Dark Genius of Wall Street

by Edward J Renehan Jr

  Gould did not bother to keep his mechanics a secret. “There has been a mischievous manipulation of the money market for speculative purposes,” wrote a reporter for the Commercial and Financial Chronicle in mid-November. “A combination, not only owning large private capital, but also controlling several millions of funds in possession of a leading railway company, have withdrawn from the banks and placed in hoard an aggregate of money which cannot be estimated below $10,000,000, and by many is considered to reach $15,000,000. In addition to this withdrawal of funds, these parties are engaged in reckless and demoralizing operations embracing a railroad scheme the full scope of which is not yet apparent, but which it is feared may involve more serious consequences to holders of securities and to the public confidence in corporate management than is generally anticipated.”7

  Stocks fell, the Erie to a low of 38 1/2.

  As for Drew, he soon realized that he was incapable of allowing someone else to drive. Having so frequently and wantonly robbed participants in pools of his own devising, Drew simply could not relax with the thought of his $4 million resting in a blind pool directed by Gould, whom he’d taught so many tricks. That Gould and Fisk felt ill used when Drew suddenly demanded all his money back in early November cannot be denied. That Drew also felt ill used when refunded only $3 million of his original $4 million investment–a function of market timing, Gould announced, the cost of cash- ing out at the wrong moment–is also a fact. Intent on recouping his million and then some, on 12 November Drew shorted Erie (70,000 shares at 38) and got ready to ride the stock down, convinced that Gould and Fisk were not done tightening the dollar market and that the Erie (along with Wall Street in general) had considerable sinking to do before it would finally bob to the surface on the back of dollars released by Gould.

  Gould and Fisk quickly became annoyed by what they saw as Drew’s duplicity. In retaliation, they decided to expedite their schedule a bit and give the dean of stock watering a financial bath. One day after Drew took his short position, the Erie sank to 35 and all seemed well. This was most likely the day Gould’s blind pool relieved itself of its short positions, for on the next morning, 14 November, a Saturday, Gould and Fisk unlocked their cash reserves. During the abbreviated weekend session of the Regular Board that followed, the Erie represented half the day’s volume of 80,000 shares, and its price rose steadily to close at 52 1/2.8

  Meanwhile, facing ruin, Drew considered his options. On Saturday afternoon, he paid a call on his sometime associate August Belmont. The venerable Prussian immigrant, twenty years Gould’s senior and known for years as “the king of Fifth Avenue,” owned 4,000 shares of Erie himself. More important, Belmont also represented many British, French, and German clients (among them the Rothschild family) who were short in the stock. Belmont had recently felt himself slashed by both sides of Gould’s sword. In the preceding weeks, with Gould still on the short side of the market, Belmont had seen his own shares lose half their value. Now, with Gould releasing funds and moving the price of the Erie upward, Belmont looked on helplessly as many of the European investors he represented approached ruin. Adding to his frustration was the fact that the stock certificates his distant clients hoped to use to cover their contracts were quite literally on a slow boat to New York. The steamer Russia was not due to arrive in Manhattan until 23 November. (Gould had made a point of moving a large number of stock certificates–including some specially prepared ten-share notes–to Europe explicitly to have them out of reach of the bears who would desperately need them when he released currency, allowed the market to buoy, and reaped massive profits from a sudden Erie corner.)

  At Drew’s urging, Belmont made a decision to sue Gould and Fisk for malfeasance, and to ask that the courts appoint a receiver to take control of the Erie. Drew pledged his support and even wrote out and signed an affidavit detailing everything he knew about recent Erie operations–which could not have been much. True to form, however, Drew was in this instance a double-agent with sworn allegiance to just one interest: his own. Saying he had to go over it and perhaps reword it, Drew took the affidavit away with him from Belmont’s house. The next day (Sunday), he made a beeline for the Erie offices on West and Duane Streets, where he accosted Fisk and Gould.

