by John Brooks
AT one-forty on Friday afternoon, when the stock market was already badly rattled by the rumors of Haupt’s impending failure, the first reports of the President’s assassination reached the Exchange floor, in garbled form. Crooks, who was there, says that the first thing he heard was that the President had been shot, the second was that the President’s brother, the Attorney General, had also been shot, and the third was that the Vice-President had had a heart attack. “The rumors came like machine-gun bullets,” Crooks says. And they struck with comparable impact. In the next twenty-seven minutes, during which no hard news arrived to relieve the atmosphere of apocalypse, the prices of stocks declined at a rate unparalleled in the Exchange’s history. In less than half an hour, the values of listed stocks decreased by thirteen billion dollars, and they would no doubt have dropped further if the board of governors had not closed the market for the day at seven minutes past two. The panic’s immediate effect on the Haupt situation was to make the status of the twenty thousand frozen accounts far worse, because now, in the event of Haupt’s bankruptcy and the consequent liquidation of many of the accounts, the cashing in would have to be done at panic prices, with heavy losses to the accounts’ owners. A larger and less calculable effect of the events in Dallas was paralyzing despair. However, Wall Street—or, rather, some Wall Streeters—had a psychological advantage over the rest of the country in that there was work at hand to be done. This convergence of disasters confronted them with a definable task.
Having testified in Washington on Wednesday afternoon, Funston had returned to New York that evening and had spent most of Thursday as well as Friday morning working on getting Williston & Beane back in business. Sometime during that period, as it was gradually made clear that Haupt was not merely short of capital but actually insolvent, Funston became convinced the Exchange and its member firms must consider doing something virtually unprecedented—that is, reimburse the innocent victims of Haupt’s imprudence with their own money. (The nearest thing to a precedent for such action was the case of DuPont, Homsey & Co., a small Stock Exchange firm that went bankrupt in 1960 as a result of fraud by one of its partners; the Exchange then repaid the firm’s customers the money they had been divested of—about eight hundred thousand dollars.) Now, having hurried back to his office from a lunch date shortly before the emergency closing of the market, Funston set about putting his plan into action, calling about thirty leading brokers whose offices happened to be nearby and asking them to trot over to the Exchange immediately as an unofficial delegation representing its membership. Shortly after three o’clock, the brokers were assembled in the South Committee Room—a somewhat smaller version of the Governors’ Room—and Funston set before them the facts of the Haupt case as he then knew them, along with an outline of his plan for a solution. The facts were these: Haupt owed about thirty-six million dollars to a group of United States and British banks; since over twenty million of its assets were represented by warehouse receipts that now appeared to be worthless, there was no hope that Haupt could pay its debts. In the normal course of events, therefore, Haupt would be sued by the creditor banks when the courts reopened next week, the cash and many of the securities held by Haupt for its customers would be tied up by the creditors, and, according to Funston’s liberal estimate, some of the customers might end up getting back—after an extended period caused by legal delays—no more than sixty-five cents on the dollar. And there was another side to the case. If Haupt were to go into bankruptcy, the psychological effect of this, combined with the palpable effect of Haupt’s considerable assets’ being thrown on the market, might well lead to further depression of a stock market already in wild retreat at a time of grave national crisis. Not only the welfare of the Haupt customers was at stake, then, but perhaps the national welfare, too. Funston’s plan, simple enough in outline, was that the Stock Exchange or its members put up enough money to enable all the Haupt customers to get back their cash and securities—to be once again “whole,” in the banking expression. (The banking expression is etymologically sound; “whole” derives from the Anglo-Saxon “hal,” which meant uninjured or recovered from injury, and from which “hale” is also derived.) Funston further proposed that Haupt’s creditors, the banks, be persuaded to defer any efforts to collect their money until the customers had been taken care of. Funston estimated that the amount needed to do the job might run to seven million dollars, or even more.
