by James Grant
Baruch passed Monday in South Elberon, New Jersey, with Annie, the baby, and his mother. Although he had left word that nobody was to call on business, he spent the day distractedly listening to the ringing of the telephone. Baruch is his own witness to the fact that not once did he yield to temptation and answer. Only after sundown, when the secular world was again permitted to intrude, did he learn that Amalgamated had crumpled. It had opened at 100 and dropped to 97⅞ before coming back to 98½ just after 11 a.m. Then it fell more or less steadily to 93¾ by the 3 p.m. bell. It continued in that direction for the rest of the year, closing on New Year’s Eve 1901 at 69½. By the time Baruch got around to taking his profits, they amounted to some $700,000.(He was quick to put down his triumph to his reluctant observance of Yom Kippur. Had he been on the floor, he said, he would probably have taken his profits when the price of the stock ticketed up to 98½. Perhaps, but he might plausibly have sold more stock on the resumption of the decline that day.)
Baruch’s prowess on the short side won him some commission business from sellers who wanted to leave the impression that the character of their selling was speculative, not the respectable investment kind. So large had his personal operations become that anything he did on behalf of a customer of the firm might conceivably have been done on his own hook. His desirability as a broker was therefore enhanced. Another dividend of the copper episode was a news clipping, one of his first, that celebrated his career, as follows:
The substantial decline in Amalgamated Copper has brought into prominence a man who, though he had been well known to the inner circles of Wall Street for some time, has not hitherto been generally conspicuous because of an abhorrence of self-advertisement that is not often found among Wall Street men. The man is Bernard M. Baruch, a partner in the big house of A. A. Houseman [sic]. Anyone who gives attention to Wall Street matters hears much of Wormser, Field, Oliver, Content, etc., but he hears nothing of Baruch. Yet Baruch has done wonderful things in the relatively few years he has been in Wall street, and in the opinion of the men who know he has attained a position and reputation for shrewdness, foresight, and nerve in combination that is only second to that of the veteran Keene. From the beginning of the Amalgamated Copper downfall Baruch, of all the big men, has been the only one who has had the proper idea of what was going on, and instead of suffering, as otherwise ones have done, he and his friends have profited wonderfully. He has never missed a move in the copper game, and he has frustrated every attempt to twist him. What he has done in Amalgamated reminds one of what Keene used to do in Sugar in the old days. It will be well to watch Baruch. He will be heard from in many ways in the future.
Baruch had arrived.
8. The New York Times seemed to describe Baruch without naming him. “In one important instance,” it reported on July 5, “a Stock Exchange man, summering at Long Branch, chartered a special train at 2 o’clock in the morning in time to cable instructions abroad for the execution of orders said to be beyond 25,000 shares.”
9. By year’s end, BRT had sunk to 60. In December the company posted a $25,000 reward for information leading to the discovery and conviction of persons who had spread false and malicious rumors about its stock.
10. Baruch was short of stocks outright and also short against call options. A call grants the holder the right to buy a stock at a particular price over a certain period of time. For example, an option on US Steel might have granted the option holder the right to buy 100 shares at 50 until June 30. If the price of Steel had happened to run to 100, the option holder could have merely exercised his right to buy at 50. A call option, therefore, served (and still serves) as a kind of insurance policy for short sellers.
Five
His Own Man
In the mid-1930s, when Baruch was momentarily fed up with the New Deal, he confessed to an impulse to get rid of his money and go out and fight for the rights of the people. The impulse passed. In 1902, with fewer millions to feel guilty over, he had had similar musings. One cause of his dissatisfaction was the irritant of having to deal with other people’s money. It was becoming Baruch’s view that a speculator should not be a stockbroker, bank director, or any other kind of fiduciary. He should be his own man, exclusively. For another thing, now that he had made a lot of money, he began to wonder what it meant. His brother Herman had studied medicine, and his own faint medical ambitions stirred again. For a while he toyed with the idea of becoming a lawyer and of championing the poor, but the prospect of law school dismayed him. Wanting some time to think, he gathered up Annie, his father, and a business friend, Henry C. Davis, and packed them off to Europe with him in the summer of 1902.
