Wall Street History: iPhone Launch, IRS Birth And ZZZZ Best Fraud

By Andrew Beattie | June 30, 2010 AAA
Wall Street History: iPhone Launch, IRS Birth And ZZZZ Best Fraud

Sometimes history has a beautiful symmetry. Events never occur twice, but in two of our landmarks this week, there are strong connections to major stories unfolding now. A hint? One is a computer company entering the phone market and the other rhymes with "mail out." (Missed last week's article? Check out Wall Street History: Madoff Funnels, Buffett Gives And Ma Bell Marries.)
IN PICTURES: 8 Financial Tips For Young Adults

Jobs Extends His iEmpire
There are people who will tell you they can't live without an iPhone. Way back in the world of 2007, however, the blackberry was the dominant smartphone and Apple (Nasdaq:AAPL) sold computers and iPods. On June 29, 2007, the original iPhone went on sale for $499 for 4GB and $599 for 8GB. At the time, there were a lot of doubts as to whether Apple could sell phones, but standing here in 2010, three years older and wiser and faced with a line-ups buying the newest iPhone faster than they can actually make it, even a critic would have to admit they've done a pretty good job.

Keynes Makes a Call
On June 28, 1919, John Maynard Keynes left the Peace Conference in France. His disgust in the process was summed up in a clear warning that the war reparations outlined in the Treaty of Versailles will lead to financial chaos – not just for Germany, but for the world. The heavy debt demands caused hyperinflation in Germany and acted as one of many triggers that set off the Great Depression and, in a more direct way, World War II.

A Bailout Behemoth Closes
On June 30, 1957, the Reconstruction Finance Corporation (RFC) was shut down by the government. The RFC was intended to be a lender of last resort for various business and financial institutions during the Great Depression – lending where the Fed wouldn't – and set a dangerous precedent for government bailouts. The RFC was uncharacteristically well run at first, picking up the liquidity slack that would be handled by the Fed today (and should have been then). The FDIC was brought in to make an RFC unnecessary by providing protection to consumers, the banks themselves be damned.

The biggest shot at the RFC is that it only lent to companies that existed pre-crash, and wouldn't lend to new companies looking to fill in gaps opened by failing firms. Essentially, the RFC encouraged companies to get big enough to where the government would bail them out and protect them from competition by reallocating scarce capital to them. TARP anyone?

The Grim Reaper's Sidekick
Death and taxes are both frightening things, but at least you only die once – taxes face you daily. On July 1, 1862, Abraham Lincoln instituted an income tax to pay for the Civil War. To collect this tax, the Bureau of Internal Revenue was formed, now known to us as the U.S. Internal Revenue Service (IRS). The Bureau was once a four-man operation that collected and calculated federal taxes on inheritance, tobacco and a progressive rate on incomes over $600. Today, its employees number in the thousands and the tome that is the tax code is heavy enough to serve as a murder weapon and convoluted enough to kill you with frustration.

Bad Medicine
On July 1, 1997, Thailand experienced both the worst and best day – worst in the short-term, best in the long-term. After years of defending its currency from speculators and over-extending by piling on debt to fund growth, Thailand was forced to let its currency, the baht, float. It devalued 20%. This event marked the beginning of the Asian economic crises and hurt the country so badly that the IMF stepped in and covered some of the countries debts with what was essentially a consolidation loan. However, the lower market value of the currency proved a long-term boon to Thailand in both exports and tourism and the lesson – those who grow from debt, grow without a safety net – changed the fiscal policy for the better. Unfortunately, the political system in Thailand deteriorated before the benefits of the tough cure could be fully appreciated.

ZZZZ Best Becomes The Worst
On July 2, 1987, Barry Minkow resigned as CEO of ZZZZ Best. At 18, he was the youngest CEO to ever take a company public. At 20, he was the youngest CEO to be indicted for securities fraud. Minkow started his carpet cleaning business, ZZZZ Best, at the age of 16 and was in debt troubles from the beginning. In order to meet payroll and equipment needs, Minkow used check kiting and resorted to private loans that were rumored to be connected to the mafia.

Through various methods of deceit, including fake books, false offices and claiming the work of other companies as his own, Minkow passed the independent audits and became the youngest person to undertake an IPO in 1986. The IPO made Minkow a paper millionaire but did little to solve the fraud on which the company was built. Minkow went from owning $100 million of a $300 million company to facing jail time as the result of concurrent SEC and FBI investigations. Minkow served time in prison and is still paying reparations to the investors who lost over $100 million as a result of his fraud. In an ironic twist, Minkow has gone on to work for the Fraud Discovery Institute, catching people running schemes similar to his own.

Independence Day
And, of course, on July 4, 1776, the U.S. declared independence. Although not exactly a financial event, this same love of freedom led to a business environment that propelled a backwater country to an economic power.

That's all for this week in financial history. Next week we'll look at the birth of a beer dynasty, a very important first edition and much more.

Catch up on the latest financial news, read Water Cooler Finance: Shocking Court Rulings, Sinking Markets.

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