Business Adventures: Twelve Classic Tales from the World of Wall Street

Business Adventures
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Published: 8/12/2014
What do the $350 million Ford Motor Company disaster known as the Edsel, the fast and incredible rise of Xerox, and the unbelievable scandals at General Electric and Texas Gulf Sulphur have in common? Each is an example of how an iconic company was defined by a particular moment of fame or notoriety.

Business Adventures: Twelve Classic Tales from the World of Wall Street by John Brooks

Key Insights

What do many of the top companies in the business world have in common? For each of these companies, there is a specific moment in their history, either good or bad, that helped to define them.

In Business Adventures: Twelve Classic Tales from the World of Wall Street, John Brooks looks at the defining moments of 12 iconic companies. Whether these moments were about fame or notoriety, each one helped to define the company in a way that is still relevant today.

This is a chance to get an in-depth look at some iconic companies, while also learning more about the intricacies of the corporate world as they were when each of these events took place.

Why Business Adventures is still critical reading today

No matter what business story the author looked at, from the 1962 market crash to a brokerage firm crashing, there is one thing that becomes clear - history often repeats itself.

In an effort to prevent history from repeating itself, it is important to learn from the mistakes of the past.

This is a chance to not only learn more about business, but also what they all have in common with each other. No matter how different each of these stories are, they still have a common thread that brings them together.

Key Points

  • Stock Market crash of 1962 shows that the market is unpredictable and investors can be irrational

In 1962, a flash crash of the market left many investors in a panic, even as it proved how volatile the Stock Market can be. After six months of decline, on May 28, 1962, a crash was initiated when investors panicked over a 45 minute lag in stock price updates.

With the central office being late to update the price of stocks, investors panicked over fears that the price had dropped, which led to a large scale sell off of stocks. By selling off so many stocks so quickly, the investors ultimately created a downward spiral for the market.

However, this panic also led to the fast turn around for the market to recover. For investors, there is a common understanding that the Dow Jones Index which measures the value of the Stock Market should not drop below 500 points. As the selling frenzy crashed the market, and investors watch the market drop towards the 500 point mark, it led to those same investors quickly buying up stocks.

In just three days, millions of dollars were wiped out and then quickly replaced. All of this to prove that not only is the Stock Market unpredictable, but so are the people investing. The mood of the people is just as important as any other factor when it comes to the market.

  • Ford launches the Edsel and shows the world a product debut that is unsuccessful

In the late 1950s, Ford was getting ready to debut the Edsel, which was set to be the company’s flagship product of the time. However, it ended up being a massive failure for the company. The question is why.

In 1955, the car industry was booming and many American families were looking for cars in the mid-range of pricing. This is an area Ford was generally quite weak in at the time.

As part of their effort to fix this, Ford began planning for the Edsel. This product was ready to launch in 1958, but by that time consumer tastes had changed and an economic downturn meant that consumers were now looking for inexpensive cars.

This was not the only reason the Edsel failed. It was also one of Ford’s most hyped projects, for which they spent $250 million just on planning. However, it was ultimately a disappointment as it was truly just like every other vehicle with four wheels.

The third and final reason for its failure was the poor design quality. Rather than investing in building a well-crafted car, Ford put much of their spending in the psychological aspects of the vehicle and making sure consumers would buy the car.

While the Edsel was not useless, it ultimately did not live up to anyone’s expectations.

  • Income tax should be reset to what it was in 1913

The U.S. income tax system is considered to be unfair, even by people such as Warren Buffet. However, to understand why that is, it requires looking back to 1913 when the government first began levying an income tax against the people.

At that time, the income tax rates were low and it was the richest people who were contributing the most. However, since those first few years, the rates have continued to go up and more people were taxed.

At the same time, loopholes were created that actually benefited the wealthiest citizens. As of now, the income tax rate is much higher and having the biggest impact on the middle-class.

At this point the tax structure is generally inefficient, with some people even refusing to take on more work in order to not make too much money and be pushed into a higher tax bracket.

The current income tax system is benefiting the rich who have enough influence to keep the laws from changing. According to the author, the only real solution is to reset the income tax laws back to the way they were in 1913.

