Corrupt to the core

26 Jul, 2019 - 00:07 0 Views
Corrupt to the core

eBusiness Weekly

Alfred M. Mthimkhulu

Remember William Gladstone (1809 – 1898). He was one of the leading statesmen during the reign of Queen Victoria of the United Kingdom. He served four terms as the Chancellor of the Exchequer and four times as Prime Minister, his last premiership being 1892 to 1894. He is indeed one of those larger-than-life men who stood watch over an empire on which the sun never set.

Sometime in the late 1860s he wrote to a lawyer in the United States: “I understand you have a man in your country who is worth $100 million, and it is all in property which he can convert at will into cash. The government ought to take it away from him, as it is too dangerous a power for any one man to have.” Who was this man?

It was Cornelius Vanderbilt (1794 – 1877). TJ Stiles titled his book on the man “The First Tycoon”. It is a fantastic read on which this article is indebted.

Vanderbilt was a self-made man in an era where wealth and nobility were synonymous. A hustler who in his early career would not have hesitated hurling punches at opponents, Vanderbilt would become such a diplomacy-driven industrialist honoured publicly, in his life time, by two US Presidents and best left unprovoked by competitors.

As with most outsiders to a system run by a privileged few, he expanded his business inspired by his belief in fairness and social justice. To him, even from his humble days as a sailor before being deemed railroad king, fairness entailed low fares to his clients and a reliable service.

From the 1840s, railroad shares dominated Wall Street. One day probably in July 1867, some visitors interrupted a meeting Vanderbilt was having in his New York office.

The visitors were from a rival railroad company called The Erie. Amongst them was stockbroker James Fisk Jr. They were working on ousting the Erie President Daniel Drew otherwise known as the ‘speculating director’. He was so-named because he manipulated the Erie share price for his pocket. The visitors went on to say that they had lined-up funds to buy Erie but, to get the ball rolling, the speculating director had to go.

Vanderbilt held a chunk of Erie shares. Would he give them a proxy for his shares so that they vote out Drew in the meeting of 8 October 1867? He agreed being also cajoled to buy more Erie shares.

Two days before the meeting, it was clear to Drew that he would be kicked out. He reached out to Vanderbilt and managed to persuade him to withdraw backing Fisk and crew.

Fisk and crew were told of this development after which all agreed to keep the speculating director but fire three others. Their bigger plan seemed intact. Wall Street saw the changes in the board and concluded Vanderbilt was angling for Erie.

It made sense. Some two months after the attempted coup on the Erie President, Vanderbilt had gotten a controlling stake in New York Central Rail. Could Erie be next? The share price went crazy hitting all-time highs in January 1868 before dropping mysteriously in February. What was going on?

Drew, Fisk and crew were dumping shares. It seems they had accumulated a lot of shares before meeting Vanderbilt and were using Vanderbilt to cash out. But they did more than cash out.

Drew, independent of others, went short the stock meaning that he sold shares he did not have hoping the share price would drop so much that he would buy the shares back at a lower price.

Meanwhile, Fisk and other schemers issued convertible bonds without shareholder approval. They quickly converted the bonds and sold. Vanderbilt, the only big buyer was now feeling the weight especially after Erie executives withdraw $5 million cash from the bank and locked it all away.

For a financial market with fixed cash circulation of $12 million or so, the $5 million cash locked away was huge.

It drove interest rates up as banks chocked in a liquidity crunch. Stockbrokers called clients to top-up their margin accounts. All this accelerated the downward spiral of shares.

The public was livid. How dare Vanderbilt try to create a monopoly of the railroads, they protested.

Fisk and crew leveraged on this public outcry: the poor were being victimised by this emerging monopolist, they echoed.

Meanwhile Vanderbilt was challenging the legality of the newly issued shares. All things being equal, arrests seemed imminent so the schemers fled to New Jersey. New Jersey quickly passed a law incorporating Erie thus giving the fugitives safe passage.

As Judge Barnard, well known as “a most merchantable judge”, worked on the case of fraudulently issued shares, the senate was being serenaded by the outcry against the monopolist while debating a bill to perhaps legitimise the newly issued shares thus thwart Vanderbilt’s ambitions — ambitions he strongly denied.

One senator went to meet the fugitives in New Jersey. Confessing to them that legislators were really struggling to get by, he ‘tipped’ the fugitives that the senate seemed likely to veto the bill thus promote Vanderbilt’s ambitions.

He concluded the meetings by encouraging them to return to New York “preferably well-funded”.

Biographer Maury Klein writes that one of the fugitives left New Jersey “with a suitcase full of greenbacks and a ready reserve of check books. For three days he wooed legislators with a liberal supply of food, drink, and greenbacks.”

On 1 April, the Senate would, to the fugitives’ shock, vote against the bill only to resoundingly reverse the vote two weeks later by 101 votes to 5. An April fools’ day joke or what? Such a circus.

Vanderbilt had lost a war he was dragged into.

He was barred from having a management say in Erie or taking it over. Unlike in his early days when the crowd cheered for him many seemed to loathe him. He was now with those capitalists. He was still slashing prices, cutting costs and making sure his fleet was the most efficient but that didn’t matter now.

No wonder his response to the public and the likes of William Gladstone was “the public be damned; I am working for my stockholders.”

The fugitives returned to New York and agreed to compensate the First Tycoon for his losses.

But who was in the wrong in all this? Or rather, who was not in the wrong in all this?

A deep dark cloud of corruption engulfed the public and the private sector of the time. Shadiness and criminality was blatant and the norm.

With clarity of the hindsight, historians tell us that the main cause of incidents such as this was not merely greed as many would say but the absence of “a nonpartisan, professional civil service” which was still decades away. It was coming. Such would stop.


Alfred Mthimukulu is a Senior Lecturer, Graduate School of Business, NUST

Email: [email protected]

Twitter: @mthimz

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