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Certificates and Computers: The Remaking of Wall Street, 1967 to 1971

  • Wyatt Wells (a1)
Abstract

Events in the late 1960s reshaped the securities industry. Trading volume increased sharply, with the number of shares changing hands on the New York Exchange growing from five million a day in 1965 to twelve million a day in 1968. This expansion overwhelmed the mechanisms brokers used to transfer securities and keep records, which relied heavily on paper and pen. They responded by purchasing computers, but these machines were expensive and demanded more sophisticated management than most firms could provide. Accordingly, many companies botched the process. Moreover, trading volume declined sharply in 1969 and 1970, cutting deeply into brokerage revenue. These factors combined to create a crisis that had, by the end of 1970, forced nearly a sixth of the nation's brokerage firms out of business. Yet this crisis also opened the way for large, integrated companies, which, by the 1990s, dominated the securities industry and conducted business on a scale unimagined thirty years earlier.

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1 Although, at the time, these events received considerable attention from journalists and government officials, historians have tended to overlook them. Robert Sobel does discuss the paperwork crisis in N.Y.S.E.: A History of the New York Stock Exchange, 1935–1975 (New York, 1975), but the focus of his work is elsewhere, on the ups and downs of the market and on government regulation. In his history of the Securities and Exchange Commission, The Transformation of Wall Street: A History of the Securities and Exchange Commission and Modern Corporate Finance (Boston, 1982), Joel Seligman provides a good overview of the situation. Because the SEC is the focus of his book, however, he does not examine in any detail how the crisis affected the exchanges or securities firms.

2 R.L. Petruschell et al., “Reducing Costs of Incomplete Stock Transactions: A Study of Alternative Trade Completion Systems” (Rand Corporation, 1969), mimeo., NYSE Archives, 209–210.

3 For a general history of the stock market during these years, see Sobel, N.Y.S.E.; for figures on stock ownership, see the New York Times, 22 March 1971, 49.

4 Sobel, N.Y.S.E., 315.

5 Wall Street Journal, 6 June 1968, 3.

6 U.S. Congress, Senate Committee on Banking, Housing, and Urban Affairs, Securities Industry Study: Report, 92nd Cong., 2nd sess., 1972, 75.

7 Forbes, 15 July 1970, 47–18.

8 Securities and Exchange Commission (SEC), Study of Unsafe and Unsound Practices of Brokers and Dealers, Report to the Committee on Interstate and Foreign Commerce of the U.S. Congress, 92nd Cong., 1st sess., 1971, 18.

9 Wall Street Journal, 28 July 1970, 1, 14; Louis, Arthur M., “Ross Perot Moves,” Fortune, July 1971, 115; Loomis, Carol, “The Unbelievable Last Months of Hayden Stone,” Fortune, January 1971, 154; weekly summary of duPont operations visits, 4–11 Dec. 1970, SEC records, obtained under Freedom of Information Act (FOIA), in author's possession; Robbins, Sidney M. et al., “Paper Crisis in the Securities Industry: Causes and Cures” (Lybrand, Ross Bros. & Montgomery, 1969), 53, mimeo., NYSE Archives.

10 Wall Street Journal, 28 July 1970, 1, 14.

11 Ibid., 11 Dec. 1970, 1, 12.

12 U.S. Congress, Senate Subcommittee on Banking of the Committee on Banking, Housing, and Urban Affairs, Securities Industry Study, part 4, 92nd Cong., 1st sess., 1971, 220.

13 New York Times, 15 Oct. 1967, sec. 3, 1, 18.

14 SEC, Unsafe and Unsound Practices, 69.

15 Forbes, 15 July 1970, 47–18.

16 New York Times, 31 Dec. 1970, 29, 31.

17 SEC, Unsafe and Unsound Practices, 99.

19 Report on Goodbody & Co., June 1971, SEC, FOIA, in author's possession.

20 Carol J. Loomis, “Big Board, Big Volume, Big Trouble,” Fortune, May 1968, 150.

21 Wall Street Journal, 2 Jan. 1968, 28.

22 Ibid., 11 Aug. 1967, 1, 12.

23 Robbins et al., “Paper Crisis in the Securities Industry,” 98.

24 The incredibly complex nature of stock transfers is well demonstrated by a flow chart reproduced in the New York Times, 17 Jan. 1971, sec. 3, 1; see also New York Times, 30 Dec. 1969, 50.