  According to Fisk’s account, Drew cried for protection (a loan of stock at 3 percent interest, to cover his short positions) and begged the two younger men to drum up fresh convertible bonds for prompt metamorphosis into shares. When Fisk coldly informed Drew that he “should be the last man that should whine over any position in which you may be placed in Erie,” Drew then “entered into an explanation as to certain proceedings that he said were being got up in the courts; he said that he had been in the enemy’s camp.” Next, Fisk remembered, Drew delivered a threat: “You know that during the whole of our other fights, I objected to ever giving my affidavits, but I swear I will do you all the harm I can do if you do not help me in this time of my great need.” In the end Fisk and Gould, who unlike the veterans Vanderbilt and Belmont did not nurture a soft spot for old Drew, remained unmoved. “I am a ruined man,” the Great Bear whined in parting, not realizing that he’d provided Gould and Fisk with a vital warning of what was to come.9

  On Monday, Belmont’s lawyers, the same attorneys who had most recently represented Vanderbilt in Erie-related proceedings, took Drew’s affidavit and other evidence before New York Supreme Court Judge Sutherland, whom they asked to appoint a receiver to oversee the Erie. But before Sutherland could act, it was discovered that another receiver had already been appointed in connection with yet another suit against the Erie: a receiver by the name of Jay Gould.

  Earlier that morning, Gould, Fisk, Lane, and Morosini had visited Barnard at his home together with Charles MacIntosh, superintendent of the Erie’s Hudson River ferries and a small shareholder in the firm. “The policy of the conspirators,” commented an outraged New York Times reporter, “resolved as they were to control the proceedings, was prompt and characteristic. One Charles MacIntosh, a hired ferry agent of the set con- trolling the Erie Company, was caused to bring suit before Judge Barnard on a few shares of stock, in which he praises ‘the management,’ declares the public is unreasonably disturbing its policy by making troublesome inquires about stock issued and to be issued, tells us that it will be best to let things go on as they are going; . . . that the true remedy–the one he prays for–is that the chief author of the iniquity be appointed receiver; that his associates remain in power; that they bring such suits as they wish before Judge Barnard alone; that Mr. Belmont and everyone else be enjoined from bringing any suit anywhere; that the other judges attend to other business, while this ferry agent, Mr. Jay Gould, Mr. James Fisk Jr., and Judge Barnard, aided by the advice of Mr. Lane, counsel to the Erie Railway Company, attend to the whole of that particular business! If anything could surpass the audacious assurance and effrontery of this scheme set forth in the suit of MacIntosh, it would be the fact that Judge Barnard responded instantly to its demands.”10

  Meanwhile, Drew’s contracts were fast coming due, and the price of Erie steadily rose. Wednesday saw it close at 58. Thursday morning brought the stock to 62 in early trading, before it settled back a bit. Thus Drew stood to lose more than twenty dollars on every scarce share he managed to buy, his need being on the order of 70,000 units, and the Russia still at sea. Concurrently, as if to make doubly sure that Drew found no way out, newly appointed receiver Jay Gould suddenly expressed doubts as to the legality of stocks issued the previous summer by Erie president Jay Gould. So on Wednesday afternoon Judge Barnard granted receiver Gould permission to buy up to 200,000 shares of the new stock at prices not to exceed par value.11 Barnard likewise granted Gould permission to use corporate funds for this court-ordered corner of Erie stock. (Although New York State law forbade officers of railroads to use corporate funds for dealing in the company’s stock, the law was less clear when it came to receivers, who were officers of the court.)

  Gould’s one miscalculation
in all this was to discount that most nebulous and unpredictable of Wall Street figures, the small investor. Although numerous large blocks of shares were to be found in Europe–or on the slow-floating Russia–nonblock Erie shares were abundant in New York and, indeed, throughout the United States. Given the ready availability of Erie stock in small increments, when Gould and Fisk drove down its price through machinations earnestly chronicled by the popular press, they unwittingly created a large subculture of working- and middle-class investors who took small positions in the Erie at its low in the thirties. Now, with both Gould and Drew competing for shares, these bakers and teamsters and clergy came out of the woodwork and sold. By the end of the day on Thursday, Drew had garnered enough stock to cover his contracts, paying a mean average of $57 per share, which added up to a total loss of about $1.3 million. Gould and Fisk, meanwhile, bought all they could at roughly the same price, if only to keep Drew as “cornered” as possible and make him pay as dearly as possible. On Friday, when Drew and Gould stopped buying, the price of Erie fell promptly to 42.

