The infamous wall street rivalry: The story of Cornelius Vanderbilt and Daniel Drew

Last week we took you through the story of Jay Gould. This week we are talking about the story of Cornelius Vanderbilt and Daniel Drew.

Let me introduce you to Cornelius Vanderbilt. At 68, he was then the richest man in the country. He was the man behind one of the most talked about stories of Harlem. In fact, this incident made the lay public aware about the alliance between big business and politics. Called the commodore, he hoed potatoes as a young man in Staten Island. He took a loan from his mother and bought a boat, paying back the loan by ferrying passengers around New York harbour.

Stocks in that era went public, like bonds, at a price of $100 a share. The Harlem railroad stock had fallen from a high of 100 to 9. Vanderbilt saw an opportunity, bought control and overhauled the Harlem railroad and soon became profitable and Vanderbilt made a bundle on the stock. Soon Harlem was trading at 83. At this point, conspirators shorted the stock. At the next council meeting, authorities revoked the charter and as a reaction, the stock “felt like a shot partridge.”

The law makers then only had to cover their shorted trades to make a killing, but when they went to cover their shorts, they found there was no available stock. Vanderbilt had preempted their move and bought all the shares. To save their skin, the council sent a negotiating party to Vanderbilt’s office. He turned them away. When they were desperate, he told them to reinstate their charter and they had no choice but to agree. They then reinstated the charter and Vanderbilt finally sold them the Harlem shares they needed at a greatly marked up price.

The second gentleman you must know about is Daniel Drew, a Harlem board member. If Vanderbilt led the master’s class, Drew could be called the guest lecturer. If Vanderbilt taught the section about corners and short squeezes, Drew taught market manipulation. Drew and Vanderbilt were old friends. They first were competitors in the steamboat business. Now friends, they discussed horses and played whist together.

A farmer’s son from New York Drew, as a cattle driver, became infamous for fattening up cows before auction by feeding them salt and letting them gorge on water. He moved downstate in 1830 and kept a tavern. He bought a steamship with his profits. In his seventies, he had lost none of his flair for making money.

He played the market during the week, gambled at the track on Saturday, and, to make up for the sins he committed through the week, sang with the Methodists on Sunday. His specialty was what was termed a bear raid. He’d short a company’s stocks, spread canards about the company and close the position, raking in a profit after the stock crashed thanks to the rumours.

Drew paid attention when word leaked out that Vanderbilt would get his charter. The stock rose and Drew, who was as wealthy as Vanderbilt, sold his Harlem stock at a profit. Then he shorted the stock, and persuaded the lawmakers to do the same. Revoke the permit, he convinced them and the stock will fall again. There would be no second corner of Harlem. The legislature shorted the shares in anticipation of a windfall.

The senate banking committee voted down the charter. Shares in Harlem feel like a shot partridge. Vanderbilt fought back, bought more shares and advanced the price to 200. Confident in their maths, Drew and his Albany friends sold more stock short. But the maths was wrong. Vanderbilt had more reserves than Drew, and advanced the price to $300. This ruined the plotters and Drew ran to Vanderbilt, asking for mercy. Drew reminded him of their friendship of yore. Vanderbilt finally let Drew off the hook and settled the price of the stock at $165. Drew would lose $1 million on this.

Gould had formerly been the CEO of a railroad but he was now back on Wall Street, trading stocks. He spotted opportunity in the largest enterprise in the country, the Erie Railroad. The Erie was a busy railroad, debt made it vulnerable and coupled with the panic of 1857, all the factors swept Erie into bankruptcy. When it emerged from bankruptcy, it had a new set of stockholders led by Daniel Drew.

Drew had joined the board, becoming the railroad’s treasurer and guiding force. He had always wanted to be an insider. He could now just have to buy or sell ahead of corporate news, and if he chose to he could even make the news. He could raise the dividend or slash it on a whim. He could cut freight rates and scare investors. Erie’s price was like a yo-yo in his hands. He even had Erie award contracts to businesses he owned on the side to make extra money. Vanderbilt started buying Erie shares in a bid to gain control.

In this context, Gould entered the picture. He spotted the conflict emerging between Drew and Vanderbilt, and put himself in the middle, aiming to profit regardless of which side won. To get himself elected to the board, Gould bought voting rights from English shareholders. By voting for himself, Gould gained a seat.

As for Drew, he promised Vanderbilt to behave. With the election out of the way, Vanderbilt acted on his cartel plan. He proposed a three way deal with another railroad. A price fixing scheme would propel Central’s profit (owned by Vanderbilt) and its share price. The Commodore advised his friends to buy the stock before it went up and his friends in terms tipped their own friends.

Drew meanwhile set up an investment club, known as pool from the cartel news. Vanderbilt, Gould and other Erie insiders chipped in. Erie was selling for $71. Drew announced the cartel to the public and sent the stock to $79. He took the profits and then he shorted the stock, spreading word that Erie wanted nothing to do with the cartels. The stock naturally fell. He gave Erie another kick by issuing new shares and diluting the value of Erie shares already on the market. The share price fell back to where it started.

The failure of the cartel hurt Central, too. Vanderbilt was furious and vowed to teach Drew a lesson. Thus, began the Erie war that revealed Wall Street at its worst. The Erie war would also introduce Jay Gould and his genius to a national audience.

(To be continued in the next column.)

References:

American Rascal: How Jay Gould Built Wall Street’s Biggest Fortune by Greg Steinmetz, published by Simon & Schuster August 2022

https://en.wikipedia.org/wiki/Jay_Gould

https://www.britannica.com/biography/Jay-Gould

Kirit Manral is a professional trader, and has been running a mentorship program in trading since 2019, with mentees from around the globe. He can be found on Twitter at @KiritManral