by Vanda Krefft
“You feel that your position is sound?” Fox asked Rogers.
Yes, replied Rogers, except for that qualification about changed circumstances.
“I do not think there is going to be any change of situation,” Fox said.
Fox would always believe that Thompson had told him it was all right to buy the Loew’s shares. At the time, it was widely understood that if the Justice Department had any objections to a planned acquisition, it would explicitly warn the prospective buyer not to go ahead.
Now to get the $50 million—quickly. Schenck had nearly run out of patience. The Warners had raised their offer for Loew’s to $56 million, and because Schenck was obliged to pay the Loew family only $40 million whichever buyer he chose, there would be another $6 million for him in that direction. Fox asked for a few more days, and Schenck agreed to wait until Tuesday, February 26. Fox was good for his word, while nobody was ever really sure of anything with the Warners.
On Monday, February 25, Fox met with Western Electric president Edgar S. Bloom to ask for a loan to help him buy the Loew’s shares. Bloom was intrigued by the prospect of Fox in charge of another large studio and another large, prosperous theater chain, both of them needing sound equipment. It was certainly much more appealing than having the detested Warners, whom Western Electric was fighting in arbitration hearings, in charge of Loew’s. However, several issues had to be addressed first. Most pressingly, when Western Electric broke its promise in May 1928 to give Fox exclusive Movietone sound newsreel rights, Fox had threatened to sue. He hadn’t done so, but neither had he withdrawn the threat. Bloom told Fox that Western Electric’s parent company, AT&T, would not loan him a dollar unless he formally waived any and all claims against any and all promises made by AT&T since the beginning of their relationship. Fox agreed.
Not so easily resolved was Bloom’s next condition for a loan: that Fox sell to AT&T his North American rights to the Tri-Ergon patents, which purported to govern important parts of the sound-on-film process used in the Movietone equipment sold by Western Electric. If approved by the U.S. Patent Office—the Tri-Ergon application was still under review—the patent rights would entitle Fox to claim royalties from the Movietone equipment sales and, if he wished, to start a rival equipment manufacturing company. No, Fox told Bloom. The Tri-Ergon patent rights were his personal property, and he would not surrender them at any price. But neither side wanted to see Fox lose the Loew’s deal. So, both sides backtracked. Bloom brushed off the matter, saying that the Tri-Ergon patents were worthless anyway and Fox allowed that someday he might “entertain a proposition of sale.” That was good enough. AT&T drew up the release of all claims regarding the newsreel rights; Fox signed it on February 26, 1929, and on the same day got $15 million–$12 million from AT&T and $3 million from Western Electric.
One detail made Fox uneasy. The loan would come due on February 24, 1930. What if, during that year’s time, he could not arrange long-term financing to pay off the debt? He asked for a longer term. “I was told not to worry about that. They said they had faith in me, and if at the end of the year I had not refinanced and could not return the money, they would renew the loan.”
Fox asked for the pledge in writing. AT&T refused. “They didn’t want it in writing because they said if I couldn’t trust them, than the nature of their deal with me was all wrong, and of course, I trusted them.” That is, he wanted to trust them even though he knew, from the broken newsreel rights promise, that AT&T didn’t necessarily keep its word.
Simultaneously, Fox arranged for a $12 million loan from Halsey, Stuart & Co., the banking firm that had previously handled a number of financing deals for both Fox companies. Fox could use $10 million toward the Loew’s purchase, but the other $2 million would have to go toward retiring previous obligations to the firm. This, too, was a short-term loan, due April 1, 1930.