  At the end of the affair, Gould and Fisk emerged with an odd negative celebrity as ingenious scoundrels: the only two young men to have ever gotten the better of Daniel Drew, albeit at a cost. At the same time, Fisk and Gould walked away from the episode well liked by numerous minor Wall Street players: all those bakers and shopkeepers who had stumbled into a windfall on their coattails. For the moment, most newspaper editors expressed more intrigue than disdain, and more amusement than outrage, when it came to Gould. It seemed there was little real villainy in making a victim of one such as Drew, especially through a scheme that enriched so many small investors. By mid-November 1868, Gould’s was a name well known not only in financial circles, but also among all readers of the general press. It did not yet, however, possess the profoundly negative connotation that was to come.

  In appraising Gould’s Erie corner, James Gordon Bennett, Jr., of the New York Herald expressed slight annoyance mixed with a large dose of envy: “The speculations of the last month have been on a gigantic scale such as never were equaled before in Wall Street, while it is doubtful if they have been surpassed elsewhere. Millions of dollars have been handled as if they were thousands, and the capital employed has been such as to make the outside public gape with astonishment at the daring and boldness of the operators.”12

  Bennett added that the operations of the Erie clique indicated the presence of a financial mastermind. “However questionable these schemes may be, their skill and success exhibit Napoleonic genius on the part of him who conceived them.”13 A writer for the Commercial and Financial Chronicle opined that the problem, if there was one, did not lie in the men who transacted the business of the Erie so much as it did in the laws governing those men: “The letter of the law is very deficient in its regulation of the management of corporate interests.” Gould and Fisk had done absolutely nothing illegal. And the spectacle of clever fellows exploiting inadequate laws for short-term profit was, quite simply, “nothing new under the sun.”14

  “The victors had got the spoils,” Clews wrote, “but they paid dearly for them, and had come pretty near being destroyed in the moment of their triumph. They had purchased Erie at ‘corner’ prices, and they were obligated to carry it, for nobody wanted it.”15 Indeed, the Street remained more than wary of Erie. Some two weeks earlier, at the end of October, a group of Wall Street brokers had visited Gould at his office to complain about the murkiness of Erie stock. Given the vague number of Erie shares outstanding and the seemingly unlimited possibility of new shares being issued, it was nearly impossible, they said, for them to extend credit based on the shares or to allow the shares to be bought on margin. In response, Gould claimed the amount of stock outstanding in the company represented approximately $39.5 million and told his listeners to expect more bonds and more stock conversions to raise funds necessary for maintaining the line and keeping the Erie away from Vanderbilt.

  “With unspeakable effrontery,” wrote the Adamses, “an effrontery so great as actually to impose on his audience and a portion of the press, and make them believe that the public ought to wish him success, he described how stock issues at the proper time, to any required amount, could alone keep him in control. . . . The strangest thing of all was that it never seemed to occur to his audience that the propounder of this comical sophistry was a trustee and guardian for the stockholders, and not a public benefactor; and that the owners of the Erie road might possibly prefer not to be deprived of their property in order to secure the blessings of competition.”16

