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01/11/2002

Oris and Mantis

A little while ago I was watching White House spokesman Ari
Fleischer get grilled concerning the decision by the Justice
Department to launch a criminal investigation into the Enron
disaster. Well, it just so happens I stumbled on a story or two
from the 1920s with some similarities. This first one concerns
the Van Sweringen brothers.

Boy, these guys were weird. Born outside Wooster, Ohio, Oris
Paxton and Mantis James Van Sweringen (who we will call the
Vans from here on, as they were known in their day) were two
years apart in age, but in everything else were like twins. Short
in stature, quiet and modest, neither went beyond the 8th grade.
In later life, one was never seen without the other, as they lived
in a sprawling Cleveland mansion, employed no servants, lived
in only a few rooms, even slept in twin beds. Well, I guess that''s
all we really need, or want, to know about their personal
situation.

Anyway, Oris and Mantis (they themselves never knew the
origin of their unusual names) started off as office boys before
getting into real estate. It was soon apparent they had quite a
knack in this realm, and they took advantage of opportunities
presented to them at the end of Cleveland''s great boom in the
early 1900s.

First, they developed Cleveland Heights, before acquiring an
adjacent 1,366-acre farm, which they then turned into Shaker
Heights, one of the nation''s wealthiest communities.

By the end of World War I the Vans had a well-deserved
reputation in their field, plus they had amassed loads of Wall
Street connections and about $500,000 in cash. At this time
they decided it was time to take an interest in railroads.

Their new venture started when they realized it made sense to
connect Shaker Heights to downtown Cleveland by rail. At the
time there was an ancient streetcar line, so they decided to build
a high-speed train. But the New York, Chicago & St. Louis
railroad also wanted the location that the Vans had chosen for a
new terminal.

Well, it just so happens that the owner of the New York, Chicago
was one Al Smith*. He had had prior dealings with the Vans
(they purchased a farm he owned for the development of Shaker
Heights) and he convinced bankers that the Vans were good for
the $8.5 million price for his railroad that he chose to accept,
even though the brothers had but $500,000 in cash.

Actually, they had their own $500,000 plus $500,000 from
friends, so they needed $7.5 million to complete the deal. Smith
told J.P. Morgan and Company, "I have had many experiences
with these two boys. They are very capable.I want you to
cooperate with them in any way you legitimately can." [Geisst]

Now what the Vans did to complete the transaction was form
something new for that day, a holding company, called "Nickel
Plate Securities Co.," which then sold stock and raised more than
the needed $7.5 million.

The holding company was a hallmark of the 1920s and the bull
market. Some have called the era a period of consolidation
rather than innovation in the markets, and market historian
Charles Geisst cites John Kenneth Galbraith, who pointed out
that "through all the consolidation there was a shortage of stock
which helped push up share prices." [Geisst''s quote]

Of course it was another financial invention of the time, the
"investment trust," the first mutual funds, which used pools of
money to buy up shares in holding companies, or other
institutions.

For their part, the Vans turned the railroad into a profitable
business and liked the industry so much they sold off their real
estate holdings and went full bore into buying up railroad
properties; including the giant Chesapeake & Ohio, the Erie, and
the Missouri Pacific. And how did they do it? By floating bonds
and selling stock, of course. What they really did was create a
giant pyramid scheme, one with massive paper wealth through
the holding company, the vehicle which was used to manipulate
earnings since no one understood all the leverage that was being
employed in the different subsidiaries. [Kind of like Enron and
its partnerships, eh?]

Historian Robert Sobel writes that at cocktail parties, investment
bankers would try to explain how Nickel Plate Securities Co.
worked, but "usually with little success." Though the facts
seemed to be public, so it HAD to be explainable.

Well, here''s a description, as told by Sobel.

"By the end of the decade (the 20s) the flotations,
amalgamations, and manipulations had resulted in a chaotic
jumble of companies which, taken together, made the brothers
one of the most important forces in transportation. [Ed. By one
estimation they had an empire of $2 billion at their peak.] At the
top of the Van Sweringen pyramid were the General Securities
Corporation and the Vaness Co. The brothers owned 40 percent
of G.S.C. and 80 percent of Vaness. Since Vaness owned an
additional 50 percent of General Securities, control of both was
assured.

"General Securities controlled Alleghany Corporation, which
controlled Chesapeake Corporation, which controlled the
Chesapeake & Ohio Railroad. The C. & O. in turn held stock in
other lines, together with Vaness, General Securities, Alleghany,
and the Chesapeake Corporation. The Wheeling & Lake Erie,
the Kansas City Southern, the Chicago & Eastern Illinois, the
Missouri Pacific, and the Denver & Rio Grande were also in the
Van Sweringen web. So complex was the pyramid that the
brothers'' equity in the small Hocking Valley was only .25
percent, but they controlled it nonetheless. Much of this was
beyond Oris'' and Mantis'' comprehension; their lawyers and
accountants took care of such details."

