A LITTLE HELP FROM MY FRIENDS

I apologize, but the closest I can come to describing the drama in the board room of the New York and Erie Railroad on that crisp November afternoon is to recall one of the concocted tribal councils on the “reality” television show “Survivor”. Now, because of the time compression, deleted conversations, subtle “background” music additions and the myriad of other minor manipulations that fall under the label of “editing”, the only common element between a modern day “Survivor” contestant and Mr. Jacob Little, the Antebellum Napoleon of the Board Room, was that over the span of just a few moments they both stood to win or lose a fortune. And that has not been a reality for corporate managers in America for so long as to make it hard for modern readers to imagine it was ever true. It ain’t a real game if you are “too big to fail” because then, you can’t lose. And Jacob could.

Jacob Little was called “the original Wall Street Bull”. That was not quite true. The ancient traders, who bought hides from butchers, invented the ‘futures market’ by buying and selling the hides of cattle that had not yet been born. And if farmers thought the prices for hides were approaching the bottom they might hold onto more of their bulls, thus ensuring more cows for next season, when the prices might be better. So, those who expected prices were going up, were expecting a “bull market”.  A bull in the stock market is a gambler, aggressive and willing to use his horns to get his way. And that is an apt description of Jacob Little.

Jacob’s contemporary, Henry Clews, claimed that Jacob “…made and lost” nine fortunes on Wall Street. And Matthew Smith, in his book “Sunshine and Shadow in New York” recorded a moment of introspection which Jacob experienced while walking past the mansions surrounding Union Square in New York City. “I have lost money enough today to buy this whole square. Yes, and half the people in it,” he said. And that was probably not an exaggeration.

At a time when railroads were the high tech, Jacob Little, tall and slim and “careless in his attire, wearing a hat like that of a farmer, and not a very prosperous one”, was known as the ‘Railway King’. He had realized early that there was far more money to be made in railroad stock than in running railroads. Between 1830 and 1855, when the nation quadrupled its miles of track, 125 railroad companies issued stock but never laid a single mile of railroad track. They sold preferred stock and common stock, and several varieties of bonds in their non-exsistent roads. And then there was the "futures’ market" in stocks and bonds of railroads that did not exist. Before regulations, this was the Wall Street version of the Wild West - have printing press, will fleece all suckers. Under this cloud of conspiracies,  even those railroads that were real, suffered from endless manipulation.  A few got rich. Many were cheated. And worse, millions dared not invest, thus hurting the nation as a whole.

Consider the very real and profitable Norwich and Worchester Railroad in Massachusetts, whose largest stockholders signed a secret agreement to sell their Norwich stock only to each other. This created an artificial shortage of the stock, which drove the price up. The partners had agreed to hold their stock until Norwich topped $90 a share. They would then dump the stock and leave the suckers owning a suddenly broke and worthless railroad; As the lawyer Tom Hagan explains in “The Godfather”, “Its just business, Sonny.” Just to keep all the crooks honest, any member of the “cartel” who sold below $90 a share pledged to pay a $25,000 fine to his fellow conspirators.

Jacob Little was one of the few non-New Englanders in on this game and one of the largest holders of Norwich stock. But he was the smart one. As the price of the stock began to rise, Jacob quietly offered to sell his partners a portion of his shares at $89 a share. Well, perhaps offer is the wrong word. Because after Jacob had done this several times it dawned on the crafty New Englanders that they had to buy his stock in order to avoid a price collapse of their stock. But once Jacob had unloaded all of his Norwich stock at $89 a share, he dutifully mailed a $25,000 check to his “partners”. By then he had profited several times that amount by shafting his partners exactly as they had planned on shafting the suckers. The partners let it be known that if the Bull of Wall Street showed his face in Boston again, they intended on claiming his ears.

It was maneuvers such as that which inspired a handful of the lesser wizards of Wall Street to plot Jacob’s demise. They were his fellow board members on the New York and Erie Railroad, and it seemed to them that Jacob was overextended. Besides owning a large chunk of Erie stock of course, Jacob had recently bought several thousand ‘options’, pledging to buy even more. When those options matured in six months, if the option holders demanded it, Jacob would have to deliver the stock, whatever the price.

Jacob was betting, of course, that the price would go down, and as a board member he had the power to help that happen. But the wizards decided to use Jacob’s genius against him. First, they quietly bought up all of Jacob’s options. And then, as the six months ran out, they began to buy every share of Erie stock they could find, bidding the price up 15 points above the price of Jacob’s options. And Jacob remained so blissfully unaware of the doom that was impending, he actually bought even more options, digging the hole he was in that much deeper.

The ultimate “Survivor” moment arrived at the 2:00 p.m. meeting on Friday, November 16, 1855. It was the maturity date for Jacob’s options. Jacob was late arriving, and the meeting droned on, until the board room clock struck 3:00 p.m. The New York Stock Exchange was closed for the day. It was no longer possible for Jacob to buy stock to meet his options. And in the best tribal council fashion, one by one the wizards presented their options to their cornered prey. The stack got very impressive. The Napoleon of the Board Room had been broken and broke right before their eyes. But just as Jeff Probst was about to say, “The next person voted off Survivor,..."  Jacob Little pulled an immunity idol right out of his derrière.

Actually he pulled it out of London. Jacob was late to the board meeting because he had stopped in the corporate stock transfer room to convert Erie “convertible bonds”, bought weeks earlier on the London Stock Exchange, into Erie common stock. Now, "convertible bonds" are usually not worth the premium they sell for. If you are going to pay extra for a premium stock, you might as well buy the common stock. But in this case the wizards had helpfully bid the price of Erie stock so high, they made the premium more than worth the price. And as Jacob fastidiously signed over each share required to fill the options, he was also diluting Erie Stock so that, come morning, the stock took a nose dive. The wizards had been so intent on cutting off the limb that Jacob had climbed out on, that they failed to notice they were on the same limb. And right in front of  their eyes, Jacob climbed down first.

Clearly somebody had leaked the plot, and, in retrospect that was inevitable. During his 12 years as an independent broker Jacob had built friendships and done favors for local bankers from San Francisco to New Orleans. At lest one of them was bound to warn Jacob about the brewing coup d’etat. But so brilliantly had Jacob gamed the system that future generations of Wall Street bulls used his trick to transfer future fortunes into their bank accounts at the expense of future generations of suckers - until the rules were changed to require a convertible bond be held for at least sixty days before it could be transferred into common stock.

Most Wall Street fairy tails end the story here, with The Napoleon of the Board Room winning until he faded into history. But inevitably Jacob lost one more fortune than he made. He died broke on Sunday, March 28th, 1865. The Board of the New York Stock Exchange adjourned for the day to attend his funeral, but I can not say for certain whether they did this out of respect, or to confirm that Jacob was really dead. But I can say it has been the goal of Wall Street players ever since to rig the game so that they never run the risk of dying broke, ever again. And that makes it a very different game than the one that Jacob played.

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