This week in financial history has no shortage of drama, including a break-up and one very unlikely marriage. (Missed last week's article? Check out Wall Street History: Y2K, Milton Friedman And Golden Watches.)
IN PICTURES: Top 7 Biggest Bank Failures
A Smile You Can Trust
Charles Ponzi will always be remembered as the inventor of the Ponzi scheme - a variation of the pyramid scheme that depends on paying early investors with the money from new investors. On August 2, 1920, Ponzi's scheme was coming under increasing pressure from newspaper articles pointing out holes in the investment story.
Ponzi, perhaps unconsciously, dealt with the ensuing panic in the same way as bankers were trained to deal with banking runs. He personally handed out cash slowly, greeting each investor in turn. Despite surviving the day, Ponzi's scheme collapsed in the following weeks.
War Is Hell, But Taxes Stick
On August 5, 1861, the U.S. enacted the first federal income taxes with the Revenue Act of 1861. The tax was intended to help pay for the Civil War. It was levied on incomes exceeding $800 at a rate of 3% and incomes above $10,000 at 5%. Unlike later taxes, it had an explicit limit and was considered an extraordinary measure. The tax was replaced the following year, however, with a tax lowering the minimum to $600. Income tax did stop after the war, but it kept popping up before becoming a permanent fixture in the 1900s. (To learn more, check out The History Of Taxes In The U.S.)
Bye, Bye, Ma Bell
On August 5, 1983, AT&T lost its final case against the antitrust complaint that ended with it being broken up into the baby bells. The break-up plan had already been prepared over nearly a decade of legal battles, going back to the early '70s. Since then, the separate companies and Ma Bell have begun to consolidate again.
The Apple of His Eye
On August 6, 1997, Steve Jobs' speech at the Macworld Expo was one for the ages. Jobs announced that Microsoft Office was going to be coming out for the Mac. Oh, and that Microsoft invested $150 million to help the struggling company find its feet after years of losses and stock price drops. Jobs, then serving as the interim CEO, stated that the days of one company profiting from the other's losses are over. Years - and several Mac vs. PC commercials - later, Jobs' message of brotherhood seems largely forgotten by both parties.
NYSE Looks to the Future
On August 7, 1980, the New York Stock Exchange opened the New York Futures Exchange (NYFE). The new exchange was a subsidiary to the NYSE and it helped broaden the market for futures and other derivatives. While some market participants saw the move as encouraging destructive market games, many welcomed another level of flexibility in crafting and selling unique financial instruments.
The NYFE did add to the roaring bull market that formed in the 1980s, but it was a small player compared to Chicago. The subsidiary was sold to the New York Cotton Exchange (NYCE) in 1994, and then rolled up into the New York Board of Trade (NYBOT) after the NYBOT bought the NYCE. So, NYFE was created by the NYSE, who sold it to NYCE, who was bought by NYBOT, who then subsumed the NYFE. Who said finance was confusing?
Double-Check the Math
On August 8, 2002, Worldcom auditors announced another $3.3 billion in accounting errors, adding to the $3.85 billion worth of accounting fraud that sunk the company. The company was claiming routine costs as capital expenditures and was already forced to file for bankruptcy. Previous weeks saw most of the management fired or fleeing and the exodus and revelations drove the share price of the formerly $60 stock to a low of 20 cents before trading was halted. The final rounding error on Worldcom's financials was $11 billion, including hundreds of millions in loans to CEO Bernie Ebbers. Ebbers was sentenced to 25 years for his crime. (For more, see The Pioneers Of Financial Fraud.)
That's all for this week. Next week we'll look at an $8,000 computer, the unflappable Mr. Greenspan and much more.
Catch up on your financial news; read Water Cooler Finance: Google Gains, Taxpayers Pay.