And we have this example of just the Alleghany spoke of the
Vans'' holdings.

"On January 29 the Van Sweringens sold to (J.P.) Morgan $35
million in 5 percent bonds for $32.75 million, $25 million in
preferred stock, and 1.25 million of the 3.5 million common
shares for $20 a share, or $25 million. In addition, Morgan paid
$375,000 to obtain warrants for another 375,000 shares of
common at $30 per share. The Vans also took warrants for
375,000 shares at the same price and bought 2.25 million shares
of common at $20 a share. For this stock they paid not cash but
100,000 shares of Nickel Plate common and 440,286 shares of
Chesapeake Corporation common. Then they sold to their own
General Securities Corporation the 2.25 million shares of
Alleghany and 1.725 million option warrants at $1 per warrant.
Since all the directors of Alleghany were Van Sweringen
associates, the deal amounted to trading with themselves." Or, as
an official said at the time, "The control of the parent''s directors
over the subsidiaries'' machinery is absolute; even the
information disclosed may be so blind as to be unintelligible."
[Maury Klein, "Rainbow''s End."]

Of course it all came crashing down, or I wouldn''t be telling this
story now, would I? Shares in Alleghany Corp., which became
the main trading vehicle for the Vans'' holdings, hit $57 before
tumbling to below $5 in July 1932 when the overall market
bottomed, and they never recovered. Then Senator Harry
Truman complained that the Van Sweringen''s were like the
railway bandits of the 19th century, but that they were worse than
Jesse James.

Charles Geisst, in a discussion of this era, makes an interesting
comment that is just as applicable to today. "Get-rich-quick
notions had seduced the average investor, but the fall of these
highly leveraged industrial empires caused a serious deterioration
in national savings."

Next week.Samuel Insull, power broker.

Sources:

"The Great Bull Market," Robert Sobel
"Rainbow''s End: The Crash of 1929," Maury Klein
"Monopolies in America," Charles R. Geisst
"Wall Street: A History," Charles R. Geisst
"Devil Take the Hindmost," Edward Chancellor

*I need to explain the reference to Al Smith. From the above
noted sources, it is not clear if the Al Smith of New York
gubernatorial fame and the Ohio Al Smith are the same. While I''m
assuming they aren''t, some of the sourced authors really confuse
the issue. The Geisst quote would have me believe we are dealing
with two different figures.

Brian Trumbore



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-01/11/2002-      
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Wall Street History

01/11/2002

Oris and Mantis

A little while ago I was watching White House spokesman Ari
Fleischer get grilled concerning the decision by the Justice
Department to launch a criminal investigation into the Enron
disaster. Well, it just so happens I stumbled on a story or two
from the 1920s with some similarities. This first one concerns
the Van Sweringen brothers.

Boy, these guys were weird. Born outside Wooster, Ohio, Oris
Paxton and Mantis James Van Sweringen (who we will call the
Vans from here on, as they were known in their day) were two
years apart in age, but in everything else were like twins. Short
in stature, quiet and modest, neither went beyond the 8th grade.
In later life, one was never seen without the other, as they lived
in a sprawling Cleveland mansion, employed no servants, lived
in only a few rooms, even slept in twin beds. Well, I guess that''s
all we really need, or want, to know about their personal
situation.

Anyway, Oris and Mantis (they themselves never knew the
origin of their unusual names) started off as office boys before
getting into real estate. It was soon apparent they had quite a
knack in this realm, and they took advantage of opportunities
presented to them at the end of Cleveland''s great boom in the
early 1900s.

First, they developed Cleveland Heights, before acquiring an
adjacent 1,366-acre farm, which they then turned into Shaker
Heights, one of the nation''s wealthiest communities.

By the end of World War I the Vans had a well-deserved
reputation in their field, plus they had amassed loads of Wall
Street connections and about $500,000 in cash. At this time
they decided it was time to take an interest in railroads.

Their new venture started when they realized it made sense to
connect Shaker Heights to downtown Cleveland by rail. At the
time there was an ancient streetcar line, so they decided to build
a high-speed train. But the New York, Chicago & St. Louis
railroad also wanted the location that the Vans had chosen for a
new terminal.

Well, it just so happens that the owner of the New York, Chicago
was one Al Smith*. He had had prior dealings with the Vans
(they purchased a farm he owned for the development of Shaker
Heights) and he convinced bankers that the Vans were good for
the $8.5 million price for his railroad that he chose to accept,
even though the brothers had but $500,000 in cash.

Actually, they had their own $500,000 plus $500,000 from
friends, so they needed $7.5 million to complete the deal. Smith
told J.P. Morgan and Company, "I have had many experiences
with these two boys. They are very capable.I want you to
cooperate with them in any way you legitimately can." [Geisst]

Now what the Vans did to complete the transaction was form
something new for that day, a holding company, called "Nickel
Plate Securities Co.," which then sold stock and raised more than
the needed $7.5 million.

