by John Brooks
Wilson went on slowly, “The whole matter of committing the company to taking stands on major public issues raises questions that make us examine ourselves all the time. It’s a matter of balance. You can’t just be bland, or you throw away your influence. But you can’t take a stand on every major issue, either. We don’t think it’s a corporation’s job to take stands on national elections, for example—fortunately, perhaps, since Sol Linowitz is a Democrat and I’m a Republican. Issues like university education, civil rights, and Negro employment clearly are our business. I’d hope that we would have the courage to stand up for a point of view that was unpopular if we thought it was appropriate to do so. So far, we haven’t faced that situation—we haven’t found a conflict between what we consider our civic responsibility and good business. But the time may come. We may have to stand on the firing line yet. For example, we’ve tried, without much fanfare, to equip some Negro youths to take jobs beyond sweeping the floor and so on. The program required complete coöperation from our union, and we got it. But I’ve learned that, in subtle ways, the honeymoon is over. There’s an undercurrent of opposition. Here’s something started, then, that if it grows could confront us with a real business problem. If it becomes a few hundred objectors instead of a few dozen, things might even come to a strike, and in such a case I hope we and the union leadership would stand up and fight. But I don’t really know. You can’t honestly predict what you’d do in a case like that. I think I know what we’d do.”
Getting up and walking to a window, Wilson said that, as he saw it, one of the company’s major efforts now, and even more in the future, must be to keep the personal and human quality for which it has come to be known. “Already we see signs of losing it,” he said. “We’re trying to indoctrinate new people, but twenty thousand employees around the Western Hemisphere isn’t like a thousand in Rochester.”
I joined Wilson at the window, preparatory to leaving. It was a dank, dark morning, such as I’m told the city is famous for much of the year, and I asked him whether, on a gloomy day like this, he was ever assailed by doubts that the old quality could be preserved. He nodded briefly and said, “It’s an everlasting battle, which we may or may not win.”
6
Making the Customers Whole
ON THE MORNING of Tuesday, November 19th, 1963, a well-dressed but haggard-looking man in his middle thirties presented himself at the executive offices of the New York Stock Exchange, at 11 Wall Street, with the announcement that he was Morton Kamerman, managing partner of the brokerage firm of Ira Haupt & Co., a member of the Stock Exchange, and that he wanted to see Frank J. Coyle, head of the Exchange’s member-firms department. After checking, a receptionist explained politely that Mr. Coyle was tied up in a meeting, whereupon the visitor said that his mission was an urgent one and asked to see Robert M. Bishop, the department’s second-in-command. Bishop, the receptionist found, was unavailable, too; he was tied up with an important phone call. At length, Kamerman, who seemed to be growing more and more distracted, was ushered into the presence of a less exalted Exchange official named George H. Newman. He then duly delivered his message—that, to the best of his belief, the capital reserve of the Haupt firm had fallen below the Exchange’s requirements for member firms, and that he was formally reporting the fact, in accordance with regulations. While this startling announcement was being made, Bishop, in a nearby office, was continuing his important telephone conversation, the second party to which was a knowledgeable Wall Streeter whom Bishop has since declined to identify. The caller was telling Bishop he had reason to believe that two Stock Exchange member firms—J. R. Williston & Beane, Inc., and Ira Haupt & Co.—were in financial trouble serious enough to warrant the Exchange’s attention. After hanging up, Bishop made an interoffice call to Newman to tell him what he had just heard. To Bishop’s surprise, Newman already had the news, or part of it. “As a matter of fact, Kamerman is right here with me now,” he said.
