Pecora, however, would not back down, and his response dripped with sarcasm. The opinion, Pecora repeated, said that Lehmann and Wickersham were in agreement. “[F]or the benefit of the learned gentleman who has just placed his observation on the record,” Pecora sneered, “I will repeat—”
Covington dismissively cut him off: “I heard that, Mr. Pecora.”
Now Pecora was furious, and he read directly from a portion of the opinion where Lehmann explained that he and Wickersham had “concurred that the agreements and arrangements in question were made to enable the bank to carry on business and exercise powers prohibited to it by the national banking act.” Pecora looked up from his copy of the opinion and glared at Lehmann: “Did you hear that Judge Covington?”
“I heard that, Mr. Pecora.”
“And you still say that the Attorney General did not concur, do you?”
“I did not say that he did not concur.”
“Then I misunderstood you,” Pecora replied derisively. “Excuse me.” Covington had indeed said that, and now he said it again. Wickersham must have ultimately come to a different conclusion than Lehmann because he never filed an action against City Bank and “the fair presumption is that Mr. Wickersham always obeyed the law.”19
Pecora had refused to be intimidated by Mitchell, and he certainly wasn’t going to let Covington walk all over him. In truth, however, neither man was precisely right, although of the two, Pecora seemed to have the better of it, at least when it came to what Wickersham thought of securities affiliates. Formation of the National City Company prompted the congressman Charles A. Lindbergh Sr., father of the famed aviator, to call for a congressional investigation of the “money trust.” That investigation would eventually be dubbed the Pujo Committee, the investigation that gave Samuel Untermyer his first taste of national fame. At around the same time, Wickersham also launched an investigation of City Bank and its investment affiliate, without ever bothering to consult with the Treasury secretary, Franklin MacVeagh, who oversaw nationally chartered banks. The investigation revealed a strong difference of opinion in the Taft administration. Wickersham was an ardent trustbuster who called the Supreme Court’s decision to affirm the dissolution of Standard Oil “one of the most important ever rendered in this country.” He generally favored greater government regulation of economic matters. MacVeagh, by contrast, was sympathetic to the complaints he was hearing from the national banks—federal regulation was hamstringing them as they tried to compete with state banks and trust companies. MacVeagh was ready to hold that City Bank’s affiliate was legal.20
In the summer of 1911, Taft’s advisers battled to convince the president that they were right. MacVeagh told Taft that the secretary of state, Philander Knox, shared his assessment of the legality of the affiliate. The attorney general urged Taft to authorize an action against City Bank. This “flagrant evasion of the statute,” he wrote the president, needed to be “brought to book” at once.21
The dispute between Justice and Treasury left President Taft in an awkward political position. If he sided with MacVeagh he would be portrayed as capitulating to the “money trust”; if he sided with Wickersham he risked destabilizing the banking sector, which was only a few years past the devastating Panic of 1907. So like any good politician, Taft said he would resolve the dispute, and then never did. At some level he didn’t have to. The primary concern the City Bank affiliate raised was the propriety of its functioning as a bank holding company. All the governmental attention now focused on the bank was too much for Vanderlip. By the fall of 1911, he had divested the company of all its domestic banking stocks. Over a year later, Taft finally informed Wickersham that he had decided to take no action against City Bank. The affiliate survived; it was free to engage in a host of investment banking activities, all with the apparent acquiescence of the federal government, although it was no longer a bank holding company.22
The Pujo Committee ultimately found that national banks like City Bank were subject to severe conflicts of interest when they underwrote and sold corporate securities through affiliates, the same concern that was earlier expressed about trust companies. The committee, however, was not so sure that the integrity and honesty of bankers would be sufficient to minimize abuses. Its report recommended that national banks be prohibited from dealing in securities. It would have been the death knell for securities affiliates, but again the federal government failed to act. Congress never passed legislation incorporating that recommendation.
In fact, over the next decade, the federal government’s tacit acceptance of securities affiliates shifted to outright approval. During World War I state banks and trust companies were, for the first time, permitted to join the Federal Reserve System. Those that joined were not required to give up any of their allied financial services, and national banks took this as an obvious signal that it was all right for them to continue to engage in investment banking. In 1920, the comptroller of the currency again warned that securities affiliates of national banks were a “menace” and he again called for their abolition, but this warning was ignored. Indeed, the comptroller office’s view soon reversed; worried that national banks would leave the system unless they could compete with state banks on more even footing, the comptroller called for a substantial loosening of the restrictions imposed on national banks.
