Wall Street History: GE, McDomination And J.P. Morgan
This week in financial history sees the formation of two of the largest corporations in history, as well as the birth of one of Wall Street's most powerful figures. Read on to find out more. (Check out the past week's business highlights in Water Cooler Finance: My iPad Beats Your Toyota.)
Tutorial: The Biggest Market Crashes Of All Time
Another Rogue Trading Scandal
General Electric (NYSE:GE) began its ownership of Kidder, Peabody & Co. by paying $26 million in fines as part of a settlement over Kidder's involvement with the Ivan Boesky scandal. These events occurred before GE owned the company, but it was a taste of what was to come. On April 14, 1994, it was discovered that rogue trader Joseph Jett had entered $350 million worth of fictitious trades. (For more on Ivan Boesky, read Top 4 Most Scandalous Insider Trading Debacles.)
Jett was a bond trader working the company's government bond desk. His job was to skin a profit from the price differences between plain vanilla government bonds and their cousins, the zero-coupon bonds. The technical term for Jett's work was stripping and/or reconstituting bonds to take advantage of arbitrage. Jett soon found that Kidder's computer system had an interesting glitch. It would record profits on a forward reconstitution daily, even if the trades would be worthless upon actual settlement.
$350 million in false trades were made and $8 million in performance bonuses on the false trades were paid to Jett. Interestingly, Jett denied concealing the trades and put the blame on management for supporting his fraud in an attempt to wrest control of Kidder, Peabody back from GE. Either way Kidder, Peabody did get away when GE sold the investment bank to PaineWebber, presumably out of anger for having to deal with two high-profile trading scandals.
Goodbye Dotcom Boom, Hello Dotcom Crash
On April 14, 2000, the Nasdaq lost 9.67%, or 355.49 points, in a single day. This signaled the end of the dotcom bubble as it slid into the deepest part of the dotcom crash. The record would stand for only eight years, however, as the rejection of the bailout in September 2008 sent all markets, including the Nasdaq, to historic lows once again. (To learn more, check out Market Crashes: The Dotcom Crash.)
General Electric Is Born
On April 15, 1892, General Electric was formed. It was an amalgamation of all the companies required to provide the infrastructure to run Thomas Edison's electric light. With the help of J.P. Morgan, among others, Edison mass-produced not just the light bulb, but electricity. This became a textbook case of vertical integration as the Edison Electric Company merged, created and bought out companies that fit with its business lines.
The savings in cost and the economies of scale from mass production put an electric light in every home in America while the rest of the world was still burning candles, whale oil and kerosene. This steadily growing combination of companies became General Electric in 1892, now more commonly known as GE. Its two-letter stamp can still be found in every American household today. Interesting, the lesson of mass production and vertical integration was certainly not lost on one of Edison's employees, Henry Ford. (Learn more about esteemed GE CEO Jack Welch in Management Strategies From A Top CEO.)
On April 15, 1955, another business juggernaut got rolling as Ray Kroc opened his first McDonald's (NYSE:MCD). Kroc turned McDonald's into a global power through the franchising of outlets and the economies of scale created by rapid expansion. Keeping his franchise fees low, Kroc decided to use the inflow of cash to bring the same standardization to the hamburger as Henry Ford did to the automobile. Kroc opened "Hamburger University" to train operators in management and scientific precision. All McDonald's hamburgers would have the same diameter, fat content and number of pickles, just as every outlet had the same basic menu and procedures. Kroc even opened an R&D department to look into food storage and other areas.
McDonald's went public in 1965 and the company quickly began to saturate the domestic market. Kroc set his sights overseas and opened up franchises, buying land in Japan, Germany, London, and basically everywhere he could. Stepping down in 1968, Kroc watched McDonald's spread further and further across the globe. He died in 1984, one year before McDonald's entered the Dow based on the strength of its multibillion dollar real estate holdings. (For more on Ray Kroc, see CEOs Who Blazed The Trail.)
Wall Street's Kingpin Is Born
On April 17, 1837, John Pierpont Morgan, better known as J.P. Morgan, was born. Morgan grew to be one of the most influential people on Wall Street, playing a part in the formation of railroads, U.S. Steel (NYSE:X), and, of course, GE. His great "Morganization" involved creating economies of scale to push production harder and faster than at any time in American history. Every deal he lent his name to was a public success. The power of that same name was instrumental in stopping the Bank Panic of 1907. It is largely because an aging banker was the only one with the power to pull together capital in an emergency, that the U.S. government began seriously looking at creating the Fed. (To learn more, see The Kingpin Of Wall Street: J.P. Morgan.)
That's all for this week. Next week, we will see the end for Michael Milken, the beginning of the end for Tyco, as well as a host of bad business decisions, from New Coke to Gerald Ratner's frank appraisal of his own product.
Missed last weeks Wall Street History? You can find it here, Wall Street History: Howard Hughes, Enron and Sin Taxes.