"Money never sleeps" – The Wall Street movie
Wall Street carries a long way down history.
From a boom in the stock exchange to crashes in the stock exchange, it has faced both the circumstances.
Wall Street has seen people coming into big personalities, to people becoming no-one.
From rags to riches and from riches to rag, Wall Street has undergone several emotions.
Investment in the stock market became a pool of opportunities for investors to become wealthy.
And thus, many did.
But have you ever thought that how did the concept of investment start?
Or, who had initiated the investment idea?
Well, investment started sowing its seeds in Ancient Greece.
Interesting. Isn't it?
The ship captains at that time used to offer profits to those people who would risk their life for a trading voyage.
And, from such instances, the process of gambling began. It was like the ship might return with riches, or might not return at all.
After them, Romans too sold the stock for huge construction.
Investing had taken a major leap in Holland in the 1600s. A company named, The Dutch East India Company, required capital for the International Trade.
Now, since they required capital, people bought a stake in the company.
They started investing in the company apart from a single trading voyage.
This led to wide speculations because the investors could sell and buy their shares to one another over the time.
WALL STREET IS BORN
Started as a habit of gambling, and later it became the arena for investment, WALL STREET has impacted a lot of people.
IN Wall Street, lives have been made and lives have been destroyed.
But the questions that arise are,
How did Wall Street start?
Who started the Wall Street, is it one person or a bunch of people?
IS Wall Street a lane or a building?
Well, let's start from the beginning.
WALL STREET got its name when New York was just a tiny colonial outpost.
Around 1653, pilgrims built a wall to keep out the Indians. As they had issues with Indians.
But later, around 100 years later, this wall was gone.
But the path that had run beside it, had become the heart of New York's commerce and society.
Earlier this street was a place where the auction for slaves and public humiliation was held
In 1789, George Washington was sworn as the 1st President of US Wall Street.
Here, merchants would gather beneath a Buttonwood tree to auction on stocks in Banks and mines, making a commission on every sale.
This open-air market lasted until 1792 when 24 merchants decided to sign a document known as the BUTTONWOOD AGREEMENT.
Now, what was this Buttonwood Agreement?
This pact was an effort, made to avoid the government regulations of street auctions.
This pact also restricted the entry of any new-comers in this business.
And thus, this led to the formation of NEW YORK STOCK EXCHANGE in 17th May 1792 on the famous WALL STREET.
Brokers used to meet inside the Tontine's Coffee House for 2 formal auctions, per day.
In here, the public was not allowed. If a person wanted to buy or sell their stocks, they had to hire a broker to do it.
According to Robert Sobel, a business history professor,
" This did one thing, which is less involvement of the public in trading, due to which public had the access of very less information, of what was going on in the open auction system."
However, these indoor sections, allowed brokers to regulate themselves to avoid fraud and abuse.
Only respectable stocks were being traded and sales were also recorded.
These procedures led to the creation of respectability in the air.
And, thus Wall Street had now gotten its motive. And by now, it was ready to be filled with successful people.
PLAYERS PREPARING THEMSELVES TO PLAY
During the initial auctions, the prices quoted for investments were 1/8th of a dollar.
Only 30 companies were traded inside the exchange.
Investments in Banks, Cargo's, Insurance companies and construction firms, were done by only a handful of fearless investors.
Many people feared to invest in stocks, as they believed that what if the company goes bankrupt? Then, the stock owners could lose everything.
Stocks were invested by two kinds of people,
- Outright Speculators.
-People who try to take control of the company.
Now, as there was an air of respectability going on, this led to a struggle of ‘limited successes.
Due to which, the trading of less reputed stocks started on the street, among the brokers who weren't allowed to join the exchange.
Thus, this led to disputes among the brokers.
Here, the disputes were settled with fists.
Apart from all these disputes and problems, big changes were stored for Wall Street.
Wall Street was just at its beginning space, as more changes had to be crossed while being in this street.
WALL STREET ROSE ITS BULL AND BEAR
Many of you must have heard about the Bull and Bear market?
Or some of you might get curious to know, that what do these animals represent in the market?
Well, going back to its history, many legends have described that bulls and bear have found their way to Wall Street.
The most dramatic story involves a struggle of bullfights, which happened in the Old Wild West.
It stated that "a thousand-pound grizzly would be chained to a stake in the bullfight arena. And, then a bull would charge. The Bull would win the contest by thrusting him upwards with his horns. And, the Bear could survive by wrestling the Bull down, breaking its neck".
