The Go-Go Years (40 page)

N.S.M.C. stock dropped briefly after the report appeared—only to rise again to the 100-times-earnings range. But a few Wall Streeters seem to have read the footnotes; stock analysts and investing institutions began asking N.S.M.C. executives pointed questions for the first time late in 1969. Simultaneously, Randell began to be pressed by his colleagues within the company; some of them came to wince whenever he made a public statement, and a few of the more conservative of them went so far as to demand that he resign as president. He can hardly have failed to realize that the game was nearly up—that he had not succeeded in exploiting the youth market, assuming there was one, if only because he had never seriously tried to exploit it in his preoccupation with exploiting the stock market; and that now, at last, investors were catching on. Nevertheless, he bulled ahead until the last. On November 5, 1969, speaking to the New York Society of Security Analysts, he predicted, true to form, that earnings for fiscal 1970 would be almost triple those for 1969. The stock jumped 20 points, causing Randell's personal worth to rise $6.5 million. That he and his colleagues had somewhat different private notions is suggested by the fact that in December the company and its principal officers suddenly unloaded more than 325,000 shares. In January 1970, Randell—over the frantic objections of his colleagues, some of whom by this time would have liked nothing better than to silence their president with a gag and adhesive tape—made a nationwide speech tour during which he constantly reiterated his 1970 earnings projection.

In early February, N.S.M.C.'s financial vice president gave a dumbstruck group of company executives the jolting news that the actual result for the quarter just ended would be a loss. By February 17, Randell's ebullience had been dampened at last, at least to the extent that, in a speech to the St. Louis security analysts that day, he said merely that N.S.M.C.'s first 1970 quarter would be “profitable.” His partial concession to reality was too little and too late. The following day, amid panic in the councils of N.S.M.C, Randell resigned as president; a week later, a first-quarter loss of $1.2 million was announced, and two days after that, the company shamefacedly admitted that there had been a “mechanical error in transferring figures from one set of books to another,” and that the actual loss was more like $1.5 million. By this time the market for the stock had understandably caved in; having sold at 140 as recently as late December, it was down to 50 and sinking fast; by July it would stand at 3 1/2, a loss of more than 97 percent from its peak seven months before. By then, it may be assumed, the investing public, including many of its firmly established corporate citizens, would be sadder if not wiser about fast-talking young entrepreneurs selling companies with faddish stories. As for Cort Randell, he would by then have vanished into the obscurity of his Potomac palace, with a few million dollars intact from stock sales made in time—one more stock-market rocket of youth's short era, rich and burned out at thirty-five.

Well and good. But the question remains, How could he have fooled the Morgan Guaranty, the Bankers Trust, Harvard and Cornell, the whole brains trust of institutional investing, for as long as he did—and, of course, taken the innocent investing public along with them? The answer appears to be painfully simple: that he was plausible and they were gullible as well as greedy; that, in times of speculative madness, the wisdom and experience of the soundest and soberest may yield to a hysteria induced by the glimpse of fool's gold dished by a young man with a smile on his lips and a gleam in his eye.

6

Late in September 1968, at the height of the Presidential election campaign, the Republican candidate Richard M. Nixon sent a letter to a group of top Wall Street executives in which he attacked the S.E.C. under Democratic leadership for its “heavy-handed bureaucratic regulatory schemes,” expressed the fear that a continuation of such policies “might seriously impair the nation's ability to continue to raise the capital needed for its future economic growth,” and went on to promise, in effect, that regulation of the securities business under his administration would be relatively passive and permissive.

The free and healthy operation of the market [Nixon wrote] is of utmost importance to the investor. … Our securities laws were designed to protect the investor by insisting on full and complete disclosure.… I believe in the full enforcement of the securities laws to assure absolute protection for the investor. … The philosophy of this [Democratic] administration, however, has been that disclosure alone is not enough and that the Government can make decisions for the investor better than he can make them for himself. This philosophy I reject.

