Just before the noon lunch break, it was time for Pecora to show just what City Bank’s compensation scheme meant to Mitchell’s bottom line. He first wanted to know how Mitchell and the others divvied up the management fund. There were some minor differences between the bank and the affiliate, but basically it was done in two ways, Mitchell said. The board’s executive committee allocated half the fund, deciding the share each executive would get based on his value to the company. Since Mitchell was a member of that committee, he had a strong hand in determining his own bonus for the year. It was an enormous conflict of interest. For the second half of the fund, however, Mitchell tried to cast himself as an enlightened business leader. Mitchell gave his subordinates the opportunity to anonymously vote on his share. “I do the rather bold thing of placing myself on a pedestal,” he proclaimed, “where the officers can throw all the stones that they will at me without my knowing from whom the stone comes, and I take their final net as the maximum which I will receive.”
While Mitchell may have considered himself enlightened, it is not entirely clear that Mitchell’s subordinates relished the opportunity to throw those stones, a point that Pecora was quick to make. Mitchell had “a voice in fixing the apportionments” of the management fund that the bank awarded to his stone-throwing subordinates, didn’t he? Mitchell conceded he did, but maintained that he did not know how they voted for him. That promise of anonymity, however, may have been small solace to Mitchell’s underlings. Mitchell was famously autocratic, ruling the bank by fear and the constant threat of dismissal if someone’s performance dipped.28
When his subordinates anonymously voted on Mitchell’s share, they signed a ballot indicating what share they thought their fellow executives should get of the remaining fund. It probably would not have been very difficult to match up the anonymous ballots with the signed ones. In constant anxiety about the security of their own jobs, were Mitchell’s subordinates confident enough in the anonymity of the process to vote Mitchell the share they thought he really deserved? It is hard to know today, but each year Mitchell took home about 40 percent of the bank’s management fund and about 30 percent from the securities affiliate. “Mitchell,” Pecora wrote, “asked for stones, but was given bread.”29
How much bread did he end up with? Through the management funds and his “low” salary, City Bank paid Mitchell over $3.5 million from 1927 to 1929. It is hard to even contemplate what those numbers must have sounded like to the people gathered in Room 301. Pecora was making $255 a month as counsel for the committee. The senators were earning $9,000 a year, congressional pages about a tenth of that amount. Newspapers had cut reporters’ salaries in half as they began to feel the economic squeeze. Factory workers, if they were lucky enough to have a job in February 1933—unemployment in the manufacturing sector was 45 percent—were making about $17 a week. If you were able to get relief in New York, you could expect to get $10 a week. Even in the bubble years, Mitchell’s income put him in rarefied company. Of the four million or so tax returns filed each year from 1927 to 1929, only a few hundred had income above $1 million. Measured in current dollars, Mitchell earned nearly a half billion dollars in those three years.30
Senator Brookhart, the progressive Republican from Iowa, who had been largely silent during the morning, was shocked. “Congress is making a big noise about reducing the salaries of these $1,600-a-year Government clerks. Would not it be a good idea for them to consider regulating the salaries of these national-bank presidents, first?” Mitchell wisely avoided answering. “That is something,” he said, “you will have to answer yourself.”31
But regulating salaries was not what Pecora was after. Just before the chairman called the noon recess, Pecora spelled out precisely the point he was trying to make in case anyone in the room had missed it that morning. It wasn’t just shock value, although that was certainly part of his calculus. Pecora was trying to show, as Senator Couzens had suggested earlier, that the bonus plan created inordinate incentives for “unwise security selling methods, and unwise and unsound banking methods.”32
After lunch, Pecora returned to the kind of factual details he started off with in the morning session. As the hearing went on, it became clear to Mitchell that this appearance before the committee was radically different from his earlier one, and that Pecora was a lawyer far different from Gray. As Pecora asked one precise and detailed question after another, he gradually saw a change in Mitchell, who, as he later recalled, “seemed to be wondering where I got the information from upon which I based these questions. I don’t know whether he had been told . . . that I had spent three days from morning till midnight examining these minute books.” Mitchell thought someone had given Pecora “a lot of inside information,” and so as the hearing wore on, Mitchell became more frank and candid in his answers. He had no choice; Pecora already knew what he would say. Indeed, by the afternoon Pecora must have known that he couldn’t have asked for a better witness than the “self-confident” Mitchell, who “was convinced of his own integrity” and seemingly clueless about the impressions his answers made.33
Two significant disclosures dominated the early part of the afternoon. Pecora stuck with his questions about the management fund, this time focusing on 1929, the year of the crash. The securities affiliate made its initial profit distribution to executives in July, as the stock market continued to boom. The October crash wiped out those profits and the executives should have been entitled to nothing for the year. But Mitchell, who had again taken the lion’s share of the fund, recommended to the directors that he and the other officers be allowed to keep the money they had received in July. They would just call it an advance on future bonuses.