25 Loomis, “Big Board, Big Volume, Big Trouble,” 150.

26 Robbins et al., “Paper Crisis in the Securities Industry,” 8.

27 Account by Charles Moran of Decline and Fall of F.I. Dupont & Co., SEC, FOIA, in author's possession.

28 R.L. Petruschell et al., “Reducing Costs of Incomplete Stock,” v.

29 New York Times, 30 March 1969, sec. 3, 14; Robbins et al. “Paper Crisis in the Securities Industry,” 25.

30 Wall Street Journal, 23 July 1968, 3.

31 Business Week, 24 Aug. 1968, 92–96.

32 Newsweek, 15 July 1968, 65–68; New York Times, 27 March 1969, 49.

33 Wall Street Journal, 15 May 1968, 4.

34 New York Times, 13 June 1969, 71, 74.

36 Wall Street Journal, 6 Nov. 1969, 1, 24.

37 New York Times, 13 June 1968, 71, 74.

38 Robbins et al., “Paper Crisis in the Securities Industry,” 62–63; Nortman and Rashes, “Report on Goodbody & Co.,” June 1971, SEC, FOIA, contains many examples of bad working conditions, low morale, and high turnover among that firm's back-office personnel.

39 SEC, Unsafe and Unsound Practices, 13.

40 Ibid., 157; New York Times, 7 Feb. 1969, 1, 56.

41 Robbins et al., “Paper Crisis in the Securities Industry,” 36–37.

42 Wall Street Journal, 8 Aug. 1967, 3.

43 Securities Industry Study: Report, 10.

44 “Improving Office Operations,” 8 March 1969, NYSE Archives, press releases, box 23, 5 March–31 May 1968.

45 Wall Street Journal, 25 August 1967, 13.

46 Robbins et al., “Paper Crisis in the Securities Industry,” 46–47.

47 New York Times, 3 April 1968, 65, 71.

48 The AMEX had exclusive jurisdiction over very few brokerage firms because almost all its members also belonged to the NYSE. As a result, when it came to dealing with the operational crisis, the AMEX operated in tandem with its larger rival.

49 SEC, Unsafe and Unsound Practices, 225; “An Exchange Report: Self-Regulation at a Time of Crisis,” [October 1970], NYSE Archives, press releases, box 25, 20 July-26 Oct. 1970; Charles Moran, Account of the Decline and Fall of F.I. Dupont & Co. [1971]; Hayden, Stone Inc. to Mahlon Frankhauser, 21 Nov. 1968; Alfred Coyle to Mahlon Frankhauser, 21 Nov. 1968, all SEC, FOIA, in author's possession.

50 U.S. Congress, House Subcommittee on Commerce and Finance of the Committee on Interstate and Foreign Commerce, Securities Market Agencies, 91st Cong., 1st sess., 1969, 143.

52 Securities Industry Study: Report, 9–10, 75.

53 Securities Market Agencies, 49.

54 “Staff Study of the Interpretation and Enforcement of the Net Capital Rule of the New York Stock Exchange,” reproduced in Securities Industry Study, part 4, 228.

55 New York Times, 20 Feb. 1968, 63, 74.

56 Wall Street Journal, 23 May 1968, 8; 8 Aug. 1968, 4; “Liquidation of Pickard & Company Incorporated,” 21 March 1969, NYSE Archives, press releases, box 24, 25 Feb. –1 May 1969.

57 New York Times, 26 Oct. 1968, 55.

58 Loomis, Carol J., “Wall Street on the Ropes,” Fortune, Dec. 1970, 136; New York Times, 6 July 1969, sec. 3, 13.

59 Robbins et al., “Paper Crisis in the Securities Industry,” 55.

60 Nortman and Rashes, “Report on Goodbody & Co.,” gives a particularly harrowing account of what could happen when a firm installs an untested computer system.

61 Robbins et al., “Paper Crisis in the Securities Industry,” 38.

62 SEC, Unsafe and Unsound Practices, 2–3.

63 Wall Street Journal, 6 Nov. 1968, 1, 24.

64 Securities Market Agencies, 8–11.

65 NASD press release, 23 July 1968, reproduced in Securities Markets Agencies, 427–428; New York Times, 16 Feb. 1969, sec. 3, 1, 12; Loomis, “Wall Street on the Ropes,” 130.

66 American Banker, 21 March 1969, clipping in “Automation Case Study Source Book,” NYSE Archives.

67 U.S. Congress, Senate Subcommittee on Securities of the Committee on Banking, Housing, and Urban Affairs, Clearance and Settlement of Securities Transactions, 91st Cong., 2nd sess., 1972, 225–235; New York Times, 7 March 1969, 51; Wall Street Journal, 23 May 1969, 3; 3 June 1969, 14; and 5 Aug. 1969, 12.

68 Securities Market Agencies, 265.

69 Clearance and Settlement, 225–235.

71 Securities Market Agencies, 143; Wall Street Journal, 31 Jan. 1969, 4; 1 March 1969, 3.

72 U.S. Congress, Senate Subcommittee on Banking and the Committee on Banking, Housing, and Urban Affairs, Securities Industry Study, part 2, 92nd Cong., 1st sess., 1971, 259–265.

