Pecora’s personality came through whenever he asked a question. At one point that afternoon, Pecora interrupted Silver briefly to ask whether National City had sent one of its engineers to Chile to make “a study and survey of that industrial field.” The witness was Ronald Byrnes, the man who previously testified about Minas Geraes, and his answer rambled on for some time: “Although we had very great confidence in the acumen and the ability of the Guggenheim organization, so-called, in the engineers whom they had then attached to their organization, we did take the final precaution of sending a man to Chile to study the industry on the ground, in order that we might have somebody in our organization that would understand something about the very technical processes involved.”
Pecora waited patiently through Byrnes’s long-winded answer, and then he asked, dryly, “And that answer is another way of saying ‘Yes’ to my question, is it not?”
“I think it is,” Byrnes sheepishly replied.
“All right,” Pecora responded. “Now we would save time if you would just confine yourself to simple answers.” Pecora had style and verve and he could lift the most prosaic questioning into enjoyably political theater.3
The only really new information on that last day of testimony involved National City’s handling of one of the emerging industries of the 1920s—aviation. In 1928, National City had advised on the merger of the three companies that would eventually become Boeing. The investment banker handling the deal, Joseph Ripley, wanted to make a public offering of Boeing’s common and preferred stock, but National City, in an apparent burst of concern for the welfare of the average investor, vetoed that suggestion. The offering, the company decided, “was a little bit too speculative to be spread around to the entire American public.” Instead, Mitchell wrote Ripley on October 22, 1928, telling him that National City would buy the stock and “distribution [would] be limited as far as possible to our own officers, key men, directors and special friends.” Mitchell, Rentschler, Ripley, and various directors of City Bank were given allocations of Boeing stock. So too were Cary, Winston, and other lawyers from Shearman & Sterling. The biggest chunk went to a partner from J.P. Morgan, who presumably spread the shares around to his fellow partners at the firm.
They were all wealthy and sophisticated and thus could understand and bear the risks associated with investing in such a speculative start-up industry. The company had just floated Minas Geraes and Peruvian bonds, but here at least it seemed National City was indeed only offering securities that were prudent for ordinary investors. Then a funny thing happened. Nine days after the private placement, National City, on behalf of Boeing, requested that the stock be listed for public trading on the New York Curb Exchange (the precursor to the American Stock Exchange), an exchange whose listing standards were far less rigorous than those of the New York Stock Exchange. The next day, National City announced that it had just privately placed a large block of Boeing stock. In the feverish atmosphere of the late 1920s, that announcement could have only one effect. National City insiders, Pecora wrote, “bought plums, not lemons” after all. Boeing’s stock price soared, and in no time, National City earned a nearly 50 percent profit, as did Mitchell and the other key men and special friends. In January, the process was repeated with another block of the aviation company’s stock with much the same results.
The Boeing disclosures were the final piece of the picture. National City’s insiders, Pecora concluded, had “grasped with both hands” the opportunity “for getting in on the ground floor” of the Boeing stock offering. Boeing was “considered too good to be handled in quite the ordinary manner.” It became “one of the most familiar tokens of the torrid Wall Street gambles of the period,” Pecora wrote. “But before the general public was allowed to enter the game, Mr. Mitchell and his friends had already used their position as officers and directors of the National City to supply themselves with a full set of these tokens . . . at reduced rates.” After the bonuses from the management fund and the morale loans, the Boeing testimony was just more evidence that Mitchell and the other officers were running the second largest bank in the country largely “for the profit of themselves and their friends.” It was not nearly as dramatic as Edgar Brown or Richard Whitney, but it was, in its own way, a fitting conclusion to Pecora’s ten-day economics class.4
The lesson Pecora took from those ten days was a simple one. For him, there were two primary culprits that lay at the heart of all the problems he had cataloged—the securities affiliates and the absence of any regulations requiring disclosures to shareholders and investors.