Davis, who was Housman’s authority on the American West, declined to venture beyond London, because across the Channel they spoke foreign languages. The three Baruchs (Belle and her infant brother and their governesses and grandmother apparently stayed behind) pushed as far east as Constantinople before Dr. Baruch left the party to pay professional calls. Baruch and Annie made their way to the Ritz Hotel in Paris. It was there, late one night, that Baruch was roused from a sound sleep by a cable from New York. The message, which was signed by his brother Sailing, was that Housman was in financial straits. Reading it, Baruch almost fell to his “knees from shock.” If Housman was in trouble it followed that the firm was also imperiled. Baruch, as a partner of A. A. Housman & Company, had pledged his own assets, which included $3.2 million in cash, to the solvency of the firm. Arthur Housman and he, therefore, were potentially in trouble together. Baruch cabled a transfer of funds to his partner’s account and boarded the next ship home.
In New York, he found Housman pacing at dockside, ready to relate more or less the following. He had, said Housman, fallen in with Edwin Hawley, the railroad man, to buy stock in the Minneapolis & St. Paul and the Colorado & Southern railroads. Hawley, a member of the board of the Colorado road, was authoritatively bullish, but the price of the stocks dropped nonetheless. Housman had bought on margin, so he hadn’t the luxury of waiting for the market to turn. He had to put up more money at once or lose what he already had invested.
Baruch, taking charge, advanced the money himself. The market finally rebounded and Housman was able to sell at a profit. Secure again in his fortune, he continued to support his several unmarried sisters and to maintain some sixty head of cattle at his estate in Babylon, New York, in what a newspaper called “luxurious sanitary quarters.” His distress escaped the official notice of the New York Stock Exchange.
Baruch was happy to help a man who had done so much for him, but notwithstanding his affection for the Housman brothers he decided to quit the firm. In the first place he wanted to be independent of any firm. A second reason might be conjectured. It is that Baruch was worried that Housman’s uncritical market judgment might one day be the ruin of them all. (It wasn’t. The firm was the forerunner of Housman-Gwathmey & Company in 1926 and of E. A. Pierce & Company in 1927. In 1930, it absorbed most of Merrill Lynch & Company and in 1940 was merged with that large and fated organization.) Although Baruch was by no means always bearish, Housman was nearly always bullish. Baruch told a story of how they had once characteristically disagreed on the market. He wrote:
After a particularly bad drop [in the market] I was sitting at a table in the Waldorf bar listening to some of the traders comfort themselves. Jake Field, who was also on the bear side of the market, was doing the talking for both of us. I never would argue about what was going to take place but tried to let the results speak for themselves. Pretty soon James Keene came up.
“Gentlemen, what do you think of the great firm of A. A. Housman & Company?” he asked in his high-pitched voice. “At the head of it you have a roaring bull, and at the other end, a snarling, scratching bear!”
By August 1903 Baruch had moved into an office of his own,[11] which he furnished with three parental oddments: a congratulatory telegram from his mother, mounted and hung; a green china cat, speckled with red, also from his mother; and a photograph
of his father, framed and inscribed with the motto: “Let unswerving integrity always be your watchword.” (He listed these things only; if Annie sent anything he failed to mention it.) Thus the result of months of introspection was a decision to stay in Wall Street but to leave A. A. Housman & Company. Baruch continued to trade for his own account on the floor of the New York Stock Exchange; he devoted more of his time to venture capital, especially to mining ventures, and he reluctantly took on an occasional client. One day a woman whom he had never met walked into his office to ask him to invest a quarter million dollars that she had inherited from an aunt. She said that she found him smart, cool, and “funny looking.”[12] If there was something odd in his face (and he certainly didn’t think there was; nor did many women), it was his long nose, atop which was perched a pair of pince-nez, and his wide, thin lips. He had shaved his moustache, and his hair was streaked with a bankerly silver. (In 1903, his first year as an independent operator, Baruch turned up in the city directory as a “banker” instead of a “broker.” Evidently somebody found that persona unsatisfactory, however, because in 1904 he became a “broker” again. His brothers Sailing and Harty joined him in this occupational round trip.)