The holding company was a hallmark of the 1920s and the bull
market. Some have called the era a period of consolidation
rather than innovation in the markets, and market historian
Charles Geisst cites John Kenneth Galbraith, who pointed out
that "through all the consolidation there was a shortage of stock
which helped push up share prices." [Geisst''s quote]

Of course it was another financial invention of the time, the
"investment trust," the first mutual funds, which used pools of
money to buy up shares in holding companies, or other
institutions.

For their part, the Vans turned the railroad into a profitable
business and liked the industry so much they sold off their real
estate holdings and went full bore into buying up railroad
properties; including the giant Chesapeake & Ohio, the Erie, and
the Missouri Pacific. And how did they do it? By floating bonds
and selling stock, of course. What they really did was create a
giant pyramid scheme, one with massive paper wealth through
the holding company, the vehicle which was used to manipulate
earnings since no one understood all the leverage that was being
employed in the different subsidiaries. [Kind of like Enron and
its partnerships, eh?]

Historian Robert Sobel writes that at cocktail parties, investment
bankers would try to explain how Nickel Plate Securities Co.
worked, but "usually with little success." Though the facts
seemed to be public, so it HAD to be explainable.

Well, here''s a description, as told by Sobel.

"By the end of the decade (the 20s) the flotations,
amalgamations, and manipulations had resulted in a chaotic
jumble of companies which, taken together, made the brothers
one of the most important forces in transportation. [Ed. By one
estimation they had an empire of $2 billion at their peak.] At the
top of the Van Sweringen pyramid were the General Securities
Corporation and the Vaness Co. The brothers owned 40 percent
of G.S.C. and 80 percent of Vaness. Since Vaness owned an
additional 50 percent of General Securities, control of both was
assured.

"General Securities controlled Alleghany Corporation, which
controlled Chesapeake Corporation, which controlled the
Chesapeake & Ohio Railroad. The C. & O. in turn held stock in
other lines, together with Vaness, General Securities, Alleghany,
and the Chesapeake Corporation. The Wheeling & Lake Erie,
the Kansas City Southern, the Chicago & Eastern Illinois, the
Missouri Pacific, and the Denver & Rio Grande were also in the
Van Sweringen web. So complex was the pyramid that the
brothers'' equity in the small Hocking Valley was only .25
percent, but they controlled it nonetheless. Much of this was
beyond Oris'' and Mantis'' comprehension; their lawyers and
accountants took care of such details."

And we have this example of just the Alleghany spoke of the
Vans'' holdings.

"On January 29 the Van Sweringens sold to (J.P.) Morgan $35
million in 5 percent bonds for $32.75 million, $25 million in
preferred stock, and 1.25 million of the 3.5 million common
shares for $20 a share, or $25 million. In addition, Morgan paid
$375,000 to obtain warrants for another 375,000 shares of
common at $30 per share. The Vans also took warrants for
375,000 shares at the same price and bought 2.25 million shares
of common at $20 a share. For this stock they paid not cash but
100,000 shares of Nickel Plate common and 440,286 shares of
Chesapeake Corporation common. Then they sold to their own
General Securities Corporation the 2.25 million shares of
Alleghany and 1.725 million option warrants at $1 per warrant.
Since all the directors of Alleghany were Van Sweringen
associates, the deal amounted to trading with themselves." Or, as
an official said at the time, "The control of the parent''s directors
over the subsidiaries'' machinery is absolute; even the
information disclosed may be so blind as to be unintelligible."
[Maury Klein, "Rainbow''s End."]

Of course it all came crashing down, or I wouldn''t be telling this
story now, would I? Shares in Alleghany Corp., which became
the main trading vehicle for the Vans'' holdings, hit $57 before
tumbling to below $5 in July 1932 when the overall market
bottomed, and they never recovered. Then Senator Harry
Truman complained that the Van Sweringen''s were like the
railway bandits of the 19th century, but that they were worse than
Jesse James.

Charles Geisst, in a discussion of this era, makes an interesting
comment that is just as applicable to today. "Get-rich-quick
notions had seduced the average investor, but the fall of these
highly leveraged industrial empires caused a serious deterioration
in national savings."

Next week.Samuel Insull, power broker.

Sources:

"The Great Bull Market," Robert Sobel
"Rainbow''s End: The Crash of 1929," Maury Klein
"Monopolies in America," Charles R. Geisst
"Wall Street: A History," Charles R. Geisst
"Devil Take the Hindmost," Edward Chancellor

*I need to explain the reference to Al Smith. From the above
noted sources, it is not clear if the Al Smith of New York
gubernatorial fame and the Ohio Al Smith are the same. While I''m
assuming they aren''t, some of the sourced authors really confuse
the issue. The Geisst quote would have me believe we are dealing
with two different figures.

Brian Trumbore