Spreading the Losses

The Wall Street philosophy of caveat emptor, that every man's losses are his own misfortune, received an important qualification last week. The New York Stock Exchange decided to make good to 20,000 hapless investors the mistake of one of the members of its club. After four feverish days of consultation, Exchange officials and a group of top brokers agreed to set up a $12 million fund to pay back almost immediately the losses suffered by the customers of Ira Haupt & Co., which was suspended from trading after its biggest commodity customer went bankrupt, leaving the firm with debts that by week's end had mounted to more than $24 million (TIME, Nov. 29). In so doing, Wall Street set a precedent of considerable importance: while it takes no more responsibility than it ever did for a customer who loses money on his own, it decided that the Exchange cannot allow him to lose through the peccadilloes or mistakes of a member firm.*

Missing Oil. The number of people and companies caught up in the commodity scandal seemed to grow almost daily. Four major New York banks Chase Manhattan, First National City, Manufacturers Hanover Trust, Morgan Guaranty--and 14 other banks are stuck with more than $24 million in bad loans to Haupt, have agreed not to try to collect until customers who lost their stock because Haupt used it to get loans are paid off. Haupt's bankrupt commodity customer, Allied Crude Vegetable Oil Refining Corp., wove such a web of tangled credit deals (offering as collateral for loans stocks of vegetable oil that now cannot be found) that losses may total more than $150 million. Giant American Express Co. could face heavy losses because it operates warehouse facilities in which missing oil was supposedly stored, and issued receipts for it. Also locked into commodity deals with Allied that stand to cost them money were Chicago's Walter E. Heller & Co., A. E. Staley Manufacturing Co. (starch), Isbrandtsen & Co., and 13 other firms.

Since the death last summer of 74-year-old Ira Haupt, who founded the brokerage house 36 years ago, Haupt's new, young managers (the senior partner is 36) have been eagerly trying to expand business. They grabbed at the chance to handle Allied's trading after it had been judged too risky by another broker. Allied President Anthony DeAngelis, out to make a killing in cottonseed and soybean oil futures, almost cornered the futures market; but he built on such a fragile debt structure--with the low-margin help of Haupt that a slight drop in price was enough to start the avalanche.

Looking Ahead. In one of the first steps of Haupt's liquidation by the Stock Exchange, Bache & Co. last week bought three of Haupt's Manhattan branch offices and another in Denver, and is negotiating for more of Haupt's 14 branch offices. It was the first liquidation of any member firm by the Stock Exchange, and Wall Street did not like the feel of it. The Street is already looking ahead to minimize the chance of any future failures among brokerage houses. At week's end the Exchange appointed two top-level committees, one to study how the Exchange might change its rules to protect customers better against commodity speculation, and the other to suggest how it could recover the money it coughed up to cover Haupt's customers--possibly by assessing each of 1,366 members about $9,000. Another idea being seriously considered is the setting up of a private version for investors of the kind of federal insurance protection that bank depositors now enjoy.

*In a case involving outright fraud, which is not so far involved in the Haupt case, the Exchange in 1960 reimbursed $797000 to customers of Boston's DuPont-Homsey & Co.

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