The Hellhound of Wall Street

by Michael Perino

Everywhere people were shocked at the portrait of Wall Street callousness, of bankers’ grasping indifference to ethics. “There is the weakness of America,” one paper lamented, “wealth without responsibility, wealth without duty, wealth without a heart-beat.” And they were, to be sure, angry at Mitchell in particular. Heywood Broun found Mitchell’s conduct particularly galling given the stern warnings the banker gave New York City about cutting its expenses if it wanted to borrow money to ease its financial crisis. “If I were a school teacher,” he wrote that Saturday, “and my salary had been cut in order to meet the ideas of civic economy propounded by the big bankers of New York City, I would be a little sore as I read the testimony which is being given before the Senate investigating committee.” But he too noted that the testimony had implications beyond Mitchell. “Until a few years ago a fiction went rounds [sic]. High finance, we were told, was an elaborate undertaking carried on by men wholly dedicated to the public weal. That myth has gone.” It had been replaced by a more durable conception of Wall Street. The Street wasn’t a place that provided capital to help build great companies and fund the American economy; it was a gambling den, and a rigged one at that. “It seems to me,” Broun wrote, “that the only thing some of our great financial institutions overlooked during the years of the boom was the installation of a roulette wheel for the convenience of depositors. And, of course, it would have been a wheel with four zeros.”20

  Even the staid and Wall Street-friendly Commercial & Financial Chronicle found the City Bank disclosures “depressing.” The “ready way in which millions of dollars were passed back and forth between the National City Bank and the National City Company during the period of the speculative craze reveals banking practices which cannot be considered conducive to sound and safe management.” The disclosure of Mitchell’s wash sale when combined with his enormous bonuses did “not look well taking the most tolerant view of the matter.” For a paper that wrote about nothing but the financial community and that had constantly criticized the hearings, it was quite a rebuke, and it reflected a broader outrage that boded well for legislative reform. “Because now also,” one young lawyer wrote, “conservative elements are lined up against the bankers: every industrialist whose program for development was retarded by lack of credit facilities; every rentier to whom the National City Co. sold sour bonds; every professional man who lost his shirt in the market; every diehard who took a trimming (& most of them did) will be solidly lined up against the ‘money power.’”21

  Savvier observers saw past the pervading anger. The problem they thought was not so much the scruples of these particular bankers as the ability of anybody to wield so much power with nary a regulatory check. “I don’t think I have any animus against Mitchell,” the Roosevelt intimate and future Supreme Court justice Felix Frankfurter wrote to Walter Lippmann, probably the most influential columnist of his day. Writing with Roosevelt’s approval, Frankfurter, who would go on to a role as a behind-the-scenes architect of New Deal legislation, assured the conservative columnist that he didnot believe that vice inheres in the rich and virtue in the poor. But for too long we have been largely operating on the assumption that the converse is the truth, and more particularly that the rich are the guardians of wisdom and should control affairs. . . . The crux of the business is not the wickedness of the Mitchells but the power which is wielded by concentration of financial power which they are wholly unworthy—no matter who they are—to wield because of the obfuscations and the arrogances which power almost invariably generates.

  A few months later, commenting on the Morgan hearings, Lippmann, who usually toed the Wall Street party line, said much the same thing. “No set of men,” he told his readers, “however honorable they may be, and however good their traditions, can be trusted with so much private power.”22

  Roosevelt had to that point only vaguely and indirectly come out in favor of continuing the hearings, but Frankfurter’s letter confirms what the public already seemed to think. Pecora was a harbinger for the incoming administration, a signal that power was indeed shifting from the canyons of Lower Manhattan to the corridors of Washington. Although the hearings did not yet bear the new president’s imprimatur, Pecora the New Yorker was certainly part of the urban immigrant coalition that had helped bring his party into power. Agnes Meyer saw the same thing when she came to the Morgan hearings a few months later, and something more as well. She was impressed with Pecora, who was “very controlled, patient, sure of his goal.” And she chided the Washington elite who tried to discount the significance of the investigation. “The very aspect of this Italo-American immigrant putting J. P. Morgan [Jr.] through his paces has a new American note that papers seem to overlook. . . . Washington is modern America in essence. The new stock showing up the hollowness of the old stock.” One reporter, Thomas L. Stokes, thought the “leveling process was never better exemplified.”23

