This week in financial history ranks high on a barometer of the bizarre. It sees an insider scandal that would eventually engulf the homemaking queen, a rogue trader who attempted to castrate himself and a famous free-market advocate helping big government tax more efficiently. (Missed last week's article? Check out Wall Street History: Rogue Traders, The SEC And Alan Greenspan.)
In Pictures: Top 7 Social Security Myths: Exposed
The Birth of Social Security
On June 8, 1934, president Roosevelt outlined what would become Social Security in his message to congress. Despite Roosevelt's vision of a fund watched over by the government to help Americans as they aged or fell on hard times, the Social Security system would grow to be one of the most expensive and mismanaged government initiatives to come out of the New Deal.
Even early on, it became clear that the "fund" was actually a wealth transfer from the young to the retired. This "works" only as long as there are more people paying funds forward than there are collecting. With more baby boomers loading the back-end every year, it's anyone's guess how long it will last.
Every Boss a Tax Collector
In the midst of WWII the U.S. government was having troubles funding the war effort. The problem wasn't citizens dodging taxes, it was the lack of a regular flow of tax income. Instead of receiving a glut of cash at the end of each tax year, the government decided to withhold taxes before wages were paid, requiring employers to become government tax collectors before paying employees. This gave the government a regular flow of tax dollars to ease the ups and downs of war financing. Taxpayers' year-end filings became a way to reclaim overpayments or make additional payments to the government.
Although the tax legislation was passed on June 9, 1943, the idea was formed by the Treasury department in the early years of the war. Interestingly, the IRS was not thrilled about pay-as-you-go tax because it involved monthly paperwork and seemed more trouble than the year-end filing method. The system was adopted as a temporary measure for the duration of the war. When tax dollars started flowing in an uninterrupted stream, however, both the government and the IRS changed their tune and continue to withhold at source. One last surprising fact about pay-as-you-go tax, one of its architects was none other than free-market hero Milton Friedman. (Find out how Milton Friedman went from free-market hero to income tax advocate, read Free Market Maven: Milton Friedman.)
Cooking Up Something Illegal
On June 10, 2003 disgraced ImClone CEO, Samuel Waksal was fined $4.3 million for insider trading and sentenced to over seven years in prison. In 2001, the FDA announced that it was rejecting ImClone's new cancer drug, Erbitux. The drug represented a major portion of ImClone's pipeline so the company's stock took a sharp dive. On the surface, it was just another example of legislative risk in the pharmaceutical industry, but closer scrutiny revealed a number of discrepancies.
It turned out that leading up to the announcement many friends and family of Samuel Waksal sold their holdings. In short, it looked like Waskal had tipped off his people. Among the people who showed uncanny insight into the FDA approval process was homemaking guru Martha Stewart. Stewart did end up serving time for selling shares that, had she held them, would have been in the green again by the time she was jailed. (Learn more about insider trading in Infamous Insider Traders.)
A Busy Day
June 11 has seen a couple of interesting events. In 1859, it marked the discovery of the Comstock silver lode in Nevada. The lode gave the U.S. its first silver mine and opened the door to calls for a silver standard rather than a gold one. In 1998, June 11 saw a blockbuster deal when Compaq bought Digital Equipment Corporation for $9.6 billion. This $9.6 billion merger set a record for the computer industry and it made Compaq the third-largest PC maker behind IBM and HP.
And, finally, in 1947, financial analysts in Boston, New York, Philadelphia and Chicago joined to create the National Federation of Financial Analyst Societies. This federation would eventually lead to the CFA Institute and those lovely CFA exams that have aspiring financial professionals dry swallowing caffeine pills and poring over textbooks every year.
Sexually Confused Rogue Trader Found Guilty
Peter Young is one of the most memorable rogue traders, not because of the amount of money he lost, but because of the bizarre events that followed his arrest and continued throughout his trial. Young was a fund manager for Morgan Grenfell Asset Management, trading for three large European funds seeking international exposure.
Young had made good profits on speculative investments in unlisted stock in previous years and kept ramping up the risk to keep his run going. Eventually, Morgan Grenfell found that Young was holding over three-times the legal limit in unlisted shares and the bank hurried to cover the losses in closing out positions. One of the companies in the fund, Russ Oil, turned out to be wholly owned by Peter Young. He used it as a way to milk money from the fund to pay for his lavish house.
The bank was fined and took losses, covering for their investors, but the story had barely begun when Young was charged for conspiracy to defraud investors. The actual trial became highly publicized when Young wore a dress to the hearings. On top of cross-dressing, and in answer to those who may have thought it all an act, it came out that Young attempted and botched a do-it-yourself sex change. Young was found guilty of the charges on June 13, 2003, but the judge promptly voided the verdict for reasons of insanity.
We'll wrap up with that happy ending. Next week we will cover Mr. Copper, the birth of a real estate tycoon and much more.
Catch up on this week's financial news. Read Water Cooler Finance: Buffett Speaks Up, AIG Deal Collapses.