73 Securities Industry Study: Report, 16–17.

74 New York Times, 2 Nov. 1968, sec. 3, 1, 7.

75 NYSE, “Annual Report, 1968,” 9, NYSE Archives

76 Securities Industry Study: Report, 7.

77 New York Times, 16 Oct. 1968, 60.

78 Ibid., 12 Nov. 1968, 46.

79 Securities Market Agencies, 155–156.

80 New York Times, 29 Dec. 1968, sec. 3, 1, 11.

81 Wall Street Journal, 31 Dec. 1968, 3; Newsweek, 13 Jan. 1969, 66–67.

82 New York Times, 15 April 1969. 72.

83 Loomis, “Wall Street on the Ropes,” 136.

84 SEC, Unsafe, and Unsound Practices, 99.

85 Clearance and Settlement, 156.

86 Homer Budge to Robert Haack, 16 Oct. 1970, and Haack to Budge, 26 Oct. 1970, SEC, FOIA, in authors possession.

87 SEC, Unsafe and Unsound Practices, 96–117.

88 Ibid., 99.

89 Wall Street Journal, 9 Oct. 1970, 3.

90 Loomis, “Wall Street on the Ropes,” 64, 156; New York Times, 22 Feb. 1970, see. 3, 1, 14.

91 Brooks, John, The Go-Go Years: The Drama and Crashing Finale of Wall Street's Bullish 1960s (New York, 1973), 2425.

92 Wall Street Journal, 14 April 1970, 1, 33.

93 Ibid., 15 Sept. 1971, 4.

94 Ibid., 15 June 1970, 2.

95 Ibid., 28 April 1970, 1, 29; New York Times, 8 May 1970, 47, 50; 23 Dec. 1970, 35, 41; NYSE, Fact Book, 1971, 57

96 Wall Street Journal, 28 April 1970, 1, 29.

97 SEC, Unsafe and Unsound Practices, 99.

98 Ira Haupt had collapsed in 1964 because of fraud. The NYSE stepped in, making sure that the firm's customers received the cash and securities they had on deposit with Haupt, although it cost the Exchange several million dollars. The trust fund was supposed to defray such expenses in the future, as well as to reassure investors.

99 Securities Industry Study, part 4, 220.

100 Fortune, July 1970, 141–144.

101 Louis, “Perot Moves,” 91–92.

102 U.S. Congress, Senate Subcommittee on Banking of the Committee on Banking, Housing, and Urban Affairs, Securities Industry Study, part 3, 92nd Cong., 1st sess., 1971, 232.

103 “An Exchange Report: Self-Regulation at a Time of Crisis” (October 1970), NYSE Archives, press releases, box 25, 20 July-26 Oct. 1970.

104 Securities Industry Study, part 4, 233.

105 New York Times, 14 June 1970, sec. 3, 11.

106 Business Week, 18 July 1970, 84.

107 Memo from Lee Aming to Owen Melaugh, 20 July 1970, SEC, FOIA, in author's possession.

108 Wall Street Journal, 3 June 1970, 2; and 9 June 1970, 40; memo from Frank Dominach to John Cunningham and Lee Arning, 24 June 1970, SEC, FOIA, in author's possession.

109 Memo from Robert Biship, Fred Stock, and Richard Greves to Lee Arning and John Cunningham, 5 Feb. 1970, SEC, FOIA, in author's possession.

110 Securities Industry Study, part 4, 233.

111 Ibid–., 232; memo from Dominach to Cunningham and Arning, 24 June 1970.

112 Loomis, “Last Months of Hayden, Stone,” 114–116, 154–159.

113 Wall Street Journal, 26 March 1970, 6.

114 Loomis, “Last Months of Hayden, Stone,” 114–116, 154–159; U.S. Congress, Senate Subcommittee on Securities of the Committee on Banking and Currency, Federal Broker-Dealer Insurance Corporation, 91st Cong., 2nd sess., 1970, 39; Wall Street Journal, 1 May 1970, 13; and 16 Jan. 1970, 30.

115 The other firms were Pickard & Co., Amott, Baker & Co., Fusz-Schmeltze & Co., Gregory & Sons, Baerwald & DeBoer, Orvis Brothers & Co., and Meyerson & Co.

116 Business Week, 16 Jan. 1971, 80.

117 Loomis, “Last Months of Hayden, Stone,” 114–116, 154–159.

118 Ibid.

119 See U.S. Congress, House Subcommittee on Commerce and Finance of the Committee on Interstate and Foreign Commerce, Securities Market Agencies and Problems in the Securities Industry, both 91st Cong., 1st sess., 1969.

