Thomas Fortune Ryan: The Great Opportunist

POLITICS AND BUSINESS

Ryan moved to New York City as a young man and became a stockbroker. He cultivated ties with New York's notorious Tammany Hall political machine, which controlled the local Democratic Party and city government. His Tammany connections, Ryan realized, could be used to build a transportation fiefdom in New York City using the trolley cars that were the main form of public transportation in urban areas in the 1880s and 1890s. Also known as traction railroads, the trolley cars were operated by private businesses that were licensed by the city.

To achieve his ambition, Ryan formed an unlikely partnership with businessman and attorney William C. Whitney. These two men seemed to have little in common — in fact, they would have appeared to be natural adversaries — yet they formed a remarkably successful partnership and friendship.

Ryan came from a poor background and left school early. Whitney, 10 years his senior, came from a well-to-do family in Conway, MA, and graduated from both Harvard and Yale. Ryan was a power broker at Tammany, while Whitney, who came to New York to practice corporate law, was a leader of the anti-Tammany reform wing of the Democratic Party. Indeed, Whitney made his national reputation for his key role in bringing down the notorious William "Boss" Tweed. Ryan made a point of avoiding the limelight, while Whitney achieved prominence as an early supporter of reformist Grover Cleveland. After being elected to the Presidency in 1884, Cleveland rewarded Whitney with the high-profile position of Secretary of the Navy.

Whitney left his Cabinet post in 1889 and returned to New York with his bride, Flora Payne, a daughter of Henry Payne (a partner of John D. Rockefeller). Ryan and Whitney began investing in the trolley car industry independently, but they soon linked up to create a monopoly centered around the Metropolitan Street Railway Co., a holding company that Ryan formed in 1886.

Ryan and Whitney bribed municipal officials with cash and stock to gain licenses (known as "franchises") for the firm and to block others from competing. They channeled so much money to Tammany, and gained such influence to match, that many came to believe that they controlled politics in New York City. While this was an exaggeration, it was clear that the Metropolitan Street Railway Co. and Tammany became mutually dependent on each other.

Ryan organized the Metropolitan Street Railway Co. as a holding company — that is, the holding company owned controlling interests in several operating companies but maintained separate corporate identities. Ryan was one of the first people to realize the potentials of such an organization, and he used it more aggressively than his peers.

By maintaining separate operating corporations, Ryan knew that he could subordinate the interests of one component of the system to another, issue stocks and bonds for various entities, switch the cash flow between them, and create a financial web that was so complicated that outsiders would not be able to penetrate it. Ryan and Whitney was also thought to keep the trolley lines independent of each other so they could charge riders additional fares when they transferred from one line to another.

TRICKS OF THE TRADE

By the 1890s, Ryan and Whitney controlled all of the city's trolley lines. They subsequently expanded into the new field of subway service, forming the Independent Rapid Transit (IRT) subway line. They also took control of the Brooklyn Railroad.

One of their favorite tactics was to accumulate shares of a company they controlled and then raise the dividends in order to inflate the stock price. They would next sell shares at the peak, including short or borrowed shares, and then cut the dividends to profit as the shares plummeted. They repeated this process many times, milking investors of millions of dollars.

Ryan was versatile. He used his trolley car wealth to successfully invest in a range of industries, including mining, banking, and utilities. He became a power on Wall Street and because of his success in many endeavors was known as the "Great Opportunist."

One of the fields that Ryan entered was insurance. The most notable example of this was made possible by a bizarre scandal that fascinated the American public at the dawn of the 20th century.

In 1899, Henry Hyde, the founder of the Equitable Life Insurance Co., died and left 51% of the firm's stock in trust to his son, James Hazen Hyde, to vest when he was 30 years old. At the time, the younger Hyde was a 23-year-old playboy who left the day-to-day operations of the insurance company to its president, James Alexander. More important, Hyde looked to investment banker Jacob Schiff of the Kuhn Loeb firm for guidance about investing the Equitable's $400 million in assets, a remarkable sum at the time. Schiff, in turn, used his influence to back Edward H. Harriman, an extremely able financier who controlled the Union Pacific Railroad. In particular, Schiff used the Equitable's money to support Harriman's partially successful effort to gain control of the Northern Pacific Railroad in 1901.

