Saturday, June 23, 2012

Money in Politics: "In 1868, a Wild Fraud to Dwarf Today’s Political Sleaze"

I've mentioned the ErieWars a few times, links below.
From Bloomberg's Echoes blog:
Echoes: Erie
Source: Library of Congress Prints and Photographs Division 

Do big corporations really control U.S. politicians through money and contributions? Is the system more corrupt today than ever before?

It often seems that way. U.S. corporations spent about $3.32 billion in 2011 to lobby officials in Washington, according to This, plus billions more in newly liberated campaign contributions and other practices have combined to create a system many describe as “legalized bribery.”

Still, lobbying is protected by the First Amendment and, if anything, decades of reforms designed to increase transparency have made today’s abuses mild by comparison.
How bad was it?

Probably the low point for corporate-influence peddling in the U.S. came in 1868, when the New York state legislature decided a contest over control of the Erie Railroad, then one of America’s premier corporations.
The battle pitted the venerable Cornelius Vanderbilt, the owner of the New York Central Railroad, against Daniel Drew of Erie and his two young proteges, Jay Gould and James Fisk Jr.

Vanderbilt’s goal was simple: With Erie in his pocket, he could control all rail links from New York City to the Great Lakes, an immensely profitable monopoly. But Drew, who had grown rich manipulating Erie stock prices as company treasurer (before insider-trading bans), had no intention to let go.

The so-called Erie War took place during one of the most corrupt periods in American history. Historians call it the “Era of Good Stealings,” the years just after the Civil War when William “Boss” Tweed ruled New York City, Ulysses S. Grant sat in the White House, and scandals -- from the Whiskey Ring to Credit Mobilier to postal frauds to Reconstruction to Indian agent frauds -- all bubbled just beneath the surface. The New York Stock Exchange was an unregulated frontier of booms, busts and manipulations.

The complex contest between Vanderbilt and Drew -- involving bribed judges, stock fraud, dueling injunctions and corporate piracy -- reached its climax in March 1868. Decades before the existence of rules governing tender offers, stock registration, disclosures or other such niceties, all Vanderbilt had to do was buy Erie stock as fast as he could until he owned enough to control the company -- what was known as a “raid.”

But Drew cheated. Tipped off to Vanderbilt’s plan, he secretly authorized and printed thousands of new Erie shares, turning the market into a quicksand pit.

Furious, Vanderbilt responded by finding a friendly New York judge to declare Drew, Gould, and the other Erie directors in contempt, forcing them all to flee across the Hudson River to New Jersey to avoid arrest.
Drew, in turn, responded by sending Gould to Albany to persuade the state Legislature to approve a bill legitimizing the large block of new stock issued to thwart Vanderbilt’s raid. Tweed, as a state senator (among other titles), personally represented Vanderbilt in the fight....MORE
From 2010's "Thanks Alphaville: 'Testing the Hindenberg Omen"':
For those not old enough to remember the Erie Wars, the standard procedure for officers and directors on the receiving end of an attempted stock corner was simply to issue more stock. Completely illegal but it was a effective as all get out.
(as a side note one of my mentors once warned me off a similar adventure by saying "They got more stock than you got money")

This was how Jay Gould, Jim Fisk and Daniel Drew cost Cornelius Vanderbilt a bundle as he tried to buy the Erie Railroad..
On the other hand the Commodore was able to corner the New York & Harlem Railway in both 1863 and 1864 to punish short-selling elected officials.
In 1863 it was the City Council who had granted the franchise, sold the stock and then pulled the franchise, in 1864 it was the state legislature who sold more than the issued and outstanding.

That means he got to set the price they were allowed to cover at.
The same thing happened with the Northern Pacific corner of May 1901, gunning the stock from just under $150 to $1000 per share. This of course caused a panic as the shorts sold everything else they owned in an attempt to stay liquid.

Robert Sobel's Panic on Wall Street has an entire chapter called "Battle of the Titans" devoted to the story.
I suppose he wasn't being melodramatic being that James J. Hill's broker was Pierpoint Morgan and E.H. Harriman's was Jacob Schiff of Kuhn, Loeb & Company.

Good times, good times.
And from 2011's From the "I Knew This Might Be Important" File: "Who Loses if Greece Restructures Without Triggering a 'Default Event'?:
He who sells what isn't his'n, Must buy it back or go to prison.
-Daniel Drew
Wall Street speculator*
*That's a bit of understatement. He was probably the first great American speculator. And he knew all the tricks. In addition to his comment on short-selling he applied the term "watered stock" to finance.
In 1867 the owner of the New York Central Railroad, Cornelius Vanderbilt, decided to buy the Erie Railroad out from under Uncle Dan'l.

Drew responded by the tripling the outstanding stock with illegally issued shares.
Good times.

**In 1863 Uncle Dan'l had shorted the New York & Harlem Railroad and then conspired with municipal officials (who were also short) to revoke their previously granted approval for the railroad to lay track from south of Union Square to the Battery. Vanderbilt, had been building a position starting in the $8-9 range because of the railroad's strategic value. The stock advanced to the $50 range after it became apparent that the Commodore was interested in taking control. After the City Council approved the laying of track the length of Broadway the stock advanced to $75. Enter Drew et al.

Vanderbilt absorbed every share the shorts sold to him and ended up with the entire float.
He allowed the shorts to settle at $179.
[there is some dispute whether Drew got caught in the first Harlem corner. -ed]

In 1864 Vanderbilt decided to bypass the aldermen and went to Albany to get the State's okey-dokey.
Uncle Dan got wind of the plan, went long, got the legislators on the bandwagon and ran the stock to $150.
The plan was to sell, go short and defeat the bill.

The stock dropped from $150 to $100 in two days.
This time Vanderbilt bought 137,000 of the 110,000 shares outstanding. Uh oh.
He was so pissed that this had happened again that he said he'd let the shorts out at $1000 but eventually settled at $285.


Large Investors, Price Manipulation, and Limits to
Arbitrage: An Anatomy of Market Corners

Wharton, 2006 (49 page PDF)