Money and Power (11 page)

The report went on to criticize Jonas for not disclosing in a letter to his own shareholders—a minority of whom were vociferously opposed to the combination with Goldman Sachs Trading Corporation—that by the terms of the joint-account agreement, his overriding incentive was to make sure his shareholders voted for the deal at the shareholders meeting on February 21. By around this time, the joint account had spent close to $50 million—a substantial sum at the time—buying the stocks of the two merger partners; if the shareholders did not approve the merger, Jonas would have been on the hook for half—$25 million—of the cost of the stock that had been bought. “Mr. Jonas thus possessed a special pecuniary interest in facilitating the sale,” the report observed. In Jonas’s letter to his shareholders he made the affirmative statement—albeit untruthful—that “I have never personally owned nor has anyone owned for me, a single share of Goldman Sachs Trading Corporation.” Under later “interrogation,” Jonas justified his decidedly misleading statement by claiming his obligation would only kick in had the merger not been approved. “
I never regarded that we had a commitment except the one commitment on the merger not going through,” he said.

On February 21, both sets of shareholders approved the merger, and the Trading Corporation issued 2.25 million shares of its own stock, valued at $235 million, to the holders of the Financial and Industrial Securities Corporation, which had assets of $117.5 million. Goldman paid this premium using its own stock, which it had inflated through its robust purchases during the previous weeks. “
The market value for its own stock … was almost exclusively the creation of the Goldman Sachs Trading Corporation itself,” the subsequent report concluded. When asked about the manipulation later, Weinberg conceded that “
buying actually improves the market, we know that,” but little else.

As for Catchings, he was even more dishonest than Weinberg.

“
I tell you with great positiveness,” he testified, “that the account was not formed for the purpose of putting up stock and that it was not formed for the sake of manipulating the market but was formed for the purpose of being active in the market during the time until the stock reached its natural level,” which Catchings believed would be $220 per share “by the mere force of the agreement of the two companies to combine.”

With tongue in cheek, Galbraith took note of all this activity at Goldman. “
The spring and early summer were relatively quiet for Goldman, Sachs, but it was a period of preparation,” he wrote. With the Financial and Industrial deal closed, in April 1929, Catchings and his editorial sidekick,
William Trufant Foster, lashed out at the Federal Reserve Board in a statement printed in the
New York Times,
claiming that it “
had gone outside its legitimate functions” in seeking to regulate the flow of credit into the stock market. Instead of accommodating business, they declared, the board had kept business in a “state of growing uncertainty and apprehension.” The pair warned the Fed not to try to thwart the “confidence in the soundness of American business,” a confidence that was “warranted by the facts.” Not for the first time would a Wall Street figure guilty of rank speculation—and possibly insider trading—attack the government, even the weak government of the time, for trying to protect the public.

——

O
N
J
ULY
26, Catchings decided to ratchet up Goldman’s exposure to its high-flying investment trust. Together with another sponsor, Goldman launched the
Shenandoah Corporation by selling $102.5 million of securities to the public. The deal was said to be seven times oversubscribed and included layers of additional leverage that the original Goldman Sachs Trading Corporation did not have. The Trading Corporation bought 2 million of the 5 million Shenandoah shares offered, and Goldman partners took seats on its board. Goldman sold through a public offering the Shenandoah stock at $17.50 and it closed at $36 per share at the end of its first day of trading, up more than 100 percent on the day. Some twenty-five days later, Catchings struck again, this time selling $142 million of shares in yet another trust, the
Blue Ridge Corporation—the board for which was identical to Shenandoah’s. Of the 7.25 million shares Blue Ridge offered to the public, Shenandoah bought all but 1 million of them. “
Goldman Sachs by now was applying leverage with a vengeance,” Galbraith observed.