MISTAKES HAPPEN

In 1905, the young Hyde made the biggest mistake of his life. On January 31, he hosted an elaborate costume party at Sherry's, a famed New York restaurant of the time. Attending guests spent more on their outfits than a typical workingman earned from several years of hard work. In addition, Hyde spent thousands to decorate the restaurant in the style of a ballroom at the royal palace at Versailles, and spent thousands more to hire the Metropolitan Opera's orchestra and other entertainers. He had the windows of the restaurant boarded up for privacy, but in a remarkable example of indiscretion, he invited the press to observe and photograph the affair from a balcony over the ballroom.

The excesses of the party were made to order for the tabloids, which trumpeted news about them on the front page for months, embellishing the tale with more and more exaggerations as the days passed. The resulting public outrage made Hyde one of the most notorious men in the country. He fled in disgrace to France, only returning in 1941 when the Nazi invasion forced him to seek safety in the United States.

Harriman saw this scandal as his chance to gain control of the Equitable's assets. With unfettered access to $400 million, he realized he would be nearly as powerful as J.P. Morgan. Of course, the fact that by snatching control of the firm from young James Hazen Hyde, who was his former backer (via Schiff), he was betraying his benefactor, never entered into Harriman's calculations.

Stung by the betrayal, Hyde became determined that Harriman would not succeed, especially since Harriman was known to spread malicious stories about Hyde in the tabloids. Harriman was also one of the forces behind the decision by the Equitable's board of directors to denounce Hyde for "moral obliqueness."

At this point, Ryan entered the picture. Rather than surrender to his enemies, Hyde agreed to sell out to Ryan for the bargain basement price of $2.5 million, 75% less than the $10 million that Hyde had been offered before the scandal. A provision of the deal, apparently at the insistence of Hyde's advisors at the JP Morgan investment bank, was that control of the Equitable's investments be put under the direction of a trust for five years.

Paul Morton, a successor to Whitney as US Secretary of the Navy, was appointed as the Equitable's new chairman. He observed that Harriman "shook the tree for months and months and Ryan walked off with the plums." However, the fruits of this victory would be limited.

In the following year, Ryan and Whitney sold off their trolley car and New York City railroad interests. Ryan received an estimated $50 million. His timing was perfect, as the organization collapsed during the stock market panic of 1907. In 1910, as the Equitable voting trust was set to expire, Ryan became a target of public outrage because of his underhanded street car activities.

To prevent further controversy, JP Morgan insisted that Ryan sell his shares in the Equitable company, which the Morgan bank bought at Ryan's cost plus 4% annual interest from the date of Ryan's purchase. A similar deal was made with Harriman.

TROLLEYS TO TOBACCO

More successful was Ryan's entry into the tobacco industry. Ryan and Whitney joined with Ryan's brother-in-law, Oliver H. Payne, and others to form the Union Tobacco Co., which was made up of the few major tobacco companies that resisted James Buchanan Duke's control of the industry. Ryan, Whitney, Payne et al. then decided to launch a hostile takeover of Duke's American Tobacco Co., but later decided to cooperate with Duke, creating a holding company that controlled virtually all of the industry until it was broken up by President Theodore Roosevelt as a centerpiece of his trust-busting campaign.

Whitney died in 1907. The death was convenient for Ryan, because whenever the Metropolitan Street Car Co. was accused of illegal activities as a result of the investigations that followed its bankruptcy, all blame was placed on the late Whitney, who was safely beyond the reach of the US courts.

Ryan's first wife died in 1917, and within two weeks he remarried. This outraged his oldest son, Allan, who publicly denounced the marriage, causing a breach in the family.

Allan Ryan turned out to be a successful investor, although on a smaller scale than his father. He gained control of Stutz Motors, an early automobile manufacturer that produced the Stutz Bearcat, a stylish car that became an emblem of the Roaring 1920s.