In this humdrum setting of office confusion there began one of the most trying—and in some ways one of the most serious—crises in the Stock Exchange’s long history. Before it was over, this crisis had been exacerbated by the greater crisis resulting from the assassination of President Kennedy, and out of it the Stock Exchange—which has not always been noted for acting in the public interest, and, indeed, had been accused only a few months before by the Securities and Exchange Commission of an anti-social tendency to conduct itself like a private club—emerged temporarily poorer by almost ten million dollars but incalculably richer in the esteem of at least some of its countrymen. The event that had brought Haupt and Williston & Beane into straitened circumstances is history—or, rather, future history. It was the sudden souring of a huge speculation that these two firms (along with various brokers not members of the Stock Exchange) had become involved in on behalf of a single customer—the Allied Crude Vegetable Oil & Refining Co., of Bayonne, New Jersey. The speculation was in contracts to buy vast quantities of cottonseed oil and soybean oil for future delivery. Such contracts are known as commodity futures, and the element of speculation in them lies in the possibility that by delivery date the commodity will be worth more (or less) than the contract price. Vegetable-oil futures are traded daily at the New York Produce Exchange, at 2 Broadway, and at the Board of Trade, in Chicago, and they are bought and sold on behalf of customers by about eighty of the four hundred-odd firms that belong to the Stock Exchange and conduct a public business. On the day that Kamerman came to the Exchange, the Haupt firm was holding for Allied—on credit—so many cottonseed-oil and soybean-oil contracts that the change of a single penny per pound in the prices of the commodities meant a twelve-million-dollar change in the value of the Allied account with Haupt. On the two previous business days—Friday the fifteenth and Monday the eighteenth—the prices had dropped an average of a little less than a cent and a half per pound, and as a result Haupt had demanded that Allied put up about fifteen million dollars in cash to keep the account seaworthy. Allied had declined to do this, so Haupt—like any broker when a customer operating on credit has defaulted—was faced with the necessity of selling out the Allied contracts to get back what it could of its advances. The suicidal extent of the risk that Haupt had undertaken is further indicated by the fact that while the firm’s capital in early November had amounted to only about eight million dollars, it had borrowed enough money to supply a single customer—Allied—with some thirty-seven million dollars to finance the oil speculations. Worse still, as things turned out it had accepted as collateral for some of these advances enormous amounts of actual cottonseed oil and soybean oil from Allied’s inventory, the presence of which in tanks at Bayonne was attested to by warehouse receipts stating the precise amount and kind of oil on hand. Haupt had borrowed the money it supplied Allied with from various banks, passing along most of the warehouse receipts to the banks as collateral. All this would have been well and good if it had not developed later that many of the warehouse receipts were forged, that much of the oil they attested to was not, and probably never had been, in Bayonne, and that Allied’s president, Anthony De Angelis (who was later sent to jail on a whole parcel of charges), had apparently pulled off the biggest commercial fraud since that of Ivar Kreuger, the match king.
Where was the missing oil? How could Allied’s direct and indirect creditors, including some of the most powerful and worldly-wise banks of the United States and Great Britain, have been so thoroughly gulled? Would aggregate losses on the whole debacle finally total a hundred and fifty million dollars, as some authorities had estimated, or would the bill be even bigger? How could a leading Stock Exchange firm like Haupt have been so foolish as to take on such an inconceivably risky commitment for a single customer? These questions had not even been raised, let alone answered, on November 19th; some of them have not been answered yet, and some of them may not be answered for years. What began to emerge on November 19th, and what became clear in the harrowing days that followed, was that in the case of H
aupt, which had about twenty thousand individual stock-market customers on its books, and in the case of Williston & Beane, which had about nine thousand, the impending disaster directly involved the personal savings of many totally innocent persons who had never heard of Allied and had only the vaguest notion of what commodity trading is.