Would it “not have been fairer to the company,” Pecora asked, “for [the officers] to have made a refund?” Mitchell refused to concede the point. He tried to argue that the executives were entitled to keep the money despite the affiliate’s losses for the year. What about those “advances”? Pecora queried. Did Mitchell or any of the other executives have their subsequent bonuses reduced because of the advances? Mitchell had no choice but to admit that there had been no profits in the past three years and, he was “sorry to say,” no prospects for any in the current depression. Calling the distributions advances thus “proved a very inexpensive gesture.” Mitchell and the other executives never returned any of that money, showing about as much regard for their duty to the shareholders of the bank, whom they theoretically worked for, as for its customers. Indeed, as would become apparent in the next few days, Mitchell never even saw fit to disclose to the bank’s shareholders just how much he and the other officers were taking through the management fund. Why should he? “Mr. Mitchell’s whole attitude,” Pecora wrote, “was not that of the servant, but of the master, of his institution.”34
In the afternoon, Pecora also began to lay out some of the unwise securities-selling methods this compensation scheme created, focusing first on the slim information City Bank typically provided to investors. The former Bull Moose progressive was adhering closely to the progressive playbook. Other People’s Money, Louis Brandeis’s then two-decade-old chronicle of the Pujo investigation, advocated increased disclosure as the best way to clean up Wall Street abuses. “Sunlight,” the future Supreme Court justice wrote, “is said to be the best of disinfectants; electric light the most efficient policeman.”
If investment bankers had to disclose not only their fees but also all the material information about the securities they offered, investors would be adequately equipped to make up their own minds about what to buy and what to shun. Like much of progressivism, it was a modest and moderate reform. The government would not be in the business of deciding what securities were safe enough to sell. Disclosure was simply an attempt to make the market for securities function more efficiently. It was also the reform Roosevelt pushed during his presidential campaign. Perhaps burned by some of his own investment failures, Roosevelt once described stocks as “a package too often sold only because o
f the bright colors on the wrapper.” Candidate Roosevelt proclaimed that federal law should “let in the light.”35
To make this point, Pecora returned to the spreads that Senator Couzens had brought up in the morning session. Spreads were a focal point in Brandeis’s critique and now Pecora walked Mitchell through a standard bond sale. In a hypothetical deal, City Bank would buy a bond with a face value of $100 from the issuing company for $90, and then sell that bond to investors for $97.50. So, in a $10 million bond issue, City Bank would immediately pocket $750,000. Did the affiliate, Pecora wanted to know, tell investors about the spread?
The answer, of course, was no; City Bank never told customers what it was making on the deal. Nor, for that matter, did any other United States investment bank. Mitchell, who viewed securities selling as no different from any other form of retailing, was “perplexed” at the point Pecora was making: “If I go in and buy a pound of coffee there is no indication as to what the grocer paid for it and what profit he got for it.”
Pecora quickly rejected that analogy: “But when a person goes to a store to buy a pound of coffee he knows the merchandise that he is buying, doesn’t he?”
Mitchell tried humor to throw the lawyer off his point. “Well, from some of the coffee that I have drunk I wouldn’t think he did.”
But Pecora kept at him, refusing to be put off. “And that usually is the fact with regard to the average investor, isn’t it?” he asked Mitchell. “He doesn’t know the offers except as to such information as is vouchsafed to him by the offering house?”
Mitchell had to agree; he had been saying the same thing for years. The company’s customers knew very little about the securities it offered and the firm encouraged investors to rely on its “experienced advice.” So, Pecora asked Mitchell again, did he think buyers should have information on spreads? Mitchell was at least candid: “I have been unable myself to really see the desirability of it.” He did claim that he thought investment bankers “ought to work toward giving additional information to the public. But whether [information about spreads] is pertinent, whether it is something that would really aid a buyer to determine the true intrinsic merit of that which he buys, I must say I am very much in doubt.”
Was there harm in providing the information? Pecora asked. “No,” Mitchell replied, “but it would not be harmful or beneficial as to whether the circular was printed on red paper or gray paper or yellow paper.”
Pecora didn’t care for that answer at all, and he rebuked Mitchell with a flash of anger that had not been seen in the morning. “I am not discussing the best color. The color of the paper gives no information, does it, of the security to the public?”
Mitchell remained unconvinced. “I do not consider that spread is pertinent information. Maybe it is.” It was, in other words, a mystery to this Wall Street tycoon why a customer, trying to evaluate the advice it was getting from City Bank, would care about the company’s profit margins on the various securities it offered. Wouldn’t the company have an incentive to push the securities on which it stood to make the most money? Mitchell apparently could not, or would not, see the issue. Despite his pronouncements to the bond training class at the company that caveat emptor was not good enough for the sacred relations between the securities affiliate and its customers, that seemed to be precisely what the firm was practicing.