And why not? At the time of the Blue Ridge offering, according to
the
New York Times,
Goldman Sachs Trading Corporation was worth $500 million, up fivefold in nine months, and Shenandoah had doubled in value in less than a month. Blue Ridge had the additional financial innovation that it allowed investors to exchange shares in a select group of twenty-one other blue-chip
New York Stock Exchange companies—among them
AT&T and
General Electric—at fixed prices for shares in Blue Ridge. Why anyone would want to do this was not made clear, of course, especially if the fixed price offered for, say, a share of General Electric by Blue Ridge was less than where GE was trading in the market. It is often the case that Wall Street’s shenanigans are not readily apparent. After the Blue Ridge deal, Goldman Sachs had created well over $1 billion in market value—actually $1.7 billion—in about nine months, as impressive an act of financial alchemy as had ever been achieved. “
[T]he nearly simultaneous promotion of Shenandoah and Blue Ridge was to stand as the pinnacle of new era finance,” Galbraith wrote. “It is difficult not to marvel at the imagination which was implicit in this gargantuan insanity. If there must be madness something may be said for having it on a heroic scale.”

It was not much of an excuse, but the Sachses—Walter and Arthur—were in Europe during the summer when Catchings constructed and sold Blue Ridge. Walter Sachs was in Merano, Italy, up north, with his wife when he received a cable informing him of the Blue Ridge deal. “
Well, this is just absolutely crazy,” he said to her, and then he stayed up all night worrying about what might come of the deal. When Sachs returned to New York in September, he made a beeline to Catchings’s apartment at the Plaza Hotel and told him he thought “this thing was crazy” and that he “didn’t agree with it.” Sachs remembered precisely what Catchings responded. “
The trouble with you, Walter, is that you’ve got no imagination.”

In the end, the entire enterprise collapsed, and Goldman lost nearly its entire $10 million investment plus another $3 million from other associated liabilities in the Goldman Sachs Trading Corporation—a meaningful chunk of capital in those days and of Goldman’s. The other shareholders had lost hundreds of millions of dollars more.

Of the Crash itself, Sidney Weinberg later told the writer
Studs Terkel, “
I remember that day very intimately. I stayed in the office a week without going home. The tape was running. I’ve forgotten how long that night. It must have been ten, eleven o’clock before we got the final reports. It was like a thunder clap. Everybody was stunned. Nobody knew what it was all about. The Street had general confusion. They didn’t understand it any more than anybody else. They thought something
would be announced.” Weinberg said he remembered that John D. Rockefeller Jr. stood on the steps of the
J. P. Morgan building on Wall Street to announce that he and his sons were buying stock. “Immediately the market went down again,” Weinberg said. “Pools combined to support the market, to no avail. The public got scared and sold. It was a very trying period for me.” Weinberg blamed the Crash on “over-speculation” and a “reckless disregard of economics.” He said he doubted those people who claimed to have gotten their money out of the market before it collapsed and saw many people scarred psychologically by what happened. “I don’t know anybody that jumped out of the window,” he said. “But I know many who threatened to jump. They ended up in nursing homes and insane asylums and things like that. These were people who were trading in the market or in banking houses. They broke down physically, as well as financially.”

A couple of months after the Crash of 1929, Catchings headed out west, to Reno, Nevada, to “
secure a divorce from his first wife.” One day while Catchings was on the West Coast as the markets were, according to Walter Sachs, “
beginning, in 1930, to show some improvement,” Catchings called his partner Sidney Weinberg from San Francisco and said, “We owe $20 million to the banks and we have certain other obligations, amounting to about $10 million. We ought to fund this debt into a two-year convertible note. We ought to sell $50 million of two-year convertible notes” and take the balance of the proceeds—$20 million or so—and give it to
Frank Taylor, an investment manager affiliated with the firm, to invest. “Frank Taylor can make a world of money,” Catchings told Weinberg.

Walter Sachs and Sidney Weinberg thought perhaps that Catchings had lost his mind. How in the world, a mere three months after the most devastating financial crisis in American history, did Catchings think Goldman would be able to issue $50 million in new risky securities? “
Weinberg and I talked together,” Sachs said. “We spent practically the whole night talking about this thing. At first we said, ‘We can’t sell a note like that.’ ” Sachs then said to Weinberg, “Well, either you and I are crazy, or this man Catchings is crazy, and of course it can’t be done.”

