The Go-Go Years (17 page)

It was open season now on Anglo-Saxon Protestants even when they stayed plausibly close to the straight and narrow. Their sins, or alleged sins, which had once been so sedulously covered up by press and even government, were now good politics for their opponents. They had become useful as scapegoats—as was perhaps shown in the poignant personal tragedy of Thomas S. Lamont. Son of Thomas W. Lamont, the Morgan partner who may well have been the most powerful man in the nation in the nineteen twenties, “Tommy” Lamont was an amiable, easygoing man. He was a high officer of the Morgan Guaranty Trust Company and a director of Texas Gulf Sulphur Company, and on the morning—April 16, 1964—when Texas Gulf publicly announced its great Timmins ore strike, he notified one of his banking colleagues of the good news at a moment when, although he had reason to believe that it was public knowledge, by the S.E.C.'s lights in fact it was not. The colleague acted quickly and forcefully on Lamont's tip, on behalf of some of the bank's clients; then, almost two hours later, when news of the mine was unquestionably public, Lamont bought Texas Gulf stock for himself and his family.

He thought he had done nothing wrong; indeed, inasmuch as he had known all about Timmins several days earlier and had taken no advantage of the fact by either word or deed, he had clearly resisted a powerful temptation to wrongdoing. But the S.E.C—promulgating an entirely new doctrine of insider trading to the effect that fiduciaries with inside information were required not only to wait until after public announcement before acting on it, but then to wait an additional “reasonable amount of time”—accused him of violating the securities laws. In so doing, it lumped him with flagrant violators, some Texas Gulf geologists and executives who had bought stock on the strength of their knowledge of Timmins days and months earlier, and who made up the bulk of the S.E.C.'s landmark insider case of 1966.

Could it be, then, that the S.E.C. knew well enough that it had a weak case against Lamont, and dragged him into the suit purely for the publicity value of his name? The outlandishness
of the charge against him, and the frequency with which his name appeared in newspaper headlines about the case, suggest such a conclusion. At all events, the publicity and attendant opprobrium were too much for Lamont, and soon after the S.E.C. charges his health went into a decline. In the end, he, almost alone among the defendants, was vindicated through the dropping of all charges against him. Too late, however, to do him any good. The vindication came after his death, to which he was hounded, some of his friends maintained, by the ruthlessness and irresponsibility of bureaucrats who sacrificed him to get public attention to their cause—made him, because of his name and lineage, a wholly involuntary martyr to the public interest.

Even in strictly religious terms, it was hardly surprising that Protestantism had lost its dispensation as Wall Street's established church. The faith itself, in Wall Street's part of the country, had largely lost its traditional character. The Protestant church in New York City was becoming a black church. Shortly before 1960 Negroes had for the first time become a majority of the city's Protestants, and by 1965 they amounted to six out of ten. White membership was declining rapidly, and the various Protestant churches in the area, responding to their new constituency, were abandoning their old role of serving as the austere and worldly conscience of economic rulers to become agencies to fill the spiritual, and sometimes the material, needs of the culturally and economically deprived. Was this deeply integrated and sometimes activist church, then, the one for virtually all-white and surely nonactivist Wall Street? Apparently not.

The new downtown religion was liberal Judaism. German Jews had been among the founding fathers of Wall Street; the Seligmans, the Lehmans, the Goldmans and the Sachs had founded American investment banking before even Pierpont Morgan's bulky presence had arrived on the scene, and from the time at the turn of the century when Kuhn, Loeb had fought Morgan to a standoff in the Northern Pacific affair, the Jews of Wall Street had enjoyed recognition as equal to the Yankees in
both prestige and power. But those Jews had tended to be sedulous apes; awed and inspired by the new nation in which they or their fathers were immigrants, inclined to put Old Europe behind them except in matters of business, they became more Yankee than the Yankees, more Protestant than the Protestants, and thus did little to change the atmosphere. Moreover, with a few exceptions (like Paul M. Warburg, the Kuhn, Loeb partner who was virtually founder of the Federal Reserve System) they were by common consent excluded from the formal and official Wall Street leadership, and it went without saying that they never assumed the leadership of any but Jewish firms. In the nineteen sixties a great change came. By that time, some of the staid old Jewish firms had literally Protestantized themselves; their Anglophilia and Yankeephilia had reached the point where many of their partners and some of their senior partners were Protestants, not by conversion but by birth. Meanwhile, a newer strain of Jews, most of them more recent immigrants than the Germans and with origins in Eastern Europe, were taking over Wall Street leadership in a way that their predecessors had never aspired to. Even at the conservative New York Stock Exchange, the power struggle had largely come down to an armed truce between Jews, Catholics, and Protestants; President Funston, a Yankee Protestant if there ever was one, was widely thought of by the membership as a compromise candidate acceptable—like a Liberal Party member—precisely because his constituency was weak.

