Wall Street History

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Wall Street History

10/18/2002

Charles Hatry

One of the key events leading up to the 1929 Crash was the
collapse of Clarence Hatry’s empire in Britain. As you read this
brief tale, you’ll invariably think of today’s market, and the
problems with Enron, Tyco et al, because contained herein are
definite parallels.

One of the only real descriptions I have of Hatry’s personality is
that he was “flamboyant,” so we’ll run with that. According to
Charles Geisst, Hatry made his name by transporting Eastern
European immigrants to the United States and Canada, gouging
them, I’m sure. Soon he had built a business empire, with
investments in photographic supplies, cameras, vending
machines, and loan offices (which catered to the little guy
needing a few pounds or shillings).

But by 1928, Hatry sought to make a really big splash by
attempting to wrest control of United Steel, an operation that
accounted for about 10% of all production in the U.K. There
was only one problem. He couldn’t put a debt package together
(pre-Michael Milken, you understand), which he needed since he
didn’t have a lot of cash on hand.

Hatry tried everything, including his connections at the venerable
institutions, Bank of England and City of London, but, again, he
failed. It turns out Hatry was faking his empire’s books, passing
his operation off as having a far more favorable balance sheet
than it actually did. But then he was finally caught forging stock
certificates, which had given the impression that his little empire
was rocking and rolling, even though the truth was he was up to
his gills in debt, the level of which some of the better bankers
had begun to question.

With the fraud exposed, Hatry declared bankruptcy on
September 20, 1929, and the move echoed across the Atlantic,
causing markets to shudder. The Dow Jones, which had hit its
all-time high of 381 on September 3, was down to 362 at the
close on the 20th. [It lost over 2% that day a big percentage
move for those times.]

Part of the problem was that the Bank of England, in response to
the collapse of a key speculator, Hatry, as well as dealing with a
steady drain of gold reserves at the time, forced the discount rate
up from 5 to 6 percent. Within moments, British investors
began repatriating assets away from the U.S. and back home. Of
course this had a snowball effect on Wall Street, and both fed on
each other. So in most history books you’ll come across, the
demise of Clarence Hatry is often cited as a contributing factor to
the crash that followed.

Perhaps a bit of an overstatement, but he did impact things for a
spell, that’s for sure. What is clear is that Clarence Hatry was
forging stocks and issuing unauthorized shares in a successful
attempt to acquire various companies at will. In a sense, it was a
Ponzi scheme, and thus destined to fail like all the others.

Meanwhile, a few weeks after the Hatry collapse, Alfred Sloan,
head of General Motors, observed that car sales were beginning
to decline, so he proclaimed the “end of expansion” was at hand.
Rather prescient, and something to keep in mind when you think
about today’s auto and housing markets.

Lastly, market historian Robert Sobel has a passage in his book
“The Great Bull Market” that I’d like to share with you. Sobel
was commenting on the bloodbath of October 3, 1929, when the
Dow Jones fell from 344 to 329 (4.4%) in the worst selloff of the
year up to that point.

“Margin calls went out, and financial analysts wrote that the bull
market might be coming to an end. Some brokerages began
publishing lists of conservative issues for investment, suggesting
that their customers consider yield and price/earnings ratios more
carefully in the future. But others repeated the now familiar
statements that price/earnings ratios of twenty to one were not
unreasonable in the 1929 market; that the investment trusts and
‘big boys’ were waiting for the proper moment to purchase
stocks – a time when ‘suckers’ sold in panic; that bull pools were
forming throughout the district; and that there was no reason to
consider 60 per cent margin accounts as speculative.”

Of course by July 1932 the Dow Jones was at 41.

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Sources:

“Wall Street: A History” Charles R.Geisst
“Monopolies in America” Charles R. Geisst
“Manias, Panics, and Crashes” Charles P. Kindleberger
“Devil Take the Hindmost” Edward Chancellor
“Rainbow’s End” Maury Klein
“The Great Bull Market” Robert Sobel

Brian Trumbore

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