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Jacob Little, Wall Street's First Tycoon

02/18/04 04:07:21 PM PST
by James Maccaro

Here's the story of a famous short-seller and his legendary nine fortunes.

Jacob Little was widely hailed in the 1830s and 1840s as the most respected man of Wall Street. Some historians have described him as the first modern stock market tycoon. Of course, many men before Little had made their careers in American finance, and some were very successful. However, these old-fashioned speculators largely depended on social and political contacts, and used what we would consider today to be insider information. In contrast, Little relied only on his ability to predict future price moves of stocks based upon his knowledge of the way the stock market worked.

Little, who was born in the early 1800s in Newburyport, MA, was the son of a respected local shipbuilder. He went to New York as a teenager in 1817, worked as a clerk for a stockbroker, and in 1822 started his own firm with $700 that he managed to save from his earnings.

Wall Street historian Henry Clews, writing in 1888, asserted that Little made and lost nine fortunes. Other stock market historians credit Little as having made and lost only four fortunes over the course of his life, adding that he recovered from the loss of all but the last.

Little made his money as a short-seller and as the nemesis of other short-sellers. A short-seller is a trader who sells a stock before purchasing it. The hope is that the price will decline by the time that the short-seller "covers" his position by purchasing the shares. The short-seller can then pocket the difference.

During Little's time, a stock could be shorted because stock market rules allowed for future delivery of stock certificates. Today, the shares must be borrowed from a broker, who is paid a fee and interest. In addition, all dividends that are paid while the stock is shorted are paid to the owner, not the borrower.

LITTLE'S FIRST COUP

In December 1834, Little had his first great coup when he cornered the stock of the Morris Canal & Banking company. A "corner" occurs when all of the available shares of a company have been purchased or are otherwise controlled by a speculator or group of speculators acting in concert (known as a "syndicate"). This forces all would-be buyers to deal with the individual or syndicate that organized the corner. A corner can be thought of as the anti­short sale, in that its purpose is to extract as much money as possible from short-sellers.

In the words of doggerel attributed (almost certainly erroneously) to the infamous stock market manipulator Daniel Drew —

He who sells what isn't his'n,
Must buy it back or go to prison.

Since short-sellers must eventually buy shares to cover the stock they have already sold, they are at the mercy of any individual or group that can successfully achieve a corner.

In the case of Morris Canal & Banking, Little's machinations pushed the stock price from $10 per share in December 1834, just before the corner, to $185 per share in January 1835, at which price he allowed the short-sellers to cover their positions. Theoretically, he could have compelled them to pay an even higher price. However, Little did not want to force the issue, because doing so could have caused all or at least most of the short-sellers into bankruptcy, which in turn could have triggered a stock market collapse. In any event, he made a fortune, all at the expense of the short-sellers.

In September 1835, Little cornered another stock. This time, the shares were of the Harlem Railroad, for which approximately 60,000 shares had been sold short — at a time when only 7,000 shares had been issued!

DESTROYING THE BANK OF THE UNITED STATES

Little was now one of the richest men in New York and, hence, in the entire US. However, he was knocked off his perch not long after by the devastating crash of 1837, which was caused by President Andrew Jackson's campaign against the existence of a national central bank. He ordered the withdrawal of US banknotes from circulation on the grounds that they had "no intrinsic value" and, unlike gold, are "liable to great and sudden fluctuations, thereby rendering property [values] insecure." He feared that a monetary system based on paper money (as opposed to gold) would be manipulated by unscrupulous politicians, speculators, and foreign financiers.

On a personal level, President Jackson was highly suspicious of bankers because he had lost a great deal of money years earlier in an unsuccessful, highly leveraged real estate speculation. Further, Jackson was a major landowner and wanted to maintain the stability of land prices. The result of his policy was a sharp curtailment of credit, which was magnified when English investors (a major source of capital at the time) lost interest in the American market. Inevitably, liquidity on Wall Street evaporated and prices plunged.

What could have been a temporary setback grew into a nearly devastating financial debacle as Jackson successfully destroyed the Bank of the United States, the nation's central bank at the time. It would not be replaced by another central bank until 1913, when the modern Federal Reserve system was created. Without a strong currency overseen by a respected national bank, confidence in American financial markets collapsed, both at home and abroad.

Well into the 1840s, Wall Street was gripped by a devastating bear market, which was in many ways worse than the Great Depression of the 1930s. During this period, Little profited handsomely by repeatedly selling short as stock prices continuously plummeted. It was at this time that he became known as "the Great Bear of Wall Street."

CORNERING THE CORNERMASTER

One of Little's most interesting operations as a short-seller occurred in 1837, when he sold short shares of Erie Railroad stock. A group of rival stockbrokers decided to turn the tables on Little by staging a corner against the acknowledged master of corners. They purchased virtually all of the available stock of Erie Railroad in the belief that Little was unaware of their actions. Then, confident they had cornered the stock, they demanded delivery of the shares that they believed Little had sold short.