  • The 1959 Texas Gulf case is was what reined in insider trading

Before 1959, insider trading was a big thing, with people who knew something important keeping what they knew quiet so they could buy up stocks that would end up being valuable.

In 1959, Texas Gulf Sulphur, a mineral company, ended up hitting the jackpot in the Ontario wilderness when they were drilling. They ended up finding what seemed to be millions of dollars worth of minerals, including copper and silver in the ground.

People who knew about the find decided to stay quiet about the find and began buying up shares in the company, even having relatives do the same thing quietly. Rumors began to spread about a massive find, but the company chose to hold a press conference to not only spread disinformation, but downplay the rumors. At the same time, the company’s executives were still buying up shares.

When Texas Gulf finally admitted to their findings, the stock in the company increased and everyone with stock in the company suddenly had tons of money.

Even though these actions were even then considered unethical, there was never any enforcement of insider trading laws. However, this time things were different, and the Securities and Exchange Commission (SEC) chose to charge the company with insider trading and deceptive practices.

Many investors were angry by this move. However, it was up to the court to decide if what Texas Gulf had done was illegal. Ultimately, they found the company guilty and it was determined that all companies needed to afford everyone a chance to get the information they need to make informed decisions. This ruling helped to clean up Wall Street and make insider trading truly illegal.

  • Xerox achieves quick success and then loses that success with similar speed

The early 1960s saw the automatic copy machine becoming a huge hit. And with that success came success for its developer, Xerox. However, just a few years later Xerox found themselves in a huge downfall.

When Xerox first launched its plain-paper copy machine, even they did not expect much success. Not only was it expensive at the time to make copies, but special paper was often needed. However, Xerox was able to fill a need and ended up with revenue of around $500 million in just six years.

While Xerox was able to sustain their success for a period of time, which led to them donating a lot of money in an effort to give back, it was not long before they hit a major bump in the road leading to their downfall.

Even though they were able to achieve success, they had plenty of competition that was now producing cheaper products. And even with attempts at new investments, they were coming up with nothing new to stay competitive.

However, while Xerox went through the three stages of success, they ultimately survived them all and are still in business today.

  • The New York Stock Exchange rescued a brokerage in 1963 to stop a financial crisis from happening

In 1963, a brokerage by the name of Ira Haupt & Co. was in trouble. They had their membership revoked after they no longer had the capital needed to trade on the NYSE.

The reason for their troubles had to do with a bad deal they made. While the company traded in commodities, they had made a deal to buy soybean oil and cottonseed that would be delivered at a future date. To do this, they used receipts from their warehouse as bank collateral for a loan.

However, it was discovered that the receipts were doctored and the oil never existed. This meant that the brokerage was involved in commercial fraud on a large scale and did not have the money to pay the bank back.

In order to become solvent again, it was determined that Ira Haupt & Co. needed $22.5 million. At the time, the nation was already in a panic because of President Kennedy being shot and the market in decline.

With the brokerage on the verge of bankruptcy, the NYSE was worried what would happen if they did in fact let the company go bankrupt. To save the rest of Wall Street from a collapse, they decided to save the brokerage. This meant that the NYSE and other banks put together the money needed to pay off Ira Haupt & Co.’s debt.

We may never see the Stock Exchange do something like this again, but in 1963 it helped to ward off a financial crisis and panic.

  • Criminal or immoral actions are blamed on communication problems by executives

When a company is involved in a scandal, often times the claim is that everyone is innocent. Instead, the real problem is communication problems.

An example of this came in the 1950s when GE was involved in price fixing on a large-scale. At least 29 companies were involved in working together to fix prices on at least $1.75 billion worth of machinery. This led to customers paying up to 25 percent more than they normally would have.

When it was determined that GE was the leader in this ring of price fixing, it was brought before the courts. Even as prison terms and fines were handed out to managers, no executives were held accountable.

The reason for this is that they claimed it was due to poor communication from the managers. Executives claimed that the middle managers did not properly interpret their directions.

And since there were two policies in effect at GE, with middle managers thinking that the idea of not sharing pricing information with competitors was merely window dressing, the executives simply could not be blamed.

