The Go-Go Years (26 page)

And while this systemic eruption of sores covered the body politic, Wall Street, an organ of barometric sensitivity, had its own convulsions and its own loss of grip and tone. The loss amounted, indeed, to perhaps the single most dramatic technical failure of the free-enterprise system on record anywhere.

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It was the year Wall Street nearly committed suicide by swallowing too much business, and by compounding its own near-fatal folly by simultaneously encouraging more of the same. The pace of trading had been picking up in the latter months of 1967 as a new speculative binge—the second in the decade—began to take shape. The average daily trading volume for 1967 on the New York Stock Exchange came to 10,080,000 shares, an all-time record by a wide margin. But not one destined to stand. Nineteen sixty-eight was to be the year when speculation spread like a prairie fire—when the nation, sick and disgusted with itself, seemed to try to drown its guilt in a frenetic quest for quick and easy money. “The great garbage market,” Richard Jenrette called it—a market in which the “leaders” were neither old blue chips like General Motors and American Telephone
nor newer solid stars like Polaroid and Xerox, but stocks with names like Four Seasons Nursing Centers, Kentucky Fried Chicken, United Convalescent Homes, and Applied Logic. The fad, as in 1961, was for taking short, profitable rides on hot new issues. Charles Plohn, an underwriter known as “Two-a-Week Charlie” for the number of new low-priced issues he brought out, described his philosophy by saying, “I give people the kind of merchandise they want. I sell stock cheap. I bring out risky deals that most firms wouldn't touch.” The public paid the astronomical amount of $3.9 billion for new stock issues alone during the twelve-month period.

Trading volume was such as had never figured in any broker's wildest dreams of avarice. During the week after the Johnson withdrawal, which the market considered highly bullish, the Stock Exchange set new volume records almost every day. April 10, 1968, was the first day in history when Exchange trading exceeded 20 million shares; before the year was out there had been five more 20-million-share days, with a peak of 21.35 million on June 13. New investors and new money were coming into the market in torrents. During the first five months of the year, Merrill Lynch opened up over 200,000 new accounts; in other words, that winter and spring one American in every thousand—counting men, women, and children—opened a new brokerage account
with a single firm.
Brokers, of course, were reaping the harvest in commissions. Some of them had personal commission incomes for the year running to more than $1 million.

One million dollars income in a year, with no capital at risk—merely for writing orders for stock! It was enough to convince anyone that the Stock Exchange had indeed become Golconda revisited, that ancient city within whose portals all, according to legend, became rich, and so desirable was membership in the Exchange that the price of a seat rose from $450,000 in January to reach an all-time record in December of $515,000, topping even the peak prices of 1929.

As early as January, there began to be high cirrus cloud warnings that the back offices, the paper-handling departments
of the brokerage firms, were in for a storm of trouble—that, as constituted, they were simply unable to process the new business, and that therefore, as Hurd Baruch of the S.E.C. would put it later, the best of times for Wall Street were in danger of becoming the worst of times. That month, January, the S.E.C. wrote to the two leading exchanges and the National Association of Securities Dealers, guardian of the over-the-counter market, expressing concern about “accounting, record-keeping and back-office problems and their effects on the prompt transfer and delivery of securities.” The main barometric measuring device for the seriousness of back-office trouble was the amount of what Wall Street calls “fails.” A fail, which might more bluntly be called a default, occurs when on the normal settlement date for any stock trade—five days after the transaction itself—the seller's broker for some reason does not physically deliver the actual sold stock certificates to the buyer's broker, or the buyer's broker for some reason fails to receive it. The reasons for fails in most cases are exactly what one might expect: either the selling broker in his confusion can't find the certificates being sold on the designated date, or the buying broker receives them but in
his
confusion immediately misplaces them, or someone on one side or the other fouls up the record-keeping so that the certificates appear not to have been delivered when in fact they have been. Of course, not all fails—in 1968 or other years—are the result of innocent mistakes. In a certain number of cases, one brokerage firm or the other intentionally misappropriates the certificates to an improper purpose, or an employee of one firm or the other steals them. There is another problem related to that of the fail. Often, in times of back-office confusion, deliveries of certificates by brokers—particularly deliveries to banks—are rejected by the recipient with the notation, in effect, “I don't know anything of the transaction.” This confession of nescience is officially and rather charmingly designated a “Don't Know,” or “D.K.” Incredible as it may seem, a subsequent RAND study indicated that in 1968 between 25 percent and 40 percent of
all
brokers' deliveries of stock to banks were thus rejected.