“Unswerving integrity” is no easy standard to uphold, no matter what one’s father adjures, and Baruch apparently did veer from it. Once he was led into temptation by some Baltimore men who somehow had met him when he was still a partner at A. A. Housman and described an accountant’s report that they had at their disposal. The report concerned the Metropolitan Street Railway Company, a giant Manhattan streetcar line that was then in the formative stages of crookedness. Early in 1902, Harry Content, Baruch’s favorite broker, filed a stockholder’s suit alleging that a certain Metropolitan leasing scheme was “born in iniquity.” Eventually the directors, including Thomas Fortune Ryan, were accused (though never indicted or convicted) of looting, and the belief gained currency that the company trafficked in jurors and politicians. In the fall of 1902, before most of this dirty laundry had been aired, the Baltimoreans brought their inside information to Baruch. The accountant’s report must have been negative, because it was supposedly understood that Baruch would sell the stock short: selling first and buying later, it was hoped at a lower price. He would risk his capital and take half the profits. His informants—by name, Barreda Turner, Frank G. Turner, and Motz Prag—would share the other half. Nothing was written down and no deadline was set, but it was agreed that Baruch would deal in at least 10,000 shares of stock. Such were the Baltimoreans’ recollections.
In October 1902, when the deal was allegedly struck, the price of a share of Metropolitan was $142. A year later it was $105 (a decline almost exactly in line with the fall of the Dow Jones Rail index). At the end of September 1903 Prag sued Baruch, charging that he had held back huge profits. Just $4,271 had been accounted for, the complaint charged, although Baruch had earned half a million. Baruch denied even trading on the basis of an “expert accountant’s report,” much less hiding his profits. However, he agreed to settle out of court for $9,000, “as a matter of compromise,” he later explained, “and to avoid the personal inconvenience of being made a party to an unfounded litigation.” This was in 1904. Probably if Prag had been cheated to the extent he claimed he wouldn’t have settled for $9,000 (which, in point of fact, was a pretty good sum in 1904). On the other hand if Baruch were absolutely innocent he probably wouldn’t have paid any tribute. In 1901 he had litigated a suit that had been brought against him on account of his chauffeur and appealed a $1,000 verdict, a record that suggests a certain legal pugnaciousness. In any case, neither Baruch nor Prag breathed a word of the suit to the Turners, the other alleged partners. (Frank G. Turner was the son of a Lutheran minister, a lawyer, and the treasurer of the Maryland State Bar Association; Barreda, who may or may not have been related, was a court clerk; and Prag was apparently an insurance and stock broker.) But nine years later they did find out, cried foul, filed suit and settled too.
Baruch’s fellow Stock Exchange members overlooked (or never heard about or perhaps wrote off as small potatoes) the Metropolitan contretemps. On December 9, 1903, they honored the defendant Baruch with election to the forty-man Governing Committee, and, in 1904, he began a long tenure on the Committee on Unlisted Securities, which he used as a forum to advance the acceptance of mining issues by the rest of the governors. As mentioned, the Stock Exchange elicited a certain amount of information from listed companies years before the Securities and Exchange Commission was in business to demand it. Corporations seeking the privilege of full-fledged listing after the turn of the century were obliged to conform with the disclosure requirements of the Committee on Stock List. The job of the Committee on Unlisted Securities, which numbered three, was to admit worthy companies that were unwilling or unable to comply immediately but which had it in mind to do so eventually.
On the evidence of the minutes, Baruch was a diligent Unlisted committeeman. He examined the quality of engraving on stock certificates, attended to various administrative matters, and worked to hustle companies as quickly as possible into the light of full listing. The record shows, for instance, that on January 24, 1906, he urged that the American Smelters Securities Company move faster on an issue of preferred that it had promised to submit to the Committee on Stock List. Smelters Securities was sponsored by his friends the Guggenheims.
