Investment Pool

Investment Pool

Not everybody was speculating in the market in 1929, as was commonly assumed. Borrowing to buy stocks (buying on margin) did increase from only one billion dollars in 1921 to almost 9 billion in 1929. Nevertheless, only about a million persons owned stocks on margin in 1929. Still, the speculative spirit was at least as widespread as in the previous crazes and was certainly unrivaled in its intensity. More important, stock-market speculation was central to the culture. John Brooks in Once in Golconda (Golconda – now in ruins – was a city in India. According to legend, everyone who passed through it, became rich). recounted the remarks of a British correspondent newly arrived in New York: “You could talk about Prohibition, or Hemingway, or air conditioning, or music, or horses, but in the end you had to talk about the stock market, and that was when the conversation became serious.

Unfortunately, there were hundreds of smiling operators only too glad to help the public construct castles in the air. Manipulation on the stock exchange set new records for unscrupulousness. No better example can be found that the operation of investment pools. Once such undertaking raised the price of RCA stock 61 points in 4 days.

Let us explain how the pools could manipulate the price of a stock:

An investment pool required close cooperation on one hand and complete disdain for the public on the other. Generally such operation began when a number of traders banded together to manipulate a particular stock. They appointed a pool manager (who justifiable was considered something of an artist) and promised not to doublecross each other through private operations.

The pool manager accumulated a large block of stock through inconspicuous buying over a period of weeks. If possible, he obtained an option to buy a substantial block of stock at the current market price within a stated period of, say, three or six months. Next, he tried to enlist the stock’s specialist on the exchange floor as an ally.

Pool members were in the swim with the specialist on their side. A stock-exchange specialist functions as a broker’s broker. If a stock was trading at $50 a share and you gave your broker an order to buy at $45, the broker typically left that order with the specialist. If and when the stock fell to $45, the specialist then executed the order. All such orders to buy below the market price or sell above it were kept in the specialist’s supposedly private book. Now you see why the specialist could be so valuable to the pool manager. The book gave information about the extent of existing orders to buy and sell at prices below and above the current market. It was always helpful to know as many of the cards of the public players as possible. Now the real fun was ready to begin.

An Eagle, a symbol of power. Photo by Elena

Generally, at this point the pool manager had members of the pool trade between themselves. For example, Haskell sells 200 shares to Sidney at 40, at Sidney sells them back at 40 ½. The process is repeated with 400 shares at prices of 4 ¼ and 4 ½. Next comes the sale of 1,000-share block at 4 5/8, followed by another at 4 ¾. Those sales were recorded on ticker tapes across the country and the illusion of activity was conveyed to the thousands of tape watchers who crowded into the brokerage offices of the country. Such activity, generated by so-called wash sales, created the impression that something big was afoot.

Now, tipsheet writers and market commentators under the control of the pool manager would tell of exciting developments in the offing. The pool manager also tried to ensure that the flow of news from the company`s management was increasingly favorable – assuming the company management was involved in the operation. If all went well, and in the speculative atmosphere of the 1928-29 period it could hardly miss, the combination of tape activity and managed news would bring the public in.

Once the public came in the free-for-all started and it was time discreetly to “pull the plug”. Since the public was doing the buying, the pool did the selling. The pool manager began feeding stock into the market, first slowly and then in larger and larger blocks before the public could collect its senses. At the end of the roller-coaster ride the pool members had netted large profits and the public was left holding the suddenly deflated stock.

But people didn`t have to band together to defraud the public. Many individuals, particularly corporate officers and directors, did quite well on their own. Take Albert Wiggin, the head of Chase, the nation`s second largest bank at the time. In July 1929 Mr. Wiggin became apprehensive about the dizzy heights to which stocks had climbed and no longer felt comfortable speculating on the bull side of the market. (He is rumored to have made millions in a pool boosting the price of his own bank).

Believing that the prospects for his own bank`s stock were particularly dim (perhaps because of his previous speculation), he sold short over 42, 000 shares of Chase stock. Selling short is a way to make money is stock prices fall. It involves selling stock you do not presently own in the expectation of buying it back later at a lower price. It`s like hoping to buy low and sell high, but in reverse order.

Wiggin`s timing was perfect. Immediately after the short sale the price of Chase stock began to fall, and when the crash came in the fall the stock dropped precipitously. When the account was closed in November, Mr. Wiggin had netted a multimillion-dollar profit the operation. Conflicts of interest apparently did not trouble Mr. Wiggin. Usually corporate officers are encouraged to own the stock of their company so that they will have an added incentive to put their best efforts. Wiggin, on the other hand, had provided himself with an incentive (and a very large on at that) to encourage the deterioration of the shares of the financial institution he headed.

There`s a sequel to this story. When Wiggin retired in 1932, the Chase Executive Committee thanked him warmly for his many services to the bank and unanimously voted him a life pension of $100,000 per year.

The extent of the rises of the major industrial companies from March 3, 1928 to September 3, 1929:

Security, opening prices, high prices, percentage gain in 18 months:

American Telephone and Telegraph Company:

Opening price, March 3, 1928 – 179, 5

High price, September 3, 1929 – 335, 5

Percentage gain in 18 months – 87, 0

Bethlehem Steel:

Opening price, March 3, 1928 – 56, 5

High price, September 3, 1929 – 150, 5

Percentage gain in 18 months – 146, 8

General Electric:

Opening price, March 3, 1928 – 128, 7

High price, September 3, 1929 – 396, 4

Percentage gain in 18 months – 207, 6

Montgomery Ward:

Opening price, March 3, 1928 – 132, 8

High price, September 3, 1929 – 466, 5

Percentage gain in 18 months – 251, 4

National Cash Register:

Opening price, March 3, 1928 – 50, 8

High price, September 3, 1929 – 127, 5

Percentage gain in 18 months – 151, 2

Radio Corporation of America:

Opening price, March 3, 1928 – 94, 5

High price, September 3, 1929 – 505

Percentage gain in 18 months – 434, 5

Source :

• Burton G. Malkiel. A Random Walk Down Wall Street, including a life-cycle guide to personal investing. First edition, 1973, by W.W. Norton and company, Inc.