Almost to a man, the assembled brokers agreed to support this public-spirited, if not downright eleemosynary, plan. But before the meeting was over a difficulty arose. Now that the Stock Exchange and the member firms had decided on a deed of self-sacrifice, the problem confronting each side—to a certain extent, anyway—was how to arrange to have the other side do the sacrificing. Funston urged the member firms to take over the entire matter. The firms declined this suggestion with thanks and countered by urging the Stock Exchange to handle it. “If we do,” Funston said, “you’ll have to repay us the amount we pay out.” Out of this not very dignified dialogue emerged an agreement that initially the funds would come out of the Exchange’s treasury, with repayment to be apportioned among the member firms later. A three-man committee, headed by Funston, was empowered to conduct negotiations to bring the deal off.
The chief parties that needed negotiating with were Haupt’s creditor banks. Their unanimous consent to the plan was essential, because if even one of them insisted on immediate liquidation of its loans “the pot would fall in,” as the Exchange’s chairman, Henry Watts—a fatherly-looking graduate of Harvard and of Omaha Beach, 1944—pungently put it. Prominent among the creditors were four local banks of towering prestige—Chase Manhattan, Morgan Guaranty Trust, First National City, and Manufacturers Hanover Trust—which among them had lent Haupt about eighteen and a half million dollars. (Three of the banks have remained notably reticent about the exact amount of their ill-fated loans to Haupt, but blaming them for their silence would be like blaming a poker player who is less than garrulous about a losing night. The Chase, however, has said that Haupt owed it $5,700,000.) Earlier in the week, George Champion, chairman of the Chase, had telephoned Funston; not only did the Stock Exchange have a friend at Chase, Champion assured him, but the bank stood ready to give any help it could in the Haupt matter. Funston now called Champion and said he was ready to take him up on his offer. He and Bishop then began to try to assemble representatives of the Chase and the three other banks for an immediate conference. Bishop remembers that he felt highly bearish about the chances of rounding up a group of bankers at five o’clock on a Friday—even such an exceptional Friday as this one—but to his surprise he found practically all of them at their battle stations and willing to come straight to the Exchange.
Funston and his fellow-negotiators for the Exchange—Chairman Watts and Vice-Chairman Walter N. Frank—conferred with the bankers from shortly after five until well into the dinner hour. The meeting was constructive, if tense. “First, we all agreed that it was a devil of a situation all around,” Funston subsequently recalled. “Then we got down to business. The bankers, of course, were hoping that the Exchange would pick up the whole thing, but we quickly disabused them of that notion. Instead, I made them an offer. We would put up a certain sum in cash solely for the benefit of the Haupt customers; in exchange for every dollar that we put up, the banks would defer collection—that is, would temporarily refrain from foreclosing—on two dollars. If, as we then estimated, twenty-two and a half million was needed to make Haupt solvent, we would put up seven and a half, and the banks would defer collection of fifteen. They weren’t so sure about our figures—they thought we were too low—and they insisted that the Exchange’s claim to get back any of its contribution out of Haupt assets would have to come after the banks’ claims for their loans. We agreed to that. We all fought and negotiated, and when we finally went home there was general agreement on the broad outline of the thing. Of course, everyone recognized that this meeting was only preliminary—to begin w
ith, by no means all the creditor banks were represented at it—and that both the detail work and much of the hard bargaining would have to be done over the weekend.”
Just how much detail work and hard bargaining lay ahead became manifest on Saturday. The Exchange’s board met at eleven, and more than two-thirds of its thirty-three members were present; because of the Haupt crisis, some governors had cancelled weekend plans, and others had flown in from their regular stands in such outposts as Georgia and Florida. The board’s first action—a decision to keep the Exchange closed on Monday, the day of the President’s funeral—was accomplished with deep relief, because the holiday would give the negotiators an additional twenty-four hours in which to hammer out a deal before the deadline represented by the reopening of the courts and the markets. Funston brought the governors up to date on what was known about Haupt’s financial position and on the status of the negotiations that had been begun with the banks; he also gave them a new estimate of the sum that might be required to make the Haupt customers whole—nine million dollars. After a fractional moment of silence, several governors rose to say, in essence, that they felt that more than money was at stake; it was a question of the relation of the Stock Exchange to the country’s many million investors. The meeting was then temporarily adjourned, and, with the authority of the governors’ lofty sentiments to back it up, the Exchange’s three-man committee got down to negotiations with the bankers.
