A LITTLE HELP THe Original Bear of Wall Street

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 riding on the scariest roller coaster you've ever ridden upon. Without safety inspections. And that is the common element between a modern day coaster rider  and Mr. Jacob Little, the Antebellum Napoleon of the Board Room. When he was riding the Wall Street roller coaster, every once in awhile the cars jumped the rails and the riders got killed.  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. And did.

Jacob Little (above) -  tall and slim and “careless in his attire, wearing a hat like that of a farmer, and not a very prosperous one” - was called “The Great Bull of Wall Street”.  The original traders, who bought hides from butchers, had invented the ‘futures market’, by buying and selling the hides of cattle that had not yet been slaughtered, and then later, those not yet born.  And if farmers thought the prices for hides were about to fall, they would hold onto more of their bulls, thus ensuring more calf's for next season, when the prices might be better. So, those who expected prices were going up, were expecting a “bull market”.  And a Bull Trader in the stock market is an aggressive  gambler, willing to use his horns to get to the food trough.  And that is an apt description of Jacob Little.

Jacob’s contemporary, Henry Clews, claimed that Jacob “…made and lost” nine fortunes on the Wall Street merry-go-round. 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. “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 was known as the ‘Railway King’, and not because he knew anything about how to run a railroad.  Jacob was one of the first to realize there was far more money to be made in buying and selling railroad stock than in actually running a railroad. 

Between 1830 and 1855 the nation quadrupled its miles of railroad track, During that same time at least 125 railroad companies issued stock but never laid a single mile of track. They sold preferred stock and common stock, and bonds that had to be held for years, and bonds which could be converted into either preferred or common stock the same day you bought them. But they never bought an engine or a freight car.

And then there was the "futures’ market" in railroad stocks and bonds. There was even an ‘options’ market, which was the buying and selling of promises to buy or sell stock in railroads which might never exist. This was the Wall Street version of the Wild West; have printing press, will fleece all suckers. And even those railroads that were real, suffered from endless stock manipulation.

Consider the profitable Norwich and Worchester Railroad in Massachusetts, whose largest stockholders signed a secret agreement to stop investing in the new track or engines, and sell their Norwich stock only to each other. This created an artificial shortage of the stock, which drove up the price...for the time being  

The partners agreed to hold their shares until Norwich topped $90 a share. They would then dump the stock and leave the suckers owning a hollowed out and nearly worthless railroad;  And just to keep all the crooks honest, any member of the “cartel” who sold below $90 a share contracted to pay a $25,000 fine to their fellow conspirators.

Jacob Little was one of the largest conspirators in the Norwich stock scam, but he was the smart one. As the stock began to rise, Jacob quietly offered to sell his fellows a portion of his stock at $89 a share. Well, perhaps offer is the wrong word. Because after Jacob had done this several times it dawned on his New England  "partners" that they had to buy his stock in order to avoid a price collapse of their own inflated stock. 

And once Jacob had unloaded all 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 called themselves "The Happy Family" but in reality 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, 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 at whatever current market 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 Happy Family decided to use Jacob’s genius against him. First, they quietly bought up all of Jacob’s 6 month 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 seemed to remain so blissfully unaware of this impending doom that he actually bought even more options.

The ultimate thrill on this ride arrived at the annual stock holders meeting, 2:00 p.m. Friday, 16 November, 1855.  It was the maturity date for Jacob’s options. The meeting had droned on for an hour until the clock struck 3:00 pm. The market was closed for the day. It was not until it was no longer possible for Jacob to buy stock to meet his options, that he made his appearance.  Now they would bankrupt him. 

At Jacob's late appearance, one of the Happy Family, Nelson Robinson, could not help gloating. He greeted Jacob by saying, "Well, we've got the Erie locked up tight enough, every share of it. Now, stand to the rack like a man and acknowledge that the jig is up".

And then, one by one,  the wizards presented their options to their cornered prey. The stack was very impressive. The Napoleon of the Board Room had been broken and broke right before their eyes. But just as the operator was about say, "Exit the car to your right", Jacob Little pulled another ticket for the ride, right out of his derriere.

Actually he pulled it out of London. Jacob was late to the board meeting because he had stopped in the Erie’s stock transfer room to complete a transaction he had conducted out of sight of the Happy Family, on the London Stock Exchange.  There Jacob had bought Erie Railroad “convertible bonds”, 

Normally convertible bonds are  not worth the premium they sell for. If you are going to pay that much, you might as well buy the stock. But in this case the Happy Family had helpfully bid the price of Erie stock so high, they made the premium more than worth the price. 

And as Jacob fastidiously converted his convertible Erie railroad bonds into to enough shares of common Erie Stock required to fill the options, he was also diluting Erie Stock so that, when the market opened Saturday morning (they traded a half day Saturday in those days) the price of Erie 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 Jacob just climbed down first.

Clearly somebody had leaked the plot, and, in retrospect that was inevitable. With Jacob always willing to bribe any trader or broker for an advantage,  somebody 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 this same trick to transfer future fortunes into their bank accounts at the expense of future generations of suckers, until investors insisted the rules be changed - in this case a new law requiring a convertible bond be held for at least sixty days before it could be transferred into common or preferred stock.

None of this had anything to do with running a railroad. Except it siphoned profits out of providing better and safer service at a lower price - the supposed advantage of capitalism. 

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. Less than a year later a Wall Street Panic left him (above center right) stunned and wandering Wall Street. 

Jacob Little, "The Great Bear of Wall Street” and "The Napoleon of the Board Room". died broke on Sunday, 28 March, 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 that it has been the goal of Wall Street brokers 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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