As to fails, which are a more important indicator than D.K.'s of the degree of paperwork chaos in the securities business, the rule of thumb in Wall Street in 1968 held that an acceptable level of fails on New York Stock Exchange transactions at any given time (“acceptable,” the bemused observer must conclude, in relative terms) amounted to one billion dollars' worth. Let a mere billion dollars of the customers' money be more or less missing in Wall Street, the conventional wisdom went, and things were still within the ball park. Late in January, the fail level rose well above that figure, and the exchanges took action. Starting January 22, they and the over-the-counter market cut back daily trading hours by an hour and a half; closing time for an indefinite period became 2 P.M. instead of 3:30. The move—in retrospect an extremely timid one—was nevertheless made over loud opposition from a minority of the exchanges' governors. (The governors were brokers, and brokers, to say it right out, make money on heavy trading.)

In February, the opposition continued. And so did the rise in both trading volume and the level of fails. The early closings appeared to be having little if any effect, and in March they were quietly abandoned, and not replaced by any other restraining action. Would the problem, just possibly, go away? It would not. In April, N.Y.S.E. fails were up to a level of $2.67 billion; in May, to $3.47 billion. All over Wall Street, committees were formed and recommendations made on the back-office problem, but nothing substantive was done. By June, the old, established firm of Lehman Brothers was in such total confusion that its customers' securities were in clear jeopardy. Back in April, Lehman had converted to a fully automated accounting system, and, as is so often the case, the new system at first simply didn't work. Stock record discrepancies at the firm, by the end of May, ran into hundreds of millions of dollars. Lehman reacted by eliminating a few accounts, ceasing to make markets in over-the-counter stocks, and refusing further orders for low-priced securities; it did not augment these comparatively mild measures with drastic ones—the institution of a crash program costing half a million dollars to eliminate stock record errors—until
August, when the S.E.C. threatened to suspend Lehman's registration as a broker-dealer and thus effectively put it out of business. Lehman's reluctance to act promptly to save its customers' skins, and ultimately its own, was all too characteristic of Wall Street's attitude toward its troubles in 1968.

At last, when the fails level was up to $3.7 billion, the exchanges finally took a measure of drastic action themselves. Beginning on June 12, the securities markets were closed tight every Wednesday—a measure not used since 1929—in order to give the back offices a regular midweek breather in which to make a stab at catching up. But the order for Wednesday closings was unaccompanied by such logical, if painful, further measures as a prohibition on advertising and promotion designed to bring in still more business, or on the hiring of still more salesmen and the opening of still more branch offices. The lure of new money and additional commissions was irresistible. Brokerage ads continued to fill the financial pages and the airwaves; new salesmen were hired, new offices opened. Wall Street had become a mindless glutton methodically eating itself to paralysis and death.

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Why? Where were the counsels of restraint, not to say common sense, in both Washington and on Wall Street? The answer seems to lie in the conclusion that in America, with its deeply imprinted business ethic, no inherent stabilizer, moral or practical, is sufficiently strong in and of itself to support the turning away of new business when competitors are taking it on. As a people, we would rather face chaos making potsfull of short-term money than maintain long-term order and sanity by profiting less. A former high S.E.C. official, talking to me in 1969 about the situation the year before, defended the S.E.C.'s relative passivity by describing its rightful function as that of being
“an arbiter between powerful industry groups pulling in different directions.” An arbiter, rather than a conscience? And indeed, did Wall Street that year deserve an S.E.C. that would act vigorously to save it from itself? After all, the Securities Acts, not by chance, were based on self-regulation on the part of Wall Street. Where was self-regulation in 1968?

