Mitchell hedged, but finally conceded that there had been some “personal transactions” in the later part of 1929. Pecora pressed on and a few questions later, the truth tumbled out. At the end of 1929, Mitchell sold 18,300 shares of City Bank stock to establish an investment loss and then turned right around and bought the stock back for exactly the same price in early 1930. There was absolutely no economic reason for the transaction; it was a sham, done with only a single goal in mind.
“I sold this stock,” Mitchell conceded, “frankly, for tax purposes.”
Brookhart thought Mitchell was putting a bit too fine a point on his motive. The “sale was really just a sale of convenience” to reduce his income tax, wasn’t it?
Mitchell hedged again: “You can call it that if you will.”
“Well, is that right?”
“Yes, it was a sale, frankly, for that purpose,” Mitchell finally admitted.
No one in the room could have expected this. A cold hearing transcript rarely provides clues as to the reactions of the spectators, but there were really only two possibilities—either stunned silence or shocked murmuring. This was supposed to be a hearing about stock-selling practices, but Pecora had just succeeded in making one of the leading bankers in the country—a man of theoretically “unimpeachable integrity”—admit to what might have been criminal tax evasion. The confident man who walked into the committee room irked at the banality of yet another congressional hearing was now facing the real prospect of incarceration for a personal transaction that had nothing to do with stock exchange practices, but had a great deal to do with public perceptions of his character and his motives.
Pecora didn’t want to leave any doubts about the transaction Mitchell had just admitted, so he had Mitchell spell out all the details. How big a loss did Mitchell report on just this one transaction? There was a bit of jockeying, but the number that finally came out was large even by today’s standards; in early 1933 it was colossal—$2.8 million. Yes, Mitchell admitted, due to that single transaction he did not have to pay a penny of taxes for 1929, the same year he took home $1.1 million in salary and bonuses. Pecora had just one final question: “By the way, that sale of this bank stock that you referred to in the latter part of 1929 was made to a member of your family, wasn’t it?”
“It was; yes, sir,” Mitchell replied.40
Pecora was gentleman enough not to disclose that the member of Mitchell’s family on the other side of this trade was his wife, Elizabeth. The portrait of a greedy banker willing to use any artifice to hang on to every cent of his enormous salary was now complete, and Pecora had Norbeck adjourn the hearings for the day.
It was all over before five o’clock. In a little more than four hours of testimony, Pecora, in concert with the senators on the committee, had managed to punch some gaping holes in the veneer of invincibility and respectability surrounding City Bank and in the unimpeachable integrity of Charles Mitchell. Mitchell and his associates were not dispassionately looking out for the interests of depositors, securities customers, or even the bank’s shareholders. Pecora was understated when he described their motives in his memoirs; they had, he said, “a lively interest in their own financial profits as well.” In truth the picture Pecora painted on that first day of testimony was of a corporation run with only a single purpose in mind—to maximize the financial returns of its officers, especially its chairman. Nothing else seemed to matter. Not the shareholders, who were kept in the dark about how much the officers were raking in; not the customers, who trusted the institution to provide them with sound financial advice; and certainly not the federal government, whose tax bills could be easily evaded with a couple of ledger entries.41
If Pecora’s goal was to create outrage, he succeeded magnificently. The only thing dividing most newspapers was which part of the testimony was more outrageous. The Washington Post went with the bonuses (the paper ran the line “Huge Pay Told” over Mitchell’s picture). For the New York Times, it was the taxes—“Mitchell Avoided Income Tax in 1929 by ‘$2,800,000 Loss,’” its headline read. Given Mitchell’s prominence, the most common reaction was surprise and shock. “Charles E. Mitchell, president of the National City Bank, and a man who has always been held in high regard,” one paper wrote a few days later, “admits a cheap dodge to avoid paying income taxes in 1929.” The Wall Street Journal’s coverage was, perhaps not surprisingly, notably different. It thought the most significant aspect of Mitchell’s testimony was his huge purchases of City Bank stock during the crash. The Journal gave only cursory treatment to the bonuses and, as for taxes, merely buried near the end of the article that there had been “temporary transactions in connection with taxation.”42
The New York papers reported the news stories, but their editorial pages were strangely silent. This was not true in the Midwest, where editors typically needed little prompting to criticize Wall Street. The Capital Times of Madison, Wisconsin, for example, praised the “strong calcium light” Pecora was shining on City Bank. The editors saw the bonuses as a “vicious accelerator” of the Great Depression. “Perhaps few things could be worse or more corrupting and insidiously devastating,” the editors wrote, “than paying officers of a bank, which underwrites extensive bond issues, a bonus. That is one institution where a bonus shouldn’t even be permitted in the front door.”