In 1927, Congress did exactly that when it passed the McFadden Act. Its primary innovation was to permit greater branching opportunities, but it also formally recognized securities affiliates. The provision engendered little debate because it appeared to ratify already existing and well-entrenched practices. But the effect in a time of burgeoning stock market values was enormous. Securities affiliates nearly doubled their participation in offerings and quickly became the dominant players in investment banking. Covington was wrong about Wickersham, but he was right about the federal government—it ultimately came to the conclusion that the affiliates were acceptable. Washington, it seemed, was just as much at fault for the abuses of the 1920s as Wall Street.23
Pecora implicitly blamed all the unsavory sales practices he cataloged that afternoon on Washington acquiescence, although strictly speaking that was not the case. Some practices—pushing depositors into the securities markets and aggressively hawking City Bank stock—would not have occurred but for the fact that the company was the bank’s alter ego. Many of the sales practices that the senators and the public found so objectionable, however, had nothing to do with affiliate status. Mass advertising, door-to-door sales, and sales contests were the by-products of trying to peddle securities to the middle class. Other investment bankers, like Halsey, Stuart, used similar techniques but were not affiliated with nationally chartered banks. These practices may well have existed even if the Taft administration had cracked down on affiliates. Still, Pecora wasn’t totally wrong when he equated the two. After all, it was City Bank’s reputation for integrity that had made its aggressive sales efforts so successful, a reputation it would not have but for its status as a safe and sound national bank.
At least that was how the New York Times and other leading papers saw matters. After the Kreuger testimony six weeks earlier, the Times warned that legislation was pointless because it would do nothing to deter the handful of individuals who were responsible for these frauds. Congress “cannot legislate for business on the basis of a monstrous exception,” the paper warned. Now, after a week of Pecora’s relentless questions, the Times was willing to recognize more systemic problems, problems that it said arose from the proliferation of securities affiliates:The sensational disclosures at Washington, not yet complete, show what happens when vast banking resources are made available for excesses of speculation. Through their subordinate companies, the so-called “affiliates,” too many banks were infected by the mania of the time and became more like agencies for the flotation of securities than organizations for the regular supply of loans and discounts in ordinary business. But there is now reason to believe that the lesson of that folly has
been learned and that at least for a long time to come the principles of conservative banking will be recognized and lived up to. The abuses of recent years, some of which the Glass banking bill would remove or correct, will certainly have fewer defenders after the wholesome publicity which has now set them in so vivid and startling a light.
While the Times suggested that further legislation was unnecessary to address those problems—presumably they still thought the integrity and honesty of bankers would be sufficient—by Friday afternoon, Wall Street knew what was coming. “The general impression in the financial district today,” the New York World-Telegram reported, “was that the security affiliate of a banking institution will soon become a thing of the past.” Affiliates, to columnists Drew Pearson and Robert Allen, “had become a festering sore in the financial structure of the country.”24
It was just what Senator Carter Glass had tried to accomplish in his banking bill and, in all fairness, he deserved a good deal of the credit for uncovering Lehmann’s obscure, twenty-year-old legal opinion. Carter Glass—the senator who, more than any other, consistently and vigorously denounced this kind of political theater—had disclosed the opinion nine months earlier. Indeed, in May 1932 Glass had been even more incendiary than Pecora, charging in a speech on the Senate floor that Wickersham and another unnamed Democratic attorney general suppressed the opinion, a stark demonstration, he said, of the “power and blandishment of inordinate wealth.” Affiliates, Glass charged, were one of the greatest contributors to the Depression, and he urged his fellow senators to separate them from national banks. But as willing as Glass was to attack politicians on the Senate floor, he was unwilling to attack bankers in the hearing room. In his own banking reform hearings in 1931, Glass played down evidence of personal wrongdoing. He wanted a dispassionate analysis of the banking system, not a public pillorying of prominent financiers or financial institutions.25
Glass must have been a little chagrined about the success Pecora was having. He knew more about the banking system than Pecora ever would, and most of the same critique of securities affiliates had been made in Glass’s earlier hearings. Pecora had the advantage of marvelous timing—the banking crisis created something of a teachable moment, a time when the entire country seemed to be talking about the banks. But his success was built on more than just good luck. Pecora was a far more effective teacher than the more knowledgeable Glass because he moved the analysis from the abstract to the particular. Pecora wasn’t talking about what affiliates might do; he was talking about what this particular affiliate did. On one level it worked because Pecora was vilifying the National City Company—angry and frustrated Americans could now focus on a single individual and a single institution. But more than that, he was using Mitchell and National City as a device, a concrete example, one that was easier to grasp and much more immediate and powerful for everyone trying to come to grips with what was wrong with the banking system.
Glass may have been vexed at this neophyte’s overwhelming success, but the astute politician knew how to seize a propitious moment. He lashed out at the Senate opponents who had first emasculated and then killed his banking bill. The disclosures, the senator said, provided concrete evidence of the need to reform the nation’s banking laws. “These disclosures . . . prove conclusively the truth of what I said on the Senate floor four years ago—at the height of the boom—namely, that the Federal Reserve System was being used to aid the speculators rather than those for whom it was created.” As his bill languished in the House, Glass again pressed for its passage. To him, it was “utterly incomprehensible” why the House, in light of all these new revelations, was continuing to do nothing.