120 “Synopsis of Federal Broker-Dealer Insurance Corporation Act,” [1970], NYSE Archives, public relations, box 16, Member Firms: Failures—SIPC.

121 Robbins et al., “Paper Crisis in the Securities Industry,” 6.

122 Broker-Dealer Insurance, 224–235.

123 New York Times, 19 Dec. 1970, 1, 45.

124 Broker-Dealer Insurance, 193–195.

125 “Fact Sheet: Securities Investor Protection Act of 1970,” [December 1970], NYSE Archives, press releases, box 25, 27 Oct.–23 Dec. 1970; Wall Street Journal, 17 June 1970, 2.

126 Wall Street Journal, 24 May 1971, 3; 8 Nov. 1971, 2.

127 Haack to Hamer Budge, 14 July 1970, and Haack to Theodore H. Focht, 23 July 1970, reproduced in U.S. Congress, House Subcommittee on Commerce and Finance of the Committee on Interstate and Foreign Commerce, Securities Investor Protection, 91st Cong., 2nd sess., 1970, 330–331, 396–397.

128 Brooks, The Go-Go Years, 324–325; Business Week, 3 Oct. 1970, 20–21.

129 Press release, 17 Nov. 1970, NYSE Archives, press releases, box 25, 27 Oct.–23 Dec. 1970.

130 New York Times, 19 Dec. 1970, 1, 45. The SIPC did not insure against market fluctuations, only against the failure of brokers. For instance, if a customer whose broker failed had 100 shares of IBM on deposit with that broker, the SIPC would guarantee that he would get back those shares (provided they were worth no more than $50,000). But the government would not compensate an investor for a decline in the value of IBM shares in the interim.

131 Wall Street Journal, 17 Jan. 1971, 2. Most of this money came from a $15 million tax refund from the federal government, the product of losses suffered by the Exchange in liquidating failed firms. In a sense, therefore, the government did end up bailing out these three firms.

132 For examples of the problems of both firms, see the following memos: from Haskins & Sells, 16 Dec. 1969; Charles Moran to Robert Bishop, 28 Feb. 1969; James King to Paul Chenet, 20 June 1970; M.A Speicher to Paul Chenet, 1 Dec. 1970; and information statement, 16 Oct 1970, all SEC, FOIA, in author's possession.

133 Budge to Haack, 16 Oct. 1970, and Haack to Budge, 26 Oct. 1970.

134 Ibid.

135 Nortman and Rashes, “Report on Goodbody & Co.”

136 Wall Street Journal, 27 July 1971, 2.

137 Louis, “Perot Moves,” 90–93, 113–115.

138 M.A. Speichder to Paul Chenet, 5 Jan. 1971; Thomas Thompson to Charles Rubin, 17 Feb. 1971, both SEC, FOIA, in author's possession.

139 Louis, “Perot Moves,” 90–93, 113–115.

140 Minutes of special meeting, 17 March 1971, SEC, FOIA, in author's possession.

141 Louis, “Perot Moves,” 90–93, 113–115; NYSE memo to members and allied members, 3 May 1971, SEC, FOIA, in author's possession. Perot wanted Dupont on a sound financial footing when he took over and decided that it should have a ten-to-one capital ratio. If his $40 million was not enough, the NYSE agreed to put in up to $15 million to bring it to this point. Should increasing the firm's debt-to-capital ratio require more money, however, Perot would have to find it elsewhere.

142 Mason, Todd, Perot: An Unauthorized Biography (Homewood, Ill., 1990), provides a good account of Perot's adventures on Wall Street.

143 Wall Street Journal, 11 Sept. 1970, 1.

144 Ibid., 23 Feb. 1971, 7.

145 Ibid., 16 April 1971, 2.

146 NYSE, “Annual Report, 1971,” 2, NYSE Archives.

147 SEC, Unsafe and Unsound Practices, 98.

148 See Elias, Christopher, Fleecing the Lambs (Chicago, 1971) and Baruch, Hurd, Wall Street: Security Risk (Washington, 1971). Even Brooks's The Go-Go Hears, a generally good history of Wall Street during the 1960s, offers a strange moral judgement on the back-office crisis, coupling discussion of the subject with an examination of increasing drug use by the staff of brokerage firms (chap. 8).

149 Petruschell et al., “Reducing Costs of Incomplete Stock Transactions,” 40.

150 Account by Charles Moran of the Decline and Fall of F.I. Dupont.

151 Ernst & Ernst to Goodbody & Co., 31 March 1970, SEC, FOIA, in author's possession.

152 Wall Street Journal, 31 July 1969, 4; 15 Sept. 1971, 4.

153 By 1971, the NYSE allowed members to sell a minority stake to the public.

154 NYSE, “Annual Report, 1971,” 2.

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