Dillon's Pyramid

When the U. S. Senate's Banking & Currency Committee and its Inquisitor Ferdinand Pecora resumed their researches into pre-Crash financial practices of Wall Street last week, the Press and public were apathetic. Nevertheless, the show went on. First to take the stand was Clarence Dillon, smooth, cheery, Texas-born head of the banking house of Dillon, Read & Co., whose father ran a general store in San Angelo and changed his name from Lapowski to Dillon before Clarence was born. Banker Dillon willingly told the Senators how to form investment trusts.

In 1924 Dillon, Read set up U. S. & Foreign Securities Corp. To the public it sold $25,000,000 of preferred stock. The firm bought $5,000,000 of second preferred. There were 1,000,000 shares of common stock. The public got 250,000 shares as a bonus--one share of common with each share of preferred. Dillon, Read got 250,000 shares as a bonus for handling the deal. The remaining 500,000 shares went to Dillon, Read partners for $100,000 or 20-c- a share, which was precisely 20-c- more than it was worth--then. But with 75% of the common Dillon, Read had control.

In the long years of the Coolidge Bull Market, U. S. & Foreign made money fast. So Dillon, Read decided that it would be a good idea to form another trust, particularly if it was pyramided on top of the first. U. S. & Foreign formed U. S. & International Securities and $50,000,000 of preferred of International were sold to the public with a share for share bonus of common. Out of its rich market winnings, Foreign bought $10,000,000 of second preferred and got the remaining 2,000,000 shares of common as its bonus.

Through an original investment of $5,100,000 Dillon, Read thus controlled $90,000,000 of capital. The little wheels ran by the grace of God, but the big wheels ran for Dillon, Read. Since the two preferred stocks had only a fixed claim against assets ($100 a share), the liquidating value of International's common went up much faster than the securities International owned and so did Foreign's. But

Foreign owned most of International's common. Foreign's '"leverage" was thus terrific.

In 1929 Foreign's common hit a high of $72 a share and some of the Dillon, Read partners (but not Clarence Dillon) cashed in. Stock costing originally $24,110 was unloaded for $6,844,000. Return: 28,000%.

All this had a horrid sound, but Wall Street was disposed to be tolerant. The pyramided set-up was no secret; the public which had bought the preferred had had a chance to cash in on their bonus of common at prices that they probably never dreamed they would get. U. S. & Foreign had paid $11,000,000 in dividends on the publicly-owned preferred and was still paying. U. S. & International paid preferred dividends until this year but there was no reason to believe that eventually they would not be resumed.

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