Paper Losses, Real Losses

PrintPrintEmailEmail

During one week last summer the stock market suddenly soured on technology stocks. Microsoft’s William S. Gates saw his fortune decline by an awesome 2.4 billion dollars. To get some idea of just how much money that is, consider that if a person had a net worth that large, he or she would rank about number twenty-two on the Forbes Four Hundred List, right along- side the likes or Ross Perot. Of course, Bill Gates is not number twenty-two; he is number one, so the wolves remain many billions of dollars away from his front door. Still, that is probably some sort of record for short-term paper losses.

For short-term real losses, however, the record is almost certainly held by William C. Durant. Between April and November 1920 he lost ninety million dollars, well over a billion in today’s money. Had there been a Forbes list then, he would have gone from near the top to the edge of bankruptcy in less than eight months. Ironically he suffered these real losses in a hopeless attempt to prevent mere paper ones.

Of all the major figures in the history of the American automobile industry, none, not even Henry Ford, compares with Durant for the sheer drama of his career. (The best full-length biography of him, The Dream Maker , is by one of my colleagues in the front of this magazine, Bernard A. Weisberger.) Durant would scale the heights of capitalism by creating General Motors. But he would end his days running a bowling alley.

Durant was born in Boston in 1861 of old New England stock. His maternal grandfather had moved to Michigan, prospered mightily in the lumber trade, and served as the mayor of Flint and as Michigan’s governor. When Durant’s parents’ marriage collapsed- after his father bankrupted himself in the wild stock market of the late 1860s —his mother moved back to Flint.

Leaving high school without bothering to graduate, Durant was soon working for a local cigar manufacturer as a salesman. When he returned from his first sales trip, his boss was furious to learn that Durant had run up travel expenses of $8.15 in only two days. The employer, however, decided not to make an issue of it when Durant turned in orders for no fewer than twenty-two thousand cigars.

While many of his contemporaries were still in school, Durant had already found the wellspring of his genius. He was a natural-born salesman. His philosophy was simple: “Let the customer sell himself,” he said. “Look for a self-seller. If you cannot find one, make one.”

Following his own advice, he quickly found a self-seller and decided to make it. When he was twenty-four, a friend offered him a lift in his new cart. Durant discovered that the cart did not bounce the passengers around the way most sulkies did. He inspected it and saw that the reason was a unique suspension system.

Durant recognized a winner immediately. He tracked down the manufacturer and, for fifteen hundred dollars he didn’t yet have, bought the patent rights and took in a partner to provide working capital. The company was an immediate success, and by 1900 Durant-Dort was the largest carriage company in the United States.

Durant was a very rich man, but the carriage business was beginning to bore him. He needed new challenges. In 1900 it was still possible to believe in a prosperous future for the horse-drawn carriage business, but Durant noticed that when he drove an automobile around Flint, he collected a fascinated crowd wherever he stopped. Durant had a self-seller; he just had to make it.

Automobiles had been around since the early 1890s. But they remained largely the product of back-yard tinkerers, most of whom had no conception of what was needed to make a successful automobile business. Durant did: capital and lots of it. He quickly proved as able at selling stock as he was at selling everything else.

In 1904 Durant took over management of the Buick Motor Company, which had moved to Flint the previous year and was in financial extremis. He displayed a model at the New York Automobile Show that year and immediately took orders for 1,108 cars, despite the fact that this was more than twenty-five times the total number of cars the company had manufactured since its inception. But Durant’s unquenchable optimism led him on, this time to glory. He raised capital by selling new stock to everyone with money in Flint, many of them his friends, relations, and employees. He would always feel a personal responsibility to those who held stock in his companies, an emotion that would one day cost him dearly indeed.

Buick produced 725 cars in 1905, 1,400 in 1906, and 4,641 in 1907. In 1908 Buick, with a production of 8,820, was the number one car company in the country, outselling the second and third companies—Ford and Cadillac—combined.