On Wall Street, the Bulls indicated the traders who expected stock prices to rise.
And, the Bears were the Traders who anticipated drops in the market.
Robert Sobel says, "In those days if you are on Wall Street, you meant to have a dark side. Wall Street was no place for amateurs".
WICKED WITCH TURNED OUT TO BE A BILLIONAIRE
Apart from the presence of all bulls, one colorful figure of a bull, known as Hetty Green.
She became the World's Richest Women by investing in Railroads.
With her severe appearance and misery character, she earned a title,
"THE WITCH OF THE WALL STREET".
American Railroad, that time, was the most ambitious engineering projects in history.
As for building a railroad a lot of capital was required.
And, at that point, the stock market became extremely important.
She was also among America's first value investors.
With struggles in family, and people judging her based on her appearance, but still didn't take care, and proved everyone being the richest women, with a net worth of $200 million.
Investing in a railroad made her happy. As she liked to buy things which are cheap at first.
She said, "There is no secret to fortune making, all you have to do is buy cheap and sell deer back to the thrift with shrewdness and be persistent".
The greatest strategy used, according to her was,
"I buy when things are low and nobody wants them. I keep them until they go up and people are crazy to get them. That is, I believe, the secret of all successful business".
A DEVIL IN THE WALL STREET
Bulls and Bears made the stock market as a rambunctious place.
With the competition and disputes among the bull and the bear, these struggles made Wall Street a dangerous place.
Along with this, a notorious bear came to power.
He was the former store clerk, who became the markets most detested raider.
He was known as the most famous speculators on Wall Street.
As he always gave money and himself as the priority, he never thought of the companies.
He was sort of a devil in the Wall Street, and was commonly known as the ‘MEPHISTOPHELES', meaning ‘devil'.
Being the manipulator at its best, he earned his seats among the kings of the Wall Street.
He was the master of ‘short-sale'. This was a technique to make money when the stock prices were down.
He used to persuade unwitting investors to loan him their shares at a smaller rate in the market. Then he would immediately sell them at the exchange.
Later, he used to publish vicious rumors about the company in the newspaper, to drive its stock price down.
With such manipulation and devilry habits, he was also known as the ‘robber baron".
This way, he became America's shrewdest businessman.
INVENTIONS LEADING TO THE GROWTH OF STOCK EXCHANGE IN WALL STREET
As it is said, that some instances come in our life, which not only changes our life but revolutionizes it. And, is this what happens to Wall Street
1832, saw the revolutionization of the Stock Exchange with just a simple device.
The Telegraph was considered as an invention sent by God. As in the world of finance, where information is power, it could travel the news to distant cities.
This invention was made by Samuel Morse.
With the coming of this invention, the brokers got quite interested in this.
And, seeing their interest, he opened up a demonstration in an office nearby the stock exchange, and he charged brokers 25 cents to see this invention.
The coming of the Telegraph turned New York into America's financial capital.
As, now with the help of this, dozens of stock exchanges from all over the company initiated.
Another major invention, THE STOCK TICKER, was made in 1867 by Edward A. Calahan.
This ticker printed the telegraph signals, onto a narrow paper tape. This ticker became so useful, as, for the first time, people got to know what was happening.
Another milestone was covered on July 8th 1889.
This was the issuance of THE WALL STREET JOURNAL.
Charles Dow and Edward Jones had raised the standard of financial journalism with their new publication.
The price was 2 cents.
The most popular feature of this journal was that it provided a daily index of 12 stocks, known as the DOW JONES INDUSTRIAL AVERAGE.
So, by analyzing the performances of key companies like the American Sugar, US rubber, General Electrics, Dow and Jones became the barometer of stock market updates.
To be precise, the invention of the telegraph, the stock ticker and the Wall street journal created a powerful impact on the world of stocks and to the general public.
J.P MORGON BILLIONAIRE MAN OF STEEL
Earlier, in America, there was this man, who was known as the most powerful man.
He was a son of a prominent banker, who made his mark in history.
He was the undisputed king of corporate line, he is none other than, J.PIERPOINT MORGON.
Morgan had combined hundreds and hundreds of independent railroads and factories into a coast to coast monopolies. He also co-founded a banking firm, called the J.P Morgan & Co, in 1871.
