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Gordon Gekko had it right (5 pre-Enron financial scandals)

March 9, 2010

“Greed is good”.  That was Gordon Gekko’s mantra.  Apparently, he wasn’t the only one to live by that code.  The last several years have seen corporate greed and fraudulent activities at an amazing pace.  It started with the Enron failure and moved on to Worldcom, Tyco, Adelphia, AIG, and then was capped off by the wonderful personalities of Bernie Madoff and Allen Stanford.  While this recent trend is disturbing, it is hardly original.  Scandals, frauds, and corruption like this have been going on for hundreds of years. 

Greed may not be necessarily good, but it has certainly been popular.  Here are five financial scandals that happened before the current wave of bad headlines was written.

Credit Mobilier

Back in 1864, Credit Mobilier was a construction company started by executives of Union Pacific Railroad.  They then had Union Pacific make contracts with Credit Mobilier to build railroads at inflated prices.  These payments would in turn go to buy Union Pacific stock at par value and sell them at market value, generating huge profits to the tune of over $43 million.

Here’s the thing: the contracts were being paid with generous subsidies from the U.S. Government.  Then a man named Oakes Ames, a U.S. congressman, was tabbed to head the firm.  He started offering other members of congress stock at the par value, giving many of them a chance to earn a huge profit.  The whole thing came crashing down when a New York newspaper published a story about how Credit Mobilier built $53 million worth of railroads while receiving $72 million in payments.  The resulting downfall implicated several executives and politicians, including future president James Garfield.

Samuel Insull

Insull was an major player in the early electricity industry.  In 1892 he became president of the Chicago Edison Co. and 5 years later merged another power company with his to create Commonwealth Edison.  He then started purchasing portions of other companies that included utilities and railroads, essentially creating the first “holding company”.  He ended up controlling a $500 million dollar empire.

The problem was that the empire only had $27 million in equity due to many of his holdings being highly leveraged.   When the Great Depression hit, his holding company collapsed and wiped out the life savings of 600,000 investors.  He fled to Greece but was later captured in Turkey and extradited to the U.S.  He was found not-guilty of wrongdoing because the courts ruled that “a holding company could not be held responsible for the acts of the companies it controlled”.

Cornering the gold market

Shortly after the Civil War, America was in a period of reconstruction and expansion.  This was because the government issued a large influx of currency backed only by credit.  The plan was to eventually buy back the cash with gold.  A couple of financiers, Jay Gould and James Fisk, saw this as a way to make a lot of money and set forth a plan to get it.  They befriended Abel Corbin, who was the brother-in-law of President Grant.  They used this connection to get close to the president and convince him to appoint an acquaintance as the Treasurer.  That way Gould and Fisk could have inside information as to when the government planned a gold sale.

In 1869, they began purchasing large amounts of gold, causing the price of gold to rise and stocks to go down.  When they really started hoarding it later that year, Grant realized what was going on and immediately authorized a $4 million government sale.  Gold prices plummeted so rapidly that it not only ruined the fortunes of many (including Corbin) but also sparked the Panic of 1869.  What followed was an eight year depression in which millions lost jobs, businesses, and savings.

The Keating Five

In the early 1980’s, there was massive deregulation of the savings & loan industry.  It allowed S&L institutions to invest the money of their depositors into more risky ventures.  Charles Keating, who ran American Continental Corporation, got into the business through the purchase of Lincoln Savings & Loan in Irvine, Ca.  He took advantage of the loosened restrictions to make a lot of money for a while.  After a few years, Lincoln Savings & Loan started to struggle and came under investigation by the Securities and Exchange Commission.  The company eventually failed, costing the government $3 billion and leaving 23,000 customers with worthless bonds and depleted life savings.

What followed was the S&L meltdown of the late 80’s.  Over 700 failed and put the country into a recession that would last years.  The devastation also put a magnifying glass on Lincoln Savings & Loan.  After the investigation, it was revealed that Keating had made many large (but legal) donations to the campaign funds of five U.S. senators in return for preferential treatment from the SEC.  The senators implicated were Donald Riegle Jr., Dennis DeConcini, John Glenn, Alan Cranston, and John McCain.  They were all found to have acted improperly and the case generated two rounds of campaign finance reform.

 Money for oil (but not the oil you think)

This one didn’t affect a lot of innocent people like the others, but I came across it while doing research and had to include it.  It’s just too original.  It was a multi-million dollar scandal and the circumstances have been compared to the recent housing meltdown because of the of the way that otherwise cautious and conservative lenders were giving out increasingly risky loans.   In 1963, there was a company called the Allied Crude Vegetable Oil company, led by Tino De Angelis.  De Angelis discovered that he could obtain low interest loans based on his inventory of salad oil.

He would have ships that appeared to be full of salad oil inspected and then get millions of dollars worth of loans based on that cargo.  That’s where the scandal begins.  Oil is thicker than water, so the ships were filled mostly with water and a few feet of salad oil floating on top.  To the inspectors, it appeared to be full of oil.  Once the scam was revealed, De Angelis was tried and sentenced to seven years in jail.  The biggest loser in this was American Express, who wrote many of the loans to the company.  Their stock dropped 50% in one day and it ended up costing them over $50 million in losses.

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6 Comments leave one →
  1. mark mchugh permalink
    March 9, 2010 4:32 pm

    I like this post, Christian. Certainly sociopathic greed is nothing new. But I really think something’s different now. Bernie Madoff turned himself in, and after the fact, we find out that plenty of people at the very least suspected something was up (Harry Markopolos’s letter to the SEC led me to believe that Hank Paulson knew).

    The difference now, I think, is our law enforcement officials refuse to persecute and prosecute people that by all reasonable measures are complete sociopaths. We glorify this behavior more than condemn it.

    The Madoff fraud was greater than the property damage of 911 (including estimated rebuilding costs). But I guess because he didn’t outright murder people, people don’t seem too outraged. No one even got fired for allowing the greatest fraud in history to happen on their watch.

    • March 10, 2010 8:29 am

      Agreed. The whole Madoff disaster will likely end up costing more than the damage left by Hurricane Katrina. All from one man. (And a few helpers) It seems to me that society has become numb to these kind of scandals. I remember when Enron happened and it was front page news for the better part of a year. 8 years and several massive frauds later, Madoff turns himself in and it’s demoted to page 3 in a few weeks.

  2. Dubious Brother permalink
    March 11, 2010 11:13 am

    The Houston law firm that represented ENRON was Vinson & Elkins. They collected over $150 million in fees over several years and then denied that they had any knowledge or anything to do with the scam. Enron’s accounting firm, Arthur Andersen, surrendered its license but the accountants just moved to other firms. Every attorney and every accountant with the firms that enabled these companies or funds should have their license suspended for three years and those involved directly should be permanently barred from practicing when they get out of jail.

  3. July 10, 2010 5:51 pm

    it was a good start for Mc cain.

  4. John permalink
    September 12, 2010 8:31 am

    Too many people get away scot free from this things yet they are enablers. We need an enabler law so people who should know better smarten up!

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  1. 5 financial scandals long before Enron | NEWS Gate

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