Thus, the pattern for Saturday and Sunday was set. While the rest of the nation sat stupefied in front of its television sets, and while the downtown Manhattan streets were as deserted as they must have been during the yellow-fever epidemics of the early nineteenth century, the sixth floor of 11 Wall Street was a nexus of utterly absorbed activity. The Exchange’s committee would remain closeted with the bankers until a point was reached at which Funston and his colleagues needed further authorization; then the board of governors would go into session again and either grant the new authority or decline to do so. Between sessions, the governors congregated in the hallways or smoked and brooded in empty offices. An ordinarily obscure corner of the Exchange bureaucracy called the Conduct and Complaints Department was having a busy weekend, too; a staff of half a dozen there was continuously on the phone dealing with anxious inquiries from Haupt customers, who were feeling anything but hale. And, of course, there were lawyers everywhere—“I never saw so many lawyers in my life,” one veteran Stock Exchange man has said. Coyle estimates that there were more than a hundred people at 11 Wall Street during most of the weekend, and since practically all local restaurants as well as the Exchange’s own eating facilities were closed, the food problem was acute. On Saturday, the entire output of a downtown lunch counter that had shrewdly stayed open was bought up and consumed, after which a taxi was dispatched to Greenwich Village for more supplies; on Sunday, one of the Exchange secretaries thoughtfully brought in an electric coffee-maker and a huge bag of groceries and set up shop in the Chairman’s Dining Room.
The bankers’ negotiating committee now included men from two Haupt creditors that had not been represented on Friday—the National State Bank of Newark and the Continental Illinois National Bank & Trust Co., of Chicago. (Still unrepresented were the four British creditors—Henry Ansbacher & Co.; William Brandt’s Sons & Co., Ltd.; S. Japhet & Co., Ltd.; and Kleinwort, Benson, Ltd. Moreover, with the weekend half gone, they seemed to be temporarily unrepresentable. It was decided to continue negotiating without the British banks and then, on Monday morning, present any agreement to them for approval.) A crucial point at issue, it now developed, was the amount of cash that would be needed from the Stock Exchange to fulfill its part of the bargain. The bankers accepted Funston’s formula under which they would defer collection of two dollars for every dollar that the Exchange contributed to the cause, and they did not doubt that Haupt was stuck with about twenty-two and a half million dollars’ worth of useless warehouse receipts; however, they were unwilling to take that figure as the maximum amount that might be necessary to liquidate Haupt. To be on the safe side, they argued, the amount ought to be based on Haupt’s over-all indebtedness to them—thirty-six million—and this meant that the Exchange’s cash contribution would have to be not seven and a half million but twelve. Another point at issue was the question of to whom the Exchange would pay whatever sum was agreed upon. Some of the bankers thought the money ought to go straight into the coffers of Ira Haupt & Co., to be dispensed by the firm itself to its customers; the trouble with this suggestion, as the Exchange’s representatives were not slow to point out, was that it would put the Exchange’s contribution entirely beyond its control. As a final complication, one bank—the Continental Illinois—was distinctly reluctant to enter into the deal at all. “The Continental’s people were thinking in terms of their bank’s exposure,” an Exchange man has explained sympathetically. “They thought our arrangement might ultimately be more damaging to them than a formal Haupt bankruptcy and receivership. They needed time to consider, to make sure they were taking the proper action, but I must say they were coöperative.” Indeed, since it was primarily the Stock Exchange’s good name that was at the center of the planned deal, it would appear that all the banks were marvels of coöperation. After all, a banker is legally and morally charged with doing the best he can for his depositors and stockholders, and is therefore hardly in a position to indulge in grand gestures for the public good; if his eyes are flinty, they may mask a kind, but stifled, heart. As for the Continental, it had reason to be particularly slow to act, because its “exposure” amounted to well over ten million dollars, or much more than that of any other bank. No one concerned has been willing to say exactly what the points were on which the Continental held out, but it seems safe to assume that no bank or person who had lent Haupt less than ten million dollars can know exactly how the Continental felt.