The mood in Congress was ugly. Brookhart was furious, although that was hardly a surprise since he believed that Wall Street “was the particular invention of the devil.” As he devoted more time to the Detroit banks, Senator Couzens faded from the hearings, but he was especially indignant about Mitchell’s tax dodge given his own running battles with Treasury. The idea that a business leader like Mitchell would try to avoid paying his proper taxes through this kind of ruse infuriated him.
On the floor of the Senate the next day, Burton K. Wheeler, the progressive Montana Democrat, roared, “It seems to me that the best way to restore confidence in banks would be to have them take these crooked presidents out of the banks and treat them the same as they treated ‘Al’ Capone when he avoided payment of the income tax.” Soon bankers everywhere were derided with a new nickname—“banksters.” Carter Glass, a vehement states’ rights advocate, offered his own peculiarly Southern quip: “There is a big scandal down in Georgia. The fact has just been discovered that a white woman is married to a banker.”43
The previous summer, Agnes Meyer, that perceptive Washington chronicler, had expressed her anger at “New York bankers” who had “proved that they are no heroes. The wealthy classes as I have learned to know them through the depression are not much to be admired. They are overcome by fear and selfishness.” The worst were the bankers. “If the general public realized the ignorance, smallness, futility and greed of the average N.Y. banker,” she wrote in her diary, “I think they would certainly hang a few of them, beginning I hope with Charlie Mitchell.”44
That was precisely what Pecora had shown on that first day of testimony. There was still much more to come.
Chapter 9
DAY TWO: MORALE
By Wednesday, the sham stock sale had clearly emerged as the biggest story. Reporters were desperate for more information on the transaction, especially the identity of the mysterious family member on the other side of the trade. As the day wore on it became clear they weren’t going to learn that information from either the committee members or from Mitchell. The 1930s were far more gallant than the present times, and the senators on the committee refused to divulge Elizabeth Mitchell’s name because they were reluctant “to bring that person unnecessarily into a public investigation.” Mitchell clammed up entirely, most probably on the advice of his lawyers, who must have known he was now facing a potential tax evasion charge. When reporters asked him about the sale, Mitchell would only say, “I shall make no statement as to that while these hearings are still in progress.”1
Not everyone was happy with Pecora’s first day of work on the City Bank hearings. One critic dashed off a handwri
tten note to the committee to complain vehemently about the unfair treatment that Mitchell suffered at the hands of Pecora and the senators. “If ever a man was crucified that man was C.E. Mitchell.” The leaders of the investigation were a “bunch of ward politicians” who only knew how to spend “money like a lot of drunken Indians. . . . One of the finest men in the country has been sacrificed on the altar of political ambition.” That kind of opinion, however, was decidedly in the minority—most everyone who wrote to the committee for the remainder of the City Bank hearings was angry, but their anger was directed at Wall Street, not Washington.2
Over the course of the day, Hoover administration officials saw the banking crisis worsen appreciably. People across the country were rushing to banks, withdrawing in aggregate tens of millions of dollars each day, and hoarding it to prevent it from possibly being lost forever if their bank failed. The United States was still on the gold standard in those days, permitting depositors to exchange their paper money for bullion. In those sketchy times, precious metals seemed like a more certain bet than paper money, so many customers insisted on the former or on the gold coins that were then still in circulation. European central banks were also pulling gold from the United States at alarming rates. The huge outflow of gold—into European government coffers, sock drawers and strongboxes, and in jars buried in the backyard—put yet another strain on the already strained banks. Federal Reserve banks were required to maintain a certain amount of gold, and some were coming close to dropping below that mandated level. Banks in Cleveland, Toledo, and Baltimore were particularly hard hit by wave after wave of panicked withdrawals. All sent urgent appeals to the RFC for emergency loans.3
