The Hellhound of Wall Street

by Michael Perino

  Could Mitchell save the market again? He tried to say all the right reassuring things, insisting that he was unconcerned about what he viewed as a “purely technical” market adjustment. Sunshine Charlie had been right many times before—this time he was dead wrong. With the bankers’ organized support the market stabilized, but only temporarily. On Monday, as thousands of frightened investors congregated outside the police barricades surrounding the New York Stock Exchange, the market dove a record 13 percent. Another 12 percent drop on Black Tuesday, on volume that easily beat the record of the previous Thursday, meant that the market had lost $30 billion in value in a week, ten times the annual federal budget.22

  There was no way that Mitchell, after his unbounded optimism and failed attempt to stem the crisis, could avoid some well-earned rebukes in the aftermath. Senator Glass did not mince words, charging that Mitchell was “more responsible than all others together for excesses that have resulted in this disaster.” The New Yorker did its best to supply a little humbling derision. Parodying the New York Times’s Neediest Cases column, it told the story of “Charlie,” who “likes nothing better than to tell everyone that the prices of securities in Wall Street are grotesquely conservative.” Charlie was now forced “to subsist on a diet of crow and raspberries. What he needs for Christmas is some good, serviceable prestige.” Publicly, Mitchell maintained the requisite stiff upper lip, but in private he “accused the country of crucifying him.”23

  The reprimands and ridicule, however, were aimed at Mitchell’s lack of foresight, not his villainy. Almost no one seemed to believe that Mitchell had deliberately deceived investors—he was simply overly optimistic. “When Mr. Mitchell was broadcasting his roseate dreams to buy stocks,” one author wrote at the time, “he thought he was walking in a new world.” Mitchell’s public optimism mirrored his private comments. The banker had wired the Wall Street financier Bernard Baruch in August 1929 that stocks looked “exceptionally sound” and likened the market to “a weather-vane pointing into a gale of prosperity.” Baruch proved to be the savvier investor—with Mitchell’s predictions still reverberating in his head, he chose to sell all his remaining stocks and managed to get out of the market before the crash.24

  Even with this colossal blunder, Mitchell’s position at City Bank was never in jeopardy. Percy Rockefeller (John D. Rockefeller’s nephew) was a City Bank director and one of its largest stockholders, and he called rumors that Mitchell would resign in the wake of the crash “too absurd to be considered by any sensible person.” Even a magazine as liberal as the Nation could still call the “imaginative and unconventional” Mitchell “courageous” for his “progressive” attempts to democratize banking. Sure, he was only doing it to make money, but Mitchell had, nevertheless, convinced his bank “to lend to common people in small amounts, at reasonable interest” and to “sell securities to even the least investor.” He had “done as much as any one . . . to socialize banking.” Mitchell was still a banking visionary.25

  Within a few months, Mitchell’s reputation would rebound, and by 1932 he was far from a pariah. His place in society and in the power structure of the country appeared both secure and undiminished. In 1930, he was on a list put together by a wealthy corporate lawyer and former ambassador to Germany, James W. Gerard, of the fifty-nine men—mostly bankers and industrialists—who, “by virtue of their ability” actually “ruled” the United States. Publication of the list caused something of a sensation. Some scoffed at Gerard’s assertion that these men were “too busy to hold political office but they determine who shall hold such offices.” Still, New York’s Governor Roosevelt felt compelled to announce that he was tired of a handful of men controlling the destinies of 120 million. Whatever the truth, Mitchell’s inclusion on the list reflected his secure position among the business and financial elite. He served out his term as a director of the New York Federal Reserve, despite Glass’s finger-pointing. In many quarters he was still praised for his courageous stand against the Federal Reserve.26

