In truth, the overwhelming public anger over congressional ineptitude was firmly in place well before Long’s virtuoso performance. The previous summer, Agnes Meyer, the wife of Federal Reserve chairman Eugene Meyer, had attended a hearing on a relief bill, which quickly bogged down into pointless debate. Agnes was a keen and intelligent observer of the Washington scene and a perceptive chronicler of the foibles of politicians and of her fellow members of the upper class. She was a social reformer who wrote for the Washington Post, a paper that her husband would later purchase and eventually pass on to their daughter, Katharine Graham. As the frustrated Meyer left the hearing room, she “passed a group of bonus marchers lying in front of the Congressional Library exhausted by their perpetual marching, ragged filthy, eating some horrible-smelling beans which were being cooked on the sidewalk in an army range. For sheer ignorance in the Senate . . . the picture was drab and discouraging beyond words. Of such materials is democracy compounded.”12
On January 26, one day after the Senate passed the watered-down Glass bill, Norbeck announced that the committee’s investigation would not be limited to Insull, but instead would explore other “important matters.” Norbeck announced no specific names, but Pecora’s attention had been turning to a single company and a single individual who were closely associated in the public’s mind with the stock market bubble. The same was not true of Norbeck, who continued to suggest company after company the committee could investigate. Despite his failures in the investigation over the previous year, Norbeck still seemed not to appreciate how much time it took to investigate a company thoroughly, nor that such an investigation to pin down facts was essential to a successful hearing. Pecora was able to dissuade Norbeck from those other investigations, and on January 30, Pecora subpoenaed Charles E. Mitchell, chairman of the board of City Bank, and two other executives of the bank. The subpoenas required them to appear before the committee on February 21, 1933, just three weeks away. It was a remarkably short period of time given that Pecora somehow had to squeeze in the Insull hearings as well, but he had little choice. Authorization for the investigation ended in just thirty-five days.13
In the abstract, the subpoenas seemed like big news for the struggling investigation, but the immediate reaction was mild, in part because Pecora was undercutting expectations. He told reporters he was in Washington to do a constructive investigation that could lead to useful legislation. He was conducting “a fact-finding, not a head-hunting, exploration.” Many reporters took that statement as confirmation of everything that Irving Ben Cooper had charged. There was just a month left in the inquiry, nobody had their heart in it any longer, and it was going to quietly whimper offstage as the new Roosevelt administration came into office. “We prophesy,” the editors of the Milwaukee Leader wrote, “that the senate committee will put many, many thousands of words in print and eventually decide to straddle the subject and make a few minor recommendations that will only amount to a couple of tinker’s damns.”14 As January 1933 came to a close, reining in Wall Street remained, for most observers, a pipe dream.
Chapter 5
SUNSHINE CHARLIE
Pecora’s decision to subpoena Mitchell to appear before the committee was more serendipitous than calculated. True, Mitchell was a natural choice if Pecora’s goal was to indict Wall Street’s entire stock-selling operation; City Bank’s investment arm sold more securities during the Roaring Twenties than any other investment banking operation. But the reason Pecora subsequently offered for his selection was far more mundane. The lawyer had just read that Mitchell was about to sail for Europe, “having been invited by Mussolini to come to Rome to give advice about the stabilization of the lire [sic].” Pecora “was anxious to have a subpoena served on Mr. Mitchell before he sailed.”
Although seemingly haphazard, there can be little doubt that Pecora knew just how daring his choice was. There was certainly a big chance that Pecora would come away from the probe empty-handed. Mitchell was a veteran of congressional inquiries; he had even appeared before the committee in June 1932 to testify about City Bank’s alleged participation in a pool to manipulate the stock of Anaconda Copper. City Bank’s securities affiliate, the National City Company, offered Anaconda stock to the public at $125 a share in late 1929. In 1932, it was selling for $5. When William Gray pointed to that disparity Mitchell was indignant: “You don’t hold us responsible for that?”
Mitchell treated Gray with contempt. He called the lawyer’s financial calculations meaningless and he generally ignored Gray’s questions and interruptions about manipulation, focusing instead on telling the committee about Anaconda’s bright financial prospects and its long history with City Bank. Anaconda controlled 20 percent of the world’s copper production and owned a third of the world’s reserves. “In other words,” he assured the senators, “we are not talking, as we sit here gentlemen, about a stock manipulation in some fly-by-night concern. We are talking about offering an investment of the primest [sic] quality in one of America’s greatest industrial properties.” Mitchell categorically denied any knowledge of an Anaconda stock pool; the securities affiliate’s market activities were simply its attempt to meet the great customer demand for such a quality offering.1
Mitchell rode roughshod over Gray, and with so little time to investigate the bank, there was every chance that he would do the same to Pecora. Still, the payoff was potentially enormous. City Bank was a pillar of the banking community. The bank was an international powerhouse with almost a hundred branches in twenty-three countries. It had a hand in a fifth of all securities sold during the 1920s, and it was catering to more and more middle-class investors who entered the market in droves during that decade. Mitchell, one of the most powerful and well-known financiers of his day, was almost single-handedly responsible for creating that securities-selling giant.