Mr. Mitchell, are you an officer of the General Sugar Corporation?” With his first question on Wednesday, Pecora revisited the crisis that led to Mitchell’s selection as the bank’s president, in 1921. The bank had foolishly wagered 80 percent of its total capital on the Cuban sugar industry and in the face of plummeting sugar prices the bank had nearly collapsed. In characteristic Mitchell fashion, he decided to invest even more in Cuba. The bank consolidated its holdings in the General Sugar Corporation—in effect City Bank was going into the sugar business—and waited for sugar prices to turn around, at which point it might be able to sell its holdings at a smaller loss.
Mitchell told City Bank’s shareholders over the next several years that the Cuban situation was “well in hand” and had “continued to improve,” but it wasn’t and it hadn’t, at least not in any meaningful way. Prices never really came back; they bounced between two and six cents per pound throughout the 1920s. Many of City Bank’s loans were made when sugar was selling for twenty-two cents a pound. It is hard to imagine that an intelligent businessman of Mitchell’s caliber could have ever thought they would reach that level anytime soon. Those were monopoly prices under wartime conditions. Most likely Mitchell simply wanted to postpone the day of reckoning until the bank was in a more stable financial position. If he could grow the bank sufficiently in other areas, writing off the sugar loans would end up being a much smaller percentage of the firm’s capital base.4
By 1926, General Sugar was consistently losing money, and, with the bank now otherwise thriving, Mitchell decided to finally close the books on the Cuban sugar fiasco, halting any further loans to the country’s mills. Federal bank examiners had been after him for years to write off the loans but Mitchell dismissed their suggestions, apparently believing that the examiners’ views were barely worthy of consideration. “[W]hat a bank examiner could know about the detail of operation of these great properties in Cuba,” he said disdainfully, “was always a question in our mind.” Even after deciding to shed the loans, Mitchell still didn’t want to write them off entirely, because doing so would reduce the bank’s capital too drastically. Nor did he have any great interest in publicly disclosing the enormity of the bank’s Cuban losses. So he fixed on another plan, a plan that Pecora briefly explored in the hearings the previous afternoon.5
On February 15, 1927, City Bank sold 250,000 new shares for $200 each. Half the $50 million it raised was allocated to the securities affiliate, the National City Company. The very next day, National City purchased all of General Sugar’s 1.5 million shares for precisely $25 million. General Sugar in turn then paid off the vast bulk of what it owed to City Bank. Through this simple transaction, City Bank had neatly excised the Cuban debt from its books and placed it in its affiliate, with the bank’s shareholders picking up the tab. This shift, Mitchell conceded, was the primary motivation for increasing the company’s capital—to get the bank out of its exposure to Cuba.6
On Tuesday, Pecora asked Mitchell if the bank classified the Cuban sugar loans as bad loans. Mitchell would only say that they were “slow and doubtful,” although he did admit that in 1931 the company had written down the value of the 1.5 million General Sugar shares it owned to $1, essentially conceding that the shares were worthless. Of course, that $25 million came directly from the shareholders—that was the whole point of the stock offering. Hadn’t City Bank, Pecora demanded, simply bailed itself out of a bad loan?