  N orbeck couldn’t have been happier. After a year of largely unremitting criticism, after the personal attacks from Wall Street, and after his lonely battle to keep the investigation going, he was “immensely gratified” about the reaction the hearings were finally getting. On Saturday, it became absolutely certain that the investigation and the leveling process would continue past March 4, 1933. On Friday, just before heading back to New York for the weekend, Pecora emphasized that because of the severe time constraints under which he was operating, he would have to limit his questioning to “the main highway of Wall Street irregularities without going down any of the side streets.” The public, in light of everything that had come out that week, was certainly not going to be satisfied with that kind of cursory inquiry. Pecora, like Untermyer, knew how to work the press to his advantage.

  Earlier in the week, Senator Edward Costigan, a Colorado Democrat, introduced a resolution to continue the investigation into the next session of Congress. Now Senator Duncan Fletcher, the man who, with Roosevelt’s encouragement, would assume control of the committee in the new Congress, introduced a similar resolution. Resolutions like these are routine under ordinary circumstances. Given the public outcry over the City Bank hearings and Roosevelt’s tacit approval for their continuation, there was no way they would fail. On Monday morning, before the Senate’s formal vote had even taken place, the committee met in executive session with Pecora to plan its strategy for the new congressional session.24

  Mitchell’s fall had been nothing short of spectacular. A week earlier he had been the undisputed leader of City Bank and among the most prominent figures in the financial community. Now his reputation was in tatters. Time magazine’s headline said it all: “The Damnation of Mitchell.”

  It was a titanic scandal, one that had finally touched the upper echelons of Wall Street, the boardrooms and offices of the men who had largely set financial policy for the nation. A member of the club that ruled the Street was now the subject of a federal criminal investigation. No bank executive, even “the greatest bond salesman who ever lived,” could weather that kind of storm. Mitchell did what the banker’s code required; he tendered his resignation, as did Hugh Baker. Mitchell’s letter to the bank’s board was hardly conciliatory. He wrote that his offer to resign was prompted, not by his own impropriate behavior, but by the “public misunderstanding” of his testimony before “ex-parte hearings.” Mitchell’s letter downplayed the significance of the disclosures that week and tried to discount the connection that nearly everyone had made between the boom of the 1920s and the Depression. His testimony involved “a period which has passed into history . . . and [which] had little relation to the conditions of the present day.” Nonetheless, he did what he thought a gentleman should do: “I personally have been brought under a cloud of criticism from which I conceive that the institution should not be permitted to suffer by my continuance in office.” There was no contrition, no recognition that he had done anything wrong, and certainly no apology. It was no wonder that one paper accused Mitchell of “moral obtuseness.”25

  Right after the crash,
Percy Rockefeller had ridiculed the notion that Mitchell should resign from the bank, but no one was jumping to Mitchell’s defense now. Still the board hesitated, worried that accepting the resignation might further erode already weakening customer confidence in the bank. City Bank’s directors reached out to both the current and incoming administrations for advice about what to do with Mitchell, and for once Hoover and Roosevelt found something on which they could agree.

  Neither the outgoing nor the incoming president shared Mitchell’s surprise or the directors’ trepidation. Hoover thought that accepting Mitchell’s resignation would almost certainly increase customer confidence in City Bank, not destroy it, as the directors feared. The conduit to the president-elect was William Woodin, the Treasury secretary designate who had sat on the board of the New York Federal Reserve with Mitchell. Roosevelt told Woodin that it was patently obvious that Mitchell should resign immediately and he was surprised that the bankers could even ask the question. Roosevelt had been imbued from an early age with the idea that the well-off had a duty to serve the less fortunate and he was contemptuous of “the grasping speculator.” The City Bank scandal had also hit close to home for the incoming president, who had a long personal banking relationship there, and he felt personally aggrieved by the “scandalous” outsize bonuses. “My gosh,” he said shortly after he took office, “I feel Charlie took my money.” Nor was he sympathetic to the claim that Pecora’s investigation was destroying public confidence in the financial sector. “The bankers should have thought of that,” he observed, “when they did the things that are now being exposed.”