Without the affiliate to act as an alter ego of the Bank, free from the wise restrictions of the National Banking Act, most of the mischief could not even have been initiated. And had there been full disclosure of what was being done in furtherance of these schemes, they could not long have survived the fierce light of publicity and criticism. Legal chicanery and beneficent darkness were the banker’s stoutest allies.5
Senator Glass’s banking bill, which everyone was now predicting would easily be enacted, would address affiliates, and the securities bill that Untermyer was theoretically working on would presumably shine light into the darkness.
On Thursday, the banking system was in its last throes. Before dawn that morning, the telephone rang in Walter Bimson’s hotel room in Phoenix. The caller told Bimson, the president of Arizona’s Valley Bank and Trust Company, that California had just declared a statewide holiday. California’s governor, James Rolph, announced that the holiday was crucial to protect California’s banks, and he blamed the panic on “communists who are endeavoring to spread destruction and hysteria.”
Arizona’s governor, Benjamin Moeur, was staying in the same hotel as Bimson, and the banker rushed to his suite. At first the governor, still in his pajamas and half asleep, did not understand what the problem was. It took Bimson several attempts to explain to Moeur that California banks kept large deposits in Arizona banks. If the California banks all withdrew their money, which was now very likely, the already creaky Arizona banking system would instantly implode. When the governor finally agreed to consult with the state attorney general to determine his authority to declare a holiday, Bimson ran six blocks to the bank’s headquarters, where he and the bank’s attorney quickly hammered out a draft proclamation. Just before the banks were scheduled to open, Governor Moeur authorized a three-day holiday.6
Across the country, there were long lines outside New York’s savings banks as fear of the banking crisis reached the city. On Friday those lines grew even longer and soon spread to the large commercial banks. Extra police were called out and did what they could to maintain order, but they were not always successful. An unruly mob at the world’s largest savings and loan, the Bowery Savings Bank, forced the bank to close its doors. City Bank was no exception in the panic; its domestic deposits dropped over 10 percent in two days. Enterprising New Yorkers did what they could to make sure they got their money. A woman begged to move to the head of the line at one bank because she had her baby with her. The other customers let her through and then let through the next four women with babies until the bank clerk announced: “This is the fifth time that baby has been here.” The mother, it seems, had been renting the baby to anxious depositors for 25 cents a trip.7
More states joined the ever growing list of those with full-blown bank holidays or severe restrictions. By the end of the day there were moratoria in Idaho, Nevada, Oregon, Texas, and Washington. Iowa, Mississippi, and Washington, D.C., put restrictions in place. Many of the political dignitaries then flooding into the capital for the inauguration suddenly discovered that their hotels would no longer cash out-of-town checks. On Friday, W. A. Sheaffer, the president of the Sheaffer Pen Company, reported to Raymond Moley that its checks had been refused in twenty-four states. In a few days, he predicted, business would be at “an actual standstill.” The “most urgent emergency in the history of our nation,” Sheaffer concluded, “is at hand.” Over the next two days, the
rest of the states would declare their own holidays or restrictions, the two most significant—New York and Illinois—coming in the early hours before dawn on Saturday.
That same morning, Richard Whitney went to the podium overlooking the New York Stock Exchange’s immense trading floor and announced that it too would shut down. In Chicago, the commodities exchange, the Board of Trade, closed for the first time in nearly a century, and the streets in the city were eerily quiet. “I do not know how it may have been in other places,” one resident recalled, “but in Chicago, as we saw it, the city seemed to have died. There was something awful—absolutely abnormal—in the very stillness of those streets. I recall being startled by the clatter of a horse’s hooves on the pavement as a mounted policeman rode past.”
