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Management in Practice

What used to be the new capital?

What used to be the new capital?

By Ted O'Callahan

Cowboys with a Scottish Accent

Profits from massive industrial and agricultural development made Scotland into a significant exporter of capital during the later 1800s. When the Edinburgh-based Prairie Cattle Company’s Texas ranches returned 19.5% two years after its founding, then 28% the next year, ranch fever swept Scotland. Investment trusts with low share prices allowed broad participation.

Many ventures formed in the excitement of the boom failed within a few years. A half dozen, including the Prairie Cattle Company and the Matador Land and Cattle Company, combined financial expertise, ranching savvy, and understanding of American frontier politics to create successful, long-lived companies. Even those companies, however, discovered that their capital wasn’t always welcome in America.

A New York Times story with a dateline of Austin, Texas, October 14, 1887, explained:

A foreign corporation, the Matador Land and Cattle Company, incorporated in Scotland with a capital of £400,000, having applied for the filing of its charter to do business in the State, the Secretary of State refers it to the opinion of Attorney-General Hogg, who holds, in an elaborate ruling, that...[t]his company certainly proposes to exercise extraordinary franchises not compatible with the public policy of this State in its own prime purpose to own and improve land... He cites laws to justify his view that the Legislature did not intend to discriminate in favor of foreign corporations or to admit that class of companies whose organization and purpose both portend evil effects upon the policy of the State, and are clearly repugnant to public interests.

While Hogg went on to become the governor of Texas and briefly managed to outlaw all foreign ownership of land in the state, the Matador Land and Cattle Company grew and became incorporated into the U.S. economy, as evidenced by an item in the Washington Post’s “People Met in Hotel Lobbies” column, which reported on important comings and goings. The January 25, 1905, column welcomed

Mr. Murdo Mackenzie of Trinidad, Colo., general manager of the Matador Land and Cattle Company, a concern which embraces in its Texas and Dakota cattle ranches not less than 1,500,000 acres of inclosed pasture lands, on which graze over 70,000 head of the bovine family. Mr. Mackenzie is a stalwart Scotchman, and though he has been in this country many years, his voice retains an agreeable trace of the accent of his native heath.

Mackenzie was in Washington to lobby Congress on behalf of “practically the entire live-stock interests of the great Western and Southwestern centers of production.”

Matador was sold to Lazard Brothers in 1951 for nearly $20 million.

Pyramids in Steel and Stock

Following World War I, pent-up demand for office space led to a boom in skyscraper construction. Small individual investors financed much of the New York skyline through bond houses formed to offer construction financing on terms more favorable than those offered previously by banks or insurance companies.

In Manhattan the frenzy of building peaked from 1928 through 1931. Even a year after the 1929 stock market crash, financing ever-larger buildings was so common that Fortune magazine opened the article “Skyscrapers: Pyramids in Steel and Stock” with the line “All a man needs, to own a skyscraper, is the money and the land. And he may be able to get along without the money.” Throughout the boom both critics and champions of this largely unregulated financing system found voice.

The December 23, 1924, New York Evening Post wrote of the benefits of democratizing capital.

Of late years, real estate bonds have been sold perhaps more widely than any other type of bond; they have been placed with the small investor so well in cases that many have come to regard them as the personification of safe investing. Real estate mortgage bonds have probably done more to increase the investor class in this country than any other influences since the Government war bonds selling campaigns; they have demonstrated that new buyers of bonds, in large numbers, can be created by intensive merchandising methods (and not necessarily undignified methods). In doing this the real estate banker deserves no little appreciation from the bond industry in general and from general business and the public at large.

But a year later the December 16, 1925, edition of the New York Times reported warnings that “loans on ‘crazy propositions’ made by ‘disreputable’ bonding houses have brought the building industry of New York City to the edge of ‘a very grave disaster.’”

Though the mortgage bond companies had significantly loosened their own underwriting standards, they denied the accusations. Even as its license to sell securities was suspended in Pennsylvania, G. L. Miller & Co., whose slogan read “No investor ever lost a dollar in Miller Bonds,” issued a statement quoted in the July 10, 1926, New York Times, claiming that regulators had made a mistake. “This undoubtedly is due to only partial understanding of the first mortgage real estate bond business.”

