Wall Street History: May Day and Voodoo Accounting

By Andrew Beattie | April 28, 2010 AAA
Wall Street History: May Day and Voodoo Accounting

This week in financial history has seen several momentous milestones for mergers, taxes and, most importantly, individual investors. Read on to find out more. (Missed last weeks article? Wall Street History: Michael Milken, New Coke And Bad Business Decisions.)

IN PICTURES: Learn To Invest In 10 Steps

Biggest Merger In History (For Awhile)
On April 27, 1966, a proposed merger between the Pennsylvania and New York Central Railroads was approved. The process would take years to complete, but the new company, Pennsylvania and New York Central Transportation Company, represented $4 billion in assets, making it the largest merger in history.

This record was short-lived as the record for mergers - not adjusted for inflation - jumped from $4 billion to over $100 billion before the end of the century. The other notable fact about the Penn and New York Central merger was how disastrous it was, leading to bankruptcy a few years later. Many of the history-making mergers have been plagued by serious post-merger problems (looking at you, Time Warner AOL). (To learn more, check out The Merger - What To Do When Companies Converge.)

A Global Settlement
On April 28, 2003, the book was closed - for the SEC at least - on the internet bubble. The global securities settlement exacted financial penalties from ten investment-banking firms, primarily centering on their actions during the internet boom and bust. Specifically, the practice of pressuring in-house analysts to issue strong buys on any internet stocks issued by the firm or doing business by the firm. The total bill for the firms was $1.4 billion, and the highest fines went to Salomon Smith Barney, Inc ($300 million) and Credit Suisse First Boston Corp. ($150 million).

Bad at Math
On April 29, 2003, Tyco added $1.2 billion to the $250 million in accounting "errors" reported in March. The company was still struggling with the aftermath of the massive fraud discovered in 2002. The top executives had been cooking the books, costing the company hundreds of millions before suddenly resigning ahead of SEC charges of corruption, conspiracy, grand larceny and falsifying records. For investors, the $1.2 billion mistake was just another pebble after an avalanche of bad news. (To learn more, see Cooking The Books 101.)

A Real Estate Deal For The Ages
On April 30, 1803, one of the greatest real estate deals of all time was completed. The U.S. bought the Louisiana territory from Napoleon for $15 million, borrowing some of the money for the purchase from Britain. The Louisiana Purchase gave the U.S. over 530 million acres at a price of less than three cents per acre. The deal was officially signed on May 2.

May Day
On May 1, 1975 there was no lightning, white calves or other omens to mark the moment when brokerages switched from fixed commissions to negotiated ones. In fact, most of Wall Street was convinced that the rule change would have very little effect. After all, each firm had a high opinion of the value of their advice and there was a feeling that a gentleman's agreement on rates, something the laymen might call price fixing, could be reached.

Fortunately for us, Charles Schwab wasn't a gentleman. Schwab pioneered discount brokerages with his no-advice accounts. The fees that come with buying a stock dropped from hundreds of dollars to less than a hundred. Then the internet discount brokerages took over Schwab's work and pushed it down to an unthinkable $10.

Thanks to May Day and pioneers like Schwab, the number of individual investors has exploded. Of course, the low fees have led some individual investors to overtrade, but that is a personal vice. The majority are better off being able to invest rather than being locked out of the market by high fees. (To learn more, see When & Why Did Brokerages Switch From Fixed To Negotiated Commission?)

GM's Founder Returns
On May 2, 1918, GM bought Chevrolet in a stock swap of one GM share for five shares of Chevy. The deal allowed GM founder, William Durant, to take back control. He originally lost the company when his debt-driven expansion plans worried shareholders. After being ousted, Durant hooked up with a Swiss racer named Louis Chevrolet and formed Chevrolet.

Durant still held a large amount of GM stock and he used his new company's profits to buy even more. Soon Durant had enough to bring GM to the table for merger/buyout talks. GM shareholders jumped at the chance to get another popular brand under their umbrella at a cheap price - particularly a brand that could help them fight off Ford. As part of the deal, Durant gained control over his company once more.

EF Hutton Flies a Kite
On May 2,1985, E.F. Hutton and Co. plead guilty to a check-writing scandal the financial services firm used to take out an estimated $250 million a day in no-interest, short-term loans from banks. Using a combination of overdrafts and constant transfer through deposits and withdrawals between different banks, E.F. Hutton was able to overdraw accounts by millions without incurring fees. Using many accounts, this amount was further amplified. When the kiting scandal was discovered, the company was required to pay $10 million and its reputation was so damaged that it sold itself to Shearson Lehman. (For more Wall Street Scams, check out A Nightmare On Wall Street.)

That's all for this week. Next week marks the birthday of the intelligent investor, the end of Al Capone, and much more. Until then.

Find out what else is making news this week Water Cooler Finance: Everything Old Is News Again.

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