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Pecuniary Emulation: The Role of Tycoons in Imperial City-Building

Excerpt from Reclaiming San Francisco: History, Politics, Culture. A City Lights Anthology edited by James Brook, Chris Carlsson, and Nancy J. Peters, City Lights Books, San Francisco, 1998.

I discovered San Francisco history in the Palace Hotel. For a kid up from the suburbs on the weekend, the Palace stood for the ultimate in worldly glamour, of metropolitan luxury, and of mythic individuals filtered through the writings of Lucius Beebe and Oscar Lewis.

Crime did not a figure in that guaze of romance until years later when I had the chance to visit a de luxe hotel restaurant in Scottsdale. The builder of that hotel and Arizona's most admired tycoon once sat in the very chair I occupied while making his legendary deals. A federal court had recently convicted Charles H. Keating, Jr. of 73 counts of racketeering, conspiracy, and fraud, and a state court was beginning its own investigation of alleged felonies. My mind drifted away then from peach-colored napery, faux-Fragonards and all the other trappings of mega-success in the Reagan era, all the way back to San Francisco in the Grant Era, to another banker, and to that other hotel on Market Street where I heard my calling as an historian.

San Franciscans have long prided themselves on inhabiting the Paris of the Pacific. William Chapman Ralston holds a cherished place as empire-builder in that fantasy. Just for starters, Ralston was founder of what was once the greatest financial institution of the West, the Bank of California. No less than four biographies deal with Ralston's life and impact; one dubbed him "The Man Who Built San Francisco." (Dana, 1936) He has been called the West's Lorenzo de Medici. "He blazed the path for San Francisco's onward march to achievement and renown" claims a bronze plaque near where he drowned in the bay. By doing so, Ralston was saved the historical judgement and prison term that later befell Arizona's most notorious visionary. As Ralston's partner reportedly said on viewing his corpse, "It's the best thing he could have done." (Ostrander, 1966, 58)

Ralston and Keating were born 97 years and 150 miles apart in Ohio. San Francisco and Phoenix were boom towns when the financiers respectively landed in them, the kind of go-go money machines that attract born speculators like honey does flies. Ralston had been involved in shady deals in Nicaragua before moving to San Francisco. (Lavender, 1975) Lawyer Keating had been involved in shady deals in Cincinatti. Keating beat a SEC fraud rap by signing a consent decree swearing never to do it again; he was never a man to be slowed by promises. (McCombs, 1990)

Throw bloody meat into a pool of sharks and you'll get something like the business climate of San Francisco during its formative years. Gold from the Mother Lode and silver from the Comstock Lode established an early pattern of high-risk gambling and damn-the-downstreamers exploitation that many historians believe has characterized Western behavior right to the present.

The first few years of placer mining did provide unusual opportunities for modest fortunes. But as the rich surface deposits ran out, hard rock and hydraulic mining quickly took the place of free-lance miners, and these required stock markets as well as the kind of venture capital that only financiers with international connections could raise. Nonetheless, the popular belief in "anybody's gold" became primary bait for those wishing to strike it rich on the market as others had struck it rich in the streams of the Sierra.

Capital concentration requires cities whose comforts and luxury beat the rigors of mining camps. Mining paper on the San Francisco exchanges excited frenzies resembling religious rapture. Only five of the hundreds of mines incorporated on the Comstock Lode ultimately proved profitable, but they were sufficient to lure thousands of "suckers" onto the San Francisco Mining Exchange where insiders had a second chance to strike it rich by swindling them of their savings. Gold Rush banker William Tecumseh Sherman sourly observed in 1856 that "The very nature of the country begets speculation, extravagance, failures, and rascality." (Lavender, 1975, 391)

Many others, often approvingly, agreed with Sherman's judgement. In 1883, the Overland Monthly editorialized that "The real peculiarity of our present Pacific civilization is that it is, perhaps, the most completely realized embodiment of the purely commercial civilization on the face of the earth." (Overland Monthly, December, 1883, 657) California was showing the way for less developed regions, particularly in its "less exacting moral sense." Visitors concurred. The recently-occupied tomb of William Ralston prompted tourist Joshua Speed of Kentucky to observe in 1876 that nearly all Californians were super-materialists. "They measure everything by the gold standard, men as well as mules. You never hear of Mr. Smith as a good man, or Mr. Brown as an honest man, or Mr. Jones as a Christian. But Mr. S. has twenty thousand million and so on. The more he has, the better he is — and it matters not how he got it, so he has it."(Speed, 1876•) Economist Thorstein Veblen later dubbed this easy quantification of virtue "pecuniary emulation."

