*In a short squeeze, holders of a security will force the price up by hoarding a disproportionate percentage of a company’s stock, strangling supply, thus obligating holders of short positions to buy back their appreciating shares at an ever-larger loss. Since most short positions are bought on margin or with borrowed money, the pressure to cut losses and buy back shares is intense. This forces the price still higher until, with the shorts out, the holders of the security can sell at an enormous profit. But the ploy only works if supply of the security has been greatly restricted.
†One of the banks that failed was the National Bank of North America, in which Morse held controlling interest. Morse was arrested the following February as he stepped off the gangplank of a luxury ocean liner returning from Europe. He was charged with illegal manipulation, selling essentially worthless American Ice stock to the bank for hundreds of thousands of dollars, as well as obtaining overdrafts of more than $200,000 “at the height of the panic,” immediately before he was forced to liquidate his interest. Morse was convicted, but got the last laugh. After exhausting his appeals, he finally went to prison in 1910, but two years later contracted a mysterious illness that a team of army doctors agreed would soon kill him. He was pardoned by President William Howard Taft and sailed to Germany for treatment. He recovered miraculously, and later revealed he had been drinking soapsuds and a chemical brew to precipitate his symptoms. Again a free man, Morse returned to New York and the shipping business, which he conducted no more scrupulously than before. He was ultimately indicted for mail fraud and war profiteering, among other charges, but never spent another day in prison. He died peacefully in 1933 at age seventy-seven, in Bath, Maine, the town in which was born.
CHAPTER 29
GOING DEEP
The great irony for Simon Lake was that had he not once again overplayed his hand, he might well have succeeded in exposing at least borderline corruption. Electric Boat, while perhaps not violating the letter of the law, was pushing hard against its spirit, doing everything in its power to influence Congress. “Electric Boat’s political aggressiveness and near-monopoly won the company more enemies than friends in the Navy. By pushing its product into congressional appropriations legislation, it essentially assumed the role of both market leader and naval policymaker. According to Naval Constructor and later Vice Admiral Emory S. Land, ‘If you look up history, you’ll find that the Navy Department frequently didn’t ask for submarines, but they were put in the bill anyway, due to political pressure from [Electric Boat].’”1
As a result, even after public discreditation, Simon Lake was able to defy both odds and logic and survive. For another fifteen years, he would continue to alternate brilliant innovation, bluster, incredible perseverance, and self-defeating stubbornness, and thereby remain tantalizingly close to achieving his life’s aim—to be the preeminent submarine designer in the world—but never quite get there.
Lake’s maddeningly flawed amalgam of character traits was epitomized in his first navy submarine, the one built to fulfill the contract he signed just before he unleashed George Lilley. Called the Seal, it was 161 feet long, only 13 across, and built with wheels, detachable keel, air lock, and planes amidships. For surface running, Lake employed twin screws, each powered by two 300-horsepower gasoline engines placed in tandem on the driveshaft, and he used 375-horsepower electric motors for running submerged. In addition to bow torpedo tubes, Lake had mounted four external tubes in the superstructure, where they could be swiveled and aimed at a variety of angles, much as could a deck gun. The boat was sleek and fast, initially exceeding both the navy’s surface and submerged speed specifications, and would set a depth record by diving 256 feet.
Simon Lake’s Seal
Lake was not shy in extolling the boat’s virtues. “The Seal did all that I claimed for it and more. . . . The day it was launched it was the best undersea boat that had ever been built or that had ever been proposed for our Navy.”2
He omitted to note, however, that the Seal also was not delivered until October 1911, two and a half years late, was “a notoriously slow diver,” and developed leaks in both the superstructure and torpedo tubes.3 The tandem engines continued to cause breakdowns and so one of the motors on each shaft was eventually removed, which slowed the boat to where it could only attain minimal speed required for acceptance. Its endurance could never meet the navy’s standard, and it only barely made it through sea trials. Even then, the lack of speed and quickness in submerging would limit the boat to harbor defense or coastal patrols. So uncertain was the navy of the Seal’s utility that Lake was not paid until in 1916.