KAMERMAN’S report to the Stock Exchange did not mean that Haupt had gone broke, and at the time he made it Kamerman himself surely did not think that his firm had gone broke; there is a great difference between insolvency and a mere failure to meet the Exchange’s rather stringent capital requirements, which are intended to provide a margin of safety. Indeed, various Stock Exchange officials have said that on that Tuesday morning they did not consider the Haupt situation to be especially serious, while the Williston & Beane situation, it was clear from the first, was even less so. One of the first reactions in the member-firms department was chagrin that Kamerman had come to the Exchange with his problem before the Exchange, through its elaborate system of audits and examinations, had discovered the problem for itself. This, the Exchange insists stubbornly, if a bit lamely, was a matter of bad luck rather than bad management. As a matter of routine, the Exchange required each of its member firms to fill out detailed questionnaires on its financial condition several times a year, and as an additional check an expert accountant from the Exchange staff descended unexpectedly on each member firm at least once a year to subject its books to a surprise inspection. Ira Haupt & Co. had filled out its most recent questionnaire early in October, and since the huge buildup in Allied’s commodities position with Haupt took place after that, the questionnaire showed nothing amiss. As for the surprise inspection, the Exchange’s man was in the Haupt offices conducting it at the very time the trouble broke. The auditor had been there for a week, his nose buried in Haupt’s account books, but the task of conducting such an inspection is a tedious one, and by November 19th the auditor hadn’t got around to examining the Haupt commodities department. “They had set our man up with a desk in a department where nothing unusual was going on,” an Exchange official has since said. “It’s easy to say now that he should have smelled trouble, but he didn’t.”
At midmorning on Tuesday the nineteenth, Coyle and Bishop sat down with Kamerman to see what needed to be done about Haupt’s problem, and what could be done. Bishop remembers that the atmosphere of the meeting was by no means grim; according to Kamerman’s figures, the amount of capital that Haupt needed to bring it up to snuff was about a hundred and eighty thousand dollars—an almost paltry sum for a firm of Haupt’s size. Haupt could make up the deficiency either by obtaining new money from outside or by converting securities it owned into cash. Bishop urged the latter course as the quicker and surer, whereupon Kamerman telephoned his firm and instructed his partners to begin selling some of their securities at once. The difficulty apparently was going to be solved as simply as that.
But during the rest of the day, after Kamerman had left 11 Wall, the crisis showed a tendency to go through the process that in political circles had come to be called escalation. In the late afternoon, an ominous piece of news arrived. Allied had just filed a voluntary-bankruptcy petition in Newark. Theoretically, the bankruptcy did not affect the financial position of its former brokers, since they held security for the money they had supplied Allied with; nevertheless, the news was alarming in that it provided a hint of worse news to follow. Such news, indeed, was not long in coming; the same evening, word reached the Stock Exchange that the managers of the New York Produce Exchange, in an effort to forestall chaos in their market, had voted to suspend all trading in cottonseed-oil futures until further notice, and to require immediate settlement of all outstanding contracts at a price dictated by them. Since the dictated price would have to be a low one, this meant that any remaining chance that Haupt or Williston & Beane had of getting out from under the Allied speculations on favorable terms was gone.
In the member-firms department that evening, Bishop was frantically trying to get in touch with G. Keith Funston, the president of the Stock Exchange, who was first at a midtown dinner and then on a train bound for Washington, where he was scheduled to testify the next day before a congressional committee. What with one thing and another, Bishop was busy in his office all evening; toward midnight, he found himself the last man in the member-firms department, and, having decided it was too late to go home to Fanwood, New Jersey, for the night, he collapsed on a leather couch in Coyle’s office. He had a restless night there; the cleaning women were considerately quiet, he said afterward, but the phones kept ringing all night long.
Promptly at nine-thirty on Wednesday morning, the Stock Exchange’s board of governors met in the sixth-floor Governors’ Room—which, with its regal red carpet, fierce old portraits, and fluted gilt columns, carries rather uncomfortable connotations of Wall Street’s checkered past—and, in accordance with Exchange regulations, voted to suspend Haupt and Williston & Beane because of their capital difficulties. The suspension was made public a few minutes after trading opened, at ten o’clock, by Henry M. Watts, Jr., chairman of the board of governors, who ascended a rostrum that overlooks the trading floor, rang the bell that normally signals the beginning or ending of a day’s trading, and read an announcement of it. From the point of view of the public, the immediate effect of the action was that the accounts of the almost thirty thousand customers of the two suspended firms were now frozen—that is, the owners of the accounts could neither sell their stocks nor get their money out. Touched by the plight of these unfortunates, the Stock Exchange brass now set about trying to help the beleaguered firms raise enough capital to lift the suspensions and free the accounts. In the case of Williston & Beane, its efforts were triumphantly successful. It developed that this firm needed about half a million dollars to get back into business, and so many fellow-brokers came forward to help out with loans that the firm actually had to fight off unwanted offers. The half million was finally accepted partly from Walston & Co. and partly from Merrill Lynch, Pierce, Fenner & Smith. (Cozily, the Beane of Williston & Beane was the very man who had been the caboose when the firm’s name was Merrill Lynch, Pierce, Fenner & Beane.) Restored to financial health by this timely injection of capital, Williston & Beane was relieved of its suspension—and its nine thousand customers were relieved of their anxiety—just after noon on Friday, or slightly more than two days after the suspension had been imposed.