  A year later, Mitchell prominently came to the rescue of New York City. As the Depression worsened, cash-strapped owners stopped paying their property taxes, while relief efforts sent the city’s expenses skyrocketing. In no time, New York City was on the brink of financial collapse. Mitchell led a team of bankers in negotiating potential loans to the city. When Mayor Walker was summoned to a meeting at Mitchell’s Fifth Avenue home, the banker read him the riot act—he needed to cut salaries and purge the city’s bloated payroll of patronage appointments. “Cut your budget,” he bluntly told Walker, “or go elsewhere for your money.” Despite Walker’s popularity with the voters, it was clear where the power lay. Walker was so nervous that he pulled all the tacks out of the antique French chair on which he was sitting. He hastily retreated, the city slashed salaries, and the loan was made.27

  That same year Hoover consulted Mitchell and other leading bankers on ways to address the credit crisis then gripping the country. Mostly, Mitchell thought the government did more harm than good. Taxes were damming “the natural flow of wealth,” and he advised the government to simply stay out of the way. “[E]very experiment in Government management,” he lectured, “demonstrates its disqualification in that field.” By 1933, Mitchell’s knee-jerk optimism remained, for the most part, undimmed. He was “moderately hopeful” that the storm would soon be over. The banking panic, he said, had been overcome and the United States’ economic system was “essentially sound, the most efficient in the world, and capable of providing a higher standard of living for the people than yet has been known in any country.” A few days before the Long filibuster killed Senator Glass’s banking bill, Mitchell warned City Bank’s shareholders about the dangers of severing securities affiliates from commercial banks. Affiliates were an “essential element in the financial machinery of the United States” and eliminating them would, he confidently asserted, make it that much more difficult for the country to emerge from depression.28

  Bankers’ reputations among average Americans were certainly battered and bruised at the end of January 1933. Father Charles Coughlin, the popular radio priest, grew even more popular when he began to blame Wall Street and international bankers for the Great Depression. As the Depression wore on, Coughlin’s commentary turned violently anti-Semitic, leading some commentators to dub him the father of hate radio. But in the early 1930s, at the height of his popularity and influence, Coughlin’s targets were “greedy bankers and financiers.” When Coughlin called Hoover “the Holy Ghost of the rich, the protective angel of Wall Street,” tens of thousands of letters, many stuffed with donations, inundated his church in Royal Oak, Michigan. In January 1932, another priest, Father James Cox, led a ragtag group of unemployed men to Washington. After an audience with Hoover, Father Cox confidently declared that the United States had “a government of the bankers, for the bankers and by the bankers.” Being a banker, the American Mercury noted, was “formerly regarded as a mark of esteem in the United States,” but was now synonymous with “rascal” or “scalawag.”29

  There was, at the time, a tendency, wrote journalist Anne O’Hare McCormick, “to blame the bankers for almost everything.” Mitchell was still thought of as a “rampant bull” and he and other bankers, once heroes, were now the scapegoats of the crash. In bad economic times, Americans have traditionally suspected Wall Street’s motives and its morals, but now the country doubted its intelligence, too. “An eminent financial expert,” one wag noted, “declares that conditions are improving. Nevertheless we think conditions are improving.”

  When Pecora subpoenaed Mitchell to appear before the committee, it remained clear that the public’s simmering and unfocused anger at Wall Street and the lingering animosities about Mitchell’s role in the boom days had done little to dent either the power he wielded or his stature in the banking community. Americans were angry and suspicious. Demagogues like Father Coughlin were eagerly denouncing bankers as “gangsters” who were “perfectly organized for their own se
lfish ends.” But no one had yet provided proof that Mitchell or any other leading Wall Street banker had in fact acted illegally or unethically.30

  The day after he was subpoenaed, Mitchell called Pecora directly. Seated in his wood-paneled office with its black marble fireplace, the banker was in full salesman mode, apparently feeling no need to interpose a layer of lawyers between himself and this neophyte senatorial investigator. Mitchell wasn’t taking Pecora too seriously—when he wrote Pecora a few days later, he didn’t even get his address right. On the phone he “told [Pecora] a persuasive story about the urgent necessity” of his trip to Italy and of his plan to sail in just a few days. The banker assured Pecora that he was unnecessary; the other executives of the bank had all the information the committee needed. If the committee released him from the subpoena “he would return on March 1st and submit himself for examination before the close of this session of Congress.” In exchange, the banker held out a big carrot. Mitchell promised Pecora that the bank would fully cooperate with the committee’s investigation. “Mr. Mitchell agreed,” Pecora informed Norbeck, “that the investigators and accountants of the Committee’s staff should have complete access to all the records that we regarded as relevant to the Committee inquiry.”31