1901 was considered as his greatest achievement when he managed 9 companies to join forces and become US STEEL.
US STEEL was the world's 1st billion-dollar corporation. Its stock was so valuable that it boosted the Dow Jones average by 500%.
The best thing about Morgan was that he was never into gambling.
He always made decisions based to protect its customers. Due to which, he insisted on managing every company he created.
Morgan controlled 341 seats on the Boards of more than 100 companies.
Investors respected him a lot.
He also expanded his business into many other sectors in the financial and industrial worlds. He helped in providing financial backing to coal mines, insurance, as well as the communications industries.
Morgan was also an ardent art collector and accumulated a large collection of pictures, paintings.
Therefore, he had control over everything, but sadly, not on his death.
Thus, he died in 1913, due to a silent stroke.
Since he was such a respectable person and he had done so much for people, that he received a funeral befitting royalty.
Also, the stock exchange was closed for 2 hours as his hearse.
THE RISE IN 1920
With the victory in World War 1, 1920 became an amazing year for America.
As factories were booming, families had enough money to burn, everyone was celebrating the victory.
Also, The New York Stock Exchange is a private institution looked more impressive than any government agencies.
This happened because the exchange had torn out its building to construct a larger one.
This was because they wanted to build an image of strength.
New trading floors was enormous.
Each stock was now traded at a particular spot called the ‘post'.
Auctioneers who were called specialist controlled the bidding.
New changes were being made in a good manner.
When a sale was made, the clerk would rush the details of the transaction by a pneumatic tube, to the ticker tape room.
Here, the typists would relay the news to the world.
Apart from this, 1920 saw the rise of cars.
This led to popularity in the automobile stocks.
Everything was going well. People were happy. Money was at its height.
But as they say, you never know when a bad time can come.
And, so the initiation of bad times was about to start in America.
THE GREAT DEPRESSION: 1929
Success comes to those who taste both the medicines of happiness and sorrow.
And, so did America.
Investors started buying stocks on credit. There was a rapid expansion in the stock market.
Production was declined and unemployment was rising. Stocks prices were increasing like anything, than its actual price.
Wages were low. Consumer debt was proliferating. The agriculture sector was struggling. Factory production turned slow.
But, stock prices were still rising and rising. Margin call was reaching at its peak.
The concept of "buying on margin" allowed people with little financial acumen to borrow money from their stockbroker and put down as little as 10 per cent of the share value.
On October 24th 1929, thousands of investors failed to come up with the necessary cash, by the time their brokers entered the exchange.
When the opening bell rang at 10 am, the liquidation sale began.
It started as a busy day, but later, it became worse and worse.
Suddenly, everyone wanted to sell, and no one wanted to buy.
Credit bin that had built up the market was suddenly, eating it up like a virus.
The beginning of selling overpriced stocks led to the Stock market crash, with making that day as ‘BLACK THURSDAY'.
According to sources, 12.9 million shares were traded that day. SO many shares were sold so quickly that the stock ticker was running 4 hours slow.
5days later, 29th October 1929 or the BLACK TUESDAY, created another wave of panic which swept in the Wall Street.
16 million shares were traded that day. Millions of shares which were traded were worthless.
And, investors who bought stocks "on margin" were completely wiped out.
People who had their whole life savings upon Wall Street vanished…
A person went down from $50,000 to $15,000 to 0. Panic was frightened among the people.
And thus, the overconfident market faced its circumstances, leading to a global panic….
ROOSEVELT BEING THE RESCUER
"When you come to the end of a rope, tie a knot and hang on"- Franklin d Roosevelt.
Roosevelt was hope in the darkness.
Being the elected President in 1932, Franklin D Roosevelt, brought enormous changes in the economy of America.
"This nation will endure itself, there would be a strict supervision of banking, credit and investment. There must be end with speculation of other people's money". –Roosevelt.
On his 2nd day, he ordered to close the NYSE for a week. And, he further made some rules and regulations-
- Banks could no longer gamble on stocks.
- Brokers must act responsibly, by treating their clients' money as their own.
- Corporates must file annual financial reports with the government.
- He also created the Securities and Exchange Commission (SEC), to enforce these new rules. Joseph Kennedy was made its 1st chairman.
1930s-1940s, newly emerged market became a sleepy place, as public intended to stay away from Wall Street.
World War II brought a historic milestone to Wall Street.
