Outrageous frauds, obscene personal fortunes, financiers looking after each other... so what's new?
Richard Lambert Guardian
Wednesday July 10, 2002
Golconda, now a ruin, was a city in India where, according to legend, everyone became rich. The city crumbled, but every generation or two a new version emerged. It is to be found in a narrow gully at the southern tip of Manhattan, and its influence spreads around the world. For a period in the late 90s, it flourished as never before. The names of its citizens change, but their ideas and motives are consistent over the decades.
Part of the legend is about wealth. About unimaginable sums of money that seem to come from nowhere to enrich the favoured few - the likes of Gary Winnick who during the late 90s personally cashed in over $700m of stock in his company Global Crossing before it went bankrupt.
The thing to remember, though, is that in Golconda, wealth is relative. As Andrew Carnegie, the steel magnate, said in 1913 on learning that the late JP Morgan's estate, excluding his artworks, had been valued at $68.3m: "And to think he was not a rich man."
Then there is the presumption by people within this fabulous city that if you are sufficiently successful and well known, you are also likely to be honest. As Jack Morgan, of the Morgan bank, explained to a congressional inquiry in 1933: "We do make... loans, and we make them because we believe the people should have the money; that we should loan money if these gentlemen [the firm's clients] want it. They are friends of ours, and we know that they are good straight fellows."
So it's really dreadful when you are let down.
Richard H Whitney, was the youngest ever president of the New York stock exchange, the man who halted the panic in 1929. He was also a crook, eventually sentenced to a term of five to 10 years in Sing Sing. This was something his associates found very difficult to cope with.
As Thomas Lamont, top partner in JP Morgan, testified to a securities and exchange commission investigation in 1938:
Lamont: The news of what happened in early March came to me when I was abroad as the greatest shock in the world.
Question: Even though you had known on the 23rd November 1937 that Richard Whitney had stolen approximately $1m worth of securities?
Lamont: I don't think I ever put it in... the term which you put it now. Do you see what I mean? I did not use..."
Question: You thought it was something unwise or improper?
Lamont: No, sir.
Question: You know it was illegal and unlawful?
Lamont: Sure, but you used the word stealing. It never occurred to me that Richard Whitney was a thief. What occurred to me was that he had gotten into a terrible jam...
Another consistent feature of the story is the way that people look after their friends, at least in the good times. Several Wall Street banks are in trouble today for the way they let the favoured few get their hands on shares far below the market price during the stock market boom. But they were only following a well-established tradition.
In a 1929 letter to a client, a Mr Woodin, William Ewing, a partner in JP Morgan, wrote: "Although we are making no offering of [Alleghany] stock, as it is not the class of security we wish to offer publicly, we are asking some of our close friends if they would like some of this stock at the same price it is costing us, namely, $20 a share. I believe the stock is selling in the market around $35 to $37, which means very little, except people wish to speculate. We are reserving for you 1,000 shares at $20, if you would like to have it. There are no strings tied to this stock, so you can sell it whenever you wish... We just want you to know that we were thinking of you in this connection."
But things don't always work out for the best. Goldman Sachs made a king's ransom in 1929 by selling stock in highly indebted investment trusts. Then came the crash, and the subsequent inquiries.
Here is an extract from the record of one congressional hearing:
Senator Couzens: Did Goldman, Sachs and Company organise the Goldman Sachs Trading Corporation?
Mr Sachs: Yes.
Couzens: And it sold its stock to the public?
Sachs: A portion of it. The firm invested originally in 10% of the entire issue for the sum of $10m.
Couzens: And the other 90% was sold to the public?
Sachs: Yes, sir.
Couzens: At what price?
Sachs: At 104. That is the old stock. The stock was split two for one.
Couzens: And what is the price of the stock now?
Sachs: Approximately one.
The hope in these circumstances is that investors will be protected by non-executive directors. Enron, the Houston energy company which was the first giant company to explode this time round, had a glittering collection of them on its board.
They turned out to be as much use as Lieutenant General the Hon SJ Gough-Calthorpe who was a non-executive director of the board of companies run by Whitaker Wright, a City fraudster who committed suicide in 1901.
Here's how Gough-Calthorpe explained his role:
GC: I don't suppose I would have understood what was happening if it had been explained to me. It was a matter of city finance.
Official receiver: But you were a director of a company engaged in city finance. Had you any idea of your duty?
GC: As far as I could ascertain, it was to sign my name many thousands of times on share certificates.
The next line of the defence is the auditors, firms like Arthur Andersen with a long record of business integrity. But the question is: if accountants are auditing the companies, who should be auditing the accountants?
Colonel AH Carter, senior partner of Deloitte Haskins & Sells, was asked exactly this in a congressional inquiry in 1933. His reply was simple, and impressive: "Our conscience."
One thing that the citizens of Golconda really hate is the idea that governments should intervene in their affairs. Opposing the creation of the securities and exchange commission in 1933, Richard Whitney declared: "You gentlemen are making a great mistake. The exchange is a perfect institution."
Eventually the mood changes, the street lights dim, and Golconda seems like a fantasy once more. "We'll never get taken in like that again," people say. But sooner or later, they always are.
· Richard Lambert was editor of the Financial Times from 1991 to 2001. Once in Golconda, a Wall Street drama by John Brooks, was published in 1969. -------------- next part -------------- An HTML attachment was scrubbed... URL: <../attachments/20020710/d7b718ad/attachment.htm>