By the time the negotiations were recessed, at about six o’clock Saturday evening, a compromise had been reached on the main issues—on the amount-of-cash controversy by an agreement that the Exchange would put up an initial seven and a half million with a pledge to go up to twelve million if it became necessary, and on the controversy about how the money would be paid to the Haupt customers by agreement that the Exchange’s chief examiner would be appointed liquidator of Haupt. But the Continental was still recalcitrant, and, of course, the British banks had not yet even been approached. In any event, everybody shut up shop for the night, with pledges to return early the next afternoon, even though it was Sunday. Funston, who was coming down with a bad cold, went home to Greenwich. The bankers went home to places like Glen Cove and Basking Ridge. Watts, a diehard commuter from Philadelphia, went home to that tranquil city. Even Bishop went home to Fanwood.
At two o’clock Sunday afternoon, the Exchange governors, their ranks now augmented by arrivals from Los Angeles, Minneapolis, Pittsburgh, and Richmond, met in joint session with the thirty representatives of member firms, who were anxious to learn what they were being committed to. After the current status of the emerging agreement had been explained to them, they voted unanimously in favor of going ahead with it. As the afternoon progressed, even Continental Illinois softened its opposition, and at about six o’clock, after a series of frantic long-distance telephone calls and attempts to track down Continental officers on trains and in airports, the Chicago bank agreed to go along, explaining that it was doing so in the public interest rather than in pursuance of its officers’ best business judgment. At about the same time, the Times’ financial editor, Thomas E. Mullaney—who, like the rest of the press, had been rigidly excluded from the sixth floor throughout the negotiations—called Funston to say he had heard rumors of a plan on Haupt in the offing. Because the British banks would have reason to be miffed, at the very least, if they should read in the next morning’s air editions of a scheme to dispose of their credits without their agreement, or even their knowledge, Funston had to give a reply that could only depress still further the spirits of the wa
iting twenty thousand customers. “There is no plan,” he said.
THE question of who would undertake the delicate task of cajoling the British banks had come up early Sunday afternoon. Funston, despite his cold, was anxious to make the trip (for one thing, he has since admitted, the drama of it appealed to him), and had gone as far as getting his secretary to reserve space on a plane, but as the afternoon progressed and the local problems continued to appear intractable, it was decided that he couldn’t be spared. Several other governors quickly volunteered to go, and one of them, Gustave L. Levy, was eventually selected, on the ground that his firm, Goldman, Sachs & Co., had had a long and close association with Kleinwort, Benson, one of the British banks, and that Levy himself was on excellent terms with some of the Kleinwort, Benson partners. (Levy would later succeed Watts as chairman.) Accordingly, Levy, accompanied by an executive and a lawyer of the Chase—who were presumably included in the hope that they would set the British banks an inspiring example of coöperation—left 11 Wall Street shortly after five o’clock and caught a London-bound jet at seven. The trio sat up on the plane most of the night, carefully planning the approach they would make to the bankers in the morning. They were well advised to do so, because the British banks certainly had no cause to feel coöperative; their Stock Exchange wasn’t in trouble. And there was more to it than that. According to unimpeachable sources, the four British banks had lent Haupt a total of five and a half million dollars, and these loans, like many short-term loans made by foreign banks to American brokers, had not been secured by any collateral. Sources only fractionally more impeachable maintain that some of the loans had been extended very recently—that is, a week or less before the debacle. The money lent is known to have consisted of Eurodollars, a phantom but nonetheless serviceable currency consisting of dollar deposits in European banks; some four billion Eurodollars were actively traded among European financial institutions at that time, and the banks that lent the five and a half million to Haupt had first borrowed them from somebody else. According to a local expert in international banking, Eurodollars are customarily traded in huge blocks at a relatively tiny profit; for instance, a bank might borrow a block at four and a quarter per cent and lend it at four and a half per cent, at a net advantage of one fourth of one per cent per annum. Obviously, such transactions are looked upon as practically without risk. One-fourth of one per cent of five and a half million dollars over a period of one week amounts to $264.42, which gives some indication of the size of the profit on the Haupt deal that the four British banks would have been able to divide among themselves, less expenses, if everything had gone as planned. Instead, they now stood to lose the whole bundle.
