The Hellhound of Wall Street

by Michael Perino

  Even more than the papers, the American people were angry at what they had heard over the past few days. Letters flooded the Senate Office Building, some addressed to the senators, some to Pecora, almost all praising Pecora’s performance, expressing outrage at the testimony, and calling for federal legislation to address the abuses. John S. Campen, a former National City Company salesman, rued that he had been recommending City Bank stock to “everyone in North Carolina. . . . I want to say that I think that [Mitchell’s] action constitutes one of the dirtiest and lowest passages in our Financial History—and that I hope you prosecute him and his associates who helped along that line to the very limit.” Dr. J. W. Gould lost his life savings and now found himself “in my old age an utterly ruined man. Is there no justice in the land? Is there any redress for me? Can you, will you advise me what to do?” Gould was not alone in asking Pecora for help, but to all of them Pecora was forced to express his regret and his helplessness. It was, he wrote, “beyond the province of the Committee or Counsel to function for a private litigant.”18

  Many of those writing to the committee were convinced that federal legislation was the only way that these kinds of abuses could be remedied. Indeed, many thought Mitchell was emblematic of bankers as a class, not an isolated aberration. It was, Silas Green wrote the committee, “a disgrace to the people and the authorities of this country that many men of Mitchell’s stripe can do our people the way they do and keep out of jail.” Green pointed to the law strictly regulating securities sales in Britain and urged Norbeck to prevail on Congress to follow Britain’s lead. “If you could get Congress to pass a similar law in this country,” Green concluded, “it would do more to protect the American public from dishonest bankers and Wall St. crooks than all the investigations ever held.”19

  While most people seemed angry at the disclosures coming out of Washington, others were terrified. Constant Eakin, a Frigidaire executive, had a nervous breakdown when he heard Mitchell’s confessions of wrongdoing. Most of his money was at City Bank, and he thought it all might vanish.20

  On the Senate floor on Thursday the mood was angry. Senator George Norris of Nebraska, a gray-haired Republican senator who had been reliably progressive for over two decades, hauled out an eight-foot-square chart depicting the “Spider Web of Wall Street.” The legs of the large black spider that dominated his chart were the eight Wall Street banks—including J.P. Morgan and City Bank—that Norris claimed controlled most corporations and industries through a web of interlocking directorships.

  Although most of Norris’s comments focused on that old-money trust claim, there was plenty of anger about the disclosures coming out of the Pecora hearings as well. Norris compared investment bankers to muggers preying on elderly widows and expressed sympathy for a public desire for physical revenge against them.

  Suppose the Senator from Oklahoma were walking down the streets of Washington and a widow should come along whom he knew had in her pocketbook the proceeds of a life-insurance policy on her dead husband, which she was probably taking to the bank to deposit. Suppose the Senator would knock her down and steal the money from her and undertake to escape. The people roundabout, if they saw what happened, would seize the Senator from Oklahoma, and if they did not tear him limb from limb—if the mob did not kill him on the spot—he would be sent to prison.

  Senator David Walsh, a Massachusetts Democrat, complained that corporations “have paid their entrenched officials unconscionable salaries, that they have speculated and gambled with private financial resources they have been in-trusted [sic] with, and have carried on their functions in disregard of the public interest and without an effort to do justice to their employees or even to their stockholders.” Congressional anger led to some radical, infeasible, and almost certainly unconstitutional proposals. Kentucky’s freshman Democrat, Marvel Logan, proposed that the government confiscate the profits of industry above a mandated fair return to capital and labor.21

  It was not surprising that Roosevelt and progressive legislators were outraged by what they heard coming out of Room 301. What was surprising was the fact that Pecora had even managed to sway the incumbent president. Back in December in his State of the Union message to Congress, Hoover spoke of systemic, not individual failures. Indeed, Hoover thought that thousands of individual banks and bankers “have shown distinguished courage and ability” though they were working in a fundamentally flawed and unstable banking system that was in large part responsible for the bleak state of the economy. Now in January, writing to United States Attorney General William D. Mitchell (no relation to Charles Mitchell), Hoover was so disturbed by what Pecora uncovered that he completely changed his view.

  If only part of the things brought out prove true, these men have done the American people more damage than all the incidental operations of Al Capone. Capone had the merit of confining his robbery and the infliction of physical violence to the wicked. . . . [I]f these stories are true these men are not bankers, they are banksters who rob the poor, drive the innocent to poverty and suicide and do infinite injury to those who honestly work and strive. Worse than that, they are traitors to our institutions and national ideas.