From the moment he arrived in San Francisco in 1854, Ralston was a leading player in the high-stakes game of Western exploitation. In a land whose abundant resources had scarcely been scraped and whose real estate values climbed with each new immigrant, the future belonged to the ruthless and to the lawyers who wrote the rules of the game for them. They were frequently the same.

Ralston dabbled in a number of schemes before finding his lode. Some things — like helping to finance the takeover of Nicaragua by soldier of fortune William Walker — just did not pay off. (Lavender, 1975, 94) It was to the Comstock Lode south of present-day Reno that "Billy" Ralston hitched his star soon after its discovery in 1859. Five years later, he was treasurer or director of most of the bonanza mines. (Wilson, 1969, 27) In that year, Congress admitted Nevada into the Union as San Francisco's most lucrative colony, a state commonly known as the nation's "great rotten borough."

Also in 1864, Ralston established The Bank of California. To his former partners' displeasure, Ralston took most of their best clients with him when he left to found the rival bank. Rumors abounded that Billy had been paid $50,000 to do so by the twenty-five or so bank directors with whom he surrounded himself. (Lavender, 1975, 179) With these men, Ralston entered ever-shifting partnerships and betrayals. They became known as Ralston's Ring, or simply, The Bank Crowd, and they constituted the West's wealthiest capitalists during the Civil War period.

For the titular head of the Bank, Ralston enlisted Sacramento's Darius Ogden Mills, the most respected financier on the Coast, though Ralston actually ran the Bank as its Cashier. As his agent on the Comstock, Ralston installed a stock jobber named William Sharon.

To call Sharon a piranha would be to insult the character of the fish. Sharon adroitly devoured mines, mills, business associates, transportation, forests, and Virginia City's water works. He expertly manipulated the stock market with the advantage of insider information gleaned from the mineheads. He directed the profits back to his partners in The Bank Crowd.

Ralston converted his Comstock capital into coastal transport, insurance, telegraph lines, currency speculation, woolen and silk mills, canal companies, hydraulic mines, political and judicial bribery, Alaskan furs, gas works, refineries, and hazardous real estate schemes. It seemed that there was scarcely an enterprise in which Billy Ralston did not have an interest. Collis P. Huntington, boss of the Central Pacific Railroad, wrote to his partner Mark Hopkins: "I think time will show that Ralston has got a larger institution than he is able to run." (Lavender, 1975, 278) Ralston returned Huntington's trust by referring to him in coded telegrams as "Hungry." (Lavender, 1975, 287) Both were astute judges of character.

As long as Ralston rode the wave of riches, he was the city's paragon of virtue, a role model for pecuniary emulation. His lavish entertainments, his carriages, his ducal estate at Belmont, and his many charities earned him, like Keating later, a deserved place in the developmental history of his adopted city. He was, unquestionably, a visionary; his discussions with Frederick Law Olmsted, for example, led to the cultivation of Golden Gate Park. If it took insider trading, backstabbing, and wholesale political corruption to accomplish his ends, those were the rules of the game and everyone else who could afford to play was doing the same. Fortunately for Ralston, William Sharon cared little for popular opinion and served as the genial banker's lightning rod.

A confidential letter from Ralston to his partner suggests their modus operandi. Ralston advised Sharon to go easy on a wealthy associate who owned valuable stock that they wanted. "Give him sugar and molasses at present, but when our time comes give him vinegar of the sharpest kind. He is our friend and I think will assist us." (Ostrander, 1966, 48)

Ralston's banking partner in New York wrote him in 1870 that "Everybody talks about you, your princely hospitality, and large-scale of expenditures...All who go to California want to see you and want letters of introduction." (Lavender, 1975, 280) Those words could have been written about an equally spectacular banker more than a century later.