But in the case of Haupt things went differently. It was clear by Wednesday that the capital-shortage figure of a hundred and eighty thousand dollars had been the rosiest of dreams. Even so, it appeared that the firm might still be solvent despite its losses on the forced sale of the oil contracts—on one condition. The condition was that the oil in Bayonne tanks that Allied had pledged to Haupt as collateral—and that now, through Allied’s default, belonged to Haupt—could be sold to other oil processors at a fair price. Richard M. Crooks, an Exchange governor who, unlike nearly all his colleagues, was an expert on commodities trading, figured that if the Bayonne oil were thus unloaded, Haupt might still end up slightly in the black. He therefore telephoned a couple of the country’s leading vegetable-oil processors and urged them to bid on the oil. The replies he received were unanimous and startling. The leading processors declined to make any bid at all, and they left Crooks with the feeling that they were suspicious of the Bayonne warehouse receipts held by Haupt—that they suspected some or all of them to be forgeries. If these suspicions were well founded, it would follow that some or all of the oil attested to by the receipts was not in Bayonne. “The situation was very simple,” Crooks has said. “Warehouse receipts are accepted in the commodities business as practically as good as currency, and now the possibility had been raised that millions of dollars of Haupt’s assets consisted of counterfeit money.”
Still, all that Crooks knew definitely on Wednesday morning was that the processors would not bid on Allied oil, and throughout the rest of Wednesday and all day Thursday the Exchange
furiously went on trying to help Haupt get back on its feet along with Williston & Beane. Needless to say, the fifteen partners of Haupt were busy at the same endeavor, and in aid of it Kamerman told the Times buoyantly on Wednesday evening, “Ira Haupt & Co. is solvent and is in an excellent financial position.” Also on Wednesday evening, Crooks had dinner in New York with a veteran commodities broker from Chicago. “Although I’m an optimist by temperament, my experience tells me that these things always turn out to be much worse than they look at first,” Crooks said recently. “I mentioned this to my broker friend, and he agreed. The next morning at about eleven-thirty, he called me and said, ‘Dick, this thing is a hundred per cent worse than even you think.’” A bit later, at midday on Thursday, the Exchange’s member-firms department learned that many of Allied’s warehouse receipts were indeed fake.
As nearly as can be determined, the Haupt partners were making the same unhappy discovery at about the same time. At any rate, a number of them did not go home Thursday evening but spent the night at their offices at 111 Broadway, trying to figure out what their position was. Bishop got home to Fanwood that night, but he found that he could sleep hardly any better there than on Coyle’s couch. Accordingly, he rose before dawn, took the Jersey Central’s five-eight to the city, and on a hunch went to the Haupt offices. There, in the partners’ area—recently redecorated with modern contour chairs, marble-topped filing cabinets, and refrigerators disguised as desks—he found several of the partners, unshaven and unkempt, drowsing in their chairs. “They were pretty shot by then,” Bishop said later. And no wonder. After being awakened, they told him that they had been up all night calculating, and that at about three o’clock they had come to the conclusion that their position was hopeless; in view of the worthlessness of the warehouse receipts, the Haupt firm was insolvent. Bishop took this disastrous intelligence with him to the Stock Exchange, where he waited for the sun to come up and for everyone else to come to work.