  Chapter 18

  THE SMARTEST MAN IN AMERICA

  AS WAS FAST BECOMING the New York tradition, Belmont’s Judge Sutherland and Gould’s Judge Barnard squared off with opposing pronouncements and orders at the end of November. On the 24th, the same day the Russia at last showed up in the harbor of New York, Sutherland stayed Barnard’s order appointing Gould as receiver for the Erie and issued a show-cause order as to why the ruling should not be vacated. One day later he went ahead and vacated Barnard’s order and confirmed as receiver retired Judge Henry E. Davies. A few hours after Sutherland rendered his decision, Davies showed up at the Erie offices with another former judge, Noah Davis, and D. B. Eaton, retired counsel to the Erie. An unwitting clerk stationed at the front door allowed them to enter despite orders to the contrary. Davies walked in on an astonished Gould and Fisk huddled in a back office with their lawyers. In short order, Fisk excused himself from the room. But he soon returned with one Tommy Lynch and ten other “rough-looking” Irishmen who, Fisk assured Davies, would be delighted to escort the new receiver out of the building upon the slightest signal from either Fisk or Gould. (Soon these “Thugs of Erie”–headed by Lynch, proprietor of an oyster stand near the Erie terminal in Jersey City–would become constant presences in and around the Erie offices.1)

  The gentlemanly Davies immediately objected to Fisk’s tone and theatrics, upon which Gould quickly apologized for his partner’s threats. At the same time, however, Gould handed Davies an order by Supreme Court Judge Albert Cardozo–scion of a distinguished Sephardic Jewish family of New York and father of future U.S. Supreme Court Justice Benjamin Cardozo–vacating Sutherland’s order. Like Sutherland and Barnard, Cardozo was one of the five New York Supreme Court judges operating in Manhattan at the time. As Davies was quick to note, Cardozo’s order had been issued on 24 November and thus predated the ruling it purported to vacate. When Davies protested, Erie counsel Lane actually concurred with his opinion but nevertheless was able to persuade Davies, with Lynch and his boys hovering nearby, to defer taking actual possession of the Erie until later that same week: on Friday, the 27th. Returning on the Friday, Davies found–as the Adams brothers described it–the Erie directors “fortified within and himself a much enjoined wanderer without.”2

  Meanwhile, Gould and Fisk were preoccupied with bigger fish than Belmont. Having evened up their score with Drew, they now set about taking on the other winner in the first of the Erie Wars. Early in December, Fisk (with Gould’s OK) made a grasp for some anti-Vanderbilt publicity by paying a visit to Vanderbilt at his home. Fisk was accompanied by attorney Thomas Shearman, that lawyer with the impeccable reputation who doubled as a Sunday school teacher at Beecher’s Brooklyn church. In a fierce snowstorm, the two men rode up from the Erie offices to Vanderbilt’s townhouse at 10 Washington Place, Fisk carrying 50,000 shares of Erie in a carpetbag. Once inside the Vanderbilt home, Fisk laid the carpetbag at the mogul’s feet. “I told the Commodore,” he recalled, “[that] I had come to tender 50,000 shares of Erie and wanted back the money which we had paid for them and the bonds.”3 In other words, Fisk wanted $70 per share at a time when the street price stood at about $40. It was also, moreover, a time when Vanderbilt desired no part of the Erie at any price. Of course, Fisk was hardly surprised when Vanderbilt gave the predictable answer: an answer Fisk later fed to reporters. News accounts appeared the next morning, 6 December. The articles detailed Vanderbilt
’s stock buy-back deal with the Erie, and the $1-million bonus associated with his dropping of the lawsuits.

  As Gould and Fisk must have anticipated, Vanderbilt became enraged at the reporting and, in his rage, acted unwisely. In a foolhardy and demonstrably false letter to the Times, Vanderbilt flatly denied the terms of the spring agreement ending the first Erie war. “I have had no dealings with the Erie Railway Company,” Vanderbilt wrote, “nor have I ever sold that company any stock or received from them any bonus. As to the suits instituted by Messrs. Schell and others, I had nothing to do with them, nor was I in any way concerned in their settlement.”4 Within days, a delighted Fisk sent the Times a letter of his own, this accompanied by facsimiles of checks endorsed by Vanderbilt. “In as much as it appears from these documents that someone of the name of ‘C. Vanderbilt’ received $1,000,000 from the Erie Company, and as it does not appear by any records in the Company’s office that Mr. Vanderbilt gave the company any consideration for that sum except the discontinuance of suits over which he now says he had no control, it would seem that some further explanation is needed to relieve Mr. Vanderbilt from the imputation of an enormous fraud upon the stockholders of the Erie Railway Company.”5