  Despite his personal views, Hoover maintained his public silence. He thought it inappropriate for the president to “publicly judge individuals” and he remained somewhat skeptical about the truth of Pecora’s charges. Still, he asked the attorney general to start a formal investigation of City Bank. It was too little too late. There were only a few days left in his administration, not enough time to do anything meaningful. But Hoover, who had started the hearings a year earlier simply to chase the short sellers into hiding and who was now no doubt thinking about his legacy, decided not to leave these allegations for the Roosevelt administration to handle. He told the attorney general that his letter would “indicate to you the seriousness of my feeling about it and how anxious I am that even in the few days left to us we shall not fail in our duties for upon proof that either the implications of these exposures are untrue, or that being true, these men land in jail, depends the faith of the American people in our institutions.”22

  By the inauguration, Hoover seemed even more convinced of bankers’ culpability. Perhaps his comments weren’t genuine; maybe he was still trying to shift blame for his own failures and inadequacies, but, whatever the motive, the now former president privately complained that he and the Federal Reserve chairman Eugene Meyer “have tried everything on behalf of the bankers but they have fought us, haven’t tried to [cooperate], haven’t even told us the truth. They are without ability and without character.”23

  Chapter 11

  DAY FOUR: LEGAL LEGERDEMAIN

  On Friday, Attorney General William D. Mitchell launched a formal investigation of City Bank, Charles Mitchell, and, for good measure, Insull. The Justice Department’s first step was to piggyback off Pecora’s work. It announced that it would obtain copies of the testimony and analyze whether there were violations of the National Bank Act, the tax laws, or other federal statutes. At the same time the United States attorney in Manhattan, George Z. Medalie, announced that he, too, would investigate, and would focus on whether Mitchell’s 1929 wash sale amounted to a criminal tax evasion.1

  By the weekend, the Internal Revenue Bureau, which had originally signed off on Mitchell’s return, launched its own investigation. Indeed, ever since Tuesday’s disclosure, the bureau had engaged in some serious backpedaling. Ambrose W. Hussey, the Internal Revenue agent who had “personally okayed” Mitchell’s tax return, was now furiously trying to explain his actions. Mitchell’s statements at the hearing, he explained, completely contradicted his original statements to the Internal Revenue Bureau. The bureau reviewed the transactions “thoroughly on account of it being a sale between a husband and a wife,” Hussey explained. Mitchell assured the examiners, however, that his wife was financially capable of purchasing the City Bank shares and the bureau thus allowed the loss as a bona fide transaction. The 1930 return did not discl
ose the repurchase of the 18,300 shares, and the bureau apparently decided that they could simply take Mitchell at his word, because they did nothing further to investigate the transaction.2

  The banking situation in Michigan had not improved appreciably by Thursday. Despite constant conferences between banking officials from Washington and Michigan and rumors that the RFC would loan up to $150 million to the wobbliest of the Detroit banks, nothing had happened yet. The bank holiday was still in place, although Governor Comstock revised his order to permit some very small withdrawals. A few of the more secure banks allowed their depositors to take out no more than 5 percent of their money. It helped a little, but 5 percent was tantamount to a closed bank, and no one seemed to take the change as a positive sign.

  With negotiations over the Michigan banking closures still stalled, governors in other states were beginning to address rumors that they were next. The passage of emergency legislation in New Jersey and the restrictions in place at banks in Atlantic City and Maple Shade was not, according to Governor A. Henry Moore, a cause for concern. “There is no thought,” he assured a reporter, “of a banking moratorium in this state.” Officials in other states made similar pronouncements, but they did little to calm fears, either among the depositors or the bankers. “Few bankers slept soundly,” one Arkansas banker noted about those tense days in early 1933. “Confident as they might be of their own bank’s safety, they were never free from the fear that rumor would start one run which would trigger a reaction to engulf all.” And in Washington, those fears were looking more justified with each passing hour. Ogden Mills reported a rash of bad news to the Federal Reserve Board—the situation in Cleveland was critical, with the possibility of a large bank closure by the next day; there was trouble in Kansas City and the possibility of closures in Baltimore; two banks were on the verge of collapse in the District of Columbia and they were likely to bring down four or five smaller banks with them.3

  At ten that morning, Norbeck gaveled the hearing to order, his opening line nicely summing up Pecora’s dominating performance that week.

  “Mr. Pecora,” he asked, “who will you have this morning?”

  Pecora wanted Baker again. He quickly led the soft-spoken and thoroughly flummoxed head of the National City Company through his bonus and salary for 1927 to 1929. He was a piker compared with Mitchell—he earned a little over $750,000 compared with Mitchell’s $3.5 million—but few others in the day could match even that sum. Pecora didn’t dwell on the numbers; he didn’t need to at this point. Instead, he returned to the topic that had consumed most of the previous day—the manipulation of City Bank’s stock price and whether the bank was indirectly trading in its own stock in violation of the National Bank Act.4

  Baker was still terrified of answering any of Pecora’s questions, even the most basic ones. It seemed clear that City Bank’s lawyers had drilled him long and hard about not admitting anything unless absolutely forced to do so. Returning briefly to the decision in 1927 to delist City Bank’s stock from the New York Stock Exchange, Pecora asked, “Isn’t it easier to control the over-the-counter market for a security than the Stock Exchange market?” The answer was obviously yes; over-the-counter stocks, generally speaking, have fewer shares outstanding and are more thinly traded—far fewer shares change hands in any given day, making it much easier to move the price precipitously. Baker, however, professed not to know, leaving an exasperated Pecora to ask, “You are market wise, aren’t you?”