The change brought with it a new ethical climate. The new Jewish men of power were not temperamentally religious any more than the old Protestant ones had been, but they, like the Protestants, brought with them a certain culture and set of attitudes and responses and outlook on life, which became the new climate of Wall Street. It was a style a little less dour—not less materialistic or grasping but more candid and humorous about the materialism as well as the manner; a style not less interested in the trappings and icons of culture, but undoubtedly by tradition more capable of enjoying culture; a style with more of a bent for justice and less of an acceptance of caste. It
was a style neither more nor less honest than that of the Protestants, but probably less inclined to be hypocritical on the subject. And it probably was—although this would be hard to prove—a style more inclined to dash and daring as opposed to respectability, less concerned about preservation of values and appearances and more sympathetic toward speculation and outright gambling. Our story of Wall Street from 1965 to 1970 involves a number of Jewish plungers, sometimes pitted directly against Old Protestant conservators.

5

Into this fast-changing, yet still relatively complacent, Wall Street of mid-decade there came, in June, 1965, a thunderbolt from the north.

The Texas Gulf ore strike at Timmins in early 1964 had dramatically shown Canada to United States investors as the new Golconda. Here was a great, undeveloped land with rich veins of dear metals lying almost untouched under its often-frozen soil; with stocks in companies that might soon be worth millions selling for nickels or dimes on Bay Street, the Wall Street of Toronto; and with no inconvenient Securities and Exchange Commission on hand to monitor the impulsiveness of promoters or cool the enthusiasm of investors. American money flowed to Bay Street in a torrent in 1964 and early in 1965, sending trading volume there to record heights and severely overtaxing the facilities of the Toronto Stock Exchange. Copies of
The Northern Miner,
authoritative gossip sheet of the Canadian mining industry, vanished from south-of-the-border newsstands within minutes of their arrival; some Wall Street brokers, unwilling to wait for their copies, had correspondents in Toronto telephone them the
Miner
's juicier items the moment it was off the press. And why not? Small fortunes were being made almost every week by quick-acting U.S. investors on new Canadian ore
strikes, or even on rumors of strikes. It was as if the vanished western frontier, with its infinite possibilities both spiritual and material, had magically reappeared, with a new orientation ninety degrees to the right of the old one.

The Canadian economy in general was growing fast along with the exploitation of the nation's mineral resources, and among the Canadian firms that had attracted the favorable attention of U.S. investors, long before 1964, was Atlantic Acceptance Corporation, Ltd., a credit firm, specializing in real-estate and automobile loans, headed by one Campbell Powell Morgan, a former accountant with International Silver Company of Canada, with an affable manner, a vast fund of ambition, and, it would appear later, a marked weakness for shady promoters and a fatal tendency toward compulsive gambling. As early as 1955, two years after he had founded Atlantic, Morgan saw the possibilities of raising capital for expansion in Wall Street—and elements in Wall Street saw the possibilities of making profits in Toronto. Morgan was an acquaintance as well as a countryman of Alan T. Christie, a Canadian-born partner in the small but rising Wall Street concern of Lambert and Company. The founder and head of this firm—whose members liked to describe it as a
“banque d'affaires,
” and to pronounce its name the French way, “Lombaire”—was Jean Lambert, a suave gentleman in his thirties, born and educated in France, who had come to America and married Phyllis Bronfman, daughter of the president of Seagram's. A divorce had ensued, but $1 million of Bronfman money had stayed in Lambert and Company, whose founder liked to present himself as an international statesman of finance—as a delegate to the celebrated Bretton Woods monetary conference of 1944 (where he had, in fact, served, though not as a delegate but as a translator), and as the architect of a “Lambert plan” for international monetary reform. At Christie's recommendation, Lambert and Company in 1954 put $300,000 into Atlantic Acceptance, thereby becoming Atlantic's principal U.S. investor and chief booster in Wall Street and other points south.