However, unbeknownst to them, Little had taken the precaution of purchasing Erie bonds that were convertible into stock at the bondholder's demand. The Erie syndicate had forgotten about the existence of these bonds, which had been sold by the railroad in London a few years earlier.

In a dramatic move, Little walked into the Erie offices carrying an oversized bag, revealed that it was filled with convertible bonds, and demanded his stock, which the company delivered as it was legally obligated to do. Little's opponents incurred large losses and suffered the indignity of knowing they had been tricked. Some learned their lessons well and used Little's convertible bond ploy themselves in later years. The result was an overall financial and personal triumph for Little, who proved that he could not be trifled with.

There were periodic lulls in the bear market during which sentiment turned positive, but only for brief periods. Prices continued to reach new lows until 1844, when confidence was reestablished during a wave of patriotism and good feeling that swept the nation at the outbreak of the Mexican War. This was accelerated by the California Gold Rush of 1848, which flooded the country with gold.

CRASHES AND PANICS

Although he had been wiped out by the Crash of 1837, Little bounced back and was worth at least $2 million by 1846. However, he was hit by another reversal that year. He attempted to corner the stock of the Norwich and Worcester Railroad, but failed to gain control of enough shares. As a result, he was obligated to pay for thousands of shares that he had bid up in price, while he was unable to extract a premium from short-sellers because they were able to cover their short sales by purchasing shares readily available at reasonable prices. Little lost about $1 million, a staggering sum at the time.

This setback still left Little with ample resources to continue his operations, which he did for many more years. However, time was running out for Little, who was blindsided by the Panic of 1857.

This stock market crash and the bear market that followed were caused by overexpansion by businesses throughout the country following the California Gold Rush. When it became clear in 1857 that many western mining shares were supported by hot air and no substance, many banks in the western states collapsed, which triggered further bank failures back east, which in turn caused a panic in European financial markets.

The result was a severe bear market in the United States and Europe. Unfortunately, Little did not see it coming. Instead of being short, he was "long" — that is, he had purchased huge amounts of stock, much of it "on margin" — meaning he had borrowed money to do so. This leverage causes a magnification of profits when stock prices increase, but also asserts equal force in the opposite direction when stock prices decline.

As stock prices plummeted, Little was crushed by margin calls, which are demands from lenders for additional money to compensate for the loss of value of the shares. Little did not have it, and was forced into bankruptcy once again. On this occasion, he was not able to bounce back. He no longer had much money, nor did he have sufficient confidence from others on Wall Street to obtain their backing.

After the Panic of 1857, Little was financially supported by his last protégé, David Groesbeck, which is a testament to Little's ability to inspire loyalty and to Groesbeck's generosity. Little could not resist the lure of the market and returned to trading, but only with very small amounts.

As seems almost inevitable after a powerful and often-feared person falls, Little in old age was a target of mockery. He died in 1865, a broken man.

THE GOOD THAT MEN DO

Historian Henry Clews, who knew Little personally, observed a couple of decades after Little's death that "Mr. Little was generous and liberal to a fault with his brother speculators who had experienced misfortune" and was said to be able to paper his office with promissory notes for debts that he had forgiven from other brokers who had fallen on hard times. Likewise, stock market historian Leonard Louis Levinson described Little as "a nervous perfectionist who personally attended to every detail" of his stock market operations, and who was "kind, magnanimous, honorable, and a genius in market maneuvers."

Personal sympathy plays a very small role in a modern financial market. It was not until after his death that many on Wall Street came to feel that Little had been shabbily treated after his fall. By then, of course, it was too late.

James Maccaro is an attorney and freelance writer. He has written articles for Newsday, Ideas on Liberty, the Massachusetts Law Review, and other magazines. He can be reached at jam@juno.com.

SUGGESTED READING

Clews, Henry [1888]. Twenty-Eight Years In Wall Street, Irving Publishing Co.

Gordon, John Steele [1999]. The Great Game: The Emergence Of Wall Street As A World Power, 1653­2000, Scribner.

Levinson, Leonard Louis [1961]. Wall Street: A Pictorial History, Ziff-Davis.

Sobel, Robert [1968]. Panic On Wall Street, Macmillan Co.

Current and past articles from Working Money, The Investors' Magazine, can be found at Working-Money.com.





James Maccaro

James Maccaro is an attorney and freelance writer. He has written articles for Newsday, Ideas on Liberty, The Massachusetts Law Review, and other magazines. His law journal articles have been cited in several legal decisions, including by the US Court of Appeals for the DC Circuit and by the US Supreme Court. James A. Maccaro is an attorney and freelance writer. He has written articles for Newsday, Ideas on Liberty, The Massachusetts Law Review, and other magazines. His law journal articles have been cited in several legal decisions, including by the US Court of Appeals for the DC Circuit and by the US Supreme Court. He may be reached at jam@juno.com.

Address: 154-61 22nd AVE
Whitestone, NY 11357
E-mail address: jam@juno.com


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