Crédit Mobilier Scandal

From what we have seen in the last week, President Grant more than represented on the Presidential Scandal Scale.  He might have been much better off going back to work at his dad’s black smith shop in Galena, Illinois than running for president. However, I am sure the Chamber of Commerce of this sleepy little town with the plethora of antique stores in northwest Illinois

would much rather promote their town as the childhood home of the 18^th President instead of promoting that they are east of Dubuque and have a bunch of old houses. The Grand Daddy of all scandals to rock U.S. Grant’s world was the Crédit Mobilier Scandal.   In fairness to Grant this actual scandal did not begin during his watch, but heck we can’t necessarily blame Lincoln for this one he got shot after all and Johnson was well Johnson after all. 

 This scandal involved the rail road construction company Crédit Mobilier of America.  The joke here is this company only existed on paper, and was set up by the owners of the Union Pacific Rail Road Company to convince the government and the public that they had opened up the building of this important rail line to competitive bid and Crédit Mobilier had won the contract.  The whole scandal is kind of hard to follow, but here goes:  So the stock holders of the Union Pacific set up this dummy corporation called Crédit Mobilier, which was basically a huge tax write off. 

They funneled their costs and other business expenses through Crédit Mobilier and as a result it made the Union Pacific Rail Road look more profitable than it really was.  Of course some of the excess business expenses included wining and dining Congressmen and government officials so that they would not look very closely at the two companies’ books.  One of the masterminds of this little bait switch scheme was a fellow named George Francis Train. 

Yeah, his name Train and he did rail road construction one had to love the irony.  We have not confirmed this, but I have suspicion that Mr. Train reincarnated into either Ken Lay or perhaps Jeff Skilling both of Enron shame.  So the gas that fueled the scam was the hype that the nation wanted to connect the two coasts by train.  Evidently the folks at Union Pacific had figured that this was not that difficult to do, but they convinced the government and the public that the job was darn near impossible. In order to see this engineering miracle happen Congress agreed to subsidize the construction.  Union Pacific convinced Congress that they would find a company that had the engineering capacity to pull off this job and they would supervise the work. 

Presto Chango– Crédit Mobilier emerges as the contract winner.  So if there was a Sarbanes Oxley audit of Union Pacific everything would look peachy!  Crédit Mobilier would submit invoices for bogus work or inflated charges to Union Pacific and the UP would then pass on those bills on the government for reimbursement.  What no one figured out was that the same people owned both companies.  In 1867, the head honcho at Crédit Mobilier offered members of Congress the opportunity to buy shares of the company at deeply discounted prices.

I am not sure, but this seems fishy to me, but evidently did not to our fine elected officials who gobbled up the stock in a feeding frenzy.  The Congressmen would then turn around and sell their shares on the open market for significantly higher prices to the unsuspecting public. Of course in gratitude for their windfall the Congress would then vote to increase the appropriations spending for Crédit Mobilier so they could continue to build their miraculous rail road line.  The Crédit Mobilier stink hit the fan via some good fashioned journalism during Grant’s 1872 reelection campaign. 

The New York Sun broke the story that Crédit Mobilier had charged the government over $70 million for a project that actually only cost the company $50 million to complete.  The stock prices of both Crédit Mobilier and Union Pacific fell in a free fall and of course as we have witnessed in the recent housing market bubble average investors that had hoped to get rich bought these overpriced assets and lost their shirts when the prices fell.

Congress investigated its own members that purchased discounted Crédit Mobilier stock and this led to the censure of thirteen Congressmen including future President James Garfield and Vice President Schuler Colfax.  No worry for the Grant Administration, Colfax was replaced on the national ticket by Henry Wilson who was also part of the scandal.

In all 30 Congressmen of both parties were found to be involved in the scandal, but even with the extent of the malfeasance the scandal did not seem to kill anyone’s career.  Wilson was censured, but he became Grant’s running mate in the second term and Garfield would be elected to the presidency in 1880 just in time for him for him to become the second president to assassinated in 1881.

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