Wall Street was born out of crisis.
It has walked the knife’s edge between riches and ruin ever since William Duer’s insider-trading scheme caused the Panic of 1792, threatening to bankrupt the U.S. government and convincing traders they needed some regulation.
Two months after Duer was thrown into prison, 24 of his victims signed the Buttonwood Agreement. It established a trading association that would evolve into the New York Stock Exchange.
Named for a favorite buttonwood tree on Wall Street, the agreement pledged the signers to trade only with one another, and at set rates. Their goal was to eliminate speculators like Duer.
Treasury Secretary Alexander Hamilton, a former Wall Street denizen, was a force behind the agreement. “[T]here must be a line of separation between honest Men & knaves, between respectable Stockholders and dealers in the funds, and mere unprincipled Gamblers,” he wrote in 1792.
Despite another two-plus centuries of self-regulation and government regulation, the line between honest men and knaves on Wall Street remains fluid.
The careers of men like Charles Ponzi, Jesse Livermore, and Ivan Boesky remind us that one unprincipled gambler can still cause immense damage to respectable shareholders, the market itself, and even the nation.
Hamilton despised those with “no principle but to get money.” Yet Wall Street continues to attract them, like moths to a flame.
Named for a wooden palisade running along its north side, protecting then-New Amsterdam from British attack, Wall Street was “a colorful place during the colonial era,” Robert Sobel writes in The Big Board: A History of the New York Stock Market.
City hall, the slave market, and town pillory were all there, and the wharf on the East River “made it a rendezvous for pirates,” writes Sobol. “Captain Kidd took up residence at 56 Wall Street.”
Hamilton had an office on Wall Street in the 1780s. The wall was gone, but business still centered on shipping and the slave trade.
Born in Britain, William Duer made a fortune in American logging and caught the revolutionary spirit. He signed the Articles of Confederation in 1777, befriended Hamilton, and served as his top Treasury assistant.
Duer was also an inveterate speculator and get-rich-quick schemer: “king of the alley,” as Thomas Jefferson derisively referred to Wall Street.
And, in 1790, Duer quit the Treasury, selling out Hamilton in search of riches.
Knowing that the Bank of the United States—America’s first central bank and Hamilton’s pet project—would have its public offering in 1791, Duer determined to profit off the intel.
With borrowed money and shady partners, Duer bought and sold huge quantities of stocks and bonds. Prices rose to bubble proportions.
“Whether [Duer] was trying to shift with the changing prices, manipulate them, or double-cross one set of partners or another is not clear,” writes Sobol. “[P]erhaps he was doing all three.”
A market correction in March ended the con. When debt collectors came calling, Duer couldn’t pay. His plea to old pal Hamilton arrived too late.
Duer was dragged to the gaol on March 23, trailed by mobs of creditors, including members of the city’s most prominent families. Bankruptcies multiplied and trading ceased.
Duer, who died in prison seven years later, was the original too-big-to-fail institution. His collapse had wide reverberations. “[P]rivate and public confidence has received such a blow as may even stagger the stability of government,” wrote the New York Advertiser in April.
The government held, and Hamilton got the economy running again using Bagehot’s dictum: “Lend freely, at a penalty rate, against good collateral.”
In 1817, with trade flourishing, the New York Stock & Exchange Board was established, occupying a rented room at 40 Wall. The NYSE’s imposing Broad Street headquarters opened in 1903.
That same year, Charles Ponzi arrived in America, nearly broke, having gambled away his savings on the voyage from his native Italy. He would never stop gambling.
After spending time behind bars in Montreal (forgery) and Atlanta (immigrant smuggling), Ponzi hit on an arbitrage scheme using international postage stamps.
Essentially, Ponzi would buy stamps in Italy using the depressed lira, and redeem them for U.S. dollars at—he claimed—a net profit of 400%.
Ponzi established the Securities Exchange Co. and promised astonishing profits. “Doubles the Money Within Three Months,” the Boston Post wrote July 24, 1920, reporting that Ponzi’s office was crowded with eager investors.
It was too good to be true, of course. Clarence Barron, this magazine’s founder, calculated that 160 million stamps were needed to cover Ponzi’s obligations. There were only 27,000 in circulation. It was a con.
As we now know, Ponzi used money from new investors to pay old ones. His victims lost most everything. Ponzi bounced between con job and jail, dying broke. But his name lives on in a scheme that never gets old.
Jesse Livermore earned his nickname “Boy Plunger” in Boston’s so-called bucket shops, which took bets on price movements without actually buying or selling shares. Livermore did so well he got banned from Beantown.
He took his idiosyncratic method of technical analysis to Wall Street, where he made and lost fortunes using now-banned tactics like secret corners and pump-and-dumps.
Livermore got it right in 1929, selling short before the October crash. He reportedly made $100 million ($2 billion today), even as many others went broke.
Some blamed Livermore for causing the crash. “Big Market Break Is Laid to ‘Wolf,’ ” the Atlanta Constitution wrote on Oct. 27, 1929. Livermore received death threats and hired a sharpshooter for protection.
He survived the threats, but speculation eventually got the better of him. In 1940, as America was finally putting the epression behind it, a debt-ridden Livermore shot himself to death in the cloakroom of Manhattan’s Sherry-Netherland Hotel.
More recently, insider trader Ivan Boesky’s “greed is healthy” motto became a Wall Street mantra. “Junk Bond King” Michael Milken’s illegal scheme helped trigger the savings-and-loan crisis of the ’80s. Enron’s accounting fraud led to history’s biggest bankruptcy.
And Bernie Madoff ran his own Ponzi scheme for decades before his 2008 arrest.
Perhaps Livermore had it right in Reminiscences of a Stock Operator, Edwin Lefèvre’s 1923 best-seller.
“[T]here is nothing new in Wall Street,” the Boy Plunger says. “Whatever happens in the stock market to-day has happened before and will happen again.”
Write to editors@barrons.com