  The president of the world’s largest investment bank was unwilling to admit he knew anything at all about the basic operation of the stock market: “I don’t know that I am.”

  “Do you think that you would be the president of the National City Co. if you were not a keen student and observer of the markets for securities, all markets?”

  Baker refused to answer. “Well, I certainly don’t know the answer to that question. That is somebody else’s decision to make.”

  Even on this minor point, Pecora refused to give in, so he tried a different tack: “It is not an unfair assumption that you were chosen for the chief executive position of this great investment company because you were market wise, is it?”

  “Well, I doubt if that was the consideration of it. I don’t think that was the idea, as to whether I was market wise or not.”

  Like Pecora, Senator Brookhart was having trouble believing Baker could be so recalcitrant, and he too tried to pry an answer out of Baker: “That was one of the things, wasn’t it?”

  It was no use. “I do not know Senator,” Baker said. “I was not there when the matter was being discussed.”5

  The testimony all that morning was desultory, with the senators constantly wandering off topic to ask Mitchell, who took the witness chair after Baker, about balancing the federal budget. In between the digressions, Pecora spent most of the morning trying to analyze a series of transactions in which City Bank granted what were termed “over certifications” to a brokerage firm named J.R. Schmeltzer & Co. The transactions themselves were routine. New York commercial banks ordinarily made day loans to brokerage firms to finance stock purchases, loans that the brokerage firms would repay by the end of the day when they delivered the securities to their customers and collected payment. When a broker needed more money than the normal line of credit it had with the bank, it asked for an over certification, which was regularly granted if both the broker and its customer were good credit risks. Day loans were an easy way for the banks to make some extra money. The loans didn’t pay much interest—just 1 percent per year—but they were, for all intents and purposes, riskless. “Since I have had any connection with the National City Bank,” Mitchell told the committee, “we have never lost a penny in all of our day loan accommodations.” Not even during the crash? Pecora asked. “Not a penny,” Mitchell replied.

  Although Senator Brookhart and others tried to suggest that such loans fostered speculation, they were missing the point. It was not so much that City Bank made these day loans, it was the timing and the security involved. Schmeltzer, it quickly became apparent, was purchasing large amounts of City Bank stock on behalf of the National City Company in October 1929, just as the stock market was beginning to crash. This was, of course, the time when National City was furiously buying the bank’s stock in order to stabilize its price and save the Corn Exchange merger. By helping to finance these trades, it certainly seemed as if City Bank was further blurring the line between impermissible trading on its part and permissible trading on the part of National City. City Bank was, after all, lending money to a brokerage firm hired by its own affiliate to purchase City Bank stock. Didn’t this, at a minimum, constitute financing the purchase and sale of its own stock? Mitchell, unlike Baker, at least was candid with Pecora. City Bank, a bank organized under the National Banking Act, was not trading in its own stock; the National City Company, which was not a national bank, was trading in City Bank stock.

  It was, of course, a slim distinction, but it was a distinction that Mitchell probably felt confident in making because it had two decades of history behind it. Shortly after the turn of the century, the bank’s president, Frank Vanderlip, wanted to transform City Bank from simply a commercial bank into a financial supermarket—a one-stop shopping place for all its customers’ financial needs. It was the only way, Vanderlip thought, to meet the increasing competition from two sources—state-chartered banks, and trust companies organized under liberal state corporate laws. The latter were the real financial services innovators at the time. Unburdened by the laws that prohibited nationally chartered banks from engaging in anything other than commercial banking, they quickly expanded from their traditional role of administering estates and wills to offering their customers a host of financial services—they took deposits, provided financial planning, offered safe deposit services, and started distributing securities. Customers loved them because they could do all their financial business under one roof. State-chartered banks quickly pressed their legislatures to loosen the
legal restrictions imposed on them, and they too began to offer these allied services. Both had lower capital requirements and so could offer higher interest than national banks, and both had branches, making them much more convenient than national banks, which were limited to a single office.6

  Nationally chartered banks were at a huge competitive disadvantage. Not only were national banks prohibited from engaging in lucrative trust and asset management services, by the turn of the century the United States comptroller of the currency was beginning to crack down on their nascent securities-selling efforts. As an early proponent of banking reform measures that would loosen the strictures on nationally chartered banks, Vanderlip got nowhere in Congress and he turned to plan B. If City Bank was prohibited from engaging in certain activities, why couldn’t the bank form an affiliate corporation that was not a nationally chartered bank, a corporation that was not bound by the same restrictions? Writing to the bank’s shareholders in 1911, he told them that it would be a “material advantage” to establish a separate corporation to “make investments and transact other business, which though often very profitable, may not be within the express corporate powers of a National Bank.”