Mitchell was hardly alone among business and financial leaders on this score. Many of them, despite the progressive call for greater disclosure, still seemed to adhere to the contemptuous sentiments of Henry O. Havemeyer, the president of the American Sugar Refining Company. He thought that the public had no right to know anything about the internal operations of the company before buying its securities. “Let the buyer beware,” he proclaimed at the turn of the century. “That covers the whole business. You cannot wet-nurse people from the time they are born until the day they die. They have got to wade in and get stuck and that is the way men are educated and cultivated.”36
Because of Mitchell’s blindness on the importance of spread information, Pecora pushed back on the banker’s claim that he was “heartily in favor of fuller information.” Wasn’t City Bank the largest investment bank in the world? “It would not have been unbecoming,” Pecora suggested, “for the National City Co. to have taken the lead in bringing about a change in custom with regard to putting out fuller information to the public?”
Mitchell insisted that the bank was “trying to blaze a trail with respect to that.” Now it was Pecora’s turn to be sarcastic: “When did you commence to blaze that trail?”
About eighteen months earlier, Mitchell said, and explained that City Bank had “learned much” from its mistakes during the boom years. Of course, City Bank was hardly alone in making errors: “We have all made mistakes, and a man that can not profit by it certainly is not very worthy.” Now, Mitchell repeated, the bank was trying to lead the way to a better investment banking industry: “We are trying to blaze the way for investment finance into a higher ground than it has been.”
Pecora was dubious and he gently reminded Mitchell of his response from only moments ago. “But you have not yet blazed the trail to the point where you are giving the investing public information concerning the price at which the company acquires these securities that it offers to the public?”
No, an annoyed Mitchell answered, the bank had not yet blazed the trail quite that far.37
Late in the afternoon, as the light began to fade outside, Senator Smith Wildman Brookhart, a lame duck insurgent who would be out of the Senate on March 4, decided to change topics. Brookhart was one of the most colorful characters on the Banking and Currency Committee. It was said that his ten years in the Senate had changed neither his pants nor his philosophy. Nominally a Republican, he viewed the members of the party’s right wing “old guard” as his mortal enemies, and he had long advocated “control of Wall Street.” He introduced one of the bills to criminalize short selling. A crack rifle shot, a great political barnstormer, and an “incorrigible Progressive,” Brookhart was, according to a Washington journalist of the day, “one of the best inflamers that Iowa ever produced.” Unfortunately, he was far from an intellectual powerhouse, and he knew little about the financial and banking communities that he continually railed against. Norbeck said that not only was Brookhart “the most easily fooled man in Washington,” he never even realized afterward that it had happened.38
The Iowa senator had been shocked at Mitchell’s salary, and he had heard at lunch from at least a dozen of the spectators filling Room 301 that they had lost their life savings when City Bank’s stock collapsed. How much of the bank’s stock did Mitchell own, Brookhart asked, and did he sell any of it before the crash? Anyone who had done his homework would not have asked the question, at least not that way. In his defense, Brookhart had just returned from Iowa, where he had been confined to bed with a case of double pneumonia. Still, the senator had, however unwittingly, given Mitchell the perfect opening to explain how honorably he had acted toward the shareholders. In fact, Mitchell proclaimed, he was the largest buyer of City Bank stock in 1929; he had boldly stepped in to buy the bank’s stock in the middle of the crash to sustain the share price and “protect our shareholders.”
Ever the firebrand, Brookhart scoffed at that response. He accused Mitchell of being unsympathetic to the shareholders who were wiped out when the bank’s stock cratered. Forgetting or ignoring for the moment the bonuses he had raked in during the boom years, Mitchell shot right back. His response wasn’t sympathetic, it was indignant. “If anybody here in the room, or anybody that you know, has suffered a loss in gross that I have in City Bank stock, then you know somebody that I do not,” Mitchell insisted. “I, individually, have suffered a greater loss from the market failure in National City Bank stock than any other individual in the United States.”39
If Mitchell was looking for sympathy or commendation, he wasn’t going to get it from Pecora. In the coming days, Pecora would reveal that Mitchel
l’s actions were not quite as honorable as the banker claimed. For now, however, Mitchell’s boasts about his stock purchases gave Pecora the opening he needed to throw his last bomb of the day. Pecora’s next question highlighted the real difference between the average grandstanding senator and Pecora, the skilled courtroom advocate. Brookhart had no idea what Mitchell would say when he asked his question; he only hoped the banker would be embarrassed by the answer. Pecora knew precisely what had happened when he asked Mitchell, “Well, Mr. Mitchell, did you also sell during the year 1929 any substantial portion of your holdings of National City Bank stock?”
At first Mitchell ignored the question and went right back to trumpeting his purchases. He owned more stock now than ever, he finally concluded after a long, rambling response. That kind of answer might have worked with the committee’s former counsel, but it wasn’t going to throw off Pecora. Pecora patiently let Mitchell finish his answer and then politely repeated his question. “No . . . my question was: Have you also sold very extensively of your holdings in that period or before the end of that year?”
The Hellhound of Wall Street Page 18