On his popular radio broadcast on Thursday evening, Rudy Vallée sang “Let’s Put out the Lights (and Go to Sleep),” a song advising that with “no more money in the bank” the best thing to do was simply to crawl into bed. The country’s bank leaders once could do no wrong; now everyone was blaming them for the crisis. After the sorry testimony over the last two weeks, Pecora wrote, “the catastrophic collapse of the entire banking structure of the country seemed but the natural climax.”8
Late Thursday afternoon, after the last witness testified, Pecora addressed the committee, thanking Norbeck and the other senators for his appointment and the opportunity to serve as counsel. He “accepted the engagement with a high appreciation of the privilege and the honor” it entailed and he thanked his staff “for their devotion, loyalty, industry and integrity.” Norbeck returned the compliment. “Speaking for the committee,” Norbeck said in gratitude to the little lawyer from New York sitting next to him, “I wish to say that we are well pleased with the progress you have made, Mr. Pecora, in the remarkably short time that you have had a chance to work. The Senate has ordered the committee to continue its work, and there is no doubt in my mind that it will be vigorously prosecuted. I shall not be chairman of the committee very long, but whoever takes charge of the work will go ahead with it I feel certain.”9
A few minutes later, as the overcast sky grew steadily darker, Pecora and Norbeck were standing in the Senate Office Building engaged in the kind of relaxed small talk that often follows a particularly grueling task. Pecora was no doubt still basking in the warmth of the words with which Norbeck had ended the hearings; it was, after all, just the kind of acclaim that he constantly and desperately craved. The conversation was of “no special importance” and Pecora occasionally glanced out a nearby window. At the base of Capitol Hill he would have seen the Hotel Continental, the bright neon lights on its roof beginning to light up the gloaming sky. He had spent so many sleepless hours there over the past week and a half, studying exhibits, meeting with Silver and Saperstein, getting ready for the next day’s examination. It was there—could it have been only a few days ago?—that he picked up his phone and heard Cary tell him that Mitchell had resigned in disgrace from the bank after enduring just four days of his withering questions. Beyond the hotel and across Columbus Plaza was Union Station. It must have seemed remarkable that just a month earlier he had first stepped off the train to meet the senator from South Dakota with whom he was now chatting so casually.
Thirty years later, Pecora reflected on the hearings and the transformation they had wrought in his life. Until this point Pecora likened his experiences to those of “a parish priest,” a figure of purely local importance. “I suddenly was thrown into a field of activity which embraced national issues, and matters that had even an international impact.” He called it “the most intensive period of my education throughout my entire life.” It is easy to believe that although that metamorphosis had only just begun, Pecora had some nascent sense of it as he looked out that window into the fast approaching twilight.
As he stood there, chatting with Norbeck, a figure crossing the windswept plaza caught Pecora’s eye, a slump-shouldered man shuffling away from the Senate Office Building toward the train station. Pecora pointed him out to Norbeck, who at first did not recognize him. “That’s Mr. Mitchell,” Pecora said.
The past ten days had transformed Sunshine Charlie, too, and Pecora couldn’t help but think back to when the banker first strutted into the hearing room—a domineering, world-renowned business executive; a leader of Wall Street, surrounded by a bevy of bank executives and lawyers; a man who had nothing but disdain for the people in Washington who were wasting so much of his precious time. The confident, commanding swagger was gone; Mitchell’s head was bowed as he made his way across the plaza. The entourage had vanished, too; Mitchell was completely alone, forced to carry his own suitcase as he headed back to New York. Mitchell looked, Pecora thought, like a man completely “wrapped up in his own thoughts.”
Norbeck saw the same thing. For all his lack of education, the senator was something of an art aficionado, and he loved to roam the halls of Washington’s museums. “There’s a famous picture,” the senator told Pecora, “that portrays the great Napoleon on his way to St. Helena, on the decks of the steamer conveying him from France.” That drawing shows Napoleon standing alone, his gaze fixed on the horizon, totally oblivious to his surroundings, as the ship’s officers huddle behind him staring and whispering. Pecora knew the drawing and he agreed with Norbeck—Mitchell looked like a man who was “going into exile.” It was the last glimpse the lawyer ever had of the fallen banker.10
Just a few hours later, a train rolled in to Union Station, pulling in to the easternmost siding, a gloomy and dimly lit corner of the rail yard. Secret Service men, their hands obviously clutching the pistols in their pockets, quickly surrounded the train, as did a host of policemen in black rubber overcoats, some on foot and others mounted on motorcycles. A steady mixture of sleet and icy rain formed slick, dark pools on the platforms, but it suddenly ceased as soon as President-Elect Roosevelt exited the train and made his way down a gangway to a tightly guarded car waiting nearby. His staff carried a rough draft of a proclamation declaring a nationwide bank holiday. Roosevelt waved to the crowd of about fifteen hundred people and they gave a loud cheer as he departed for the May-flower Hotel to monitor the final collapse of the banking system and to make the last preparations for the Inaugural Address he would deliver in less than forty-eight hours.
