The Go-Go Years (18 page)

The game, like all such games, could not go on forever. By early 1965, suspicion of Atlantic's operations was in the wind. In April, the New York Hanseatic Corporation, a $12-million investor in Atlantic paper, asked the Toronto-Dominion Bank for a credit check on Atlantic. The response—which in retrospect appears dumbfounding—was favorable. In fact, if the bank had been able to penetrate the mystifications of Powell's accountants, it would have discovered that Atlantic was by that time actually insolvent. For several years, at the instigation of some of the various international schemers for whom Morgan had a fatal affinity, the firm had been increasingly involved in a desperate and doomed plunge in a shaky venture far from home: between 1963 and early 1965 it had committed more than $11 million to the Lucayan Beach, a hotel with a gambling casino attached, on balmy, distant Grand Bahama Island. A Royal Commission would later describe the investment as “the last throw of the dice to retrieve all the losses created by years of imprudence and impropriety.” But the Lucayan Beach venture, managed incompetently and fraudulently, did not flourish, and the losses were not to be retrieved.

The ingenuity with which Atlantic's desperation was concealed from the investing public, even from its usually most knowledgeable sectors, is indicated by the fact that during the last part of May, only three weeks before the bubble finally burst, the Madison Fund, a good-sized U.S. investing institution, bought one last million dollars' worth of Atlantic paper through Kuhn, Loeb. On June 14, the Toronto-Dominion Bank abruptly refused to honor $5 million in Atlantic checks covering notes that had matured. This was technical failure; but worse was to come. That same day, it became known that forty-one Wall Street brokers had just received orders for various stocks closely connected with Atlantic, on the letterhead of “Sassoon's Far Eastern Trust, Ltd., of Nassau, Bahamas,” and accompanied by ostensibly certified checks amounting to nearly $6 million, drawn on the same bank. The certification, however, was faked, and the bank on which the checks were drawn was nonexistent. Later it would emerge that this strange affair was not Morgan's doing but part of a Byzantine scheme hatched by one of his unreliable associates; but the untimely whiff of fraud did nothing to restore confidence in Atlantic in its hour of need. More notes were called, and as a result, on June 15, the firm required $25 million to cure the default. Of course, it neither had nor could raise such a sum.

So the game was up at last. Waves of shock and bewilderment ran through the U.S. investment Establishment. There were frantic thrashings for several subsequent days, including the dispatching by Kuhn, Loeb to Toronto of a member of the firm with the resounding name of Thomas E. Dewey, Jr., son of the former New York State governor and Presidential candidate. To no avail. Atlantic shortly went into formal receivership, leaving the American Burke's Peerage, which seemed to have been gulled in a way that would do discredit to a shrewd schoolboy investor, shorn of a sum that was at first estimated to be around $50 million.

The repercussions of the failure, the greatest in Canada's history, were wide, deep, and long-lasting. Shortly after Atlantic's
default, a confidential report prepared for the Montreal Trust Company, Atlantic's receiver in bankruptcy, began to reveal just how unsound the whole Atlantic operation had been. “There is a paucity of credit information,” the report said, “and, as far as we were able to ascertain, no real financial control. … There appears to have been no reporting procedure.… On real estate, machinery, and other types of fixed-asset loans, apparently no appraisals were obtained and there was no evidence on file of the value of loan collateral.… In sum, procedures considered necessary in the conduct of a financial business were missing.” At the end of 1965, the Ford Foundation bit the bullet and formally wrote off $4,775,000 of its Atlantic investment as worthless; it continued to carry on its books another $2 million of Atlantic paper that showed little promise of turning out to be any better. The Steel fund revealed that it held $2.25 million in Atlantic notes, 12,000 shares of common stock, and $125,000 in convertible preferred shares. Connecticut General Life Insurance was stuck with $2 million in notes and $240,000 in convertible preferred, Massachusetts Mutual Life with $4.446 million in notes. And so it went. An officer of the First National City, still another loser on Atlantic, explained with poignant rue that the whole operation had had “an aura of respectability.” Brave and candid, or simply unguarded, the comment pointed the moral. The Old Establishment of U.S. investing had fallen for its own fading mystique. Believing, with tribal faith that can only be called touching, that no member of the club could make a serious mistake, the members had followed each other blindly into the crudest of traps, and had paid the price for their folly. As for the unfortunate Lambert and Company, it simply vanished; one week its Wall Street office was present and active, the next week it was gone.