Fox now had half the purchase price. He obtained the rest of the money, plus a $7 million cushion, from two sources. First, Fox Film, which was having a record year, loaned Fox Theatres $16 million from cash on hand. Second, Fox got pledges for $16 million in bank loans. Although the AT&T and Halsey, Stuart loans were unsecured, banks weren’t so trusting. Therefore, on Tuesday, February 26, without a written contract for the sale, Fox took possession of the Loew family’s 400,000 shares and pledged all of them as collateral for three bank loans. All three lenders valued the Loew’s shares at $40 apiece, even though the market price that day was $81¼. Three million came from the Chatham & Phenix Bank, where Western Electric president Bloom was a director. Three million came from the Bank of America, where Schenck and the Loew family kept their money. Ten million came from Bankers Securities, a Philadelphia investment company that Fox had formed with his friend Albert M. Greenfield. These were all call loans, which could be terminated at any time at the lender’s discretion.
Despite the narrow window for repayment of this $43 million from outside sources, Fox wasn’t worried. The national economy was soaring. Just as soon as the Justice Department officially approved the acquisition, Halsey, Stuart would arrange (for a handsome commission) long-term financing of $50 million of the debt by selling securities of the combined Fox-Loew’s organization.
As of Tuesday, February 26, 1929, then, Fox’s purchase of Loew’s was almost irreversible. All that remained was to sign the sale contract.
And that was most unfortunate timing. On that very day, President-elect Hoover offered the job of U.S. attorney general to solicitor general William D. Mitchell, a Democrat from Minnesota. Although Mitchell would wait until February 27 to accept, Donovan was definitely out as a candidate—not only for that job, but also for any position in the new administration. He had rejected Hoover’s offers of posts as secretary of war and as governor general of the Philippines and announced plans to quit the Justice Department and return to practicing law. The common understanding was that Donovan had offended several powerful senators and that, as a Catholic, he was unacceptable to certain strident factions of voters, including Ku Klux Klan members in the South and West, who viewed Hoover’s election primarily as a Protestant victory over the Catholic Al Smith.
Fox was stupefied. Several years later, he would remember Hoover’s rejection of Donovan as having occurred in March, but it didn’t. It occurred at a point when Fox might have changed his mind and withdrawn from the Loew’s purchase.
He went ahead anyway. On Thursday, February 28, 1929, at the office of Dr. A. P. Giannini, founder of the Bank of America, Fox signed the contracts to buy the Loew family’s stock and handed over checks totaling $50 million.
It was a bigger gamble than he’d meant to take, but still not necessarily a foolish one. Hoover was an expansion-minded Republican who as Coolidge’s secretary of commerce had placed that office largely in service to American big business. In his 1922 book American Individualism, Hoover had defined one of America’s “great ideals” as “that we shall stimulate effort of each individual to achievement.” Surely, he would instruct Mitchell to continue the existing broad-minded antitrust policies.
After Fox handed over his $50 million, there was no keeping the deal quiet anymore. On Saturday, March 2, 1929, the news that Fox had bought Loew’s hit the financial tickers, and United Press quickly issued a story. The trade press, which had been chattering for months, now roared.
So, on March 3, 1929, Fox held that afternoon press conference in the fifth-floor projection room of the Roxy Theatre and handed out his one-page typed press release that said almost nothing, only that Fox Theatres had bought “a substantial block” of Loew’s common stock. During the ensuing question-and-answer period, as forty or fifty reporters pressed for clarification, Fox remained evasive. One peeved newshound commented, “By a process of meticulous hair-splitting, he managed to tell the reporters nothing, and in the end they got nothing. Which made a lot of them wonder why the statement wasn’t merely sent to the newspaper in the first place and let it go at that.”
Simultaneously, in Washington,
DC, a Fox Movietone News crew was interviewing newly installed attorney general William D. Mitchell, who said nothing of substance about his attitude toward big business.
Fox left the Roxy press conference tense and glum. The glowing praise that followed failed to lift his spirits. Yes, the summations were true—“The man with the Midas touch”; “a brilliant show of power”; “the biggest and most startling theatre deal on record of the show business anywhere”—but otherwise very little was as it outwardly seemed. As always, money was at the center of his worries.
CHAPTER 36
Big Money
[M]oney in New York . . . the sky is lined with greenbacks . . . winnings sing from every streetcorner.