To this point, the incoming president had not breathed a word of the contents of that speech, wanting to heighten the mystery and the drama when he finally delivered it. The typewritten address was in safekeeping with Raymond Moley, who slept with it under his pillow to make sure that it didn’t inadvertently fall into the hands of a reporter.11
The next day, Union Station was back to its normal bustle as Ferdinand Pecora quietly and unobtrusively boarded a train for New York.
EPILOGUE
Over seventy-five years before Rahm Emanuel, Barack Obama’s chief of staff, advised that politicians should never let a good crisis go to waste, the columnist Walter Lippmann wrote that “there are good crises and bad crises.” Lippmann had refrained from commenting on Mitchell and City Bank during the hearings, but a week after the inauguration, though he was convinced that Pecora’s relentless unmasking of the bank’s misdeeds had exacerbated the banking crisis, he nonetheless pronounced that the hearings had been worth it. In a column published in the New York Herald Tribune, he wrote:The much debated question as to whether the Congressional exposure of Mr. Mitchell’s conduct of the National City Bank was in the public interest can now be answered clearly in the affirmative. It is, of course, true that the exposure accelerated the banking crisis by adding to the popular distrust of banks. But the exposure has proved to be a good thing, not merely in the general sense that wrongs should always be exposed whatever the consequences, but in the specific sense that the way has been opened to a more thorough-going reconstruction. The crisis has not only made it possible for the Administration to reform the banking system drastically, but it has produced, or at least brought into the open, a recognition of evils and a desire fo
r a reform within the banking community itself.1
The new president knew better than anyone the opportunity the banking crisis created, and he moved quickly to address it. On Sunday, March 5, 1933, the day after his inauguration, Roosevelt made official what was already a fait accompli—he declared a national banking holiday. To the New York Times it was the “most drastic” peacetime action that a president had ever taken. Many others saw it as a necessary breather, a chance for hysterical Americans to simply calm down. The president had given the country “a sharp slap in the face,” the historian Charles Beard wrote. “By arresting all banking functions, government removed the sources on which fear might thrive; and it gave the people time to collect themselves.”2
Now that the banks were closed, Roosevelt needed to get them back open. The president rejected calls to nationalize the banking system as completely impracticable and far too radical. Instead, working off a plan that the Hoover administration had started, and with Ogden Mills, Arthur Ballantine, and other Hoover administration officials continuing to pitch in, Roosevelt’s staff quickly drafted the emergency legislation that would permanently close hopeless cases, prop up shaky ones, and immediately reopen sound banks. Congress passed it in eight hours with virtually no debate.
A week later, Roosevelt gave his first fireside chat. Trying to restore confidence in the banking sector, he referred only obliquely to the City Bank hearings. “Some of our bankers,” he told the estimated 60 million radio listeners, “had shown themselves either incompetent or dishonest in their handling of the people’s funds. They had used the money entrusted to them in speculations and unwise loans.” Roosevelt was confident that the banking system as a whole was sound and that the vast majority of bankers were honest. He implored Americans to have faith. “I can assure you,” he told the nation, “that it is safer to keep your money in a reopened bank than under the mattress.” Roosevelt’s comforting words and quick action worked. Money flooded back into the banks and the system quickly righted itself. The New York Stock Exchange reopened and rose 15 percent in the first day’s trading. The banking crisis had passed, and the Roosevelt administration was lauded for its swift and sure-handed response.3
The Hellhound of Wall Street Page 33