The years passed and Atlantic seemed to do well, its annual
profits steadily mounting along with its volume of loans. Naturally, it constantly needed new money to finance its continuing expansion. Lambert and Company undertook to find the money in the coffers of U.S. investing institutions; and Jean Lambert, backed by Christie, had just the air of European elegance and respectability, spiced with a dash of mystery, to make him perfectly adapted for the task of impressing the authorities of such institutions. Characteristically, Lambert decided to start at the top. In 1959, his partner Christie called on Harvey E. Molé, Jr., head of the U.S. Steel and Carnegie Pension Fund, probably the largest institution of its kind in the world at that time, with assets of more than $1.6 billion. Christie made the pitch for the Steel fund to invest in Atlantic. Molé, born in France but out of Lawrenceville and Princeton, was no ramrod-stiff traditional trustee type; rather, he fancied himself, not without reason, as a money manager with a component of dash and daring. Atlantic Acceptance was just the kind of relatively far-out, yet apparently intrinsically sound, investment that appealed to Molé's Continental sporting blood. The Steel fund took a bundle of Atlantic securities, including subordinate notes, convertible preferred stock, and common stock, amounting to nearly $3 million. The following year, Lambert and Company—again starting at the top—approached the Ford Foundation, far and away the largest institution of
its
kind. The foundation's investment men made a check (perhaps not too careful a check) on Atlantic with the company's management, its competitors, and various Canadian banks; apparently the findings were favorable, and the Ford Foundation took a good-sized plunge in Atlantic debt securities.

After that, it was easy. With the kings of U.S. institutional investing taken into camp, the courtiers could be induced to surrender virtually without a fight. Now Lambert and Company could say to the fund managers, “If this is good enough for U.S. Steel and the Ford Foundation, how can you lose?” “We were all sheep,” one of them would admit, sheepishly, years later. Before the promotion was finished, the list of U.S. investors in Atlantic had become a kind of Burke's Peerage of American
investing institutions: the Morgan Guaranty and First National City Banks; the Chesapeake and Ohio Railway; the General Council of Congregational Churches; Pennsylvania and Princeton Universities (perhaps not coincidentally, the man in charge of Princeton's investment program was Harvey Molé); and Kuhn, Loeb and Company, which, to the delight of Lambert, gave the enterprise its valuable imprimatur by taking over as agent for the sale of Atlantic securities in the United States. Perhaps the final turn of the screw, as the matter appears in hindsight, is the fact that the list of Atlantic investors eventually included Moody's Investors Service, whose function is to produce statistics and reports designed specifically to help people avoid investment pitfalls of the sort of which Atlantic would turn out to be an absolutely classic case.

But nobody knew that then. Indeed, in the early nineteen sixties Atlantic seemed to exceed the wildest hopes with its almost unbelievable rate of growth. Its reported sales for 1960 were $24.6 million, for 1961 $45.6 million, for 1962 $81 million, for 1963 $176 million—a consistent improvement approaching 100 percent a year. The growth rate itself might well have been interpreted as a danger signal. In the loan business, the easiest way to expand faster than your competitors is by consistently making loans that they are unwilling to make because they consider them unsound. In fact, that was precisely what Atlantic was doing, intentionally and systematically. But the presence of the Steel fund, the Ford Foundation, and the rest on the investor list served as an effective smoke screen; any cautious critics were easily dismissed as flatulent grumps; and the bandwagon rolled on.

Late in 1964, Atlantic, hungry for capital as always, sold more stock; and early in 1965, Kuhn, Loeb helped place $8.5 million more in Atlantic long-term debt with U.S. institutional investors. By this time, Lambert and Company's stake in Atlantic amounted to $7.5 million. The firm's commitment was a do-or-die matter; it would stand or fall with Atlantic. Moreover, it is now clear that by this time Morgan and his associates were
engaged in conducting a systematic fraud on a pattern not wholly dissimilar to that of Ponzi or Ivar Kreuger. Atlantic would use the new capital flowing from Wall Street to make new loans that its major officers knew to be unsound; the unsoundness would be deliberately camouflaged in the company's reports, in order to mislead investors; the spurious growth represented by the ever-increasing loans would lure in new investment money, with which further unsound loans would be made; and so on and on. Morgan had taken to intervening personally each year in the work of his firms' accountants— some of whom were willing enough to commit fraud at their client's request—to ensure that a satisfactory rise in profits was shown through overstatement of assets and understatement of allowances for bad debts. For 1964, it would come out later, Atlantic's announced $1.4 million profit, under proper accounting procedure, should have been reported as a
loss
of $16.6 million.