But the Atlantic collapse meant more than that. For the Canadian economy as a whole it meant the threat of a credit panic, and in the first two months after the default, the Bank of Canada was forced to increase the national money supply by a billion dollars to avert one. The northward flow of U.S. funds, already slowed by President Johnson's balance-of-payments
plea in February 1965, became a trickle. In the autumn of 1965 there was a government crackdown on the casual ways of Bay Street. A Royal Commission of Ontario was formed to look into the entire Atlantic matter. In May 1966—a time when the Canadian economy was still suffering from the Atlantic shock waves—Morgan, dying of leukemia, testified dramatically to the Commission from his deathbed. The Commission reported later that his testimony had been given “under circumstances in which the physical weakness of the witness was a painful and pervasive fact,” and that he had complained about colleagues of his who had their “fingers in the till,” neither admitting nor denying his own complicity in fraud. He died that October, but the Commission's work went on; at last, in December 1969, it issued its final report, in four volumes comprising 2,700 pages. Among its findings and conclusions were that the misrepresentations in Atlantic's financial statements had been “deliberate, designed to encourage the purchase of shares and notes in the company”; that “the activities of C.P. Morgan, prosecuted with considerable energy and ingenuity as they were, have been shown to be dishonest”; and that the loss to Atlantic's investors in the debacle had been not $50 million as originally estimated, but in excess of $65 million. In the last analysis, much of that had come not out of the pockets of millionaire professional investors, but out of those of ordinary shareholders in mutual funds and insurance companies, donors to leading universities, pensioners of U.S. Steel, and recipients of the largesse of the Ford Foundation.

The sad affair of Atlantic, its effects spreading southward like the frigid Canadian air that often suffuses much of the United States in winter, was a foretaste of the homegrown bad weather soon to appear in Wall Street. A smooth operator with a streak of the gambler; a company more interested in attracting investors than in making real profits; the resort to tricky accounting; the eager complicity of long-established, supposedly conservative investing institutions; the desperation plunge in a gambling casino at the last minute; the need for massive central-bank action to localize the disaster; and finally, reform measures
instituted too late—we will see all of these elements reproduced with uncanny faithfulness in United States financial scandals and mishaps later in the nineteen sixties. Thus the Atlantic episode neatly divides Wall Street's drama of the decade, ending the first act, and beginning the second and climactic one.

CHAPTER VI

The Birth of Go-Go

1

When
Webster's Third New International Dictionary
was published in 1961, it defined the term “go-go” as “a vine found in the Philippines,” or, alternatively, as “a Bantu people.” The
Random House Dictionary of the English Language,
in 1966, ignored these arcane meanings, and under the entry “go-go” referred the reader to the phrase “à gogo,” which it defined, “as much as you like; to your heart's content; galore (used esp. in the names of cabarets, discothèques, etc.).” The
American Heritage Dictionary of the English Language,
which appeared in 1969, provided the term with by far the most ancient and scholarly provenance to that date. “À go-go,” it said, means “in a fast and lively manner; freely. Chiefly used as an adverb:
dancing à go-go;
also used as an adjective: an
à gogo
dance.” It went on to explain that the phrase was a French one meaning, in France, “in a joyful manner,” and that it was probably derived from the Old French word “gogue,” merriment or hubbub, which also gave rise to the English (originally, Middle English) “agog.”

Sometime in the middle nineteen sixties, probably in late
1965 or early 1966, the expression as used in the United States came to have a connotation that the dictionaries would not catch up with until after the phenomenon that it described was already over. The term “go-go” came to designate a method of operating in the stock market—a method that was, to be sure, free, fast, and lively, and certainly in some cases attended by joy, merriment, and hubbub. The method was characterized by rapid in-and-out trading of huge blocks of stock, with an eye to large profits taken very quickly, and the term was used specifically to apply to the operation of certain mutual funds, none of which had previously operated in anything like such a free, fast, or lively manner.