Arizona real estate tycoon Tom Arnold said of Charlie Keating's ever-ramifying companies of the 1980s: "[They] just became bigger and bigger and bigger, until the projects were so large, there was just this sense of Big Business, with airplanes, helicopters, the Phoenician Resort built at hundreds of thousands of dollars per room, the Estrella development at 20,000 acres — just massive things. And everyone, I think, admired him, but wondered how he could do such things." (Lavin, 1990)

ACC was the Phoenix-based holding company that, in 1984, swallowed Lincoln S&L with the digestive aid of $51 million in junk bonds provided by the leading authority in the field, Michael Milken of Drexel Burnham Lambert. (McCombs, 1990) The would-be free market heyday of the Grant Era provided the beau ideal at which the Reagan deregulators aimed — with a spectacular exception provided by Franklin Roosevelt's New Deal. Federally-insured deposits enabled tycoons like Keating to treat S&Ls like Visa cards drawn on the U.S. Treasury with the IRS acting as their collection agency. In five years, Keating's Crowd turned Lincoln's billion dollars in assets into a $2.6 billion liability for the U.S. taxpayer — what is known in the trade as a zombie because of its unnaturally prolonged life.

How did Keating and company accomplish such a prodigy? In short, they turned stodgy Lincoln into a "pioneer in aggressive lending and creative accounting," according to the Chicago Tribune, "a perfect cash cow" according to William Black of the Federal Home Loan Bank of San Francisco. (Lavin, 1990)

Under Keating's creative management, Lincoln's federally-insured deposits veered sharply out of home loans and into junk bonds, foreign currency speculation, legal and political fees, luxury hotels, and, what is known in Arizona real estate circles, as "raw land" — those full-color plates of saguaro-clad desert in Arizona Highways magazine that developers dream of scraping and covering with shopping malls, golf greens, and marinas. (Beard & Morrell, 1990)

Keating in fact operated ACC like one of Billy Ralston's high-pressure hydraulic mines. Ralston's operations sent floods of mercury-tainted sludge downstream after extracting the gold, leaving behind a permanent wasteland for others to worry about. In what he called a "tax-sharing plan," Keating "upstreamed" $94 million in federally-insured funds from Lincoln to ACC, leaving depositors and regulators to pick through the gravel and bones that remained. (Lavin, 1990)

To wreak such havoc required the kind of "political contributions" which in Ralston's time went by a shorter and much ruder name. Keating knew the price of men better than that of mules. He bragged that he had hired fifty accountants away from his auditors with munificent raises. He hired Alan Greenspan — long the chairman of the Federal Reserve Board — to plead Lincoln's case as "a financially strong institution" in 1985 when it wasn't. (Lavin, 1990) He tried to hire Edwin Gray — the troublesome chairman of the Federal Home Loan Bank Board. (Lavin, 1990) Politicians from Phoenix city council members (McCombs, 1990) to U.S. Senators shared his generosity, as did Mother Theresa. The gratitude of those politicians was expressed in more worldly ways than the crucifix which the blessed Mother gave Keating for his campaign against pornography. (Irving, 1989)

In the final five years of their spectacular careers, Ralston and Keating's destinies converged and paralleled like iron rails. For both men, hotels and real estate became the obsessions which (they hoped) would extricate them from the tangled webs they'd woven as well as insuring their reputations as city-builders.

During the silver boom of the 1870s, San Francisco's Montgomery Street became known as the Wall Street of the West. Just as Manhattan's Wall Street dead ends at Broadway, so did Montgomery stop cold at Market. Ralston had plans to extend Montgomery's high-value real estate to potentially valuable land which he owned south of Market. Such an extension would require cutting through city blocks and leveling a hill on which his fellow magnates had built their mansions. No matter how powerful Ralston was, equally determined plutocrats who were not in on the deal blocked his New Montgomery Street two blocks south of Market, and that presented problems.