Before the Lilley debacle was off the front page, when both he and his surrogates, both in and out of Congress were viewed as liars or worse, Lake again took up railing over the evils of monopoly and pressing the case for the Lake submarine in Washington. As a result, even with the delays in delivering the Seal, the navy ordered an additional submarine from the Lake Company in 1909 and one more in 1910. They would be called the Tuna and the Turbot, and be built from the same design as the Seal, except for the elimination of the wheels and the air lock. But Lake only made the changes to reduce costs, not because he had come to realize his design needed to be modified. The three boats would be called “G-class” submarines, and their reception by the admirals was inauspicious.
In 1915, “Yates Stirling Jr., senior aide on the staff of Commander, Submarine Flotilla, Atlantic Fleet, inspected the boat and concluded the G-class boats were crude and inefficient in comparison to current designs. Deeming ‘their military value . . . negligible’ he urged that a field of scientific or experimental use be found for them.”4 Each of the three boats would be decommissioned after only six years in service.
Lake was undaunted, ignoring the flaws and refusing to accept that some of his pet ideas, such as even-keel submergence, were impractical in a warship.* In fact, he would later insist that submarines built by foreign navies, especially Germany, were based on his design principles. In 1916, when the trans-Atlantic cargo submarine Deutschland docked in Baltimore, he swore to prove it.
Lake had been advocating submarines for transporting cargo almost from the time he entered the field. In 1909, at a dinner in Berlin, he tried to convince Alfred Lohmann, the director of the North German Lloyd shipping line, to join in a venture to produce such a vessel. According to Lake, the conversation was quite detailed, but Lohmann declined. Soon after the war began, however, with German merchant shipping stifled by a British blockade, Lohmann approached the Krupp Company, which then built him such a vessel, 213 feet long, at its shipyard in Kiel. The Deutschland, as it was named, sailed to Baltimore with a cargo of precious stones and dyestuffs, intending to return with nickel, tin, and rubber. When it arrived in the United States, Simon Lake was waiting.
He informed the captain that the Deutschland had infringed a number of Lake patents and threatened to have the vessel seized. Lake later claimed that the captain talked him out of it by imploring Lake to allow the boat to return to Germany with its intended cargo of food, blankets, medicine, and other necessities needed by the German people. On humanitarian grounds, Lake agreed. Only afterward, he said, did he find out that the Deutschland was carrying war materials.
How successful Lake would have been if he had brought suit is questionable. While the Deutschland may well have infringed on some of his minor patents, in his conviction that German submarines had stolen his basic ideas, Simon Lake was again incorrect. The principles under which the Deutschland had been designed—as well as the U-9 and every other U-boat—were John Holland’s.†
But likely the actual reason Lake withdrew his claim on the Deutschland was that North German Lloyd promised to finance the construction of Lake cargo submarines in the United States. He certainly would have welcomed the influx of funds. By the time the Deutschland docked, the Lake Company had been in and out of bankruptcy. To build the Turbot, he had terminated his contract with Newport News and opened his own shipyard in Bridgeport. But in November 19
13, Lake, yet to receive any payment from the government, found himself overextended. With the Turbot still under construction, he was forced to declare his company insolvent. The boat was completed in New York. When the war began, he emerged from bankruptcy, but was still financially fragile. In any event, the Deutschland made one only more voyage to the United States, the last ever by a cargo submarine. The joint venture was never initiated.
War in Europe eventually brought prosperity to just about every arms manufacturer, however, even those in America whose products were of dubious worth in battle. Before hostilities actually began, Congress put through an aggressive naval program, which included an expansion of its submarine fleet. Lake was awarded contracts for three new boats—Electric Boat received more than a dozen—all for harbor defense, one of which he built at his shipyard, the other two subcontracted to a shipbuilder in California. All were completed and commissioned successfully by early 1918.