  Mitchell was trying to stall, to run out the clock. He knew that authorization for the investigation expired on March 4, and if he returned from Europe on March 1, at best the committee would have just two days to question him. And that was a big if. Less than a decade earlier, Harry Blackmer had fled the country rather than testify in Congress about Teapot Dome. On that last day of January 1933, he was still safely beyond the reach of the United States legal system, splitting his time between Monaco and Cannes. Samuel Insull, currently under indictment in Chicago, was still successfully fighting extradition from Greece. Mitchell would have a much easier time avoiding the committee.32

  Pecora surely realized all this, but he also must have wanted to keep his options open. He certainly did not want to reject Mitchell’s request while the banker was holding out the promise of unfettered access to the bank’s records. There is, of course, nothing glamorous about document review—most of the time it’s mind-numbing drudgery. Lawyers typically dread the countless hours it consumes, the incessant, patient sifting of stacks and stacks of documents necessary to reconstruct the facts of a case and to unearth the few gems that may make or break it. Pecora thrived on courtroom forensics, so he was probably no different. He knew, however, that the flashy and effective cross-examination couldn’t happen without the long slog through reams of paper. There are few surprises for great cross-examiners, who almost invariably know the answers to their questions before they ask them. It is really the only way to pin down evasive witnesses, who are unlikely to concede anything important unless confronted with the documentary evidence that leaves them with no other choice. It was the failure to do that kind of legwork that had made Richard Whitney’s appearance such an abject failure for the committee. With the investigation hanging in the balance, Pecora was not about to make the same mistake with City Bank.

  Naturally, none of this was news to City Bank’s lawyers, and it was certainly possible that Mitchell was lying; perhaps he had no intention of allowing Pecora’s staff to run untrammeled through City Bank’s books and records. The senator and later Supreme Court justice Hugo Black wrote that business executives at the time had “built up the fiction that they have a right to enjoy some special privilege of secrecy” from governmental investigations. Pecora decided he could wait and see, at least for a little while. On the off chance that Mitchell really was going to provide Pecora with exactly what he wanted, he would remain noncommittal. He told Mitchell that he “would consult with the Committee and take the matter under advisement myself.” He agreed to let Mitchell know by Thursday—two days later and two days before Mitchell was due to sail—about whether his appearance could be postponed.33

  Those two days let Pecora test Mitchell’s cooperation, and it quickly became clear that it was not forthcoming. When Pecora’s staff went to City Bank headquarters the next morning, they met with delay and dawdling. City Bank was not so shortsighted as to refuse outright. “While there was no abrupt or disagreeable obstruction,” Pecora informed Norbeck, “ways were invented to kill time by reason of objections to various lines of our inquiry.” It was much the same treatment that committee investigators received in the spring of 1932 when they investigated the bank’s participation in the Anaconda Copper stock pool. At that time they were told that they could look at selected documents, but only under the watchful gaze of a City Bank officer, and under no circumstances were they permitted to take notes. Why William Gray, the committee counsel at the time, would agree to such restrictions is a mystery, but it is some measure of the deference accorded to the theoretically omnipotent leaders of Wall Street. City Bank was trying the same tactics again. Now Garrard Winston, a partner from City Bank’s outside law firm, Shearman & Sterling, and a director of the securities affiliate, would have to review and approve all requests before the investigators could look at a single document. If there were any doubts about City Bank’s strategy, those doubts were now gone.34

