Real Lace (33 page)

By early 1960 there were rumors that all was not well with the Fords' marriage, which Monsignor Sheen had proclaimed to be “unbreakable” and “for all eternity.” There was talk that Henry Ford was being seen in the company of a mysterious “contessa.” He even appeared with the “contessa” at a New York restaurant. The headwaiter refused to seat them, and, when Ford protested, the headwaiter whispered that Ford's daughter Charlotte was dining at a table inside. Presently, the “contessa” turned out to be an untitled and lively Italian-born divorcee named Christina Austin, whom Ford had met in Paris at a party given by Princess Grace. Again, Ford showed no particular reticence about escorting his new lady friend to and from fashionable parties, while his wife kept a stiff and silent upper lip.

While the Fords were having their marital difficulties in Detroit, 1960 was also the beginning of trouble for McDonnell & Company in New York. Suddenly there was a greater volume of stock being transacted on the New York Stock Exchange than anyone had ever imagined there could be. In the quieter days before the war, for the Exchange to have a “million-share day” was something of an event. By 1960 as many as twelve million shares were being traded in a single day. Soon, trading volume would climb to fifteen million shares a day, and then twenty million. There were more individual shareholders than ever before in history, and there had developed the big institutional buyers—mutual funds, bank trust accounts, insurance companies. It was becoming impossible for the back office—the accounting areas of brokerage firms—manually to handle the large numbers of orders that were daily
coming in. In the old days, it had been simple. A firm might have a hundred different orders in a day, or even two or three hundred. Tickets were written up, confirmations were sent out, and each transaction was entered in the books according to normal bookkeeping procedures. But when orders leaped to tens of thousands a day, human hands became incapable of handling them, and many firms in the 1960's began to computerize their accounting systems in an effort to cope with the deluge of paper work.

In 1962—perhaps a little later than other firms—McDonnell installed a computer firm in order to deal with the situation. But what the firm couldn't realize was that the situation was far worse than they had thought, and that the computers they had put in—at enormous cost—were quite unequipped to handle the steadily increasing volume of trades that were taking place. McDonnell & Company now had two thousand employees in twenty-six offices around the country and one in Paris on the elegant rue Cambon, and yet the firm still did not have any real business management. Murray might be an effective salesman, but it was doubtful that he was a strong operations head. McDonnell & Company was still a family-run concern, and at the time Murray, his wife, his mother, his brother Morgan, and his sister Anne Ford were the principal owners of the firm.

Many of the then currently successful brokerage firms were able to realize, quickly enough, that the computer systems they had installed simply were not up to handling the loads of orders that were pouring in. But McDonnell & Company was not one of these, and it continued limping along with its computer firm. In 1964, Anne McDonnell Ford, to the distress of others in the family, divorced Henry Ford in Sun Valley, and a year later Henry married his beautiful Christina. Earlier, the McDonnells are said to have approached Ford for another million-dollar loan, but, with his marriage to Anne disintegrating, they were turned down.

Lemming-like, the company now seemed to be heading inexorably toward self-destruction. Early in 1968 the firm had $18 million in equity and subordinated capital, and was doing a business of about $35 million a year in commissions and fees. And yet, at the same time, the back office was so hopelessly entangled that a feeling of panic had begun to set in. The accounting system was so inefficient that no one knew for sure whether trades were being made for the correct customers, whether stock certificates were being sent to the right people, or who was owed what. To this day, at least one member of the family, John Murray Cuddihy, is not entirely sure whether he really owns shares of stock credited to his account. In that grim summer of 1968, while the stock market was being coincidentally battered by the storm warnings of recession, the firm was forced to admit that out of 47,000 customer accounts there were at least 4,000 that showed errors. There were, furthermore, some $872,000 worth of uncollected dividends for McDonnell customers. The firm had some $9 million worth of securities of which it didn't know the owners. It also owed $1.3 million worth of securities to individuals and other brokerage houses that it couldn't seem to locate. Perhaps the most staggering error of all was the firm's overestimation, by $91.8 million, of the amount of fully-paid-for securities that its customers had on deposit. Meanwhile, it was $87.4 million
short
in other securities which, by law, must be segregated. In 1968, McDonnell & Company was ranked thirty-fifth in efficiency out of thirty-eight top Big Board firms.

