If you think the controversy over the gigantic hauls at Wall Street powerhouses during tough economic times—for example, the current dustup over Goldman Sachs (GS) Croesus-like 2009 bonus pool—is a recent phenomenon, think again.
It happened during another turbulent era in finance: The 1901 takeover battle over the Northern Pacific railroad, perhaps the fiercest such contest in U.S. history. However, like so many struggles on Wall Street to this day, it was really a fight for power and dominance, of outsized ego and overheated rivalry.
The takeover struggle for the northwestern rail is a convoluted tale of market manipulations, ruthless maneuvers, corners and shorts, soaring and plunging prices. In one corner was the legendary banker J. P. Morgan, the "Robber King" of Wall Street. He controlled the railroads of the East and Northwest.
In the opposite corner: Edward Harriman, the financier who owned the railroads of the Southwest. Harriman's allies included the oil-rich Rockefellers and Jacob Schiff, patriarch of Kuhn, Loeb and Morgan's only real investment banking rival. The feud led spectacularly to the largest market crash in a century, writes historian Ron Chernow in The House of Morgan. The New York Herald headline of May 9, 1901 captured the sense of the nation: "GIANTS OF WALL STREET, IN FIERCE BATTLE FOR MASTERY, PRECIPITATE CRASH THAT BRINGS RUIN TO HORDE OF PYGMIES."
Little wonder ordinary folks recoiled at the accumulation of power among financiers. The feeling grew on Main Street and in Washington that the American economy was held hostage to the whims of the "Wall Street Money Trust. " (Sound familiar?) What was Morgan's response to the revulsion? Did he issue a press release announcing a new public works program? Set up a fund for the thousands of bankrupted investors? Call a press conference to accept responsibility and soothe the fears of a frightened populace?
Not J.P. According to Chernow, he didn't tolerate any criticism of his role in the Northern Pacific debacle, magisterially pronouncing that "I owe the public nothing."
Wall Street had a lot to answer for back then—and now. More recently, banks, investment banks, and the other financial institutions that make up today's Wall Street gorged on a credit bubble that ended in the Great Recession, the longest, deepest downturn since the 1930s. The U.S. taxpayer bailed out Wall Street. Now Goldman Sachs, a global powerhouse that played a prime role during the bubble and had to be rescued from the risk of oblivion by the federal government, is set to pay its employees a record bonus estimated at nearly $17 billion.
The news has outraged Main Street and Washington. But in a reflection of how things have changed in a century, Goldman called a press conference in New York this past week. "We participated in things that were clearly wrong and have reason to regret," said Lloyd Blankfein, the firm's chief executive officer. "We apologize."
The mea culpa is backed by a $500 million fund that is to help out cash-strapped small business. The initiative also has Warren Buffett, Goldman's largest shareholder, lending his expertise to small business owners. It's impossible to imagine Morgan ever making such a gesture.
But the crafty Morgan might nonetheless appreciate Blankfein's stratagem. After all, it's a savvy trade if spending a half-billion dollars for goodwill preserves a $16-plus billion bonus pool. It's somewhat reminiscent of Lord Clive of India's remark: "When I consider my opportunities, I marvel at my moderation."
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