A syndicate of bankers gathered on October 24th to plan out how to end the panic. As acting president of the New York Stock Exchange, Richard Whitney was the face of the operation. The rest ran the six largest banks in the country.
It was like history repeating itself. J.P. Morgan famously did something similar in 1907 when he summoned the leading bankers to save the financial system from collapse. Only this time things didn’t work out as before.
The day after Black Thursday (October 24, 1929), Whitney strolled up to Post No. 2 on the exchange floor and ordered 10,000 shares of U.S. Steel. “205 for Steel” was the bid. It was over $5 above the current asking price. He did the same for several other blue-chip stocks. In a matter of minutes, he placed $20 million in bids. The market reversed course and rallied into the close. It was enough to turn the tide through the weekend.
The selling resumed on Monday. And on October 29th, forever known as Black Tuesday, the market was in a full-on panic.
For a brief moment, Whitney was the savior of Wall Street. He was a national celebrity. His actions would seal his appointment as President of the Exchange.
To say Richard Whitney lived a good life would be an understatement. He owned a seat on the Exchange tied to a trading firm that dealt almost exclusively for J.P. Morgan & Company. He had two homes, one in New York City and a 500-acre estate in New Jersey, with an assortment of champion livestock, and a full staff of servants, ranchers, and jockeys to maintain it all.
Yet, it wasn’t enough. What happened next is a lesson on how to lose everything.
Whitney had a penchant for get-rich-quick schemes. He loved long-shot investments — lottery stocks. He also had no problem borrowing money to invest.
His first sign of trouble began in 1923. Whitney found two Florida companies, Florida Hummus Company that dealt with fertilizer and Colloidal Products Corporation in mineral colloids. Money was invested but the companies didn’t pan out as planned. He refused to sell. He was certain both companies would make him richer.
Florida’s economic collapse, following the late ’20s real estate bust, left both stocks trading at what Whitney believed to be bargain prices. So he doubled down in 1928 — this time with borrowed money from his brother and a close friend. He doubled down again in 1929 with more borrowed money.
By 1932 he had flushed $2 million of borrowed cash into two companies bound for bankruptcy. The next year he would find a new lottery that would make him rich.
Distilled Liquors made an applejack brandy with a bite, known as Jersey Lightning. Whitney somehow came to the conclusion the brandy would be a national favorite after the repeal of Prohibition. So he set about preparing Distilled Liquors for an IPO, with him and his firm subscribed for up to 15,000 shares at $15 each. Of course, he needed to borrow money to buy the stock.
The end of Prohibition brought about a boom in liquor stocks. In less than a year, Distilled Liquors’ stock shot up to $45. Whitney bought all the up. Had he sold at $45, he could have paid off all his outstanding debt, with the exception of what he owed his brother. Instead, he held on, convinced it would go higher. He was all in.
$45 was the top.
Two years later, Distilled Liquors was trading at $11. Whitney never sold a single share. In fact, he pledged the stock as collateral for bank loans. He was doing everything he could to prop up the stock’s price because if the price dropped too far, the banks would ask for more collateral.
Thus his final borrowing spree began. Over the course of two years — 1936 to 1937 — he would take anything he could get his hands on to keep Distilled Liquor’s stock from falling. $100,000 was his typical ask and everyone was a mark. He mortgaged both homes to the hilt. And when that wasn’t enough, he “borrowed” his client’s assets to use as collateral for loans, along with $1 million from the Stock Exchange Gratuity Fund. The legal term is embezzlement.
At the height of his incompetence, he was shuffling around millions of dollars. It was like a Ponzi scheme with debt to keep it all from blowing up:
Let us sum up in broad strokes, for the astonishing record, Whitney’s true financial condition as of the first week of March 1938. Over the preceding four months he had negotiated, all told, 111 loans aggregating $27,361,500; of this, more than $25 million had been in more or less soundly secured borrowings from commercial banks, constantly turned over as he made new loans to repay those that came due. Apart from this, he owed, entirely unsecured, $2,897,000 to George Whitney, $474,000 to J. P. Morgan & Company, and about an even million dollars to others. He owed borrowed stocks worth about $390,000. Quite apart, then, from the sums he “owed” to the customers from whom he had embezzled, he had managed to accumulate on the strength of nothing, or almost nothing, more than his character and good name net borrowings well in excess of five million dollars.
His scheme would make front-page news on March 7, 1938. He would be indicted a few days later, found guilty, and sentenced to prison within a month.
Richard Whitney made a lot of mistakes beyond breaking the law. Where to begin? He made the mistake many people make in a booming bull market. He just took it to an unimaginable extreme. He let envy, vanity, greed, FOMO, sunk cost fallacy, horrible business sense, and blindness to the downside get the best of him.
Instead of learning from his early mistakes with two failed long shots, he repeated them. And when one finally paid off, greed got the best of him. He refused to take profits.
He borrowed more than he could afford to lose and dumped it all into too few questionable “investments.” He risked everything he had for more of something he didn’t need.
His ability to pour good money after bad, rather than cut his losses, and compound his problems was historic.
Once in Golconda
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