Record-keeping procedures were simply a disaster. For example, a customer might order 1,000 shares of Standard Oil of New Jersey at $64 a share, and get a bill for 1,000 shares of Standard Oil of Ohio at $34 a share. The customer would pay the bill—$34,000—and then, when he went to sell his stock, say, “I don't own Standard of Ohio. I paid for Standard of New Jersey.” The company would be out some $40,000 as a result of that sort of back-office mistake.

Day-to-day existence within the McDonnell & Company offices had become chaotic. “Every day there was some sort of flap,” one employee recalls. Switchboards were jammed with incoming calls from customers wanting to know what had happened to their orders, their certificates, their dividends. McDonnell brokers were often more than a week late returning their customers' calls and, even then, couldn't give them satisfactory answers. Salesmen, instructed to buy and sell only for the biggest, most lucrative accounts, disobeyed orders and bought and sold as they chose. As one of them said, “I want my commissions, and to hell with the company.” Clerks complained that they had to work standing up, since there was no place for them to sit. There were no three-hundred-dollar chairs this time, but stools were brought in. Meanwhile, weekly orders fell from 17,000 to 4,000.

At one point during this hectic period, the McDonnells brought in Murray's friend and fellow Irishman ex-Postmaster General Lawrence F. O'Brien to head the firm as president. There were some who considered O'Brien—who had been in the official entourages at the time of the shooting of both John F. Kennedy and Robert F. Kennedy—an ominous choice, as though O'Brien carried with him some mysterious kiss of death. At any rate, O'Brien left after seven months, saying only that the job had not fulfilled his expectations. A curious footnote to the brief O'Brien interlude was that, though O'Brien had brought a certain sum of money into the firm, that sum exactly equaled the cost of an apartment that the company purchased for his use at the luxurious United Nations Plaza. When O'Brien resigned, an arrangement was made whereby the apartment became his property, indicating that O'Brien may have been a better politician than a banker.

One ray of hope glimmered. Sean McDonnell, the youngest son of the McDonnell clan, was a handsome, athletic man who lived elegantly with his pretty wife in a big house in Greenwich,
Connecticut. He had graduated from Fordham in 1954, and spent two years with the Wall Street firm of Blyth & Company. After Naval Officers' Candidate School, he had spent three years in the Navy and entered Harvard Business School, graduating in 1961. He then came “home” to McDonnell & Company, joining the firm first as a senior vice president. He was made executive vice president in 1967, when he was thirty-two. Sean McDonnell was something of a family pet, and many felt that he was his mother's favorite son. He, not his brother Murray, was considered the real financial genius in the family, and Anna Murray McDonnell, who had a large personal stake in the company, considered Sean to be her husband's true successor, the young white knight who would lead the family company to further riches and glory. In its present difficulties, Sean might be the only man to help the company out. Murray McDonnell, meanwhile, was perfectly happy to let Sean handle the day-to-day operations of the company, while he, Murray, concentrated on trading for his accounts, including those of the Church (Murray was chairman of the financial committee of the Archdiocese of New York), and his horses. Sean, a stickler for physical fitness, was often seen on weekends, in sweat pants, jogging up and down the shaded lanes of Greenwich near his house on Round Hill Road.

Sean McDonnell had been responsible for the firm's acquisition of F. P. Ristine & Company, a distinguished Philadelphia house. He also had undertaken to unscramble the company's accounting department, and to revamp the entire back-office procedure. To do this, a firm had two choices. One could either install one's own computers and programmers to develop an entire “in-house” computer system. Or one could simply mark the trades initially, and send everything over at the end of a business day to an outside computer house. McDonnell & Company decided on this latter course. At the time, in 1968, there were many firms that were specializing in doing accounting for brokerage firms. Sean
McDonnell chose one called Data Architects, Inc., of Waltham, Massachusetts. At the time, his choice was hailed by the
Wall Street Journal
as a “sophisticated” one. Then, on June 4, 1968, the McDonnell family received terrible news. Sean McDonnell had had a heart attack while jogging in Greenwich, and was dead at the age of thirty-three. The golden promise was gone. On top of bad management, the firm had encountered terrible bad luck.

