In the previous article, we followed the historical relationship between Texas construction firm Brown & Roots Co. and Lyndon Johnson.
A surprise heart attack from a government insider left a large dam project half-finished and no guarantee of further funding. Identifying Lyndon Johnson as the most suitable candidate for acquiring the funds, Brown & Roots legal consel channelled money into Lyndon Johnson’s political campaigns and securing his place as congressman for Texas’ tenth district.
His appointment helped secure future contracts for Brown & Roots Co. with the Government to build ships, defence factories, and military complexes across the globe amounting to billions of dollars.
We now turn to the empirical analysis of the impact of JFK’s assassination and Lyndon Johnson’s subsequent rise to presidency.
The Efficient Markets Hypothesis (EMH) suggests that the price of any given security fully reflects all available information about expected future returns to a security. If EMH holds, then there is no use in spending any time trying to find securities that are mispriced or undervalued markets as they should be priced correctly.
The validity of EMH has been hotly debated in Finance since it was developed my Eugene Fama in the early 1960s, and empirical research has had mixed results.
If an event takes place that affects the value of a security’s future cash flows, then the value of the security will adjust to reflect this new information.
Naturally, it will take investors varying amounts of time to receive this information, process it, and finally act upon it. Thus, it is likely that security prices will adjust gradually rather than instantaneously.
An event study is a statistical method of analysis that aims to determine the effect of an event on a security by specifying a window of time around it and tracking stock price movements.
Comparing the reaction of selected portfolios and comparing them to the rest of the market can help determine the significance of an event for different firms.
Portfolios were constructed on the basis of organisations known to have provided financial support for Johnson:
1. Brown & Root portfolio
2. Petroleum Industry portfolio
3. Aircraft Industry portfolio
4. Texas Headquarters portfolio
An event window was specified as Friday 22 – Tuesday 26 November 1963, covering Kennedy’s assassination, the subsequent close of the NYSE, and reopening the following week.
Returns were calculated for each portfolio as well as for the rest of the market using daily returns data covering the event window plus the 120 trading days before and after.
By using a binary variable (taking values of 0 or 1) to indicate whether data was taken during the event window, the magnitude of the assassination on portfolio returns is directly estimated.
Results indicate that the 63 Johnson-related firms jumped 0.85 percent more than the rest of the market when the NYSE reopened on Tuesday.
Firms connected with Brown and Root did even better, increasing by an average of 1.64 percent.
Both Oil Industry and Texas Headquarters portfolios beat the market by 0.77 and 0.68 percentage point, respectively.
Aerospace firms saw their value rise three-quarters of a percentage point more than the market right after the assassination.
Interestingly, Business Week, in its last pre-assassination issue, reported that “a major cut in defence spending is in the works.” Johnson, more hawkish than Kennedy, eventually reversed that cut with a major escalation of the Vietnam War.
Of all defence firms, perhaps none had a greater stake in the sudden transfer of power from Kennedy to Johnson than General Dynamics , whose main aircraft plant was located in Fort Worth, Texas.
Its share price climbed from $23.75 on November 22 to $25.13 on November 26, and by February 1964 was up over $30, a jump of around 30 percent in three months.
Shortly before the assassination, General Dynamics was the subject of a major influence peddling investigation by the Senate Government Operations Committee.
The investigation centred around the Pentagon’s controversial award of a $7 billion contract in 1962 to General Dynamics for the TFX fighter-bomber, later known as the F-111. It was the largest aerospace contract of its time and rescued the firm from a deep financial hole.
An Air Force financial analyst said General Dynamics’ bid was up to $400 million more expensive than the rival bid from Boeing. In addition, Defense Department memos suggested that Boeing’s design was “operationally superior.”
The Senate investigation turned up the fact that one of the key participants in the selection of General Dynamics was Deputy Defense Secretary Roswell Gilpatrick, who was the firm’s special counsel before joining the administration in 1961.
Another key player in the selection was Navy Secretary Fred Korth, who had been president of the Continental National Bank of Fort Worth, a major holder of General Dynamics deposits. Before joining the administration, Korth used his political influence in Washington to promote General Dynamics contracts.
The Senate investigating committee held hearings on the growing TFX scandal on November 20, only two days before the assassination. It planned to return the following week to hear testimony from Korth. But no more hearings were held after Johnson took power.
On November 22, in a separate inquiry into government corruption, another Senate committee heard testimony about an alleged $100,000 cash payoff to Vice President Johnson in connection with the TFX contract. That investigation also went nowhere after the assassination, notes Peter Dale Scott, a professor emeritus at the University of California at Berkeley, in his 1993 book “Deep Politics and the Death of JFK.”
Only fringe conspiracy theorists would conclude from these facts that General Dynamics, Brown and Root or the “military-industrial complex” more generally, had Kennedy killed. They may have preferred Lyndon Johnson, but there’s no evidence they wanted Kennedy dead.
But the facts speak tellingly about how accidents of history can affect great fortunes. It is always good practice to think about who really benefits from seemingly random events.
Postscript for Assassination Buffs
No individual stood to lose more from the TFX scandal than Chicago investor Henry Crown, who owned 20 percent of General Dynamics. His personal attorney, Albert Jenner, became a senior staff attorney on the Warren Commission, in charge of investigating the possibility of a conspiracy.
In later years, Jenner also represented Chicago labor racketeer Allen Dorfman. Dorfman’s stepfather Paul, a leading figure in the Chicago mob, ran the Waste Handlers Union in Chicago in 1939 with Jack Ruby, Lee Harvey Oswald’s future killer.
Both Dorfmans hated the Kennedy family. Robert Kennedy had hauled them before a Senate crime panel in the late 1950s, where they took the Fifth Amendment.
Allen Dorfman was murdered, gangland-style, in 1983 in the company of another friend of Ruby, Irwin Weiner. Attorney Jenner obtained Weiner’s acquittal in a 1975 federal labor racketeering case after the government’s leading witness was shotgunned to death.
Weiner was called to testify in 1978 before the House Select Committee on Assassinations about his relationship with Ruby, including a phone conversation with Ruby shortly before the assassination. He said the call was innocent.
The committee was investigating the theory — which it never proved — that organized crime had Ruby silence Oswald to disguise its own role in the Kennedy assassination.