Wall Street was electrified. What the Republican candidate was rejecting, of course, was the now generally accepted view that in an age of stock-market participation by the millions, full disclosure alone is by no means sufficient to protect the general investor; and he was clearly and categorically announcing his intention to undo the activist work at the S.E.C. of Cary and Cohen, and turn the clock back to the old Wall Street era of “Eisenhower prosperity.” Could this really be happening, the thoughtful minds on Wall Street wondered, at the very moment when a new speculative binge was clearly building to its climax, when portfolio-churning brokers, letter-stock-buying mutual funds and law-avoiding offshore trusts were clearly making a
mockery of “full disclosure” and taking renewed advantage of unsophisticated investors?

Some in Wall Street could hardly believe their luck—apparently the cookie closet was to be no longer watched or locked. Others were dismayed. “I'm bewildered by it all,” said a senior partner of an investment banking firm. “The S.E.C. has been in the picture now for more than thirty years and it's doing its job. Regulation is here to stay.” Indeed, many practical Wall Streeters believed that the public confidence in securities promoted by the presence of a vigorous S.E.C. was a positive factor for business, and that any weakening of the S.E.C. or its authority would be concomitantly bad. Such dismay was mitigated in a somewhat equivocal way by a large measure of skepticism as to whether the Republican candidate really meant what he said. It was widely known that much of Nixon's fund-raising base was in Wall Street—that Bernard J. Lasker, then vice chairman of the New York Stock Exchange, was a leading Nixon fund-raiser as well as a close Nixon friend, and that Peter M. Flanigan of Dillon Read (later a high and controversial White House aide) was a key man in the campaign. Perhaps, it was reasoned, Nixon was just trying to tell Wall Street what he thought it wanted to hear, in the familiar spirit of campaign rhetoric. There were even rumors—given wide currency by disconcerted Nixon supporters—that the letter had been sent out without its having been read by the candidate.

Such speculation was cold comfort to the more dedicated and able members of the S.E.C. and its staff. The prospect they faced, should Nixon win, was apparently that of working under a President who either opposed everything they were trying to do, or who wished to give the appearance that he did. It was scarcely a morale-building pair of alternatives. Cohen's four year regime as chairman had been strong on enforcement and somewhat less so on policy innovation, but it had been imaginative and aggressive enough to keep most of the best S.E.C. staff men active and happy. It is axiomatic in the S.E.C. that the star performers who stay there for any length of time do so on principle and at personal sacrifice, since much higher-paying
jobs on Wall Street or in the law firms are almost always available to them. Now, with Nixon's letter, the occasion for worthwhile sacrifice seemed to have been removed. Within weeks after publication of the letter, a small ebb tide of talent began to flow out of the S.E.C.; in November, after Nixon's election, the tide became a torrent.

A hard core of skilled, experienced, and well-motivated staff men hung on into the new year and new administration, doing the day-to-day job of processing new stock registrations, and waiting to see whom Nixon would appoint as Cohen's successor. The man he appointed in February was hardly one to please a dedicated S.E.C. activist. Hamer H. Budge was a short, bald former Congressman from Idaho and political protégé of Senator Everett Dirksen, who had become an S.E.C. commissioner in 1964 as a Republican appointee of President Johnson. At Commission meetings, Judge Budge—so called in recognition of a brief term he had served as a federal judge back in Idaho, and maybe just because it sounded good, too—had happened to sit on the left of Manny Cohen, and Cohen had had many a good laugh about that. Politically, Judge Budge was by no means to the left of Cohen; rather, he was an amiable Republican with middle-of-Main-Street Republican ideas and, as to the S.E.C.'s role and function, a holder of the philosophy that the best regulation is generally the least regulation.