For instance, women who had earlier worked on the backroom now appeared on the stock exchange floor.
This led to the ending of the ‘male-only tradition' which was there for the past 150years.
As American investors return to the stocks, the market was finally recovering.
In 1954, Dow Jones Industrial Average broke its earlier record of 300.
Apart from all this, the biggest innovation also led to its path in America.
An economist, of the University of Chicago, had developed a theory called
"The Stock Diversification'.
This meant that "investors should buy a wide range of stocks to reduce the risk of bankruptcy when a single stock goes bad".
This concept became the basic tenant of Modern Investment.
PAPER PANIC IN the 1960s and the RISE OF COMPUTERS
A paper panic was a different kind of panic which hit Wall Street in the 1960s.
Especially for the brokerage companies, the paper crunch was terrifying.
The rise of pension plans and mutual funds pushed the trading volume to 11 million shares per day.
Clerks were facing difficulty in managing the balance books each night. Due to this reason, On Wednesdays, the NYSE started to close.
SO that, the clerks could catch up.
1968, paper crunch touched down a devastating cash flow crisis. This led to 100 brokerage companies to bankruptcy.
The paper crunch was somehow solved by the coming of the computers. As computers could document the stock transactions at the speed of light.
Since the 1970s computers have assisted brokers with every aspect of a secure business.
But, later, a dark side of the computers was also noted.
Brokers believed that they were largely responsible for a single-day drop in the stock market history.
But again, computers helped a lot as managing papers of various people was becoming difficult.
As some might get lost, some might get robbed, but the data in computers had its back.
NASDAQ- THE SECOND EMERGING STOCK MARKET
The computer in Connecticut has brought the marketplace for stocks to a historical crossroads.
This establishment was the NASDAQ (National Association of Securities Dealers Automated Quotations).
This was set up in 1971.
NASDAQ was considered as the quick and inexpensive ways to trade, without the need for face to face encounters.
Unlike the traditional auctioning held in NYSE, they are the dealers market.
They linked hundreds of brokerage companies worldwide.
The functioning of the NASDAQ is quite simple. As, in the NASDAQ screen, there are two columns which are displayed.
Now, for every stock, there was a list of brokers who are willing to buy share price and the brokers who are trying to sell the stock price.
As technology was changing, a need for a centralized market, as needed.
This was fulfilled just by sitting at one place and looking at all information at the computer screens.
It was believed that ‘whether the future belongs to the computers or traditional traders or the combination of both, stocks seemed destined to continue their central role in the global economy'….
ARRIVAL OF BLACK MONDAY: 1987
Wall Street has faced no shortage of crashes in the stock market.
With the relief getting from the 1929 crash, and from stock market emerging itself again in the economy, another crash was on its way and had landed on Wall Street again.
October 19th 1987, is known as the ‘Black Monday' of the history. It a day which had created millions of losses.
On this day, The Dow Jones Industrial Average shed 22% of value in just a single trading session.
The main problem with this crash was that there were no warning signs. Unlike the 1929 crash which had made the crash obvious.
There were different beliefs and ideologies regarding this crash.
Many believed that this crash happened because of the ‘declining dollar'.
In this scenario, the federal government released news of a widening trade deficit, which roiled financial markets and weakened the U.S. dollar. This led to hiking of interest rates.
The news by itself wasn't huge, but it was enough to get the attention of sellers, as they stormed the stock market looking to unload shares on Friday, Oct. 16
(the Dow was down 4.6% for the day - a precursor to the larger decline on Black Monday.)
Critics also pointed at ‘portfolio insurance' as a cause. This type of investment involved the trading of risky derivatives and options, which led to further declines in the market.
Another target of criticism was faced by computerized trading, more formally known as "program trading" by Wall Street insiders.
Program trading was largely used by big institutional investment firms.
It allowed huge stock trade orders to be executed in a specific market. With big stock trades - most of the 'sell' orders - exploded on the market during a period of major chaos.
And, thus Black Monday only grew more threatening.
Many investors did get benefit from this. Such as Warren Buffet, who bought $1 billion shares of Coca-Cola in 1988.
This was because, the crash of 1987, created attractive valuations. All types of stocks were sold off with little regard to the fundamentals.
But, as compared to the 1929 crash, it did not have that much impact. As it almost took 25 years to get recovery from the 1929 crash.
THE EMERGENCE OF THE WOLF IN THE STREET.
