once the troubles started, all the business-school-type partners knew exactly what to do. They tell you that at business school. If you have a problem, you call in an outside consultant—Arthur D. Little or McKinsey or Booz, Allen, Hamilton, or one of the computer software people. The consultant says it is lucky you called. Your communication techniques are obsolete, your record-keeping is archaic. How can you expect to conduct a twentieth-century business with eighteenth-century record-keeping? What you need is an IBM 360-20 computer system—at $5,000 a month—and some staff to go with it.

  You are relieved. You have made the right executive decision. At business school they told you you would have to use a computer.

  That is when your firm goes busted. The computer fouls up.

  I refer you to SEC Chairman Casey’s points eight and nine in the transmittal letter referred to above:8. New and expensive technologies were hastily brought to bear on the paperwork problem without adequate preparation, analysis of cost or mastery of technical requirements;

  9. Records were put on computers without maintaining the old records for safety until the computer operation proved itself.

  Of course you threw the old records away! The computer people told you everything was fine now, didn’t they?

  A sociologist came downtown and found that the computer people wouldn’t talk to the securities people. The securities people wore wide ties and the computer people wore narrow ties. The securities people lived in Manhattan or commuted from the suburbs, and the computer people lived in Brooklyn and took the subway. If Jonathan Swift had written a story about a war between the people who thought you should tap the little end of the egg first and those who thought the big end should be first, everybody would think it was a fable by some crackpot who had a strange attitude toward Irish children anyway.

  At the peak of the troubles, “fails to deliver” totaled $4 billion. Nobody could find four billion dollars’ worth of stocks.

  The New York Stock Exchange has certain requirements. A firm is supposed to have a certain amount of capital in relation to its obligations. Never mind that the obligations were getting out of hand. There was trouble on the capital end, too. If you had put capital into a Wall Street firm, you could take it out—sometimes in ninety days, sometimes in a year. Few other businesses have such an ease of exit. Some of the capitalists took their capital out. And the remaining capital—well, that was frequently in the stock market, and many of those stocks were melting away in market value.

  Back to the near miss.

  As firms began to fall grossly behind in their capital requirements, they would be suspended from dealings by the New York Stock Exchange. Except for very big firms. There was indeed a prejudice in favor of size. Said Robert Haack, president of the exchange, “We simply can’t afford to have a major firm fail.” Much later, the stock exchange gave three justifications for its prejudice in choosing to try to save the major firms, while letting lesser firms fail. The great number of customer accounts, they said, would not have allowed an orderly liquidation. Suspension of the firms would have lost them their technical clerical staffs at a time of intense competition for such people. And the announcement of a suspension of a major firm might cause a run on all brokers, even ones in good shape, by worried customers.

  The stock exchange had established a trust fund early in the sixties, at the time of the salad-oil scandal which put Ira Haupt & Company out of business. Those funds were to provide an orderly liquidation for a failed firm so that the customers would not lose their money and maybe spread the word that you could lose all your money without even making a mistake in the market. That leads to the calling up of congressmen. As the major firms began to teeter, the exchange would authorize its members to increase the trust fund: the amounts increased from $10 million in 1965 (with an additional $15 million in stand-by credit), to a maximum of $55 million in 1970, to $75 million in January 1971, and finally to $110 million, with $30 million set aside in a customer-assistance program for Merrill Lynch’s obligations in its Goodbody rescue. At each increase, some of the surviving members would ask, “Why don’t we just let the bastards go down the tube?” And Felix Rohaytn, a soft-spoken governor of the exchange, a merger specialist from Lazard Freres (who had bought a number of companies for ITT), would say, “That is not an acceptable risk.”

  At 8:30 A.M. on September 11, 1970, Hayden, Stone was out of business. It had followed the classic pattern: increased production, disorganized record-keeping facilities, its capital impaired by being invested in falling securities, and a large number of fails. (At one time, it had been said that Hayden, Stone was so disorganized that “you could peel the wallpaper off the wall, deliver it to Hayden, and get paid.”) Rohaytn and Bernard Lasker, chairman of the governors of the stock exchange, had applied all their merger-making talents to finding a firm that would take over the lagging giant. The problem was a group of Hayden, Stone’s noteholders, who were reluctant to go along with the marriage arranged, by shotgun and persuasion, with Cogan, Berlind, Weill & Levitt.