Miller failed, but the September 4, 1926, New York Times quoted a vice president from one of the largest bond houses, S. W. Straus and Co., saying the collapse “will not in any way tend to shake confidence in first mortgage bond issues underwritten by the older and more responsible houses. The first mortgage real estate bond business is too large, too important, and too well established to be affected by one failure.”

Noting that more than 1,000 real estate securities offered in 1926 brought in over $1 billion, the February 8, 1927, New York Times reported the New York State Attorney General’s call for better regulation of the industry.

Underwriting houses which are merely in business to sell bonds at a profit invite the public into “a business speculation” on the ground that they have engaged for many years in business without loss to the investing public without revealing that “this method of financing building construction was practically unknown before 1916.”

An April 12, 1927, advertisement for S.W. Straus in the Chicago Daily Tribune (adjacent to an ad for Moody’s Investors Services) read, “The possessor of funds, large or small, is entitled to freedom from worry over their safety.” Straus’s slogan is “45 Years Without Loss to Any Investor.”

In the mid-1930s, some 60,000 investors suffered losses when S.W. Straus defaulted on $214 million in bonds.

Buying the Establishment

During the “Go-Go Years” of the 1960s, “minnows discovered they could swallow whales” and investors rewarded small, aggressive companies for taking over much larger companies whose staid approach left their stock price low relative to assets and earnings.

One of the most dramatic events in this period was the attempted takeover of Chemical Bank by Saul Steinberg’s Leasco Data Processing Equipment Corporation. What Steinberg had planned to be an effort over the course of months turned into 15 days of brinksmanship after Chemical Bank’s chairman spoke with a New York Times reporter, resulting in this Feb, 6, 1969, column in the financial pages.

Chemical, with nearly $9 billion in assets, represents one of the nation’s largest capital pools and is the nation’s sixth largest commercial bank. Leasco represents a dynamic new field — computer leasing — and is a fast-growing concern that uses acquisition as a means of promoting its growth... Rumored and actual take-over attempts have emboldened the tough new breed of big game hunters. As the stakes have grown, so have the aspirations. No company, however sacred its name, is safe. Chemical’s chairman told the paper, “We intend to resist this with all the means at our command, and these means might turn out to be considerable.”

The next day, another New York Times column asked: “Does the economy benefit when a relatively small company takes over a bigger company by issuing what is known in the trade as ‘funny money’?” And proposed the answer:

This kind of thing has a salutary effect when a well-managed company takes over one that is poorly managed. But there is a growing feeling that sophisticated securities transactions are being used as a means of gobbling up major corporations for the sake of expanding on a grand scale at the expense of intelligent creative management with no serious concern for the company’s future.

The February 20, 1969, New York Times reported that “bankers have been deeply shaken by the attempt... They want it made plain that banking is something special, off limits to the corporate movers who currently are riding high on Wall Street.”

Later in the day, Steinberg, who made his career on hostile takeovers, released a statement.

Great Neck, New York, February 20, 1969 — Saul P. Steinberg, Chairman of Leasco Data Processing Equipment Corporation, stated today that Leasco has no plans to acquire control of Chemical New York Corporation. Without the support and enthusiasm of the management, Leasco has no interest whatsoever in pressing for an affiliation with Chemical.

Two months later, the Business Week of April 26, 1969, quoted a still stunned Steinberg:

“I always knew there was an Establishment,” says Saul P. Steinberg, the chubby 29-year-old, multimillionaire chairman of Leasco Data Processing Equipment Corp. “I just used to think I was part of it.”

The story goes on to quote a “Wall Street friend” saying “Saul found out there really is a back room where the big boys sit and smoke their long cigars.”

The “Un-American” Index Fund

Wells Fargo Bank pioneered the use of an index fund for a pension trust in 1971. John Bogle launched the first indexed mutual fund with Vanguard’s First Index Investment Trust on August 31, 1976. When plans for the fund were announced, a New York Times financial columnist groused,

Investors who buy shares in the fund are likely to discover that “owning the average” as it were does not guarantee investment success. Anyone who had invested in such a fund — had it existed — at the beginning of 1972 would have been little better off at the end of June, 1976 — even assuming all dividends reinvested.