The turn of the century had brought a boom in mining finance, and copper issues in particular had attracted enormous speculative attention on the Curb and Boston exchanges. The New York Stock Exchange was suspicious of mines and their stocks and bonds but fascinated by the commission income they produced for brokers. Early in 1906, the Unlisted Committee, augmented by the president of the Exchange, Frank K. Sturgis, took up the matter of the admission of mine securities. More fundamentally, it weighed the question of whether the Exchange should deal in Curb issues, in effect annexing the best of the outdoor market. The argument for bringing the Curb under the Stock Exchange roof was that the arrangement would yield more income to the members. The argument against was that the Curb was crooked and infra dig, and that to admit even its more popular issues, like United Copper and Greene Consolidated, would constitute a lowering of standards. (A compromise proposal that Curb issues be traded in-house but only in the subbasement was phrased as a question: “Shall a separate room be provided for trading in promiscuous securities, where members of the Exchange only shall be allowed?”) Baruch spoke before the committee regarding the annexation of the Curb in March 1906. The force of his personality is inevitably lost in transcription, leaving only the slightly disjointed sentences, thus:
I am like Mr. Thomas, if I had to declare myself right now, I would be against it, for the following reasons. I believe first that we could get around this matter much easier than by giving a market for these outside securities. I believe if we give them a market, whether they are listed or not, quoted on the ticker or not, they would have the same standing in the public eyes as the securities at present traded in. I believe it would be giving them the same standing unquestionably in the eyes of the public and the moneylenders. How are you going to decide that a security is reputable. You leave the disreputable ones on the outside [i.e., on the Curb] and that would still make a market there. I have made a list of the securities dealt in on the Curb and this brings up another point. If this Department would take action in the when, as, and if issued securities there would be very little left of the market out there. [“When, as, and if” securities, nowadays better known as “when issued” securities, were stocks and bonds that hadn’t been offered but which were scheduled for imminent public sale. They were dealt in on the Curb.] I think this brings us to still another question that I have studied over a good deal but have no solution of it as yet—that is, we will sooner or later have to have a mining department. Nearly all the stocks traded in out there are mining stocks. No matter what the prejudice of the New York Stock Exchange members may be it has got to come.
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p; Baruch, whose name had just been admitted for listing in the Social Register, got off a final shaft at the Curb: “I think we ought to brand it as much as possible that it is the outside market, and that the securities are not as high on the social scale as securities traded in on the Floor.” In the end, the Curb Exchange, which grew up to become the American Stock Exchange, was not annexed, and the Big Board adopted a more lenient attitude toward mining securities. It was perhaps owing to Baruch’s influence that the Unlisted Committee received a mandate to look into such “Mining Corporations as in their judgment are surrounded by the proper protection of reputable people and whose securities are legally issued. . . .”
In carrying out its charge the committee heard from some of the brightest lights in mine finance. In January 1907 came John Hays Hammond, principal engineer to the Guggenheim family, and his assistant, A. Chester Beatty. February brought Eugene Meyer Jr., the investment banker, and Daniel Jackling, the strip-mining pioneer. Jackling, who was born on a farm in Missouri and whose boyhood dream was to own 108 acres free and clear, believed in one great idea. It was that a meager copper ore could be profitably mined if there were enough steam shovels to scrape it from the surface and enough mill capacity to refine it. The site he favored was a desolate canyon in Utah. “It’s in Bingham,” explained Colonel Enos Wall, Jackling’s partner, “and it’s a mile wide and as long as a railroad. . . .” Jackling, a big, ruddy man, laid out his theory to Baruch in about 1903. Baruch was impressed by the idea, or the man, or both, and he bought “a good many shares” of Utah Copper Company. He was the exception. Without success, Jackling had solicited capital from the Amalgamated Copper Company, Ben Guggenheim, and John Hays Hammond. In the summer of 1904 he presented the idea to the General Electric Company, which wanted a copper mine, but which, as one director put it, didn’t believe the “damn figures.” At last, in 1906, Utah won over the Guggenheims, who invested and sold some convertible bonds to the public. Thus it happened in early 1907 that Baruch, Jackling, and Charles MacNeill, president of Utah, were seated around a table at the New York Stock Exchange discussing the merits of admitting the securities of Utah Copper to trading on the Big Board.[13] Over the next decade, Utah would yield 617,785 tons of copper, pay $76 million in dividends, accumulate $48 million of working capital, and establish itself as the greatest copper mine in the world.