Monday, May 6, 2013

Farber, Everybody Ought to Be Rich

No, this is not some witless self-help book. Rather, Everybody Ought to Be Rich (Oxford University Press, 2013) is, as the subtitle says, an account of The Life and Times of John J. Raskob, Capitalist. Never heard of him? Perhaps that’s because “he never ran a major corporation. He never invented a noteworthy product. Even when he started up a new enterprise he almost never took public credit for his accomplishment. When he built the tallest skyscraper in the world—the Empire State Building—he did not name that building after himself, as his close friend and rival Walter Chrysler had done with his own venture.” Nevertheless, he was a key player in the rise of American capitalism. “In partnership with the great industrialists and financiers of his time he put his knowledge to work: buying up companies, leveraging investments, creating new pools of credit for both the rich investor and the middle class consumer, reorganizing corporations, plotting hostile takeovers, financing skyscrapers, and channeling money into the political system.” (p. 4)

David Farber’s biography traces Raskob’s life from his birth in Lockport, New York, in 1879 to his death in 1950. Although Farber devotes a large chunk of the book to Raskob’s chairmanship of the Democratic Party during Al Smith’s unsuccessful bid for the presidency (Roosevelt summarily fired him after he got the party’s nod in 1932) and his generous support for Catholic charities, Raskob’s contributions to American capitalism are the real story here.

Raskob began his career as an assistant to Pierre du Pont and eventually became treasurer of the DuPont Company. He realized soon enough, however, that he couldn’t advance further at DuPont; the top spots were reserved for family members. “By 1915, Raskob had come to believe that an unstable, upstart auto company, the General Motors Corporation, offered the best opportunity.” (p. 100) In that year, in the wake of a fight for control of GM, du Pont was named chairman of the board and Raskob became a member of the board. But Raskob would move only in stages from DuPont to GM. There was still work to be done at DuPont, including a major restructuring of the company’s finances, among other things replacing old bonded debt with stock.

By the mid-1910s, as a consequence of his leveraged purchases of both DuPont and GM stock, Raskob was “a capitalist of the first order, no longer beholden to salary or bonuses.” (p. 120) He continued to engineer financial deals. In one of the most notable, he established and financed a holding company, owned by DuPont, that would buy over $25 million in GM and Chevrolet stock. DuPont owned 23.83% of GM-Chevrolet. Raskob subsequently became head of the GM Finance Committee, “ruled by DuPont Company officials.”

In early 1918 Raskob proposed that GM enter the auto installment financing business; at the beginning of 1919 the General Motors Acceptance Corporation launched. By April 1922 GMAC had financed 146,937 consumer sales.

Raskob was an early advocate of profit-sharing plans in the form of stock ownership. The plan that eventually emerged at GM included only top executives; it aimed “at registering effectively in the minds of the members of the exclusive club that what was good for General Motors was good for them.” (p. 208) Raskob benefited handsomely from this program; “in 1927 alone he would receive bonus shares of Class A stock worth $612,660 (or about $7.6 million when corrected for inflation).” (p. 209)

In 1929 Raskob devised a plan to expand stock ownership in the form of a workers’ investment trust so that “a ‘factory mechanic in Detroit with $200’ to invest would be able to secure a strong financial future for his family.” (p. 266) His plan became the talk of the nation and was generally lauded. Newspapers raved: “This is the greatest vision of Wall Street’s greatest mind.” It “might prove to be the most modern and most useful of all the numerous humanitarian enterprises founded at various times by rich Americans.” He wrote an article for the August 1929 issue of the Ladies Home Journal that was given the infamous title “Everybody Ought to be Rich.” In it he argued that too many Americans lacked economic security, “but that this inequality could be remedied by providing far more Americans with investment opportunities. “ He said that he expected to create a company to provide “millions of Americans the opportunity to invest in the stock market the same way they bought their autos, through an installment plan.” (p. 270)

Despite his idea for an investment trust, Raskob was not himself a market bull. In fact, throughout much of 1928 and all of 1929 he shorted GM stock to hedge his long position. In the weeks immediately after the Crash, he was more manipulative. He made a well-publicized purchase of 50,000 shares of GM valued at over $2 million. “After his buy order had the desired effect on GM’s share price, John quietly dumped the lot the very next day, making a tidy sum on the transaction.” (p. 279)

Even so, Raskob’s market timing ultimately proved to be off. He thought the bear market was bottoming out by the end of 1929 and began reinvesting. He lost tens of millions. Still and all, “his wounds were relatively minor—he was very, very rich before the Crash and very rich after it.” (p. 280)

No comments:

Post a Comment