The February 13, 1977, Washington Post had this:

Also known as “passive management,” indexing seems to be the fund manager’s equivalent to throwing his hands into the air helplessly. And it has drawn vigorous and emotional criticism from many investment pros whose pride and livelihoods are both on the line. Indexing, it is charged, is everything from lazy to excessively cautious and even vaguely un-American in its seeming ethics of giving up.

“It’s like the baseball teams at the beginning of the season agreeing in advance to win half the games and lose the other half,” says Leon G. Cooperman, head of investment strategy at Goldman, Sachs & Co.

“Not many industries in America have a popular new product that promises mediocrity,” complains Dick H. Williams, executive vice president of [brokerage firm] Mitchells.


Using the phrase “the money game” to describe the deeply held belief in the possibility of beating the market, the March 12, 1977, Nation wrote, “If disenchantment with the Money Game becomes widespread, it would be to Wall Street almost as if blackjack, craps, roulette, and the slots were made illegal in Las Vegas.”

The New York Times of March 26, 1977, wrote, “The only S&P index game in town for small investors is the First Index Investment Trust... It is hard to find anyone in the industry who thinks there will be a second.”

Japan’s Shopping Spree

As Japan’s economy boomed in the 1980s, making it a rival to the U.S., George Packard wrote in a 1987 essay in Foreign Affairs, “There is a volatility and an emotional quality to Japanese-American relations that is unique.” That emotion played out in press coverage of Japanese purchases of U.S. assets.

New York Times coverage on March 11, 1985, set the scene:

An enormous tide of money, rivaling the “petrodollars” from OPEC’s profits amassed in the oil crisis years, is rolling through the world economy at a rate of $50 billion to $100 billion a year... It represents Japan’s growing surplus in foreign trade, and a lot of the money is being invested in the Treasury securities issued to finance the Reagan Administration’s huge budget deficits.

The director of the Institute for International Economics told the paper, “I think of it like a family — we the husband who spends too much and they the wife who saves.” He noted that until just a few years before, the United States was a major world creditor.

A July 28, 1985, New York Times Magazine story by Pulitzer Prize-winning author Theodore White went so far as to ask whether Japan’s economic success required a reassessment of history.

Today, 40 years after the end of World War II, the Japanese are on the move again in one of history’s most brilliant commercial offensives, as they go about dismantling American industry. Whether they are still only smart, or have finally learned to be wiser than we, will be tested in the next 10 years. Only then will we know who finally won the war.

Two years later, another story in the New York Times Magazine offered more context.

To the extent that the Arabs when they had the money made diversified investments, they were bargain-hunters, buying Atlanta real estate and struggling banks in the bad times of the mid-1970s. The Japanese by contrast want to buy only the best — real estate in New York and Washington and Los Angeles rather than in Houston or Denver, blue chips rather than over-the-counter stocks.

When the Rockefeller family trust sold a controlling interest in Rockefeller Center to a Japanese company, USA Today reported, “Sen. Joseph Lieberman, D-Conn., fanned already flaming emotional issues. ‘This year when they turn on the lights to that Christmas tree in Rockefeller Center, we Americans are going to have to come to grips with the reality that that great national celebration is actually occurring on Japanese property.’”

A view from the November 13, 1989, Guardian in London was less sympathetic to U.S. fears:

The real objection to Japanese acquisitiveness is racial, cultural, and diplomatic. It is not economic. American national pride may be offended by Mitsubishi owning a chunk of Manhattan, but the danger to its economic future is overrated... The fall of national icons represents payment for years of overspending and an economic policy which offset burgeoning trade and budget deficits with foreign capital attracted by high interest rates.

On January 9, 1990, USA Today reported, “The Japanese own 26% of the buildings in downtown Los Angeles, 24% in Manhattan, and 12% in San Francisco.”

By November 27, 1990, a USA Today article entitled “Japan; Is the USA Selling Everything?” asked the questions “Is everything from sea to shining sea up for sale? Will Japan end up buying it all?” The story quoted a former U.S. trade negotiator replying, ‘’The answer is, yes and yes.’’

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