This week in financial history is notable for the birth of one of the most important men in finance. It also includes an event that seems anything but financial in nature - the death of a professor of chemical engineering. And, of course, there are the usual bits of trivia, including some dot-com madness.
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A Modest Life
On November 1, 1995, Professor Donald Othmer died at age 91. Inside the field of chemical engineering, he was fairly successful, co-editing the Kirk-Othmer Encyclopedia of Chemical Technology and holding numerous patents. What made Dr. Othmer an entry into financial history was the fact that he and his wife invested $25,000 with Warren Buffett in the early 1970s. (The Oracle of Omaha has a net worth in the billions, but his lifestyle is not as rich as you may think. Read Warren Buffett's Frugal, So Why Aren't You?)
Othmer and his wife bought their first shares when they were going for $45. At the time of his death a single share was worth around $40,000. The investment in Berkshire and other smart buys gave the Othmers an estate worth $800 million at his death. His wife followed him in 1998 and the rest of their fortune was dispersed to institutions the two supported. Professor Othmer is just one example of the men and women who made a fortune investing with Buffett. The Oracle of Omaha's own considerable fortune will be given away upon his death along with his friend Bill Gates'- a man who made more than a few millionaires himself.
Daiwa's Billion-Dollar Dishonor
On November 2, 1995, the United States Attorney for the Southern District of New York filed a criminal indictment against Daiwa Bank. In 1996, the bank pleaded guilty to charges that it covered up more than $1 billion in losses created by a rogue bond trader and agreed to a fine of $340 million. The trader, Toshihide Iguchi, confessed much earlier, but the bank was reluctant to let the information go public.
Iguchi had started out losing thousands, which he covered up to save face. As losses mounted, Iguchi went to greater lengths to keep the growing losses secret. He succeeded in doing so for over a decade. Although the losses were tiny in comparison to Daiwa's $200 billion balance sheet and $8 billion in reserves, the U.S. was angry that the bank was going to whitewash the affair. Not only did Daiwa end up leaving the U.S., but management later faced shareholder lawsuits as well. More than anything, the Daiwa scandal badly damaged the reputations of Japanese banks. (Don't assume that you can't lose money in this market - you can. Find out how. See 6 Biggest Bond Risks.)
On November 6, 1851, Charles Dow was born. Pinning down Dow's greatest achievement is a matter of taste. If you believe strongly in market information, then you can thank Dow for turning a small newsletter for investors into the Wall Street Journal, the premier financial newspaper in the world. If you are a technical analyst, you can thank Dow for positing the first trading theory, known still as Dow Theory. And, even if you care almost nothing about the market, you still have to give a nod to Dow for creating the not-so-modestly named Dow - properly known as the Dow Jones Industrial Average. True, the market existed long before Charles Dow was born, but after he died it was a lot easier to follow thanks to his life's work. (Although the DJIA only includes 30 stocks, it can tell you a lot about the market as a whole. Check out Why The Dow Matters.)
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Buy, Buy, Buy!
On November 7, 2000, Pets.com officially went under. A child of the internet bubble, the company was designed after the Amazon.com model where pet owners would order all things pet-related online. The company pulled in over $80 million in an IPO that saw shares jump from $11 to $14. After three months of operating at a loss, the shares were worth $5. Six months later, the company was broke. The company tried to give something back to the shareholders, selling all the assets and turning the money over. Despite the company's good intentions, the venture was doomed from the start.
In another twist, Merrill Lynch, the investment bank that handled the firm's IPO, was suspiciously bullish on the stock right up to the end. The firm's suspiciously bullish take on Pets.com became one of the focal points of U.S. Attorney General Eliot Spitzer's global settlement case against many of the leading investment banks. However, Merrill Lynch, along with Credit Suisse First Boston and Citigroup's Salomon Smith Barney Unit, settle charges of issuing fraudulent research reports that contained "exaggerated or unwarranted claims" to win investment banking business by paying a historic $1.4 billion in 2003.
That's all for this week. Next week we'll look at yet more financial shenanigans and a lament that has echoed down the ages.
For the latest financial news, see Water Cooler Finance: Rising Markets And Buffett's Successor.