The First Harlem Corner (1863)
At the beginning of 1863, Cornelius Vanderbilt purchased enough stock in the Harlem City Railway — from $8 to $9 per share — to have a controlling interest. Cornelius was well known as an iron-fisted but outstanding business manager in both the ocean and rail transportation industries — if you were a stock investor in railways, you would have been very happy to have him managing the firm. He began actively managing the company, and its stock rose to $50 per share. In April 1863, the New York City Council passed an ordinance allowing the Harlem City Railway to build a streetcar system along the length of Broadway. Investors reasoned that the large increase of paying passengers would boost the company’s profits. The stock price soon soared to $75 per share.
Daniel Drew was a major stock manipulator at the time who preferred to attempt to force stock prices down — bull corners — by short-selling a stock. In this case he was trying to short the stock at $75 per share. Drew was a member of the highly corrupt New York City Council for this very reason. He and all of the other council members sold the stock short and then, as council members, they all voted to repeal the Broadway ordinance to force the stock price down.
How The Biggest Crook Was Out Crooked
Vanderbilt got wind of the manipulation scheme and used secret agents to quietly buy up almost all of the remaining floating stock. Since Vanderbilt now owned all of the stock, its price shot up again. When the members of the New York City Council tried to cover their short positions by buying it back, they found out that there was none available for sale because Vanderbilt owned it all. Corne- lius forced them to settle for $179 per share, a loss of $104 per share for the short sellers. Daniel Drew himself lost over a half a million dollars in Vanderbilt’s bear squeeze revenge. The important lesson I want you to take from this is that smart stock investors like Cor- nelius Vanderbilt know when a stock’s price is in the basement, and they buy as much as they can. Notice that, even without dealing with short sellers like Daniel Drew, Cornelius had already set himself up for a profit of $66 per share, or 733%. His profit was actually much higher after he won out control of the corporation!
– Doc Brown
BIO: Doc Brown is a national expert on the stock market. His courses “How to Make a Million Dollar Portfolio from Scratch” at the Oxford Club is a national bestseller. Dr. Brown’s research appears in some of the most prestigious academic journals in the field of finance. See Journal of Financial Research and Financial Management. Scott is an associate professor of finance in the Graduate School of Business at the University of Puerto Rico.
FURTHER READING: Allen, F., and D. Gale, 1992, “Stock Price Manipulation,” Review of Financial Studies, Vol. 5:503-529.
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