But Durant was already thinking bigger still. He realized that the future of the automobile business lay in ever-larger size. On September 16, 1908, he founded General Motors, which soon owned or controlled not only Buick but Oldsmobile, Cadillac, Oakland (now Pontiac), and numerous smaller manufacturers as well.

Durant expanded not only horizontally but vertically, buying suppliers of glass, paint, sheet metal, spark plugs, lamps, and numerous other parts that go into making an automobile. Unfortunately he was much better at selling than at buying. Many of these purchases proved ill advised or overpriced, and some were total losses, eating up the company’s working capital. In 1910 General Motors, now vastly rich in assets, had to be rescued from a cash crunch by a syndicate of bankers. Durant lost control to a voting trust for five years, the life of the loan.

The bankers were as unimaginative and conservative as Durant was imaginative and reckless. Nonetheless they much strengthened the company financially by rationalizing its structure and unloading or writing off Durant’s major mistakes.

In his exile Durant was hardly idle. He founded another automobile company, Chevrolet, and turned it into a huge success with the Model 490. It cost a little more than the already legendary Model T but offered refinements and comforts that the Model T did not. It was the first instance of the mass-class concept that General Motors would use in the 1920s to claw its way past Ford and become the largest automobile manufacturer in the world.

That year, 1915, was also the year that the voting trust was due to expire, and Durant was working hard to regain control of General Motors, buying GM on the open market and collecting proxies from his many friends. He also induced the du Ponts, wallowing in cash thanks to World War I, to invest. By September Durant was back in power at GM, naming six directors, while the bankers named six and his ally Pierre S. du Pont named three.

The next year Durant took complete control when his cash-rich Chevrolet Motor Company was able to buy a majority of GM stock. In the next few years General Motors grew exponentially, and Durant’s fortune grew with it. In 1919 GM had more than half a billion in sales and sixty million dollars in profits, while its work force, expanding explosively to eighty-six thousand, turned out 397,000 cars and trucks. It seemed that the sky was the limit. It wasn’t.

The irony is that had Durant done nothing at all to support the price of GM, he would have triumphed.

In 1920 a short but vicious depression swept the economy. GM common split ten-for-one in early 1920 and stood at $42 at the end of March but began to decline steadily as the auto stocks led the market downward. Durant could have simply waited for the storm to blow over. Instead, responding to some deep psychological need, he obdurately and almost single-handedly tried to support the price. As Alfred P. Sloan put it, “He had about as much chance for success as if he had tried to stand at the top of Niagara Falls and stop it with his hat.”

It was then possible to buy stock by paying only 10 percent of the cost in cash. The broker would lend the rest, holding the securities as collateral. This could be very profitable if the stock went up. But if it went down, the broker would call for more and more collateral and would sell out the stockholder if he didn’t deliver it promptly. By the end of October GM was at $17. By November 10 it was at $14, one-third of its price in April, and his brokers would cut Durant no more slack.

Durant, no whiner, kept his troubles to himself as he maneuvered desperately to stay afloat. But Wall Street has the world’s most efficient rumor mills, and GM’s other major investors, the du Ponts and the Morgan Partners, pressed Durant to tell them where he stood. Finally, on November 10, he did so, and they were appalled. He had a margin call, due the next morning at the opening market, for $150,000, and he managed, just, to meet it. But the price declined to 13½ that day and triggered an avalanche of margin calls that he couldn’t meet.

Morgan and the du Ponts knew that if all of Durant’s GM stock was dumped on the market, the results would be disastrous for their own holdings and perhaps for the company as a whole. They had to help extricate Durant. They managed to prevent what would surely have been a major panic, but Durant lost nearly all his three million shares of GM stock as a result.

The irony, of course, is that had Durant only done nothing to support the price of GM, the paper losses would have been made up quickly in the boom of the 1920s. By 1926 GM stock was selling at $210, and Durant would have had, next to Henry Ford, the greatest fortune ever to come from an automobile. As it is, he has only the honor of being, again except for Henry Ford, the most important figure in American automotive history.