As Ralston's other investments turned rancid, the banker needed the lots he owned along New Montgomery to appreciate as planned. To attract investors to his land, he first built a million-dollar hotel called The Grand on the east corner of Market and New Montgomery. When that failed to work, he began The Palace on the western block.

Ralston's Palace was to be the opulent capstone of his career and ego. When completed in 1875, it was quite literally the grandest hotel in the world. Its luxurious appointments, high-tech gadgetry, Parisian restaurants, and tiered central lightwell placed it in a league with the finest hotels of Vienna, Paris, and New York. One historian noted that "the state of California was run from the Palace bar," though he might have added several other Western states, territories, and Hawaii as well. Cost overruns ultimately drove the price of the Palace to nearly three times the original estimate. For San Franciscans, the hotel proved that their city had become world-class in only twenty-five years.

The Palace was also approximately four times too large for Ralston's city. It would not fill for decades. (Lewis & Hall, 1940)

The building neared completion as Ralston's empire fell about him. He'd never been hampered by a firm boundary between his bank's finances and his own. He began selling properties and borrowing money on nearly everything that he owned and much that he didn't. Among the latter was San Francisco's private water company, on which he had an option and which he counted on selling back to the city at enormous profit. Other experiments in creative accounting included secretly over-issuing Bank of California stock. He borrowed $300,000 on Southern Pacific bonds which he'd removed from the bank vaults. (Lavender, 1975, 372-4)

Pyramid schemes based on the fantasy of perpetual growth are notoriously flimsy and grow more so as the economy slows down. On August 26, 1875, as rumors swept San Francisco, a run began on the Bank of California. At 2:35 PM, its vaults empty, the bank closed its doors and thousands faced ruin. The details of their failures have never been told.

The Phoenician Hotel was an equally personal obsession with Charlie Keating. It was, like Ralston's, designed to skyrocket the price of adjacent land, but there was more to it than that. (Furlong, 1989) Keating loved that hotel. He and his wife haunted the building site, like Ralston had the Palace. Their innumerable design changes hiked the final cost to an estimated $300 million. To this day, the Phoenician staff cannot tell for sure who the architects were, and say that it was mostly Charlie Keating. Again echoing his predecessor, Keating told a reporter "I had the most successful resort, probably, ever built in the history of the United States." (McCombs, 1990) Also one of the emptiest.

In the final months of his glory, Keating & Friends went on a bender similar to Ralston's, but bigger. His most famous stunt was to peddle a quarter billion dollars in ACC-uninsured junk bonds at Lincoln branches — those famous high-yield certificates that wiped out 23,000 chiefly elderly investors. (Lavin, 1990) House Banking Committee chair Henry Gonzalez later told those plaintiffs that they'd put their savings in inventive hands: "We find Mr. Keating a player on the international scene, a dabbler in the foreign currency markets, an operator of a security subsidiary in General Noriega's Panama, a member of the board of a Saudi-European bank, a good customer of Credit Suisse, a banking corporation that played a big role in the Lincoln-Kuwait partnership in the $300 million Phoenician extravaganza in Phoenix." (Irving, 1989)

On April 13, 1989, ACC declared bankruptcy and the following day the feds belatedly siezed Lincoln. At midnight on November 16, 1989, federal regulators and armed FBI agents captured the Phoenician Hotel in a midnight raid. (McCombs, 1990)When Keating came to work the next morning, the locks had been changed. He would soon be wearing a few of his own.

At the end, the bankers' fates diverged, for no federal regulators plagued Ralston. His corporate board summoned him to appear the day after his bank closed. It seemed that he owed the institution nearly five million dollars, approximately its entire capitalization. All directors professed shock and claimed to have no inkling of their partner's felonious activities, though subsequent lawsuits blew holes in their avowed naiveté. Years later, when lawyers cornered Darius Mills with a subpoena at the Palace Hotel, he suddenly grew deathly ill, retired to his bed, and lost all memory of everything pertaining to the management of the bank during his presidency.