Essentially, it was in the hands of the leaders of Wall Street's key institution, the New York Stock Exchange, whose president since the previous September had been Robert W. Haack. Haack was no Keith Funston. He lacked his predecessor's fire and flair, and also, more happily, Funston's sometimes fanatical protectiveness of Wall Street and all its self-indulgent ways. Born in 1917 and raised in Milwaukee in modest circumstances, Haack had worked his way steadily and surely to his present eminence: a B.A. from little Hope College, in Holland, Michigan (once famous as the home of Holland rusk); an M.B.A. from Harvard Business School, where he had earned part of his keep by waiting on tables; three wartime years in the Navy; a slow rise, during the nineteen forties, from research assistant to partner in a Milwaukee securities firm; a move to the East, where he joined the bureaucracy of the National Association of Securities Dealers, of which he became a governor in 1961 and full-time paid president in 1964; and then, in 1967, election to what was still the key position in Wall Street. He was the third choice, after Edwin Etherington and Donald Cook had privately made clear that they wanted no part of the job. Funston was a hard act to follow, and Haack, moreover, came to the Stock Exchange with a reputation as a technician, a plodder, a bureaucrat, what the Russians call an
apparatchik.
Still, he soon showed himself to be something more. He did not hesitate to shake up the entrenched Exchange staff to make it conform to his style rather than to Funston's; he instituted badly needed long-range planning; he gradually ended Funston's emphasis on high-pressure promotion of the concept of stock investment for every man; he generally ran a taut ship. Significantly, he kept the home he had bought in Potomac, Maryland, when he had been negotiating constantly with the S.E.C. on behalf of the over-the-counter
market, and he commuted from it to Wall Street as often as circumstances allowed. His continued residence near Washington gave evidence of the way in which he conceived of his Stock Exchange role—not as an obdurate defender of Wall Street, but as a mediator between Wall Street and Washington.

An able and conscientious man, then, as even his most disillusioned former employees have conceded. But in the 1968 back-office crisis, Haack was as inadequate as everyone else. “Exchange-imposed restrictions were critical in coping with the paperwork problems of troubled firms,” he observed later. Critical, indeed. Haack might better have used the subjunctive: “would have been critical” might have made more sense. All through the crisis, the Exchange trod on eggs, administering a slap on the wrist here, a pat on the backside there, “urging” and “advising” member firms to take “strong steps” to curtail business, but never itself taking the strong and clearly required step of imposing sanctions to make the members comply. Apart from the ill-fated January and February early closings, the Exchange made no strong positive move until it was confronted with general disaster. In March, for example, it sent member firms a letter pointing out the extent of the problem, and then continuing,

Firms with serious problems may be asked to take steps to limit the growth of business or to reduce business.… In the absence of voluntary action, restraints may be imposed by the Exchange.…

Faced with such pussy-footing, it is small wonder that the member firms did little in the way of compliance. By early June, shortly before the Wednesday closings were instituted, Haack was at it again, pleading with member firms in a new cajoling letter. Now, he said, it was his belief that firms should “seriously consider” adopting “voluntary” restraints on expanding business. Specifically, he suggested that they stop soliciting over-the-counter business; that they “reduce or discontinue” trading for their own accounts; that they disallow commission credit to
salesmen on trades in low-priced stocks; and that they take various other steps, including a reduction of advertising and promotion. As Baruch has pointed out, a flat ban on the opening of new offices or the hiring of new salesmen, which would have been legal and proper, was not among the “suggestions.” As to the effectiveness of those that were made: for July, the month after the second Haack letter and the first full month of Wednesday closings, the fail level subsided only fractionally from June's.