When the United States entered the war in 1917, submarine procurement became fervent. At one point in 1919, ninety-six boats were under construction. Although by that time, the navy had established its own construction facility at Portsmouth, New Hampshire, both Lake and Electric Boat were called on to shoulder an unprecedented burden of construction. When the war ended, though, the nation sharply cut back and Lake was hit particularly hard. Unlike Electric Boat, which had diversified sufficiently to survive a downturn in one product line, Lake’s entire focus remained submarines, and the survival of his business depended on largesse from the government. That would prove difficult to come by.
“By April of 1920, it became evident that the Navy was more interested in developing the [Portsmouth Navy Yard] into a shipyard on par with [Electric Boat] than in supporting Lake. The latter had received only a handful of submarine contracts, and after the First World War, no others seemed forthcoming. On behalf of his Bridgeport constituents, Senator Frank Brandegee, Republican from Connecticut, appealed to the secretary of the navy. He questioned the wisdom and necessity of allowing the highly specialized workers at Lake’s Bridgeport facility to lose their jobs as a result of . . . awarding the few available post-war submarine contracts to the Electric Boat Company and the Portsmouth Navy Yard. Unfortunately for Lake, its performance did not give the Navy enough reason to reconsider its reliance on Electric Boat. . . . Lake’s boats exhibited poor diving qualities, and the company had great difficulty keeping submarine construction on schedule.”5
Although Lake pleaded with the government to provide him the wherewithal to remain viable and some senior naval officials backed him because they found “the prospect of a monopoly in submarine work by the Electric Boat Company appalling,” by 1924, Simon Lake was again forced to leave the attack submarine business, this time for good.
Lake, his mind always restless, turned to other pursuits. He designed and built prefabricated housing, and proposed a system of prefabricated concrete pipes. Both ideas showed promise but ultimately failed. In 1931, he refurbished a submarine he had built twenty years earlier, renamed it Nautilus, and set sail in an attempt to reach the North Pole. Although mechanical problems cut short the attempt, the Nautilus became the first submarine to sail under Arctic ice. Two years later, he borrowed money to mount a treasure-hunting expedition for a 1780 British gold shipment lost off New York Harbor. In 1936, reports that he had found the wreck turned out to be incorrect. All of these false starts sapped Lake’s personal resources. At one point, he was forced to auction off personal possessions in order to have money to live on.
Simon Lake lived modestly for another decade, occasionally, after the start of World War II, sending letters to the navy on submarine strategy and coastal defense. He died of a heart attack on June 23, 1945, after the war in Europe had ended and just weeks before an atomic bomb would level Hiroshima. He left behind a legacy of creative invention, dogged determination, and failed promise. He also left behind a wealth of books and monographs that extolled the virtues of submarine technology, mostly his own, and what he saw as the tragic plight of the innovator. In 1935, he wrote:
All my life I have been an inventor. I have learned to accept the fact that a new idea which in any way departs from the routine of life will be repelled by the public. This is no doubt a phase of the protective machinery of society. The too ready acceptance of new things would make society even more light-minded and hair-brained [sic] than it now is. But a man with a new idea should not be regarded as a public enemy. He should be granted a hearing, and if his invention is worthwhile he should be protected in its possession and helped in its development. As matters stand today a greenhorn inventor may find himself working on some scheme that has been public property for half a century. If he has really struck into new territory he may fall into the hands of a shyster lawyer, who thinks only of the money he can wring out of the poor devil. If he escapes these early perils, a promoter may get hold of him and either waste his money or steal his invention. If he dodges the promoter and tries to interest possible backers on his own, he will be turned back by cigarette-yellowed office-boys and frozen by blonde transparencies.6
Isaac Rice, who would have rated a category all his own in Lake’s denunciation, did indeed rebuild his fortune. In truth, despite the sale of Villa Julia, it is unclear if he ever lost it. He had either retained a substantially larger share of his holdings than rumors had indicated, or he quickly bought back when the market bottomed. In any case, his estate would include stock in many of the companies in which he had held shares before the Panic of 1907 hit and be of sufficient value for his wife Julia to donate, among many other endowments, $1,000,000 for the Isaac L. Rice Convalescent Hospital in Westchester County, New York, and an additional $1,000,000 to New York City to build an Isaac L. Rice athletic complex and stadium with seating for five thousand in Pelham Bay Park. Even during the years immediately after his supposed losses, Rice himself was frequently cited for generous contributions to educational institutions, chess societies, and civic betterment.
