eBusiness Weekly
Alfred M. Mthimkhulu
It was in March 1863 that a well-known businessperson, George Law, sought a right to build a streetcar railroad along Broadway in New York.
It remains unclear to me as I read and reread about him if he was well-known for being a businessperson or for bribing.
Most New Yorkers did not like George Law’s initiative. So, the leading personalities of the city petitioned the governor of the State to block “bestowing a franchise of (such) immense value upon individuals, many of whom are unknown . . . its effect will be to injure immensely if not almost destroy the most beautiful thoroughfare in this continent”.
Schemers among city fathers then came up with a counter plan for this otherwise good infrastructure project that many were against: why not grant a local railroad company, the New York and Harlem Railroad (simply called Harlem), a right to do a similar project.
Not a bad idea, locals would love that. The alderman and councillors got down to work on it.
It so happened that another businessperson, Cornelius Vanderbilt, had been slowly accumulating Harlem shares in the market for months before all this.
Harlem share price was hovering around 58 in early 1863 and stockbrokers were generally agreed that its “certificates were only good for wrapping paper”.
They couldn’t understand what Vanderbilt’s game plan was in piling up all that wrapping paper.
Vanderbilt was elected President of Harlem in April. He immediately instituted a restructuring programme. One of his conditions for accepting the presidency was that he would earn no salary, but dividends on his shares like other shareholders.
He put in place an executive team loyal to him with a clear task of cutting costs and tearing off the wrapping paper to bring to light the hidden gem.
Meanwhile, the governor vetoed George Law’s project and not many days after that, the city authorities granted Harlem the right to “run a streetcar line down Broadway” as TJ Stiles tells us in his book “The First Tycoon: the epic life of Cornelius Vanderbilt” from which this article draws.
The share price jumped to 105. Oh, I forgot to say as the plan to grant Harlem this right to build the railroad was
being hatched, many city aldermen and councillors had bought Harlem shares big time.
Most borrowed heavily to buy knowing that a windfall was guaranteed on announcing that Harlem had been granted the right to build.
Sure enough, the windfall came. Cashing out even at 105 was a good trade.
But then, as we know, such heated tenders involving powerful people like George Law are tricky and usually haunt the victor. And of course, George Law still had friends at city hall who had been greased earlier, but had failed to deliver and could be greased again for, it would be hoped, better results.
Either because of this reality or a simple fact that the city aldermen and councillors had discovered a moneymaking scheme, things took an interesting twist.
The scheming aldermen and councillors plotted another windfall, but this time in reverse: let us short Harlem shares and then cancel the right we have just given it to build the streetcar line; once cancelled of course the share price will tumble and we will buy back the shares at a much lower price, the difference being our windfall like before. That is exactly what they set out to do.
With selling pressure, Harlem started falling. It hit 83 on June 25, and went even lower to 72 later in the day at which point the city fathers announced the cancellation of Harlem’s right to build the railroad line.
Clearly, another windfall was around the corner for what was there to stop the price from humbling all the way to the usual 50s if not lower.
Mysteriously, the share started going up the following day. It hit 97. It kept rising and was 108 two days later. Speculators who were short on the stock were being cleaned. This was a bloodbath never seen before.
Why was the stock going up?
Vanderbilt was buying. He was literally cleaning the market. His brokers were under firm instruction to just buy. Some speculators who had gone short on the stock fought hard to depress its price dishing out more and more sell orders.
Vanderbilt took them all. He had put in place a war chest of cash, mostly debt, to absorb whatever shares came his way even if it meant he bought more than the entire issued shares.
Some who were short couldn’t handle the heat so they just bought back at higher prices and crystallised their losses.
Others borrowed script and delivered to cover their shorts, but were forced to pay exorbitant interest for that, as much as 2 percent per day. Imagine how horribly beaten they felt when they discovered that the shares they were borrowing were Vanderbilts shares!
As the stock soared towards 200 on June 29, the council decided to restate the right to build the streetcar line back to Harlem. He stopped buying.
The share price retreated. The corrupt councillors were burnt. He had warned them. The Commodore, as Vanderbilt was affectionately called, had taught them a lesson.
The market had taught them a lesson. The market had whipped the corrupt authorities. In the aftermath, a leading newspaper wrote: “No member of the City Hall party could show himself to the public without exciting a roar of laughter”.
It was the beginning of a new era right there in the middle of a bloody Civil War that seemed so irrelevant and so distant as all this was happening on Wall Street.
Email: [email protected] /Twitter: @mthimz
