Hetty Green: Wall Street Witch Or Wizard?

THE WITCH OF WALL STREET
Hetty's full name was Henrietta Howland Green, but everyone called her Hetty (it is even the name on her tombstone). She became infamous because of her miserly habits, which were extensively documented in the tabloids of the day and earned her the title of "the Witch of Wall Street." Even though she amassed a fortune estimated at $100 million (worth at least a couple of billion dollars in today's spending power), she lived in a series of small apartments in low-rent working-class neighborhoods. She typically wore worn and outdated clothes, which she avoided washing for as long as she could, and she would carry a container of oatmeal with her, which she would warm on a radiator in order to save on restaurant meals when away from home. Most notoriously, she would present herself at charity wards when she needed medical care in order to not pay doctors' bills. Tragically, she followed this strategy when her son, Ned, injured his leg. When her identity was discovered and treatment was refused, she refused to take the boy to another doctor until the boy's father, from whom Hetty was estranged, was informed of the situation and promptly agreed to foot the bill. But too much time had been wasted and the leg eventually had to be amputated.

Although it is easy to sneer at Hetty Green's methods, an argument can be made that she was also a financial wizard; indeed, her operations in financial markets are reminiscent of tactics used by modern-day hedge funds. Her independence, clear thinking, and steadfastness on matters of finance equipped her for spectacular material success.

QUESTIONABLE BUT EFFECTIVE
One of Hetty's most effective attributes was her contrarian outlook. While this resulted in a brittle personality that was difficult to get along with and generated questionable decisions as they pertained to her personal life, it also produced brilliant financial results.

The essence of contrarian investing is to go against the crowd, which came naturally to Hetty Green. The contrarian outlook was ably summarized by Russell Sage, Hetty's slightly older contemporary, who advised investors to buy summer hats in the winter, when no one wanted them, and to sell them when warm weather returned.

Hetty did just that following Black Thursday, September 18, 1873, when the stock market crashed. The following morning, she appeared on Wall Street and placed large orders, reaping a bonanza when prices soon recovered. She did the same in 1907, when she also underwrote a $1.1 million New York City bond issuance at a time when no one else was interested, essentially serving as a one-woman investment bank.

SOPHISTICATED TACTICS
Another sophisticated hedge fund tactic that she used was risk arbitrage, the strategy of investing in a company in anticipation of a takeover. In 1886, a group of New York investors bought shares in the Georgia Central Railroad, a marginally profitable railroad. The investors recognized that the railroad, which encompassed about 2,000 miles of track, could be made much more profitable if management was improved. In addition, the company also owned a lucrative steamship line that ran between Georgia and New York, which was not reflected in the stock price. By targeting the Georgia Central, the New York investors were acting in the same way as contemporary private equity funds and stood to reap big profits.

The management of the railroad fought back by relying on Southern pride (remember, this was only a couple of decades after the Civil War) and by denouncing the New Yorkers as greedy interlopers. Into this battlefield Hetty Green stepped, accumulating close to 7,000 shares (about 15% of the shares outstanding) at an average price of $70 a share. It was a savvy move, as the stock price soon reached $100.

When it appeared that the proxy vote on the takeover would be close, the New York investors offered Hetty $115 a share, a 15% premium over the market price, but she demanded $125 per share. She was relying on her prediction that they would not risk losing the takeover fight and would pay up. The investors balked but then made a counteroffer: They would pay her price but not until after the election, when she would be paid without regard to the outcome. Hetty agreed but upped her price to $130 on the grounds that she should be paid more if she had to wait for her money, even for a short time. The investors made a counteroffer of $127.50, which Hetty accepted but with the added provision that the investors would have to put up collateral for the full amount. The New York investors learned that Hetty was a tough negotiator, and she made a sizable gain in a short period of time.

Another modern hedge fund strategy that Hetty Green used was "vulture" or reorganization investing, whereby she would purchase at a deep discount the secured bonds of a troubled company in the anticipation that she would profit after the firm emerged from bankruptcy. Under US bankruptcy law, then as now, stockholders are wiped out when a corporation goes under, but the secured bondholders have a claim against the firm's assets and their assent is needed for a reorganization.

In 1887, Hetty bought over a million dollars' worth of bonds in the Houston and Texas Central Railroad, a poorly run and rickety operation. When railroad titan Collis Huntington took control of the firm and attempted to intimidate bondholders into accepting bonds worth much less than their purchase price, he did not anticipate having to deal with the witch of Wall Street. She knew her bonds were secured by first mortgages on the railroad's property, and that Huntington lusted after the operation because he wanted to join it with his own Central Pacific empire.

In the fight between Huntington and Green, the proverbial unstoppable force met the unmovable object. Hetty refused to give her assent to the railroad reorganization for nearly another year, keeping Huntington's takeover plans in limbo and playing havoc with the stock prices of both the Central Pacific and the Houston and Texas Central, until Huntington satisfied her terms. Huntington was not stopped, but he was certainly diverted, and Hetty Green made a handsome profit.

After a long and profitable life, Hetty died on July 3, 1916, with her son, Ned, at her side. He inherited the bulk of her fortune and forged his own successful career as a railroad executive and financier, but he lived in style, building himself a palatial home and enjoying the best that money could buy.