Besides the new focus on securities sales, the City Bank subpoenas signaled another radical shift for the investigation. In its first year, Norbeck focused on short sellers and pool operators—men like Mike Meehan, Ben “Sell ’Em” Smith, and Jesse Livermore—financial pirates who most people assumed used any means, legal or illegal, to make money in the market. When he returned after the 1932 elections, Norbeck focused on Kreuger and Insull, scandals that had already been unveiled.
Pecora was attempting something quite different—something that was much more difficult but had the potential for a much greater impact. Mitchell had been criticized for his exuberant overoptimism during the bubble, but most of the public did not suspect him or his bank of any overtly unethical or wrongful behavior. Mitchell and City Bank occupied Wall Street’s rarefied heights, the men and firms who, so far at least, had remained untouched by scandal. If Pecora could show improprieties at City Bank, if he could suggest that a swindler like Kreuger was not, as the New York Times thought, a “monstrous exception” but an all too common menace to small investors, then he would go a long way toward securing federal legislation of the stock market. With a little more than a month left in the investigation, what did he have to lose?
Founded two days before the outbreak of the War of 1812 essentially as a credit union for a group of New York merchants, City Bank had a rather shaky start and repeatedly came close to collapsing in its early years. The bank’s heyday began about eighty years after its founding, when the famed banker James Stillman took over the reins. The enigmatic Stillman, known on Wall Street as the Sphinx, moved quickly to enlarge the bank and to attract big corporate clients, but the engine really fueling its growth was investment banking. After the Panic of 1893, railroad and other capital-intensive firms desperately needed to raise funds. Looking for a toehold in the field, Stillman formed an alliance with Kuhn Loeb, a leading private investment bank of the day, to help reorganize the faltering Union Pacific Railroad.
It was a good fit, with each bank complementing the other’s strengths. As the more established investment bank, Kuhn Loeb had the relationships necessary to originate transactions, but it lacked City
Bank’s strong capital base. City Bank’s rich clients were always looking to diversify their holdings and so provided a ready stable of customers for the firms’ securities offerings. Eventually City Bank, like J.P. Morgan, became a consolidator of industries, orchestrating complex mergers in the copper and utilities industries.2
In 1909, the bank moved in to its palatial new home at 55 Wall Street. At the time, critics called it absurd that a bank should occupy an entire city block, but Stillman conceived the bank’s headquarters as a monument to the firm’s pre-eminence in banking and a testament to its durability and permanence. City Bank was indisputably the largest and strongest commercial bank in the country. Its clients were the dominant companies in a dozen different industries, from meatpacking and sugar refining to chemicals, oil, utilities, and railroads. At that point, Stillman retired from day-to-day operations of the bank. The new president was Frank Vanderlip, who wanted to extend Stillman’s successes by transforming the bank into a worldwide, full-service financial supermarket, a one-stop shop for all its customers’ financial needs.3
Vanderlip began opening City Bank branches throughout South America, Asia, and Europe, but investment banking once again drove the bank’s success. With the advent of World War I, the United States became a creditor nation and as the European combatants increasingly sought to raise money here, New York surpassed London as the world’s financial capital. City Bank and other New York banks flourished. Through its affiliated securities business, the National City Company, the bank pushed ahead in investment banking, forging relationships with the other leading investment banks, floating foreign government bonds, and underwriting risky offerings for emerging electric and gas utilities. The more established investment houses wouldn’t touch these industries, but utilities provided City Bank with yet another way to expand its investment banking operations. The riskiness of such securities—technology was changing so rapidly that an established firm could become an anachronism nearly overnight—also made them harder to market to investors. That meant City Bank would have to look past the wealthy investors who were the traditional buyers of stocks and bonds. Vanderlip foresaw middle-class Americans as a natural outlet for all the firm’s securities offerings and embarked on a plan to develop a broad, nationwide retail network to reach them. Vanderlip’s chance for rapid expansion came in 1916 when National City acquired N. W. Halsey, a young and innovative firm that had pioneered the use of mass advertising to sell securities.
Although happy with his acquisition, Vanderlip was disappointed that he failed to convince the company’s most promising executive, Harold Stuart, to stay on. Stuart decided to set up his own bond-selling firm in Chicago, which he named Halsey, Stuart & Co. Casting about for someone to run City Bank’s newly acquired retail network, Vanderlip found an intelligent thirty-eight-year-old bond salesman “with a good eye and a keen mind,” a man he felt sure would “prove of real strength to the whole situation.” Charles E. Mitchell, Vanderlip thought, had “an astonishing capacity to create energy.”4
Mitchell was born on October 6, 1877, in Chelsea, a “shabby and unfashionable” industrial suburb of Boston on the northern bank of the Mystic River. It was, fittingly, the hometown of Horatio Alger, and although Mitchell’s was not quite a rags-to-riches success story, it was close. He had a comfortable, middle-class childhood. His father was a produce wholesaler who dabbled in local politics, eventually becoming mayor of Chelsea when Mitchell was ten. Although financially more comfortable, Mitchell’s early life eerily echoed Pecora’s. Both overcame hardships to become accomplished schoolboy speakers. Pecora had to learn English; Mitchell to conquer his early stuttering. Both became president of their class.
