Bull and Bear

Anybody who ever entrusts his or her money to Wall Street should remember Daniel Drew’s handkerchief. Drew, an illiterate cattle driver turned short seller, became the treasurer of the Erie Railroad in 1857. In the cattle business, Drew’s specialty had been to nearly starve the beasts in his charge and then give them lots of water just before delivering them so that they appeared to have the fullness and sheen of health. With Erie, a company whose balance sheet was just as watery as his cows, he tried a new trick.

Drew paid a visit to a New York club where the brokers congregated. It was a hot day, and Drew took out a handkerchief to mop his brow. A piece of paper popped out of his pocket that he pretended not to see. After Drew left, the traders seized the scrap; it contained plenty of bullish information about Erie. The stock soared, and Drew began to sell the shares. As the news about Drew’s scheme emerged, the price dropped precipitously, allowing him to buy the shares back for a pittance and lock in a tidy profit.

Other doyens of the Erie Railroad included Jay “Mephistopheles” Gould, who defrauded so many investors that he had to walk home with a bodyguard, and James “Jubilee Jim” Fisk, who was eventually shot by his mistress’ lover (to the relief of many). Indeed, a quick glance at Wall Street’s ancestry makes Woody Allen’s definition of the modern stockbroker as “somebody who takes your money and invests it until it has all gone” seem like a sign of progress.

Wall Street’s villains may be of some concern to investors. But they also provide the makings of a wonderful book. There have been plenty of colorful histories about Hollywood and a few about Silicon Valley--though neither of those centers has occupied such central roles in American history as the southern tip of Manhattan. Surely Wall Street, the heart of the most impressive economy on the globe, deserves its own chronicler too?

Charles Geisst’s “Wall Street,” the first history of this piece of real estate, answers the call. But his book is a frustrating affair because it is duller than it need have been. Geisst’s decision to make Wall Street’s relationship with government the central theme of his book is a little like deciding to examine Hollywood through the prism of the Los Angeles City Council. Intriguing rascals such as Drew force their way into the story, but Geisst gives the impression that he would much rather deal with something more serious, like the Glass-Steagall Act.

A professor at Manhattan’s College of Business, Geisst divides Wall Street’s history into four parts: the chaotic early years from 1790, when the new American government issued its first bonds, to the Civil War; the era of robber barons that lasted until the crash of 1929; the subsequent bout of depression and regulation that did not really end until 1954; and then the long recovery sparked by the Eisenhower boom. Inevitably the first two parts, which are the most lawless, are also the most interesting.

Wall Street was so named because it ran alongside a barricade erected by Peter Stuyvesant to protect the early settlers from the wilds of Manhattan. In the 18th century, the street and the coffeehouses around it became a trading place for investors. At that time, most American private sector wealth was tied up in land. The biggest borrower in the New World was the young (and distrusted) American government, and its chief source of investment was Britain.

This emerging market’s first big crash involved an old Etonian named William Duer, who was a friend of both Alexander Hamilton and George Washington. In 1792, Duer, who had amassed enormous wealth through exploiting his political contacts and engaging in curbside speculation, over-borrowed, and the market turned against him. Panic set in as traders struggled to collect their debts. Much was made of Duer’s iniquitous British nationality and of the extravagance of his wife, Lady Kitty (the Duers famously served 15 types of wine at dinner). He died in a debtors prison in 1799.

The Duer case set the tone for the next century: shady dealings, amazing booms and busts, political noises just off stage, ostentatious (though not entirely respectable) wealth and, above all, the importance of foreigners. British and Dutch investors held about half the Treasury’s securities in 1803. The British tactfully sold up just before they burned down the White House in 1814, but soon, despite recurrent protests about America being a “nation of Swindlers,” they were back again. It was fairly normal for British investors to own more than half the debt of a state government or most of the stock in a new railroad. Many of America’s investment banks, including the house of Morgan and what became Kidder Peabody, were started in London.