  “If the Hayden merger didn’t go through,” said an exchange governor, “that could have been the ball game.”

  The end of the ball game might have had the following script:

  The opening bell rings. Hayden, Stone is declared in liquidation. A minimum of $25 million from the trust fund would have been needed to pay the overhead and clear up the records while the firm’s affairs were straightened out. The firm’s overhead had been running at $5 million a month; even reduced to $2.5 million, the costs of liquidating it would more likely have been $40 million to $70 million over eighteen months, perhaps as high as $100 million. Hayden, Stone’s 90,000 customers would have been frozen in place, unable to buy or sell for many months. The cash and securities owed by Hayden, Stone to other firms would have forced those firms under; perhaps another fifty firms could have gone out of business. As those firms sold securities to raise cash, the Dow Jones average need not have stopped at 630, or indeed anywhere short of 400 or so, and broader market averages would have suffered equally.

  But worse: the confidence of millions of investors, already impaired by the bear market, would be dealt a final blow by the sight of Hayden’s immobilized and screaming customers. They would all race to their brokers and demand their cash and their securities. Wall Street had for years used its customers’ cash, and many of the securities were very likely nowhere to be found. There would be a classic run—not on the bank, but on the brokers.

  And beyond that loomed a specter so frightening nobody wanted to think about it. There was $50 billion out there in mutual funds. A mutual fund can be redeemed in one day; you simply bring the papers in and say, Sidney, I want the money. The mutual funds had had a cushion: every year their salesmen sold more fund shares than fundholders redeemed. So they had to sell stocks only as a market strategy: if they thought the market was going down, they might want 10 percent in cash; if they thought it was going up, they might want to be fully invested. (Statistics show, parenthetically, that that is what they did when they thought those thoughts, but the market generally went the other way, rather perversely.) They did not sell stocks to give cash back to worried redeemers.

  What if the holders of mutual funds got scared and started to cash in? Already fifty brokers were going out of business, hundreds of thousands of accounts were tied up, a run on the brokers was going on, brokers were selling stocks to beef up their capital accounts—and now, what if the mutual funds were forced into sales to raise cash to pay off nervous redeemers of their shares? To whom would they sell their stocks?

  “I thought about that a lot,” said my friend who was the exchange governor. “We would have had to close the exchange.”

  “Close the New York Stock Exchange?” I said. “What happens then?”

  “I don’t know, because it’s never happened like that,” he said. “But certainly you would have the government step in, and when the exchange finally reopened, things would be very, very different.”

  “Maybe like the Yugoslavia Stock Exchange,” I suggested.

  “Maybe,” he said.

  At 8:30 A.M. on September 11, 1970, the script was ninety minutes away from the bomb in the suitcase. To get Hayden, Stone merged safely away took the approval of 108 noteholders of the company. Not only did the Hayden, Stone officials scramble to get the signatures; so did Robert Haack, the president of the New York Stock Exchange, and the ubiquitous and worrying governors, Messrs. Rohaytn and Lasker. By Friday, September 4, when the deal was supposed to have been set, all but a few of the noteholders had said they would go along. The merger was supposed to be delivered to the exchange’s board of governors on Thursday, September 10, but one of the noteholders still had not signed. By the exchange’s own rules, Hayden, Stone should have been suspended some time before; now the board of governors voted a reprieve of a few hours. The holdout was an Oklahoma City businessman named Jack Golsen, who had put $1.5 million into the firm only the previous March, believing, he said, that the firm’s statements were up-to-date and that the New York Stock Exchange would not have allowed him to invest in a firm that was about to go busted. Golsen said he’d rather go into liquidation; maybe the tax consequences were better, and anyway, he was tired of being pushed around.