PHILADELPHIA REFLECTIONS
Musings of a Philadelphia Physician who has served the community for six decades

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Investing, Philadelphia Style
Land ownership once was the only practical form of savings, until banking matured in the mid-19th century. Philadelphia took an early lead in what is now called investment and still defines a certain style of it.

Tulips, Jay Cooke, and Google

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Google Logo

The majority of flowers for sale in any flower shop in the world come from Holland. These highly perishable items are air shipped to the florists, and the pricing of flowers must be quickly individualized according to their condition, quality and market variables. This is how it is done: carts of fresh flowers are wheeled into an auction room, priced and sold, and wheeled out to the trucks of distributors, within fifteen minutes of arrival. You can almost hear the airplane engines starting up as they arrive at the auction. The Auction itself is held in a large amphitheater, with every seat equipped with a little computer terminal. The buyers identify themselves on the keyboard, and sit there with a finger poised over the action key. Directly in front of the audience is what looks like a 20 foot clock, marked off with prices around the dial. As the cart of flowers is wheeled in, the pointer on the dial starts to revolve, and the buyers, who have keyed in how many dozen they want to buy, strike the action key as the pointer passes by the price they are willing to pay. The prices go from high to lower, and the pointer keeps moving lower until all of the shipment is bought; sometimes no one bids, and they do it again. The atmosphere is much like a church bingo game. If you think about this Dutch auction process a minute, you see that it extracts the highest price, the last guilder, the collective audience is willing to pay. A search of the subject on Google fails to reveal whether they were using the Dutch auction process when Holland had the famous tulip bulb mania of 1636.

The IPO process this Dutch auction is supposed to replace was brought to its present form by the Philadelphia financier Jay Cooke. As you might expect, all the other tycoons hated Cooke for upsetting their apple cart, and there was much rejoicing when Cooke went bankrupt in the panic of 1873. He didn't die until 1905, and the joke was that his funeral was well attended by people who wanted to be real sure he was dead.

Cooke's opportunity came when the Federal government failed utterly in selling U.S. bonds to finance the Civil War. Cooke persuaded the Secretary of the Treasury (Salmon Chase) to let him sell the bonds for a commission. He was given the right to sell $500 million of the bonds, and by hiring 2500 sub-agents to go beat the bushes, he actually sold $11 million more than that. Oversubscribed. Cooke instructed his agents to forget about the bankers and tycoons, and go to the small towns, instead. Part of the process was to give a patriotic sales pitch to the editor of the local newspaper. Later in the war, Cooke repeated this process for a sale of $830 million more. From that point forward, one of the main things an investment banker does for his client is to provide a distribution network. If the distribution is successful, this process, too, will produce the highest possible price for the seller. If it fails to sell all the goods on the first offering, well, the price has to be reduced to clear the market. The incentives for the investment banker are therefore structured to reward success, and penalize failure. If you can't do it well, don't touch it at all.

Is it any surprise that you've been reading a lot about this coming IPO, for at least six months, in your local paper? By the way, Cooke later invested in a Utah silver mine and got rich again. A pious man, he donated his house in Ogontz as the site of the Ogontz School for Girls.

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What prompted the writing of this?
Posted by: barb   |   Sep 9, 2010 1:12 PM

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