Article By: Curtis Beaird
Photography By: Norma W. Beaird
The Federal Government and Wall Street have had a long love affair. In the early days, as in 1790's early days, a small gathering of brokers traded stock under a Buttonwood tree in New York. This little club did fairly well until 1790 when more stock and more money showed up in the form of government refinancing of both federal and state Revolutionary War debt. Does any of this sound familiar? These bonds became the first major issues of publicly traded securities. Then, things got exciting.
A couple of years later in 1792, the first insider showed up to place his bets; or, rather to attempt to manipulate the game. William Duer, Assistant Secretary of the Treasury, under Secretary of the Treasury Alexander Hamilton, hoped to use his Hamilton connection for bond speculation. It worked really well, until it didn't. He overextended himself. When he financially failed, the market also collapsed.
"Too Big to Fail" was tested early and found wanting.
History may be an excellent teacher, but students aren’t always all that attentive.
It has been a tough struggle getting a hold on the insider’s use of privileged information for personal gain. It was William Duer's antics and the collapse that followed that brought about the beginnings of the New York Stock Exchange. One would think they wanted to go formal and move inside to nicer digs. Nope, they wanted to save the game.
The boys under the Buttonwood tree decided they needed some trading rules or they could ruin the game. So in the remaining months of 1792, The Buttonwood Agreement came into existence. In 1817, the traders became known as the NYSE. Yes, it was self- regulated.
It's the old fox in the hen house story.
The saga of the insider continued. Railroads where the dot.coms of the 1800's. Senator Kimble of the New York legislature managed a sweet stock manipulation combining legislation and short-selling to kill the price of the Harlem Railroad. "Profits on short sales were realized," as it is said.
Russell Sage, a former U.S. Congressman, mixed bribing legislators with stock manipulations to pick up some nice change on the price movements of the Pacific Mail Steamship Company. It seems the company also received a large amount of government subsidies. I guess we could say Sage not only qualifies as an insider, he is also our first Lobbyist.
It wasn't until 1909, and four major economic disasters later, that someone decided to take note of insider trading on non-pubic information. On May 3, 1909, the U.S. Supreme Court ruled that insiders must disclose such information in Strong v. Repide. The irony of this ruling is that it had nothing to do with The Hill and the Street.
Then came the 1929 Crash, the 1930's, and a guy named Ferdinand Pecora. Pecora was U. S. Senate Banking Committee counsel. He exposed the J.P. Morgan and Company stock connection with former President Calvin Coolidge and Franklin D. Roosevelt’s sitting Treasury Secretary. He also exposed the stock connection with the chairmen of the Republican and Democratic national committees and a handful of CEO's. That The Hill and Wall Street had been big buds for a long time became obvious. When Pecora produced the J.P. Morgan Preferred Customer List during hearings, the public outrage encouraged FDR to make good on his promise of financial reform. That reform became The Securities Act of 1933.
That got that fixed, I guess. Now, tell me again the story of Hank Paulson, AIG, Ben Bernanke, Goldman Sachs, etc. etc. etc., and how in 2008 we all learned to use the word billions and bailout, like it was our first name. Maybe more repair work?
That brings us to February 2012 and The House Amendment to S. 2038 aka STOCK Act. More legislation to fix up, paint up and patch up after yet another economic market crash. S. 2038 intends "to prohibit Members of Congress and employees of Congress from using non-public information derived from their official positions for personal benefit, and other purposes."
Well, let's see. This road show started 220 years ago with William Duer, Assistant Secretary of the Treasury in 1792, using insider information for personal gain. What do you suppose happened to Mr. Duer?
The boys under the Buttonwood tree didn't appreciate Mr. Duer wrecking the playpen. The citizens of New York City were livid when he crashed their economy. It is reported that they chased him through the streets and almost killed him. He died a few years later in debtor’s prison.
I will never hear a member of Congress say, “unintended consequences" the same way ever again.
On to the next bubble.
Mark 8:36 (King James Version)
36For what shall it profit a man, if he shall gain the whole world,
and lose his own soul?
Copyright 2012, Curtis Beaird. All rights reserved.