Nor did the Rices live frugally. They shuttled back and forth to Europe with first-class accommodations and were regularly featured in society columns. And, although the Rice apartments in the Ansonia might not have been up to Villa Julia standards, they were large enough to include a private ballroom in which the Rices entertained lavishly, hosting luminaries in the chess and social worlds.
This is not to say that Rice’s net worth was unaffected by the plunge in the stock market in October 1907. Even Pierpont Morgan lost a great deal of money, at least on paper. But those who had the fortitude to resist selling at a deep discount were rewarded when the stock market rebounded significantly in the latter half of 1908. Rice, although he may have sold some shares, seems to have been among them.
One stock that remained depressed, however, was Electric Boat. With only a modest American submarine program and minimal foreign sales, shares in Rice’s flagship company remained moored at $10 per share. But Rice was sufficiently convinced of the potential of the submarine that in 1911 he bought the New London Ship and Engine Company in Groton, Connecticut, to build diesel engines—which would soon supplant Ottos—and other components of submarine design. It seemed like a foolish decision. Even after war was declared in August 1914, most observers thought submarines would play at most an insignificant role in a war fought with giant armies on land and giant battleships at sea.
Then, on September 22, Otto Weddigen’s U-9 sank three British cruisers in less than ninety minutes.
Almost immediately “a twenty-million-dollar war order for submarine parts, periscopes and submarine ‘detectors’ was placed with the Electric Boat Company.”7 Frantic requests for boats or parts came in from more than a dozen different nations. Within weeks, Electric Boat had a two-year backlog of orders. The stock soared and Rice began to sell on the rise. Over the course of the following months, it is estimated that he sold twelve thousand shares at approximately $115, and in July 1915, he sold sixteen thousand shares at $150, netting him a total profit of more
than $3,500,000. In addition, in May 1915, Julia Rice sold $3,200,000 worth of Electric Boat stock that had been “given to her by her husband,” the previous October.
Four months later, Isaac Rice was dead. On November 2, 1915, in his Ansonia apartments, Rice, only sixty-four years old, suffered a massive heart attack. He died within moments with Julia at his side. Rice had become increasingly fatigued over the course of the previous year, but whether he knew he was gravely ill when he liquidated his Electric Boat shares is uncertain. In the wake of his passing, some commentators lamented Rice’s judgment, since by October 1915 the price of Electric Boat stock had reached $550.8 Had he held on, Rice would have made $16,000,000 rather than $3,500,000. But those critics assumed that Rice had sold off his entire holdings, which turned out not to be the case. A substantial position remained, as in 1922, Isaac L. Rice, Jr., a director in the Submarine Boat Company, as of 1915, Electric Boat’s holding company, was reported to own in excess of twenty-five thousand shares.
After her husband’s death, Julia Rice perpetuated both her husband’s name and her own. In addition to the hospital and stadium, she endowed the Betsy Head Memorial Playground in the Brownsville section of Brooklyn, dedicated to Isaac, and donated his entire two-thousand-volume collection of French memoir to Bates College in Maine, which had earlier granted Rice an honorary degree. In addition to her philanthropies, which were extensive, Julia Rice continued to pursue her most passionate cause.
After the Rices moved into Villa Julia in 1903, they made a disconcerting discovery. Each night, tugboat captains on the Hudson River sounded their whistles to greet other captains, or even to signal friends on shore. The sound was piercing and impossible to sleep through. Villa Julia had a soundproof chess room, but the bedrooms were exposed. Julia Rice hired some Columbia University students to monitor the noise and they recorded between two thousand and three thousand whistles each night.
Going Deep Page 36