The most successful people on Wall Street were businessmen who had already made a great deal of money elsewhere, such as John Jacob Astor, whose first fortune came from the fur business. But by the mid-19th century, Wall Street had become more central to the nation’s financial life. To men such as J.P. Morgan and Cornelius Vanderbilt, Wall Street, bear raids and money trusts were essential parts of business life; indeed it was largely thanks to their mastery of Wall Street’s methods that they were able to corner such large areas of the American economy.

Yet even as the robber barons grew rich, public resentment mounted against a system that left 5% of the population controlling more than 90% of the wealth. Spurred on by Populists such as Louis Brandeis, one congressional committee condemned Morgan and his fellow bankers for controlling 341 directorships in 112 companies with total assets of $22 billion. After the crash in 1929, anger against Wall Street boiled over, particularly once it became known that stockbrokers had earned $2.4 billion in commissions and interest income from 1928 to 1933.

Geisst does a good job of describing how the regulatory noose gradually tightened around Wall Street’s plump neck. But with each new law, his story lags. The final part of his book, which deals with the 1980s and 1990s, is especially flat. He says nothing new about a period with which most of his readers will be very familiar, and the characters fade away. Michael Milken appears almost as if he were a statistic: Surely the bewigged creator and dictator of the junk bond market who as a young man went to work early in the morning with a miner’s lamp strapped to his head so that he could read brokers’ reports is worth some description? Traders and corporate raiders like Ivan Boesky and Henry Kravis could also have been brought to life.

Above all, it is strange to treat the decadent, internationally minded Wall Street of the 1980s and 1990s as part of the same era that began with the rather staid Eisenhower boom. The forces of globalization, technology and popular capitalism (particularly the mutual fund industry) have changed the financial services industry forever. Brokers must now make their livings in an age of cheap Internet trading, indexed funds and harsh quarterly reviews of their performance, all of which make their business harder to perform. Geisst’s regulators look even more out of the picture, unable to control markets where money whizzes around the world in a matter of seconds. Indeed, in many ways, Wall Street is entering uncharted waters where its history is only a partial guide to its future.

From this point of view, there is an argument for reading no more than the first two-thirds of “Wall Street” and then turning to Doug Henwood’s book, which has the same title but is a theoretical broadside, not a history. Henwood, the editor of Left Business Observer, would seem to be a living oxymoron: a socialist who is fascinated by finance. In fact, the same could be said of Karl Marx. The main difference is that Henwood has a sense of humor (one has to admire anybody who includes, among the various blurbs on the back of his book, the following comment from Norman Pearlstine, the former executive editor of the Wall Street Journal: “You are scum. . . . [I]t’s tragic that you exist.”)

At its best, Henwood’s book fits into the category of scholarly contrarianism. American firms, he points out, actually retired $700 billion more in stock than they issued in 1981-96, and most corporate investment comes from internal funds. So how can Wall Street claim its raison d’e^tre is to raise money for new firms? He correctly criticizes the slavish financial press and takes some potshots at right-wing economists like Michael Jensen while trying to argue that John Maynard Keynes deserves a second look. In fact, his book only has one real fault: He is just, well, wrong. All the evidence seems to point to the fact that good old red-blooded Anglo-Saxon capitalism, for all its excesses and inefficiencies, actually seems to work much better than any of the alternatives.

Dismissing Henwood as an amusing irritant will doubtless comfort the partners at Goldman, Sachs. Yet they would do well to consider one recurring theme of his book and Geisst’s: Wall Street tends to go too far. Inequality in America is on the increase. The downsizing that Wall Street has so applauded over the last decade has created a much wider class of malcontents than did previous waves of restructuring. The middle managers who lost their jobs bitterly resent the huge pay packets being given out to those who orchestrated their downfall. As this generation of Daniel Drews is “limoed” back home to their penthouses on Fifth Avenue, they should wonder how the next generation will cope with the bitter harvest that they have sown.