On August 27, 1875, however, Mills' mind was in fine shape. He and his partners forced Ralston's resignation. They also made him sign over all of his assets to William Sharon whom, they trusted, would attempt to straighten out the mess. Ralston left the bank for his daily swim.

He was a strong swimmer, but on the day of his downfall, he was under considerable stress. An hour after plunging into the Bay, his body was retrieved by observers who watched him flounder and sink.

William Sharon had recently been elected to the U.S. Senate from Nevada, thanks to the generosity of his "sack bearers" in the Silver State. It was in the Senator's best interests to rehabilitate Ralston's reputation, for California law held him and his partners financially liable for the failed bank's debts. He did so with the same skill with which he played poker and the stock market.

Fifty thousand mourners marched in the banker's funeral cortege. Orators thundered his virtues. The Alta California mourned that "His was the vast vision of the Builders and his like shall never pass this way again." Ralston biographer David Lavender claims that Sharon deliberately prolonged the city's "emotional jag" to make the work of the bank's reorganization committee easier. Sharon chaired that committee. (Lavender, 1975, 382)

The reclamation of both Ralston's reputation and institution worked like a charm. On October 2 1875, the new Bank of California opened its doors. Jubilant crowds surged from the bank to the nearly-complete Palace where Senator Sharon delivered a touching eulogy to his late friend. In addition to the Palace, Sharon now owned the Grand Hotel, New Montgomery Street, Ralston's country estate and town house, the city's water works, and so many other lucrative properties that he, rather than Ralston's widow, could claim to be California's second wealthiest citizen. He just trailed Darius Mills who soon left the State to cultivate a major dynasty in New York City. Sharon founded his own in California with his vastly enhanced fortune.

San Franciscans argue to this day whether Ralston's death was accidental. Historian Hubert Howe Bancroft, Ralston's contemporary, had no such doubts; in his copy of a city history, Bancroft scrawled in the margin "Ralston, though a daring, dashing pet of the people was a bad man and committed suicide rather than face his friends, after his frauds should become public. [sic]" (Hittell, 410-411)

Though a habitual swimmer himself, Keating stayed around to serve time in a state prison while his attorneys fought to free him. ("Banker's Sentence: Ten Years for Fraud," San Francisco Examiner, April 11, 1992) His crash forced the Senate to investigate five of its own colleagues for their connections to Keating, including Senate Whip Allan Cranston of California who soon thereafter resigned. California Governor Pete Wilson and President George Bush were momentarily brushed by the Arizona banker's dark wing. Had it not been for the cornucopia of other scandals during the Reagan years, the Keating chapter of the S&L disaster would easily rank with other national stenches such as Teapot Dome, Julian Pete, and the crash of Chicago's Sam Insull. Lincoln's $2.6 billion price tag represented the biggest of all thrift failures. (McCombs, 1990)

The Resolution Trust Company sold the remainder of the Phoenician Hotel to the Kuwait Investment Company at a hefty discount. The Japanese had long before acquired the Palace with the Sheraton chain and the Bank of California in San Francisco.

Keating's appearance in manacles and jail togs during his first trial momentarily sated some of the tribal lust for revenge. In 1996, after serving considerably less than half of a nearly thirteen-year sentence, a federal judge sprang Keating from prison on a technicality. ("Keating Conviction Overturned," San Francisco Chronicle, December 3, 1996) In the midst of a hysterical bull maarket in the late 90s, the unwelcome lessons of the S&L crashes of the 80s joined such ancient history as the Depression and the Grant Era, and were happily forgotten. Keating's release, like so much else, was eclipsed by the saga of O.J. Simpson.

In the last analysis, Charlie Keating and Billy Ralston were far from the titans of free enterprise that their admirers claimed. Both danced a long and awkward tango with The Government which they loved to hate.