"The wolf of the street" is a movie which almost everyone has seen. As it was led by Leonardo DiCaprio.
If you haven't seen it. Then let’s present you with, the real-life story of Jordan Belfort who considered himself as THE WOLF OF THE STREET.
From his childhood, Jordan was always business-minded.
He had set up many businesses, For instance, his initial business was of ‘shaved- ice'. In which he earned $20,000.
Later, he started with the business of Meat, Beef and Fish. Which initially emerged but later got failed.
He was an amazing salesperson.
After working in a brokerage company, which was closed due to the crash of 1987, he established his firm.
Stratton Oakmont, 1989 was established by him. Jordon was the biggest manipulator, the street has ever faced.
He used to earn millions and millions doing various scams.
The main manipulation he did, was to the penny stocks who were traded over the counter.
You must be wondering what are penny stocks?
Well, penny stocks are small companies, whose failure rate is high.
Whichever penny stocks he used to manipulate, were not shown on the stock exchange, as they were traded over the counter.
He and his sales team used to buy these penny stocks at a low price.
Then they used to provide false information about the companies.
For instance stating that this company will grow in future, investing in this company will solve your financial problems, this company will provide 2-3% growth etc.
Well, all this was false. They did this promotion of those companies who were shutting off.
With such intrinsic strategies, he was able to earn millions. Due to which he threw parties, bought bungalows, luxury sports car etc.
He also kept only young staff, as he said, "Give them to me young, hungry and stupid, and in no time, I will make them rich".
Later, due to money laundering and securities fraud, he was sentenced to prison for 4 years. But covered only 22 months in jail.
After coming out of jail, he wrote a book on his life story, the wolf of Wall Street. This was later converted into a movie.
THE COMING OF THE GREAT RECESSION: 2008.
After the 1987 crash, everything was again going smooth.
In 1996, there was a Dot-Com boom going on, in which the price of technology companies was rising.
But later in 2001-2002, its prices started to decrease enormously.
Later the real estate prices were booming. Us government started encouraging people to buy houses.
As the interest rates were low people started buying houses while taking loans from banks. Eventually, this led to increasing demands in availing loans for buying houses.
This led to the focus of investors into the real estate. They started investing in real estates as they found profit in it. They considered it a low risk and high return investment.
Investment banks also wanted to earn profits. Investment banks were mediators between the banks and the investors.
They started buying loans from banks and combined these house loans into a bundle of a complex derivative product called the CDO or Collateralized Debt Obligation.
Later they gained AAA ratings, from the Credit rating agency, which made seen that the CDO is safe.
When giving loans to people, banks normally get a piece of in-depth information about the person availing it, like their credit history, or their income source.
But this later stopped. As the demand for the CDO's increased, investment banks started approaching banks for more house loan risks.
Due to which bank started provided housing loans, to those people who did not match the limitations of the bank earlier.
Knowing the fact that they might default, banks took this risk to avail profits.
Hence, these loans were known as sub-prime loans.
The process was like, the banks provide loan risks to the investment bank and then they provided it further to investors.
From 2000-2007, investment banks sold CDO for billion and billion dollars and earned the same.
AIG, American International Group, is the largest insurance company.
They also started giving insurance in CDO's by forming a product called CDS or Credit Default Swap.
The CDO investors bought CDS to get protection from their losses.
Banks provided house loans based on Adjustable-rates. Which states that initially the interest will be less but might be high in a few years.
Bank didn't provide any information regarding this to the sub-prime group which led to heavy interest rate and high EMIs in the coming years.
This led to the Defaults in the repayment of the loan.
Due to which, banks initially started selling these houses to recover the loan money. But, later this problem grew a lot.
2007-2008, the interest rates were also hiked up to 5%. After setting up auctions for these houses, then also there were no buyers.
Due to increasing defaults, banks received no money.
CDO value was reduced to 0.
CDO investors lost all their money.
AIG lost around $99 billion.
$450 billion loss was faced by both the banks and the investment banks.
One such example of Investment Bank was Lehman Brothers, which was bankrupted, leading to unemployment of 25,000 of its workers.
Countries linked with the US had faced major losses. Some countries even went bankrupt.
There was a global recession…
Wall Street has faced so many challenges coming to its ways. With so many crashes, it still managed to stay still.
You may try to shake the wall, but you won't be able to break its foundation….
And the legacy of Wall Street continues….