  Norbeck wasn’t pleased with the delaying tactics and he decided to turn up the heat on the company. Right after getting off the phone with Pecora, Norbeck told reporters that the committee intended to focus its inquiry on how City Bank sold its own stock. That wasn’t quite right—Pecora wanted to examine all the stocks and bonds City Bank sold, not just its own. Norbeck then placed responsibility for the stock market bust—and by implication for the ensuing Depression—right at the feet of City Bank and Mitchell. The investigation showed that the participation of large banks in stock promotions was “highly responsible for the wild stock market boom.” The Federal Reserve tried to slow down the stock market, Norbeck argued, but Mitchell “defied the board and speeded up the boom. He took a ‘go-to-hell’ attitude toward the Board and got away with it.”35

  Norbeck’s press gambit backfired. Bank employees told Pecora’s staff that “the picture has now changed.” From there on in, they intended to focus on the precise language of the Senate resolution in analyzing document requests. The message was clear: City Bank would look for any basis on which to shield material from the committee.

  After a day of fruitless attempts to gain access to the City Bank records, Pecora summoned Shearman’s managing partner, Guy Fairfax Cary, to his office. Sitting in Pecora’s tattered armchair, the patrician Cary, who had been a City Bank director since 1919, could not have been more out of place. Cary looked the part of the serious, formal, somewhat tightly wound Wall Street lawyer, with his down-turned mouth, bald head, and frameless pince-nez. Indeed, other than the fact that they were both New York lawyers of about the same age, it is hard to imagine two men with more different backgrounds. Cary was part of New York’s business and social elite. His maternal grandfather was a partner at one of the leading investment banking houses, Brown Bros. & Co. Cary attended prep school at Groton before going on to Harvard and Harvard Law. Now approaching his third decade of practice, he catered to the legal needs of large corporations and wealthy New Yorkers. Cary lived on Park Avenue, summered in Newport, was a fixture on the New York social scene, and belonged to some of the city’s most exclusive clubs, the kind of clubs that did not allow lawyers with vowels on the ends of their names to join.36

  For Cary to feel uncomfortable was just what Pecora wanted. He knew it was a “crude” psychological trick, but it was usually effective. Pecora would later use the same tactic in his initial meeting with J. P. Morgan Jr. Morgan famously went nowhere for meetings—if someone wanted to meet, he or she would invariably come to Morgan at 23 Wall Street. Pecora, however, insisted that he was too busy to make the trek down to Lower Manhattan; Morgan would have to come uptown. It had the desired effect. “I felt,” Pecora said, “it might be a good thing to do something which might convey to Mr. Morgan the impression that he was not going to meet Ferdinand Pe
cora, the individual, but that he was to meet a representative of the United States Government.”37

  Cary may have felt uncomfortable, but he remained recalcitrant. He told Pecora that according to his own reading of the resolution, the committee’s authority was severely limited; it could only investigate “listed securities.” That meant City Bank would not turn over any documents involving transactions in securities not listed on the New York Stock Exchange. Norbeck’s misstatement concerning the thrust of the committee’s interest—the issuance of the bank’s own stock—also gave Cary a big opening. If that was the case, Cary told Pecora, then the committee had no authority to investigate any matter involving the bank after January 11, 1928, the day City Bank had delisted from the New York Stock Exchange, ostensibly to prevent manipulation of its own stock.

  Cary’s argument was aggressive; he was trying to excise from the investigation all of City Bank’s activities around the crash, effectively gutting the investigation. Unlike the supine Gray, however, Pecora wasn’t going to back down, and he wasn’t going to get hemmed in by every mistaken utterance that came out of Norbeck’s mouth. Pecora told Cary that his position was unsound. Yes, the resolution referred to listed securities, but it also authorized the committee to investigate the effect stock exchange trading had on “the operation of the national banking system and the Federal Reserve System,” of which City Bank was most certainly a part. The resolution also didn’t limit the committee to investigating listed securities; it authorized the committee to investigate buying and selling of listed securities. Whether City Bank was listed was irrelevant, because City Bank was clearly in the business of buying and selling listed securities. Pecora was right, but Cary wasn’t looking to be right. He only needed a plausible argument that would allow him to slow down Pecora’s investigators.