The mood and the method seem to have started, of all places, in Boston, the home of the Yankee trustee. The handling of other people's money in the United States began in Boston, the nation's financial center until after the Civil War. Trusteeship is by its nature conservative—its primary purpose being to conserve capital—and so indeed was the type of man it attracted in Boston. Exquisitely memorialized in the novels of John P. Marquand, for a century the Boston trustee was the very height of unassailable probity and sobriety: his white hair neatly but not too neatly combed; his blue Yankee eyes untwinkling, at least during business hours; the lines in his cheeks running from his nose to the corners of his mouth forming a reassuringly geometric isoceles triangle; his lips touching liquor only at precisely set times each day, and then in precise therapeutic dosage; his grooming impeccable (his wildest sartorial extravagance a small, neat bow tie) with a single notable exception—that he wore the same battered gray hat through his entire adult life, which, so life-preserving was his curriculum, seldom ended before he was eighty-five or ninety.

And yet, the Boston trustee was not unimaginative; he was an outward-looking Athenian, not the ingrowing Spartan he was often accused of being. As early as 1830, Justice Samuel Putnam of the Supreme Judicial Court of Massachusetts wrote in a famous opinion,

All that can be required of a Trustee to invest is that he conduct himself faithfully and exercise a sound discretion. He is to observe how men of prudence, discretion, and intelligence manage their own affairs, not in regard to speculation, but in regard to permanent disposition of their funds, considering the probable income, as well as the probable safety of the capital to be invested.

The Boston-born “prudent man rule,” as it came to be called, represented a crucial liberalization of the law governing trustees, and such a durable one that it is still their basic guide almost a century and a half later. In 1924, Boston was the site of another epoch-making innovation in American money management, the founding of the first two mutual funds, Massachusetts Investors Trust and State Street Investing Company. And then, in the years after World War II, the go-go cult quietly originated hard by Beacon Hill under the unlikely sponsorship of a Boston Yankee named Edward Crosby Johnson II.

Although never a trustee by profession, Johnson was almost the Boston-trustee type personified. In the nineteen sixties, which corresponded roughly with
his
sixties, he was a spry, smallish, clean-cut man, proud of the hole-in-one he once made at La Gorce Country Club; in orthodox trustee style, he favored a battered hat and a bow tie. He seemed much younger than he was, as if a gentle upbringing and a comfortable life had sheltered him from the whips and scorns of time. He said “annathing” and “annabody” in the charming accent of his breed, but what he said was packed with ore; his talk tumbled out enthusiastically, yet he seemed inarticulate because his mind encompassed more than his tongue could often convey.

He was born in a Boston suburb in 1898, the son of a partner in the old Boston dry-goods firm of C.F. Hubby, and a descendant of John Johnson, a Puritan freeman in seventeenth-century Massachusetts. He was named for another ancestor who had been a Union officer in the Civil War. He went to Milton Academy and then, all but inevitably, to Harvard; he married another Brahmin, his second cousin Elsie Livingston. In deference to his father's wish that he become a lawyer, he went on to Harvard Law and then joined the proper Boston law firm of
Ropes and Gray. He stayed there for fourteen years, from 1925 to 1939, specializing in corporate reorganizations and mergers. But all the while his heart belonged to the stock market.

The market bug first bit him in 1924 when he read a serialization in the old
Saturday Evening Post
of Edwin Lefèvre's “Reminiscences of a Stock Market Operator,” the story of the career of the famous speculator Jesse Livermore. “I'll never forget the thrill,” he told a friend almost a half century later. “Everything was there, or else implied. Here was the picture of a world in which it was every man for himself, no favors asked or given. You were what you were, not because you were a friend of somebody, but for yourself. And Livermore—what a man, always betting his whole wad! A sure system for losing, of course, but the point was how much he loved it. Operating in the market, he was like Drake sitting on the poop of his vessel in a cannonade. Glorious!” Under the influence of Lefèvre's book, this young romantic of commerce, this privileged young man in danger of becoming what he became because he had always been a friend or relative of somebody, began playing the market in his spare time between his legal chores; his colleagues teased him for keeping stock-market charts on the walls of his law office. He lost along with everyone else in the 1929 crash, but, unlike many, survived the setback and, in the following years, as the market sank into the abyss, he scored his first coup. “I'd noticed a certain group of signs that, when they came together, meant a big bust was ahead,” Johnson recounted long afterward. “I saw the signs, and I anticipated the 1931–1932 drop. I sat on my little poop-deck potting away, and kept my capital intact. God, it was glorious!”