Originally published September 15, 2003

The flap over the pay of New York Stock Exchange chief Richard Grasso is reminiscent of times past, when the NYSE was run by the “good old boys” of American high finance. They were in control until “Wild Bill” Douglas appeared on the scene as head of the SEC in 1936 and forced the Exchange to make stock trading a more democratic institution.

Grasso is Chairman and Chief Executive Officer of the Exchange. He is an employee of the corporation, tasked with overseeing the world’s largest open auction exchange of financial securities. His recently announced one-time payment of $140 million of deferred compensation has raised a number of eyebrows.

According to an article in the Sept. 12 Wall Street Journal, the Exchange hired executive compensation consultants in 1994-95 to review its executive’s compensation. Since the Exchange is a not-for-profit entity, it cannot reward exemplary performance with stock or stock options. Therefore, the Exchange set performance targets for its executives and rewarded them with deferred compensation and bonuses, retirement supplement plans and other target bonuses.

Nobody is questioning the job done by Mr. Grasso. By all reports, he has done an outstanding job of running the NYSE. However, brokers who pay a fee to operate on the Exchange were surprised to learn that while their income has been declining with the falling stock market and the fees they pay the Exchange for the right to do business have risen, Mr. Grasso’s income has shot up.

Prior to Douglas, the President of the NYSE was a member of the Exchange. Perhaps the most famous NYSE President was Richard Whitney, who during Black Thursday in 1929 calmly walked down to the floor of the Exchange and began purchasing blue chip stocks (spending over $20 million in the process) in a single-handed attempt to stop the panic crash. Whitney was later convicted of stealing from the Exchange and ultimately went to jail for his troubles. But Whitney’s affair was not the only problem the NYSE was facing in the mid-1930s.

William O. Douglas arrived on the scene as the third commissioner of the newly formed Securities and Exchange Commission. Appointed by President Roosevelt, Douglas was nicknamed “Mr. Trouble” by the New York press. He was not a friend of the big business/money interests that dominated American finance in that era.

Douglas was ruthless in his drive to reform this venerable institution of American capitalism. During his tenure at the NYSE and later as a Supreme Court Justice, Douglas was criticized by conservatives for his extremely liberal views. Author Bruce Murphy, in his biography Wild Bill, the Legend and Life of William O. Douglas, points out that Douglas was concerned with the preservation of capitalism and the Exchange, and he believed the best way to accomplish this was to ensure that the Exchange remained “above suspicion.”

Whitney’s disgrace gave Douglas the opening he needed to use the SEC to reform the NYSE. The Exchange soon had a new constitution aimed at furthering its public responsibilities, not just its members’ interests. The president became a paid employee, not a member of the Exchange. Brokers were forbidden to have margin accounts for themselves if they did business with the public. From that point forward, the SEC, not the NYSE, would set margin requirements, a powerful tool for dampening speculation and preventing another bubble like the one in 1929.

The Exchange has operated relatively unchanged since the days of Douglas. The Grasso situation is once again calling public attention to the affairs of this private institution. Perhaps it is time, as some floor brokers would attest, for another “Wild Bill” to ride onto the scene.