—JOHN DOS PASSOS, THE BIG MONEY
Altogether, between 1927 and early 1929, including his purchase of the 400,000 shares of Loew’s, Inc., Fox committed Fox Film and Fox Theatres to spending about $370 million for film production and the acquisition of theaters. Publicly, Fox spoke as if money rained from the heavens to support his plans, and most observers readily accepted that picture. After all, it was the late 1920s, a time of unparalleled prosperity in American history.
But where did all the money really come from? That had always been a key question behind the growth of the Fox enterprises, and the answers along the way had illuminated the contradictory sides of Fox’s character. Vision, energy, leadership skill, a keen eye for talent—he had all those, but they hadn’t been enough to pull in all the working capital he needed. He’d had to get his hands dirty by taking money from Big Tim Sullivan and the underhand upper-class New Jersey investors and then, amid the hostile business conditions of the early 1920s, by exploiting the weaker negotiating position of exhibitors. Now, in the late 1920s, with competition more intense and the stakes higher, the question mattered more than ever. Where did the money come from?
Some of it, of course, came from the movies themselves. In 1927 and 1928, gross film rentals provided revenue of $21.8 million and $25.1 million respectively to Fox Film; sales of advertising materials to exhibitors added at least another $1 million each year. From that income had to be deducted film production costs, studio overhead, and other operating expenses. The resulting figures represented Fox Film’s net profits: $3.1 million for 1927 and $6 million for 1928. But the company did not get to keep all that money for itself. Shareholders expected their $4-per-share annual dividends, and it was simply not cost effective not to pay them because dividends were considered a crucial indicator of a company’s financial health. In 1927 the company doled out $2 million in dividends, and in 1928, $3.2 million. Thus, while Fox movies could comfortably pay for themselves at a rate that was on track with the planned $100 million production budget for 1928 through 1932, there would be nowhere near enough left over to make a significant dent in the other $270 million needed.
The lion’s share of that remaining $270 million commitment arose from the cost of buying and building theaters to increase access to the moviegoing public. Yet Fox Theatres had even less money than Fox Film to contribute to the cause. The company was not tremendously profitable and wasn’t intended to be. Fox had created Fox Theatres in 1925 as a “retail division,” essentially a chain of fancy stores to sell Fox Film’s products.
The money for expansion, then, could not come from the earnings of either Fox company; neither would it come from commercial loans. By the late 1920s, almost no major enterprise with even a pretense to prosperity went to the bank to borrow money. Amid the dynamic business conditions of the era, bank loans were disadvantageous not only because they had to be repaid in regular installments within a relatively short time frame, thus restricting flexibility, but also because they burdened a company with fixed charges that would sharpen the impact of an unexpected revenue decline and create a risk of bankruptcy.
Instead, any company that could do so turned to the stock market. The public obliged, generating a “white heat” of speculation. In 1925, 452 million shares of stock had been traded on the New York Stock Exchange; in 1928, that number soared to 920 million shares. Banks fueled the upsurge, lending to investors who couldn’t actually afford their purchases but who intended to sell out quickly at a higher price. By June 1929, reflecting a nationwide trend, New York and Chicago banks had more than 28 percent of their resources tied up in securities loans.
Swept along by those mighty economic currents, Fox set about financing his expansion plan by selling new stocks and bonds for his companies. It looked like easy money. Stock sale proceeds would never have to be repaid, except as one might voluntarily assume a moral obligation to generate profits for investors. Mortgage bond funds would have to be returned, but generally at the end of a considerably longer time period and at a lower interest rate compared to commercial loans.
Between 1927 and 1929, both Fox Film and Fox Theatres roughly doubled their number of outstanding Class A shares. Fox Film added 420,660 new shares to the 400,000 that had been distributed when the company went public in 1925, while Fox Theatres increased its outstanding Class A shares from 800,000 to 1,583,000. Each company kept its Class B voting shares at 100,000, because to issue more of those would have meant that Fox personally would have had to buy them in order to maintain absolute control. The two companies also sold $36.25 million in bonds to finance construction of the studios in Los Angeles and New York as well as the building and acquisition of various Fox theaters. To repay the $50 million he had borrowed to buy the Loew’s shares, Fox planned to merge Fox Film, Fox Theatres, and Loew’s and to issue stock for the huge combined organization.
