Brokers' Profits

There was little of importance left for Representatives to say last week when the Stock Exchange Control Bill came up for passage in the House. Few members understood the measure's technicalities and fewer still cared to. Republicans made more of its past than its future. Illinois' Britten charged that it was written by "the scarlet fever boys in the little red house in Georgetown"--a dig at Thomas Corcoran and Benjamin Victor Cohen, New Deal legalites who keep bachelor hall at $50 each per month in an old brick house in Washington's suburb. The whole country, said this hard-bitten Congressman, was whispering about these "radicals." Shouted Ohio's Truax: "They're not radical enough!" Stolid Representative Mapes of the House Interstate & Foreign Commerce Committee, which reported the bill, doggedly claimed that it was "the work of the committee and no one else." Congressman Pettengill interrupted to say that the New York Stock Exchange "is a sort of financial Dr. Jekyll and Mr. Hyde; we want to kill the jackal but save the hide." When the House passed (280-to-84) the bill and sent it to the Senate, everyone knew that the final draft, with promised revisions, would ultimately be written in conference. Only Ferdinand Pecora, Senate Banking & Currency Committee counsel, pretended to believe that the opponents of stockmarket regulation still had a chance of working their will against the overwhelming sentiment of Congress and country. Therefore, as if to wither them with one last blast and put the control bill over the Congressional hump, he flung out to the Press what the New York Times called "an armful of raw and bleeding figures." The figures were an unanalyzed summary of brokers' profits since 1927. Counsel Pecora knows how to give a sinister twist to any stated sum, particularly if it runs into nine or ten figures, and this time in blackest headlines he declared that New York Stock Exchange firms and members operating as individuals had made $906,000,000--"despite Depression." His report was based on answers to a questionnaire covering brokers' operations in the two fat years 1928 and 1929, the three lean years of 1930, 1931 and 1932, and the first eight months of 1933 which included the inflation boom. No less than $733,000,000 has been made in the last two years of the Bull Market when stock trading was a major U. S. industry. In 1930 total profits dropped to $71,000,000. Deficits of $2,109,000 in 1931 and $5,519,000 in 1932 were followed by a $109,000,000 gain in the first two-thirds of last year. Mr. Pecora's figures were out of focus because not all brokers answered his questionnaire in the same way. Kuhn, Loeb & Co. and the House of Morgan reported only their modest income from commissions, not their underwriting and banking income. Lehman Brothers, which is primarily a banking house, reported $12,000,000 profits for 1928 and 1929. Obviously, the bulk of these profits had nothing to do with the fact that the firm has a seat on the Stock Exchange. In the same manner Goldman, Sachs & Co. reported a profit of $6,681,000 in 1928, $7,900,000 in 1929, only to be followed by a thundering $9,000,000 loss in 1930. Mr. Pecora failed to compare brokers' profits to brokers' capital or total volume of business. No one knows the huge total of capital invested in brokerage firms but the total volume of business in the five years and eight months was approximately $292,000,000,000--a figure not far from the total national wealth. On this great turnover brokers' profits amounted to approximately three-tenths of 1%. Mr. Pecora also failed to mention the fact that State and Federal transfer taxes during the period yielded more than $360,000,000, an amount equal to about 40% of brokers' total profits. Boiling mad at Mr. Pecora's tactics, President Richard Whitney of the New York Stock Exchange roundly damned the report as misleading propaganda in favor of the Stock Exchange Bill. But in his haste to expose Mr. Pecora's errors, President Whitney, too, fumbled his statistics. Referring to brokers' capital losses, which were not included in the report, he declared that "one single item would wipe out" the total operating profit for all years except 1928. What Mr. Whitney had done was to calculate the decline in the total value of 1,375 seats on the Stock Exchange from $625,000 in 1929 to $130,000, the present value. This calculation assumed that each & every member paid the all-time high for his seat, which by no means all had done. Despite sloppy statistical work, Mr. Pecora's report afforded the first sweeping view of a big industry whose operations have always been smothered in the secrecy of partnerships. His report showed that Stock Exchange members who handle about 70% of the total U. S. brokerage business, took in $1,502,000,000 in commissions in five and two-thirds years. Next in importance was interest, footing up to $320,000,000 and largely derived from charging customers a slightly higher rate on margin accounts than brokers pay banks. Third was trading profits--$237,000,000. Miscellaneous income was $92,000,000. From this gross income of $2,153,000,000, $1,262,000,000 was deducted for expenses. Another $102,000,000 was dropped in bad accounts. Including the six odd-lot houses which handle orders for less than 100 shares for other brokers, Stock Exchange houses cleared $833,000,000 for their 3,500 partners. The average profit per partner was about $40,000 per year. Stock Exchange members operating as individuals cleared $72,000,000 and had the distinction of making a profit in each year. There are supposed to be over 10,000,000 security owners in the U. S. but in 1929 only 1,371,000 had accounts with Stock Exchange firms and 59% of them traded for cash. In 1933 the army of U. S. speculators in securities was still more than 1,000,000 and 58% of them still traded for cash.

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