SS City of Peking - Construction - Financial Crisis

Financial Crisis

Roach had initially welcomed the Pacific Mail contracts, anticipating that they would help establish a sound financial foundation for his new company. Unfortunately, in the spring of 1873, eight months into construction of the new ships, Pacific Mail reported an inability to meet its payments. Pacific Mail's President, Alden B. Stockwell, had attempted to manipulate his firm's stock price with company funds, depleting cash reserves and borrowing money to meet the company's obligations. When the stock scheme fell through, Pacific Mail's cash reserves had effectively been substituted with debt. Stockwell and another company director, Richard B. Irwin, then pocketed a loan from Roach and misappropriated about $750,000 in company funds before fleeing the country.

But worse was to come. Before his flight, Stockwell had exchanged 20,000 company shares with the notorious stock speculator Jay Gould for the sum of a million dollars. Gould now had influence on the company board, but he had no interest in immediately reviving the company's fortunes. Instead, he hatched a scheme to drive the price of the company's stock down still further, to a point where he and his co-conspirators could purchase the undervalued stock—and thus gain control of the company—at the lowest possible price. In order to realize this aim, Gould needed to somehow persuade shareholders that the company was facing financial ruin.

When Pacific Mail proved unable to initiate its new packet service on the date stipulated in the June 1872 statute, Congress was obliged to decide whether or not to cancel the subsidy. Gould seized on this issue to further his scheme of damaging the company's reputation. He organized a lobbying campaign to persuade Congress to rescind the subsidy, while Roach, concerned that without the subsidy Pacific Mail might be unable to meet its debts, lobbied for retaining it. Unknown to Roach, his trusted friend and adviser, the lawyer William E. Chandler who was acting as Roach's main Washington lobbyist, also had Gould as a client, a conflict of interest that encouraged Chandler's reticence. As a result, Roach's lobbying was ineffective at combating Gould's attempt to portray Roach as an unethical raider of the public purse.

Gould's campaign was ultimately successful and Congress canceled the subsidy. Owed a million dollars by Pacific Mail, Roach was now in financial difficulty himself as nervous creditors began calling for immediate settlement of their debts. Roach bluffed his way out of the crisis by declaring his readiness to settle any debt within three days of receiving a detailed statement. But he now had to decide whether to foreclose on Pacific Mail in order to secure at least some of his investment in the ships, or to renegotiate the payment plan. He chose the latter, accepting Pacific Mail's old ships for their scrap value as part payment, and reducing its monthly payment obligation from $75,000 to $35,000. Roach was embittered by the affair, but ironically, his handling of the crisis increased his reputation as a businessman able to deal with adverse circumstances.