His avowed hatred for sensational congressional hearings notwithstanding, Glass was apparently not above using the disclosures Pecora generated to achieve his own political aims. Indeed, he was not even averse to privately shaping those hearings to the extent he could so long as his own personal reputation for being above such crudities was not sullied. During the hearings the following Monday, one of Norbeck’s staffers handed Pecora a note: “Reminding you of two questions to be asked of Mr. Mitchell at the suggestion of Senator Glass, whose connection is not to be disclosed.”26
Week one was over. It had been by turns riveting and dull, funny and dramatic, eye-opening and mundane. Pecora’s performance was triumphant, although hardly flawless. He sometimes painted with too broad a brush. His ignorance about the finer details of Wall Street practice could be frustrating, and it occasionally led him astray. A few times he was flat-out wrong. Generations of critics trying to undermine the entire enterprise would latch onto those mistakes, but none of them mattered very much in the end because, while some of the details were not quite right, the overall picture was accurate.
The first four hearing days in Room 301 had become, according to the legendary journalist I. F. Stone, an “instrument of democratic education”; it had “turned the nation into a vast class in economics.” Not rarefied economics with complex formulas and elegant graphs, but practical, real-world economics. After three years of depression, Americans had certainly developed doubts about the prudence, foresight, and high-mindedness of the rulers of the nation’s financial markets. Pecora gave them proof—proof that the honesty and integrity of the financial establishment was inadequate—proof that laissez-faire didn’t work. If Wall Street could not or would not regulate itself, Washington would have to regulate for them. For his part, Pecora said that his work gave him “a feeling of pride, I hope pardonable pride, that I had been the means for bringing about this education of the public.”27
Class would be back in session on Monday.
Chapter 12
DAYS FIVE AND SIX: INTERMISSION
The economics lessons coming out of that Washington hearing room were resonating throughout the country, amplified and intensified by the ever worsening banking crisis. All week, states expanded the authority of their banking regulators to restrict withdrawals. The new statutes stoked the spreading banking panic as depositors rushed in to remove their money before the restrictions went into effect. Now even larger metropolitan banks were starting to feel the strain of heavy withdrawals. On Saturday, the Union Trust and Guardian Trust in Cleveland were inundated with panicked depositors, who by closing that day had managed to remove half their money from the beleaguered banks. The president of Cleveland Trust, Harris Creech, temporarily stemmed the panic at his bank with nothing more than impassioned rhetoric. Standing on the teller counter above the swirling mob, Creech implored the crowd to remain calm, telling them that the bank intended to honor all withdrawal requests.
Creech was apparently a persuasive speaker, because many customers, satisfied that the bank would not fail, walked away without withdrawing any money. Creech’s promise, however, was short-lived. At an emergency meeting at midnight on Sunday, Cleveland’s banking leaders agreed that when the banks reopened on Monday morning, they would limit withdrawals to 5 or 10 percent of deposits. Nearly every bank in the city, including Cleveland Trust, adhered to that restriction.
Reports from Detroit, where the bank holiday had now been in effect for eleven days, were grim; officials there had made absolutely no progress in their struggle to reopen the banks. Labor unrest had rocked Detroit a year earlier, and now Senator Couzens and the secretary of commerce, Roy Chapin, predicted that serious rioting might break out at any moment. While state officials had allowed very limited withdrawals to individual customers, there was little currency to be found anywhere. The city was bankrupt, nearly incapable of providing relief, and unemployment had been so bad for so long that starvation deaths in the city were an almost daily occurrence. “Cash for milk is scarce or not obtainable,” Secretary Chapin, he too a former Detroit auto executive, wrote, “and I foresee by the first of the week the possibility of very serious disorders.” Perishable food was rotting in railroad cars because there was no way to pay for it, and automobiles that had run out of gas were left abandoned in the streets.1
> The Saturday morning newspapers made no one feel any more secure. Although editors everywhere had done everything they could to downplay the news of bank failures, hoping not to inflame fears even further, there was no way to suppress this story. Maryland’s banks would be closed for the next three business days. Governor Albert Ritchie had been pleading for calm in radio address after radio address, but to no avail. It wasn’t just the small depositors in the lines snaking through the streets of downtown Baltimore; many of the banks’ largest customers, including the Baltimore and Ohio Railroad and the city and state governments, yanked all their money, further destabilizing the already wobbly financial institutions. A dozen Baltimore banks had no money at all. The moratorium, state officials said, was the only way to prevent the complete collapse of every bank in the city. Maryland was now the second state to declare an official bank holiday, and the closure of its banks virtually ensured that more states would follow.2
In Washington, Hoover and Mills were still trying to manage the crisis, but other governmental officials had all but given up. The Federal Reserve chairman, Eugene Meyer, hated going to the office and thought the efforts to prop up the banking sector futile. He was, his wife Agnes wrote, “too wise to try to conduct an earthquake.” His colleagues at the Federal Reserve were far harsher; they said Meyer seemed “dazed,” that he “had nothing to offer” in terms of solutions, and that he “acted like a whipped dog!” Meyer may not have known how to stop the crisis, but he was sure about what he thought of the testimony coming out of Room 301 that week. Mitchell, he concluded, had grievously injured the Federal Reserve System. That Saturday Meyer confided to a colleague that the previous June he had, without the board’s knowledge, tried to have Mitchell removed as chairman of City Bank, an effort that obviously went nowhere.3
The Hellhound of Wall Street Page 25