  Roosevelt would eventually grow weary of the attacks he received from business leaders as the New Deal progressed. Just a few years into his first term, he lashed out at them, complaining in private that businessmen “were generally very stupid.” Their core problem, he concluded, was that they, like the New York newspaper editors, lacked any sense of “moral indignation” about the sins of their colleagues. “Did they denounce Charles Mitchell?” he asked in frustration. “They did not!”

  The seeds for Roosevelt’s ultimate verdict on the business and banking communities were apparently nurtured that February day in 1933 when he advised Woodin that the bank should accept Mitchell’s resignation. After hanging up, the president-elect shook his head in disbelief at the board’s hesitation and remarked privately to his aides: “These New York bankers haven’t any more notion of public psychology than a chicken.”26

  At midnight on Sunday, Pecora was working in his room at the Hotel Continental trying to prepare for the next day’s hearings when the phone rang. It was Guy Cary, the Shearman lawyer and City Bank director. The City Bank board had accepted Mitchell’s resignation a half hour earlier, Cary told Pecora. In truth, the board would not meet until the following morning, but after the feedback from Hoover and Roosevelt, acceptance of Mitchell’s resignation was a foregone conclusion. Indeed, the next morning’s meeting lasted all of ten minutes. James H. Perkins, the president of City Bank’s trust affiliate and “an old time banker,” would be taking over for Mitchell. It was clear that Perkins had his work cut out for him in trying to restore the bank’s now sullied reputation, although he had one important qualification that would help him right the bank and which likely weighed heavily with the City Bank board—he was a personal friend of the president-elect. Even with that link to the new president, “nobody could possibly envy James H. Perkins,” the Nation wrote. “There has been dumped upon him a mess which was once a great banking institution.”

  For Perkins, the cleanup started with a significant retrenchment of the bank’s mission. Gone was talk of a financial department store and an investment banking powerhouse; his plan was “to conduct things in the most conservative way possible.” The bank’s primary business, he immediately announced, “is to serve the domestic and foreign commerce and industry of the United States in the field of commercial banking.” Perkins was not quite ready to pull the plug on the securities affiliate, but his comments forecast that the National City Company was not long for the world. Pending “legislative determination of the status of securities affiliates, the bank’s policy would be to confine the company’s activities to government, State, municipal and corporate bonds of the highest character.” That conservative note was telling. Pecora had made much of the affiliate’s inappropriate trading of the bank’s stock. Perkins’s statement, however, was more far-reaching. By focusing on the character of the securities the affiliate would underwrite in the future, it seemed to imply that many of its past offerings were unsound. It was a point that neither Mitchell nor Baker had been willing to concede. Both insisted that the staff at the affiliate vigorously reviewed all proposed securities offerings to ensure that they were suitable for investment. With all the ground Pecora had to cover that first week, it was a point that he had not yet probed in detail.27

  On Sunday Cary did what he could to contain that mess. He ended his phone call with a brief assumption, perhaps hoping to catch Pecora in the shock of the news the investigator had just heard.

  “Of course, Mr. Pecora,” Cary said, “under the circumstances it won’t be necessary for Mr. Mitchell to resume the stand.”

  “Oh, why do you assume that?” Pecora quickly replied.

  Cary argued that there was no more need for Mitchell to testify because he was no longer connected with either the bank or the company. Cary seemed to be suggesting that this was simply about the senators getting a scalp, a sentiment that was echoed in the popular press. “The U.S. Senators got their man,” read the caption under one picture of Mitchell that week. Pecora, however, still believed that the hearings were about legislation, not trophies.

