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Monday, December 02, 2002

Members of the Me generation scrutinizing what's left of their 401(k) statements and feeling they've been victimized by a uniquely heinous class of corporate criminals should take a look at the rogues who picked the pockets of their parents and grandparents in the years leading up to the Great Crash of 1929.

Browsing through two books -- "The House of Morgan" by Ron Chernow and "The Great Game" by John Steele Gordon -- won't make today's victims feel any better about postponing retirement for a few years, but it will make them realize that boys will always be boys. The history lessons that follow were derived from both books, which give investors more insight into how the market works than a week's worth of CNBC sound bites.

Just as today's hapless investors were urged on by the unvarnished optimism of market pundits -- financial columnist James Glassman's prediction of the Dow Jones industrial average reaching 36,000 being the prime example -- the lambs led to slaughter in the Roaring '20s were tutored by Irving Fisher, a Yale University economics professor.

In August of 1929, two short months before the crash, the Ivy Leaguer observed that "stock prices have reached what looks like a permanently high plateau."

One investor who wasn't buying Fisher's bunk was Albert H. Wiggin, a clergyman's son who became president of Chase National Bank. Sensing the gig was up in July 1929, Wiggin "quietly went short 42,000 shares of the stock he knew best, Chase National Bank," Gordon writes.

Short-sellers bet on stock prices falling. They borrow shares from someone, sell them at inflated prices, then repay the lenders with shares purchased after the share prices have fallen. The more the stock falls, the more short-sellers make.

"Thus Wiggin -- paid $275,000 a year to guide the policies of the bank for the benefit of the stockholders -- was personally interested in the fall of the stock," Gordon writes.

As despicable as Wiggin's behavior sounds, it gets worse. Chernow says the executive financed the gambit with a loan from his own bank.

Meanwhile, another bank was pursuing an early version of one of today's great scandals: conflicts of interest between investment bankers who underwrite stock offerings and their analysts who tout those stocks. It is only coincidence that the bank was National City -- not the Cleveland bank with branches in Pittsburgh but the New York bank that was the forerunner of Citigroup.

Many investment firms sold risky Latin American bonds to individual investors in the 1920s, but none worked at it as hard as National City Chairman Charles "Sunshine Charlie" Mitchell. Chernow relates that Mitchell had an army of 1,900 evangelical salesmen who pitched the bonds to investors eager for a piece of the action. Never mind that Latin American countries were notorious for defaulting and bankers like Mitchell knew it.

"After bank examiners criticized sugar loans made by the parent bank, [National City's] securities affiliate sold them as bonds to investors, an example of how commercial banks might palm off bad loans through securities affiliates," Chernow wrote.

Modern day inquisitors are pondering alleged conflicts of interest involving Mitchell's descendant, current Citigroup chief executive Sanford I. Weill. At issue are conversations Weill had with Jack Grubman when Grubman was the tech stock analyst at the firm's Salomon Smith Barney unit. Regulators are questioning whether Weill urged Grubman to rethink the hold rating he placed on AT&T shares in the hopes that a rosier recommendation would win investment banking business for Citigroup.

Weill denies placing any pressure on Grubman, who is in enough hot water already. In September, Citigroup agreed to pay $5 million to settle charges that Grubman misled investors about the prospects of Winstar Communications as that company hurtled toward bankruptcy.

Citigroup also is at the center of an investigation by New York Attorney General Eliot Spitzer, who alleges that five telecommunications company executives steered investment banking business to Salomon Smith Barney in return for being given access to initial public offerings of stock that netted the executives millions. The group includes former WorldCom chief Bernard Ebbers.

Such practices were common during the 1920s, according to Chernow. He writes that J.P. Morgan and other firms routinely set aside shares for their best clients and other influential people. One Morgan executive rationalized the practice of allocating shares of companies going public by saying it offered them to only those individuals who were "competent financially and mentally to undertake the risks, whatever they may be," Chernow writes.

Never mind that many of the favored few quickly unburdened themselves of such "risk" at a considerable profit, much like the privileged few who had access to the tech stock offerings of the late 1990s. Chernow said those receiving preferential treatment included former President Calvin Coolidge, the national chairmen of the Republican and Democratic parties, Gen. John Pershing and aviator Charles Lindbergh.

Corruption in the 1920s produced a torrent of new laws and regulations in the 1930s designed to thwart such scheming. For the most part, it did. But Wall Street's shady dealers are like water, which sooner or later finds its way around most things.

Your parents or grandparents can tell you that much.