For a time, the firm became, and behaved like, a riderless horse. No one seemed to be in control. The Data Architects computer system to handle the McDonnell accounts was still unfinished, and it suddenly seemed to be unfinishable. McDonnell & Company bitterly blamed Data Architects, saying that the computer firm “just didn't understand the brokerage business.” Data Architects blamed McDonnell, saying that it had become impossible to get anyone at McDonnell to make a decision, as proposals were shunted from one desk to another with no one doing anything. Sean's death was blamed for the entire situation. In retrospect, however, the choice of Data Architects may not have been as sophisticated as was at first assumed. Data Architects was a firm that the McDonnells had been very close to. It was underwritten in the heyday of underwritings in the early 1960's—when any company with the words “Data” or “Computer” or “Scientific Measurement” in its name created excitement in the marketplace—by the Wall Street firm of D. H. Blair & Company. D. H. Blair & Company were very friendly with McDonnell & Company, and the McDonnells and their partners had ended up owning approximately 50 percent of Data Architects.

Normally, it might seem, a firm like McDonnell & Company would investigate all the available computer firms before making a choice, and might have found that only one or two were equipped to handle their problems. Instead, the McDonnells went immediately to Data Architects, which was, so to speak “in the family”. The capability of Data Architects left a lot to be desired.
McDonnell & Company had a fiduciary responsibility to its customers; one could argue that the company was unwise to select a firm in which there was so great a potential conflict of interest.

Nineteen sixty-eight continued to be a year ot disasters. For the eight-month period ending August, 1968, McDonnell & Company had reported a profit of $1.8 million. By December of that year that profit was entirely wiped out. The printing and stationery bill alone was one million dollars for the year. The firm seemed on the brink of collapse. Murray McDonnell, in a desperation move, brought in Paul D. MacDonald, another friend, to head up his operations, and, under MacDonald, a drastic program of retrenchment was begun. Early in 1969 the firm closed and sold twenty-three of its twenty-six offices, leaving only the three “showcase” ones at 250 Park Avenue, 120 Broadway, and Paris. All McDonnell salesmen who were not producing at least $50,000 a year in commissions were fired. Salaries of all employees in the $30,000-to-$50,000 range were slashed by 10 percent. The sumptuous executive dining room was closed. The limousines which had carried McDonnell executives here and there about town were sold—except Murray's own, which, he explained, he personally paid for. The firm sold one of its three seats on the New York Stock Exchange for $413,000. As a result, by mid-1969 McDonnell & Company was worth half what it had been worth two years earlier.

The cuts, sales, and firings were intended to cut the company's overhead, and get it back on its feet. By November, 1969, Murray McDonnell, who admitted “I've been through hell,” was confident that things would work out for his company, and that there was at last light at the end of the tunnel. To a financial reporter from the
Wall Street Journal
, visiting Murray in his comfortable downtown office, Murray McDonnell presented a cheerful, confident front. The reporter caught his mood of optimism and headlined his story: “Riches to Rags—How Bad Management, Bad Luck,
Nearly
Ruined a Big Brokerage House.”

With a little smile, Murray said to the reporter, “I've
got
to be optimistic,” and he pointed to the photographs of his wife and nine children arrayed on his big desk. No one drew the parallel, but it was a little like the early optimism about the scope of the potato blight in 1845.

Murray also seems to have displayed a certain lack of sensitivity, or public-relations sense. In 1969, when the firm was going through its most agonizing throes, with mass firings and salary reductions taking place, his employees and associates cannot have been pleased to read that Murray McDonnell was off in Saratoga, paying nearly a quarter of a million dollars for a thoroughbred race horse.