  “I don’t see that that makes any difference at all,” Pecora responded. “Let me suggest to you, Mr. Cary, this investigation is not a head hunting expedition; it’s a fact-finding expedition. I want to continue to examine Mr. Mitchell to get all the facts I can presented to the committee, consistent with the committee’s authority to make an inquiry. Of course, he’ll have to resume the stand. . . . I shall look for him tomorrow morning.”28

  Chapter 13

  DAY SEVEN: SOUTH OF THE BORDER

  The reaction to the news of Mitchell’s and Baker’s resignations was strangely expectant. At the end of the previous week’s testimony, some columnists were already calling for resignations, so when they were officially announced on Monday, they seemed inevitable. “No banking institution,” one paper wrote, “not even the next to the largest in the world, could afford even to appear to approve or condone the transactions of which [Mitchell] was the guiding spirit and one of the beneficiaries.” The two men were simply paying the requisite and necessary “penalty for mixing the banking business with a stock promotion affiliate.” The committee, too, “appeared entirely unmoved” by the news. Pecora refused to be blamed for the “public misunderstanding” Mitchell charged in his resignation letter, explaining, as he did the previous week, that Mitchell had every opportunity to clarify his testimony if he thought anything was misleading.1

  The high-profile resignations, however, did nothing to slake the public’s thirst for change. Oswald Garrison Villard, the publisher of the left-leaning Nation and a City Bank shareholder, demanded Rentschler’s resignation as well as the resignation “of all directors who knew and countenanced” the bank’s and the affiliate’s inappropriate activities. But for many even those personnel changes were not enough. Heywood Broun thought that the Banking and Currency Committee had merely won the first “skirmish.” An avowed socialist, Broun thought the federal government ought to take over the banking industry entirely. To his way of thinking, with all the Reconstruction Finance Corporation had done to prop up banks, “Washington was already knee-deep in banking.” It was a state of affairs Broun sarcastically blamed on “the distress cries of the rugged individualists” who ran the banking system and who pleaded, “Save us or we perish!”

  Others, not willing to advocate for governmental control of
banking, still thought that Congress should not be satisfied with these high-profile scalps. “More than a change in personnel is needed to restore faith in a bank with such widespread ramifications and power,” read a Philadelphia Record editorial. “Investigation and prosecutions, new legislation to outlaw securities affiliates and regulate banking more strictly, are called for.” Although federal legislation, especially the moribund Glass banking bill, now seemed imminent, some were still warning of the limits of federal legislation to cure the problems Pecora revealed. The editorial sections of the New York papers, in particular, had finally weighed in on the investigation. The New York Times sent a mixed message about Mitchell, castigating him for flagrantly violating sound banking methods but praising him for the “loyalty” to the bank that “impelled him to step out.” But the editors there still expressed a healthy dose of skepticism about the utility of federal legislation:Even the best [legislation], however, will require men of the highest ability and utmost probity to manage it successfully. This, after all, is the chief moral to be drawn from the imprudence and irregularities which have been spread before the country by the Senate investigation, and have had so disturbing and unsettling an effect. Capable and conservative bankers can make even a bad system work, but if the established rules of sound banking practice are forgotten or openly violated, if deposits are not regarded as a sacred trust but as material for reckless speculation, if personal motives and a rush to get rich animate the management, there is no safety for anybody, and banks will fall into merited disrepute and distrust. . . . Frozen assets are not the greatest handicap of the banks. What is hurting them most is frozen confidence.2

  Despite Pecora’s insistence that Mitchell be present in Washington on Monday morning, the banker was never called to the witness stand that day. There was no hint of contrition in Mitchell’s resignation letter, but Pecora thought he saw a change in the man who was now sitting in Room 301. Both he and Baker looked “discomfited” and “chastened.” When he first took the job as president of City Bank, Mitchell wrote that he was “fully mindful of the quasi-public position which The National City Bank must hold.” Whether he believed it or not when he made this statement, he clearly had not lived up to the standards the sentiment implied. “I think,” Pecora recalled, “they were very much ashamed of the record of their institutions and of their participation in those happenings. And I think they had good reason to feel that way.”3