In 1920, Allan Ryan became outraged when a group of Wall Street operators formed a "bear pool" to attack the Stutz company. A bear pool is a concerted attempt by short sellers to force down the price of a stock through sales of borrowed stock; these sales were usually coordinated with rumors of financial difficulties planted in the media.

Allan decided to get even by staging a short squeeze. This is done by obtaining all or nearly all of the stock of a company, thereby cornering the stock. As the short sellers are legally obligated to deliver the stock upon demand but would be unable to do so because none could be had, they would be at the mercy of the purchaser.

To corner Stutz Motors' stock, the younger Ryan used all of his cash and also went deeply into debt. His plan worked, but then something completely unexpected happened: The New York Stock Exchange (NYSE) came to the rescue of the bear pool, declaring that the short sales were cancelled. The bear pool conspirators were all influential members of the NYSE, while Allan Ryan was not. Simply, the exchange protected its own and could not have cared less about the applicable law.

Allan Ryan sued, but the courts deferred to the exchange. The younger Ryan could not collect from the short sellers but was still obligated to repay his creditors. As a result, he was forced to declare bankruptcy in 1923 and lost an estimated $30 million. Thomas Fortune Ryan did nothing to help his son.

LESSONS LEARNED

Thomas Fortune Ryan's career offers many lessons for investors today.

First, beware of complicated corporate structures. Ryan purposely turned the Metropolitan Street Railway into a convoluted labyrinth with finances that defied understanding. The result was heartache for most individual investors. The same can be said of many more recent corporate meltdowns, such as Enron, Global Crossing, and WorldCom.

Second, stay away from corporations that do not have a history of focusing on shareholder value. Ryan repeatedly manipulated the earnings and dividends of his corporations to snare unsuspecting investors, much like many of the highfliers of the "go-go" stock bubble of the late 1960s and the Internet bubble of the late 1990s.

Third, be flexible. Ryan started the Union Tobacco Co. to oppose the Duke tobacco empire. He realized that a takeover of his competitor was possible and much more lucrative, but then saw that cooperating with Duke was the most profitable avenue. Likewise, Ryan began as a political and business competitor of William C. Whitney, but he saw that together they would make an unbeatable team. In both instances, and in many others, Ryan had the agility of mind to change direction quickly in accordance with the facts as he knew them.

Fourth, always arm yourself with knowledge. Ryan's investments in transportation, tobacco, mining, and banking all had in common that he completely understood the industries and discerned a competitive advantage. When he was uncertain as to the facts, such as when he financially supported the inventor Nicola Tesla, he made only relatively small investments.

Fifth, always be alert for new opportunities. Special situations always arise and can be very profitable for those who are in a position to take advantage. An example is Ryan's investment in the Equitable Life Insurance company, although, as noted, events prevented Ryan from fully exploiting this investment.

Sixth, do not rely on events unfolding as you expect. Ryan thought he would control the Equitable insurance company, but was prevented by the unanticipated public outrage at the collapse of his trolley car organization. As a result, what could have been a huge windfall materialized as only a modest gain. Even more serious was the financial destruction of his son. Allan Ryan lost his entire fortune even though he did everything right. His scheme worked exactly as planned, except that his adversaries had the power to overturn the result.

Whitney said of Thomas Fortune Ryan that he was "the most adroit, suave, and noiseless man" who would "have all the money in the world" if only he lived long enough — but, of course, no one lives forever. When Ryan's end came in 1928, he left an estate worth an estimated $100 million. In his will, he provided for his surviving wife and all of his children except for Allan, who was only left a pair of pearl shirt studs.

James Maccaro is an attorney and freelance writer. He has written articles for Newsday, Ideas on Liberty, the Massachusetts Law Review, and other magazines. He can be reached at jam@juno.com.

SUGGESTED READING

Sobel, Robert [1974]. The Entrepreneurs: Explorations Within The American Business Tradition, Weybright and Talley.

Strouse, Jean [1999]. Morgan: American Financier, Random House.

Current and past articles from Working Money, The Investors' Magazine, can be found at Working-Money.com.