Mitchell was unwilling to concede that the bank’s shareholders had squandered $25 million. “It was,” he said, “a transfer at the time of a short-term questionable investment that the bank had . . . into a long-term investment in the City Co.” The transaction, he continued, was “a contribution by shareholders in cash to make up for losses which would otherwise have affected the capital and surplus and undivided profits, the capital structure of the bank.” The shareholders were, in Mitchell’s view, simply repairing “the condition of the institution.” Because shareholders had an equal interest in the bank and the affiliate, transferring the loan between the two was simply a matter of accounting; “the stockholders when they got through it,” Mitchell argued, “had exactly what they had before.” Indeed, this shift in accounting arguably made a positive difference; the shareholders were actually better off with these loans in the affiliate to the extent that the bank’s capital was now freed up to make additional profitable loans or investments.7
Mitchell was right, but only to a point. The National City Company never published an annual earnings statement, and Mitchell was clearly using the affiliate to obscure City Bank’s mistakes, both to outsiders and to the bank’s own shareholders. As Mitchell confided to one of his bond salesmen, “We wash our dirty linen on the back porch rather than on the front porch.” Having the affiliate there to quietly take care of those mistakes created an insidious problem. If the executives at City Bank never really had to worry about being held accountable for their mistakes they would inevitably, as one newspaper noted, take “risks they would never have dared or cared to take as bankers.”8
Pecora now raised a similar point, returning again to the importance of disclosure in securities transactions. When City Bank sold the shares in 1927, Pecora asked, were the shareholders “told that they were going to make this sort of a reparation that you have just referred to?” Mitchell ignored the question: “I called your attention to the fact that it was the transfer of a questionable short-term investment that the bank had into what we hoped was a good long-term investment, which we intended to permanently keep in the City Co.”
Among Pecora’s greatest attributes in the courtroom were his patience and his persistence. The hellhound was more of a pit bull, tenaciously pursuing a line of inquiry until he got his answer. When the shareholders were asked to buy this stock, Pecora repeated, were they told that the proceeds “were going to be used to enable the National City Co. to take over these slow and doubtful loans of the bank?” No, Mitchell reluctantly acknowledged, they were not.
Perhaps the shareholders would have agreed with Mitchell that shoring up the bank’s capital was a good investment for them, but they never got the chance to decide. The bank never told them what it would use the capital for and no law required such a disclosure. As Pecora later wrote, “In Mr. Mitchell’s view, apparently, the stockholder’s function was to
put up the money, and it was none of the stockholder’s business what was to be done with it thereafter.” And besides, Pecora added, wasn’t it true that the Cuban sugar industry “has been in a state of collapse” since 1920? Other than a “slight breath of hope” in the mid-1920s, Mitchell agreed, Pecora was “deplorably correct.” Yet, Mitchell could now claim that when the bank transferred its interest he thought it was an “excellent” long-term investment for the affiliate? Given the company’s write-down of the entire value of the investment just a short time later, it certainly seemed that Mitchell’s claim was an outright lie or at least a wild exaggeration.9
Now on Wednesday morning, Pecora circled back to Cuba, but before he could Mitchell wanted to contest nearly everything that happened the day before. The mood quickly turned confrontational. What was clear right from the start of the hearings that morning was that Mitchell was enraged at the treatment he had received on Tuesday and he was aiming to get control of Pecora, just as he controlled Pecora’s predecessor. Pecora’s questions, the banker angrily charged, had created “incorrect impressions” and Mitchell wanted a chance to clear them up. Mitchell didn’t care for Pecora’s claim that the National City Company was “bailing out” the bank, and he was particularly incensed that he had been “forced” to answer questions about matters that he only vaguely remembered. It was, he said, “unfair” when Pecora knew that there were City Bank officers in the hearing room who were better able to answer.
Pecora was furious over that charge. “Wasn’t it you that made the answers to the questions that I put to you, that created whatever impression is in your mind concerning them?”
The Hellhound of Wall Street Page 19