On his first day in office as S.E.C. chairman, Budge made a surprisingly strong public attack on conglomerates and their involvement with mutual funds in the stock market, signalling the start of a Nixon administration campaign that would eventually have its focus in the office of Richard W. McLaren, Assistant Attorney General. But Judge Budge's initial burst of activism was short-lived. The S.E.C., unlike the Justice Department, actually did little to curb conglomerate power, and as the summer of 1969 came and the Wall Street bubble of widespread speculation swelled nearer the breaking point, the S.E.C.'s complacency showed signs of becoming somnolence. As promised, “heavy-handed regulatory schemes” were conspicuous by their absence; there was little evidence at the S.E.C. of plans for
regulatory schemes of any sort; there were rumors (later confirmed) that the S.E.C.'s great work in progress since 1968, a huge study of the effect of institutional investors on the stock market, was losing steam; and there was some evidence that even basic enforcement activities against stock-market fraud were being relaxed. To top it all off, in July it inconveniently became public knowledge that Judge Budge, while holding office as S.E.C. chairman, had felt free to entertain an $80,000-a-year job offer from Investors Diversified Services, a giant mutual-fund complex emphatically under the regulatory jurisdiction of the S.E.C.

In view of the fact that at about the same time the S.E.C. was actively engaged in negotiations with Investors Diversified Services about its methods of operation, this bordered on scandal, at least to Congressional Democrats. Judge Budge explained himself to a Senate subcommittee to its apparent satisfaction. But even by the most charitable possible interpretation, Budge's flirtation with a high-paying industry job while he was serving at the S.E.C.—indeed, during his first six months in office—set the worst and most demoralizing possible example for the staff men working under him. Predictably, they followed that example. As early as May, Judge Budge was expressing dismay and apparent bewilderment that so many good S.E.C. men were quitting their jobs.

By the fall of 1969, talent and morale at the S.E.C. had reached rock bottom. Two new Nixon-appointed commissioners, an upstate New York accountant and a conservative Florida Democrat with no background in securities, had consolidated the Commission's new conservative, hands-off majority. Hearings on stock-brokerage rates that had begun more than a year earlier were still dragging on without results. Judge Budge was cheerfully assuring Wall Street that it could look forward, as promised, to a spell of “self-regulation” with little interference from his office. A disillusioned S.E.C. staff man observed with resigned understatement that “things are slowing down.”

In one sense, they weren't. In terms of paper-pushing as opposed to enforcement of existing rules and promulgation of
new ones, the S.E.C. was busier than ever before, processing the new stock-and-bond registrations that were flowing in so fast—between July 1 and September 30, a thousand of them amounting to about $12 billion—that businessmen bringing their applications to the S.E.C. building were being issued numbers to designate their turns, like customers at a crowded meat counter. And there was a final irony. Like other paper-pushing agencies, the S.E.C. charged fees to the companies whose new securities issues it processed for registration; such fees were intended to cover the costs of the staff and to finance the agency's other activities in enforcement, surveillance, and planning. In 1969, fee receipts were high and expenses were low. So it came to pass that the S.E.C., which was supposed to be paid for by taxpayers in exchange for its surveillance of profit-making Wall Street, ended the year with its own bottom line showing—a net profit.

*
This turned out to be Equity Funding Corporation.

CHAPTER XII

The 1970 Crash

1

In terms of the analogy between the nineteen twenties and the nineteen sixties with which this chronicle began, the beginning of the year 1970 corresponds roughly to the late spring of 1929. In each case, there were warning signals across the land of a coming economic recession, possibly a full-scale depression, and an uneasy Republican administration, only a year or so in office, was wondering what to do for its best friend and principal political client, the business community. In each case a steep decline in second-rank stock issues—a sort of hidden crash, since it didn't show up in the popular averages—was already under way. In each case speculation continued to flourish, and money was historically tight; and in each case the Federal Reserve, torn between trying to dampen speculation and inflation on the one hand and trying to head off recession on the other, was frantically pressing its various monetary levers to little effect.

But there was at least one big difference. Where in 1929 the stock market became the national craze as it had never been before, and in some senses had never quite been since, and
interest in it was actually increased by its disintegration, in 1970 the investor mood was one of fatalism, and the decline in trading volume would become as great a problem for Wall Street as the decline in stock prices.