The next morning, when Walter Sachs went into the office—“and this was not an easy thing to do,” he said—he found his brother, Arthur, and admitted to him that he had been right about Catchings all along. “Arthur, you have been right about this man Catchings and I have been wrong,” he told his brother. “The sooner we mend our fence the better.” It fell to Walter Sachs to arrange for Catchings to meet him in Chicago shortly thereafter. “
In those days we didn’t fly very much,” Sachs said. “I
took the Century”—a cross-country luxury train—“in the afternoon and got there the next morning.” Sachs and Catchings spent the whole morning “closeted” together at the Chicago Club discussing recent events at the firm. First, Sachs told Catchings that his idea for the $50 million of financing would not be done and made no sense. He also said the firm was going back “to the old principle of agreement on the part of all partners if anything was undertaken.” In recounting the meeting some twenty-six years later, Sachs said he “took a position of clipping his wings, and he took it.” A newly contrite Catchings got the message. “Walter, I cannot imagine ever making a decision again without your agreement,” Catchings told him. Catchings went back to Reno; Sachs returned to New York.

But the real work of digging Goldman out of its sizable financial hole had just begun. The Sachs brothers realized that the only way out of the
Goldman Sachs Trading Corporation fiasco was to sell as many of the assets it had—the shares of other companies—as quickly as possible, especially since the markets had improved in the spring of 1930. “Those were the days when I worked every night till nine or ten o’clock at night,” Sachs said. “Then I’d go home and fall into bed and I’d sleep until perhaps four in the morning. Then I’d wake up and have to face the world with a smile.” After the Crash, the stock of the Trading Corporation hit $32 a share—its all-time high was $326 a share—and fell steadily until reaching its low of $1.75 per share in 1931. On January 1, 1932, Goldman announced a deal with the
Atlas Corporation, an investor in distressed securities, whereby Atlas would become the largest shareholder in the Trading Corporation and then buy it out completely and run it. The full acquisition by Atlas took place in April 1932. And eventually Atlas sold off the remains of the Trading Corporation at a modest profit—for Atlas.
“[W]e could hold up our heads,” Walter Sachs remembered, “because we never sold a share of stock until finally a merger took place with the Atlas Corporation”—why he felt vindicated even though investors lost many millions is not mentioned—“and then we turned over the management, and we certainly as far as I’m concerned will never run an investment trust again.”

By then, not surprisingly, the Sachses had decided Catchings had to go. Walter Sachs said that in 1929 Catchings “just went haywire” and reluctantly noted that he and his brother had done nothing to stop him. “We weren’t smart enough perhaps—or perhaps we were too greedy too—but anyway, we didn’t stop it in time.” By the early summer of 1930, “as things became clearer and clearer to us, we made up our minds that we were going to call it a day with Catchings.” The partnership had a contract
with him that terminated at the end of 1930, but the Sachses decided they could not wait until then. “[W]e had made up our minds to ask him to retire …,” Walter recalled. “This was because it had become clear to us that we just didn’t think alike, that he had come as near ruining the name and the reputation of the firm as any man could do.”

When Catchings—whom
Time
magazine referred to as “
the loudest prophet of the New Era”—returned to New York from Reno, fresh from his divorce, the Sachs brothers decided
les jeux sont faits
. Despite Catchings conceding in Chicago that he could not “imagine” making a decision ever again without Walter Sachs’s assent, there was no second chance for him at Goldman Sachs. “
Well, that was very nice,” Walter Sachs said of Catchings’s Chicago mea culpa, “but it was too late.” Despite the $13 million of losses that came out of their collective hides, the partners decided to pay Catchings $250,000 to cancel his contract seven months early. The Sachses decided to name Sidney Weinberg the firm’s senior partner. “I was too egotistical to refuse it,” Weinberg said with a smile some thirty-seven years later. At that moment, he had been getting paid one-third of the firm’s profits annually. His role in the Trading Corporation fiasco seemed to have no effect on his rise to power at Goldman Sachs.

Unfortunately, Catchings’s departure from Goldman did not prevent a flood of litigation against the firm for its role in sponsoring, underwriting, and managing the failed trusts. “
There were all kinds of stockholders’ suits,” Walter Sachs allowed. “Everybody had them. Our great trouble was that in good faith we had called our investment trust the
Goldman Sachs Trading Corporation, while others called theirs things like ‘the
United Corporation.’ J. P. Morgan and Company created that. That’s why this stigma clung to us.” Investors who lost money charged Goldman with “neglect and with fraud,” according to Sachs. With
Sullivan & Cromwell at its side, Goldman headed off the vast majority of the suits—
the last one of which did not get settled until 1968—by compromising and settling.