Historian Bernard DeVoto once succinctly defined the Western attitude to the federal government as "Get out and give us more money." (DeVoto, 1955, 245) Despite his loud patriotism, Charles Keating had scant regard for the U.S. federal government when it got in his way. After one of his victories over the regulators hounding him, Keating leaped upon a desk with a foaming magnum of champagne and ripped open his shirt to reveal a T-shirt inscribed "Death to the Feds." (Irving, 1989) It's a sentiment shared by many of his Sunbelt colleagues along with Arizona's private militias.

The buccaneers of Ralston's era shared that sentiment as they built their fortunes on federal largesse. In personal letters to his attorney, Southern Pacific president Collis Huntington referred to the judges and senators whom the railroad was forced to buy as "damned hogs" and "worthless dogs." Congress, he felt, was "the worst set of men that have ever been collected together since man was created." (Lewis, 1938, 228-9)

Such strong words were strange ingratitude for services rendered, for Huntington, Ralston, & Friends had used their famous "profit mill," the Contract & Finance Company, (Wilson, 1969, 33) to skim off extra millions of public dollars and millions of public acres that were meant to finance the building of the transcontinental railroad. When Congress and creditors got nosy, the books got burnt.

A similar amnesia prevails in Arizona today, extending far beyond the federally-insured deposits that built fortunes on the credit of the U.S. Treasury. The lakes, fountains, and Kilarney-green lawns eseential for Keating's luxury developments were largely provided by the feds, along with the cheap wired energy that makes life on the desert bearable. Phoenix itself, with its astonishing boom-town sprawl, would have been impossible without the Bureau of Reclamation, created in 1902 by Representative Francis G. Newlands of Nevada. Newlands was Senator Sharon's son-inlaw, and soon after the passage of the Newlands Act, moved on to the Senate himself.

Snaking over the mountains from the Colorado River, the Granite Reef Aqueduct of the $3 billion Central Arizona Project may, as water historian Marc Reisner has written, "come as close to socialism as anything this country has ever done." (Reisner, 1986, 12) But, for the moment, it keeps the desert cities growing without end.

San Francisco by the 1990s has grown to its limits, and so must grow by tearing down and building anew. It does so in a giddy atmosphere of "public-private partnerships" that now extends all the way from the local level to Clintonian Washington, and relies, as it always has, on popular amnesia of how often the public gets snookered.

When, for example, the owners of the San Francisco 49ers announced early in 1997 that they wanted to build a half billion dollar stadium cum shopping mall to replace a windy arena long known as Scandalstick Park, they demanded a $100 million subsidy or threatened to leave town. No one recalled a Fortune Magazine analysis of such projects that concluded with the warning that "The stadium's recurring deficits prove to be much higher than promised and the taxpayer discovers that civic pride has been compromised by special interest, blind boosterism, and intept planning." (Burck, 1973) Skeptics did recall that a similar deal nearly bankrupted Oakland, but Mayor Willie Brown insisted that San Francisco, by contrast, is a world-class city and would have no trouble repaying the bonds:"This is not a shaky city," Brown told the Chronicle, "There is no reason to equate us against any city that is shaky." ("Stadium Strategies Revealed," San Francisco Chronicle, February 7, 1997) Brown's law firm specialized in such public-private partnerships, since it represented some of California's biggest corporations while he served as Speaker of the Assembly.

The scions of well-aged money keep a low profile today, marrying one another or those of metropolitan dynasties elsewhere. They constitute a cousinage almost unknown to those ooutside their circle. Five and six generations beyond, the fortunes made from the poisoned rivers and the fallen redwoods, from bribery or from the pockets of suckers picked on the Stock Exchange continue to propel numerous heirs through the Chronicle's society pages. That destruction, and those scandals, have become local color, if remembered at all. The heirs regard the brassy nouveaux riches of Silicon Valley and Las Vegas with the contempt of the well-bred, and invest their capital in growth in those parts.

We must forget the mistakes of the past in order to repeat them again. The Keatings and Ralstons recur like avatars in every generation because we want them to. We need those men to give us hope. They are what the myth of the self-made man is all about. That the myth is often as much a fraud as were they is fundamental to its eternal return.

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