  • Piggly Wiggly almost killed the idea of the self-service supermarket because of a stock market battle

In 1917, Piggly Wiggly patented the concept of the self-service supermarket. They were the first grocery store to put price tags on all products, offer shopping carts to customers, and have the check out stands that would streamline purchasing groceries.

In the 1920s, Piggly Wiggly was expanding quickly across the United States, but in 1923 a few franchises failed in New York. This led to some investors deciding to make investments that would only earn them a profit if the stock actually fell. They then did whatever they could to force the stock price of Piggly Wiggly down.

As part of an attempt to teach Wall Street a lesson, the owner of Piggly Wiggly attempted to buy back a majority of the company’s stock, which he was almost able to do. The owner announced his plan and was able to get 98 percent of his stock back which actually raise the price of the stock, causing major losses for those investors.

However, the investors were able to get the stock exchange to give them an extension on paying their debts. And with the Piggly Wiggly owner dealing with his own debts, he ended up with such major losses he ended up declaring bankruptcy.

  • Being business savvy and have a clean conscience can go together

In the 1930s David Lilienthal was a civil servant under President Roosevelt. By 1941 he was appointed as the chairman for the Tennessee Valley Authority. Then he became the first chairman of the Atomic Energy Commission in 1947.

In each of his roles, he worked with energy and technology in some manner.

By 1950, Lilienthal made the decision to leave office and told everyone his reason was a desire to make more money for his family. In the private sector, he continued to be an honest man, even as he used his former positions to get a job with the Minerals and Chemical Corporation of America. He ended up bringing the company back to life and made himself and the company a lot of money.

Ultimately, what made him the ideal human is the fact that he was committed to being accountable to both humanity and the shareholders of the company he worked for.

  • Stockholders have power that they rarely use

In theory the most powerful people in America are the stockholders. Technically they own the largest corporations in the country. These same corporations are run by a board of directors that are actually elected by the stockholders.

If stockholders took this power to elect a board seriously, they could make a real change. And yet many corporations do not make it easy for the stockholders to actually use their power to vote.

The only time the meeting to elect a board is ever truly interesting is when professional investors challenge the management and board of directors into a debate. However, even this does not happen often. And yet, if shareholders would wield their power, perhaps companies would be less likely to do whatever they want.

  • Donald Wohlgemuth is the reason employees can change companies even with knowledge of trade secrets

While you now have the option to accept a job opportunity from a competitor, this was not always the case. In 1962, Wohlgemuth worked with B.F. Goodrich Company managing the space suit engineering department. And while the race for space was in full swing, the company had recently lost the contract for the Apollo mission to International Latex.

International Latex made Wohlgemuth an offer of a job with more responsibility and a higher salary, he wanted to take it, but his company was worried about him divulging their space suit secrets.

B.F. Goodrich decided to sue Wohlgemuth, which led to a court case that brought up two key points: if someone has never shown an indication that they would break confidence, could something be done based on an assumption that might, as well as the idea of can you stop someone from taking a position that might tempt them to commit a crime.

The judge decided that Wohlgemuth was in a position to harm Goodrich, but he could not be found guilty of harming the company when he had not done it yet. Therefore he was allowed to take the new job at International Latex.

  • Speculators attack the pound sterling in 1964 and bankers couldn’t even defend it

In the 1960s the pound sterling was one of the most prestigious currencies, as it was one of the oldest and also most valuable. And yet in 1964 it came under attack by financial speculators, leading to bankers attempting a defense.

Britain was dealing with financial difficulties in 1964 as they were dealing with a large trade deficit. Speculators did not believe Britain could keep up fixed currency rates and started betting against the pound, looking to make its value fall.

In an effort to protect not only the pound sterling, but also the international monetary exchange, an alliance of policy makers launched a defense of the sterling, buying pounds to raise the price in the market.

And while this back and forth worked for both sides for a short time, but the speculators were able to keep up their barrage for years, ultimately winning and leading to the pound being devalued by more than 14 percent.

Summary

Ultimately, the way we look at business and the financial market is based on significant moments in history. And even the smallest decision can have a ripple effect, leading to major changes that impact finances and corporations.

Without history, people would make the same mistakes from the past. And with these lessons, we learn the best way to make a change and push business forward as well.

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