Stock market money wasn’t entirely easy money. A major drawback of all the new capital flooding into the stock market was that it came largely from uneducated small investors who, responding to advertising and oral tips, tended to run in and out of investments on a whim. The resulting volatility in share prices was inimical to the interests of companies such as Fox Film and Fox Theatres, which needed to be able to demonstrate steady, dependable forward movement in order to sell new shares whenever they wanted. Sharp upswings in price were not desirable because astute professional investors knew they were likely to be balanced at some point by wide downswings.
Fox thus found himself in a peculiar position. His companies really did have, as he put it, “bedrock stability,” yet they were at risk of being kicked around all over the board because of broad market conditions. In order to compete, Fox realized he would have to actively manage his shares’ performance so that the Fox companies looked like the stable, profitable investments he believed them to be. As he later said, “Stocks don’t stay up without being kept up or put up.”
Everybody was doing it, and many tactics for rigging the market were neither illegal nor against New York Stock Exchange rules. Not to fall in line, Fox believed, would be to fall behind.
Beginning in July 1927, Fox conducted a secret market operation to boost the price of Fox Film stock, which was then selling at around $55 per share. Fox did not invent the scheme, and many others were using it to advance their own stocks. In his case, he had the Taylor, Thorne & Co. brokerage firm assemble a “syndicate,” a small group of professional traders and wealthy investors who put money into a pool specifically for trading in Fox Film shares. Using this money, a Taylor, Thorne syndicate manager went out into the open market and started buying Fox Film stock to make it look desirable. Then the Taylor, Thorne manager controlled the price’s upward movement at a gradual pace, allowing no more than a quarter of a point increase at a time. As one syndicate participant later explained, “[I]f the last sale was 57½ and a buyer comes into that stock, to see that it does not sell at 58, all you have to do on the floor of the New York Stock Exchange is to offer 100 shares at 57¾.” A slow stride forward conveyed the impression of wise investors backing the stock, people who didn’t need to get rich quick because they already were rich. Every week, to make sure that Taylor, Thorne stayed ahead of the general public, Fox fed the syndicate inside information about Fox Film’s performance—a not-ye
t-illegal practice.
Fox always insisted that he conducted the trading syndicate only to maintain an orderly market for Fox Film stock. In fact, the operation also yielded rich profits to the participants. When the syndicate closed in early April 1928 after eight months of operation, it showed a 71 percent return. As the syndicate’s largest participant, having invested $120,000, Fox got the most—a profit of $84,723. He knew there was something underhanded about it. To hide his involvement, he carried his Taylor, Thorne account not in his own name, but in that of his New Jersey bankers, Eisele & King.
He also used the Taylor, Thorne market operation to manipulate public perception of value so he could get the prices he wanted for new Fox Film stock offerings. In January 1928, while the syndicate was still going, and at a point when it had raised Fox Film’s share price to the $80–$90 range, Fox released two new blocks of the company’s stock, totaling 267,216 shares. The purpose was to finance the $16 million purchase of the Wesco shares, which conferred full control of the prized West Coast Theaters chain. That arrangement was questionable. Properly, Fox Theatres, and not Fox Film, should have bought the Wesco stock because theater management was its business. However, with its longer history and greater profitability, Fox Film could raise the money by selling new stock more easily than Fox Theatres could.
At first, everything went smoothly. The first of the two January 1928 stock offerings, for 125,000 shares of Fox Film stock, sold out quickly. That was because the shares were offered at $75 while the market price fluctuated from $7 to $13 higher. According to Fox Film bylaws, new shares had to be offered first to existing shareholders. Recognizing a bargain, they bought all 125,000 shares. After broker’s fees and commissions, Fox Film netted $9 million within forty-five days.