Mitchell went to Amherst, and although he was not a stellar student, he was diligent and determined. Like Pecora’s, his family suffered a setback—his father’s business failed in Mitchell’s junior year. But unlike Pecora, Mitchell stayed in college, supporting himself by working part-time in a general store and teaching public speaking. The future Wall Street titan was tall and ruggedly good-looking. He had wavy hair, deep-set eyes, an “indomitable jaw,” and an athlete’s muscular body, with thick wrists and the hands of a “worker.” He exuded strength, not only physically, but mentally. He never wasted words and he always locked eyes with whomever he was talking to. For all that steely strength, Mitchell remained an amiable man, one who was well-liked and whose many friends voted him “the greatest” when they graduated in 1899. Mitchell, never one to doubt his own abilities and accomplishments, responded, “I am.”5
He left Massachusetts for Chicago to work for Western Electric, earning ten dollars a week as a clerk and spending a fifth of his salary on night classes in bookkeeping and commercial law. He quickly rose through the ranks and, six years after he arrived, the ambitious Mitchell came up with an idea to merge several manufacturing companies. He took that idea to the president of the Trust Company of New York, Oakleigh Thorne, who was so impressed with Mitchell that he hired him on the spot as his assistant.
Mitchell arrived on Wall Street just before the Panic of 1907 and he had a front-row seat for the good old-fashioned bank run then threatening his firm. Every day he saw the customers line up in the street to get their money out, and every night he worked with Thorne planning the next day’s strategy. In those days, it was up to private bankers to avert financial catastrophe, and J. P. Morgan, City Bank’s James Stillman, and other leading New York commercial and private bankers pumped millions into the firm, successfully preventing its collapse. “In five weeks,” Mitchell later boasted, “I was given five years’ training in banking.”6
After a few years with Thorne, Mitchell set out on his own. C. E. Mitchell and Company sold bonds, and no one sold bonds more aggressively than the firm’s namesake. He joined clubs, not to socialize, but for prospects, and he quickly developed a reputation as a young, high-energy go-getter. Mitchell was fantastically disciplined. With neither the time nor the inclination to join a gym, each morning he would walk the six or so miles to his Wall Street office at a blistering pace. It was a regimen he would keep up, rain or shine, for decades.
When he joined City Bank in 1916, Mitchell articulated a high standard for the affiliate’s selling efforts, first in bonds and then in stocks as the market ballooned. It was a standard that was built on the trust and confidence that he knew its customers, most of whom were financial neophytes, placed in the bank. “The time will never come,” the new president told a group of trainees, “when, pressed with the need for securities of our great selling organization, we will let down in our exacting requirements. . . . We are going to make more exacting our yard-stick,” he told the trainees, because for the firm “the law of caveat emptor cannot apply.”7
The old-line investment banking firms never advertised—J.P. Morgan was famous for not even having its name on the building. National City, however, was trying to reach a different audience—the “person of limited resources, all of whose capital and income are necessary to insure life’s future comforts.” So the firm placed advertisements in many of the magazines popular with the rapidly expanding middle class, right next to those for RCA radios and Lifebuoy soap. Mitchell even rolled out a nationwide billboard campaign. The advertising struck the same chord as Mitchell’s speech to the trainees. In an age when advertising was viewed quite explicitly as a form of education and when consumers remained uncritically accepting of many advertising claims, the company offered an image of financial solidity, investment acumen, and “unquestioned reliability.”
Tapping directly into investors’ natural insecurity over making potentially devastating blunders in a field in which few felt comfortable, National City assured investors that they needn’t “decide it alone.” It could help investors choose safe investments in which “their principal is always safeguarded.” National City’s “world-wide investment organization” was there “for the asking” to help investors sort out the “perplexing range of possibilities” they faced. City was not just
pushing generic investment advice, but individualized counseling. “National City judgment as to which bonds are best for you,” one ad read, “is based on both strict investigation of the security and analysis of your own requirements.” Indeed, the National City Company was pitched as a time-saving device, no different from the washing machines and vacuum cleaners then flooding the marketplace. Investors no longer needed “to make a prolonged personal study” of investments; they could rely instead on the company’s “experienced advice” to help them choose from “broad lists of investigated securities.” It all seems a bit quaint to modern ears, but in the 1920s the company’s customers really did seem to believe that the investment banker was a man of probity who put his customers’ needs and welfare before everything else.8
Those sentiments notwithstanding, Mitchell pushed his salesmen hard. If a salesman complained there were no buyers, Mitchell, universally renowned as “the greatest bond salesman who ever lived,” would take him to the opulent Bankers’ Club high atop the nearby Equitable Building and lead him to the window. “There are six million people with incomes that aggregate thousands of millions of dollars,” he would tell the salesman, waving his hand at the city below. “They are just waiting for someone to come and tell them what to do with their savings. Take a good look, eat a good lunch, and then go down and tell them.”
The Hellhound of Wall Street Page 9
