Dip, dunk, deal

The Deal, November 16, 2009

by Peter Moreira


Never an effusive person, Henry Morgenthau Jr. positively gushed when he urged his father in a letter in April 1927 to sell 10,000 shares of Photomaton Inc. if they hit $15.

Their New York investment company, Henry Morgenthau and Son Inc., had bought into the gimmicky photography company only a month earlier, and in short order the shares were soaring above the $10 mark. "This [selling the shares] would put HM & Son on Easy Street," the 36-year-old Morgenthau wrote to his father. "We all have to take our hats off to you on Photomaton."

Though long forgotten, the story of Photomaton and the Morgenthaus is worth retelling today because it was the most colorful investment made by the first Henry Morgenthau, one of the great New York dealmakers in the early 20th century. What's more, the Morgenthau family tale is being celebrated with the exhibition "The Morgenthaus: A Legacy of Service" at the Museum of Jewish Heritage in New York beginning Nov. 16.

The exhibition will focus on Henry senior, ambassador to Turkey during the First World War; Henry junior, Franklin Roosevelt's friend and Treasury Secretary during the Great Depression; and Robert, who recently announced his retirement as district attorney for New York County after a remarkable tenure of 35 years.

A wiry, hyper-energetic man who came to New York from Germany when he was 10 years old, Morgenthau made a name for himself in 1890, when he led the purchase of a group of properties in Washington Heights for $980,000 and flipped it in 1891 for $1.49 million. That established the Morgenthau name, and New York newspapers were soon chronicling his ventures. In 1899, he formed the Central Realty, Bond, and Trust Co., pioneering the trend of creating trust companies to use real estate and financial markets to back each other. He sold Central Realty (minus the real estate holdings, which he retained) six years later, giving his investors a 15-fold return on their money.

Realizing New York was expanding northward, Morgenthau became a major investor in the Bronx, getting in before the subway line opened up the borough. He had also made superb corporate investments like Underwood Typewriter Co., of which he was a director, and early in 1927 he found an opportunity he couldn't pass up.

A young Siberian immigrant named Anatol Josepho was drawing crowds to his "studio" on Broadway near 51st Street with a revolutionary device called a Photomaton. This forefather of the now increasingly anachronistic "dip and dunk" photo booth allowed customers to insert a quarter in the slot and instantly receive a strip of eight different sepia photos.

According to The New York Times, Josepho was a photographer who had wandered through Budapest, Shanghai and Hollywood before landing in New York in 1924. In 1926, he had borrowed $11,000 from relatives and produced his photography machine, which became an instant hit. The craze grew when Gov. Al Smith and Sen. Robert Wagner used the machine, posing their bowlers and cigars at a different angle for each shot.

By March 1927, Morgenthau assembled a group of investors who paid $1 million, or about $12.6 million today, to Josepho for his stake in the company. Describing himself as a Socialist, Josepho, 33, said he would use half his payment to set up a charitable trust to help the poor. The buyer had more capitalistic concerns.

"We will open a studio in Atlantic City in a few days," Morgenthau told the Times. "In a week thereafter we will open one in Coney Island. Then we will begin to dot strategic points in this country with studios at a rate slightly more rapid than one a week."

He aimed to have 220 studios operating by the end of 1928.

The business steadily grew, and its shares, trading over the counter, rose to $12 by mid-1928. According to The Wall Street Journal, Photomaton earned $578,310 in 1928, up from $99,590 a year earlier. The company even attracted Roosevelt as a director in 1927 (he would become governor of New York a year later), compensating him with options on 10,000 shares.

But growth was expensive. Even after Photomaton raised $950,000 in a preferred stock offering, several investors including Morgenthau had to lend it money. By late 1928, the owners had begun to consider selling control to financier Clarence Hatry of London.

Known in London as an aggressive investor, Hatry clinched a deal in January 1929 for Austin Friars Trust Ltd. -- one of several companies he owned in Britain -- to buy out Photomaton and merge it with Automatic Camera Corp. Hatry was supposed to make a deposit of $150,000, and the parties would close the deal four months later. But even though Hatry listed a company in London called Photomaton Parent Corp., the money and the closing never came. "If the company is to be kept going, the overhead must be substantially reduced," the elder Morgenthau wrote to Henry junior in August. "I don't want to worry you so I shall not write my pessimistic thoughts."

A month later, all hell broke loose. On Sept. 20, Hatry and three partners were charged with fraud on a massive scale, and the stocks of the companies he controlled were suspended -- the first stock suspensions in London since the outbreak of World War I. The Hatry group had set up shell companies, used the stock as securities for loans and employed that debt capital to set up more phony companies. He was nailed when he deposited $750,000 of worthless paper with Porchester Trust in London as security for a $1.05 million loan. In the end, he and his cronies were charged with fraud amounting to $5.55 million.

Some historians believe the Hatry scandal was one of the causes of the stock market crash of 1929. In his book "The Great Crash: 1929," John Kenneth Galbraith described Hatry as "one of those curiously un-English figures with whom the English periodically find themselves unable to cope."

Though New York-based Photomaton reminded investors that the merger had never closed, it was too late for the company. Its costs were high. Its craze was evaporating. And a month later, the stock market crashed.

Finally, on Halloween 1930, a judge appointed receivers for Photomaton. The company issued a statement saying it was solvent but having trouble paying some rents. It put its liabilities of $395,000 against assets of $2.213 million. But most of those assets were patents on machines and fixed assets, and both were falling quickly in value.

Photomaton never recovered. The Morgenthaus were sick of Photomaton by this time, though they survived its collapse and the crash due to their strong holdings in bonds and real estate.

Soon the younger Henry would follow his friend Roosevelt into public service in Washington, culminating with his 11-year stint as Treasury secretary, and Photomaton would fade into a distant memory.

© 2009 The Deal Magazine

Contributed by Brian