All the Presidents' Bankers

by Prins, Nomi

  The Morgan Testimony and Fed Blaming

  Pecora’s roasting of Mitchell was second in terms of public fascination only to that of Jack Morgan. And as the Pecora hearings heated up, Thomas Lamont learned that his relationship with FDR wasn’t going to provide him many privileges.

  In April 1933, a politely frustrated Lamont wrote to Roosevelt to complain about the mistreatment he and Morgan counsel John Davis received at the hands of Pecora, who had interviewed the men as part of his preliminary research for the hearings (Davis had been US solicitor general under Wilson and the Democratic presidential nominee in 1924). Lamont was incensed at Pecora’s accusations that his bank had “absolutely refused to answer” any of his inquiries. “In fact,” Lamont wrote, “there is not one single item in our whole business that we are not quite willing to show to anybody who is entitled to see it.”82

  This was perhaps not the best tack for Lamont to take. His hands were dirty from his son’s tax plays and the tax-dodging securities deal involving his wife. When later asked by Pecora why that transaction had been performed without an intermediary, Lamont responded that it “didn’t occur to me to do it in any other manner.”83

  Morgan was better prepared for Pecora’s relentless questions, and he maintained a composure that gave away nothing. Even the charge of tax evasion bounced like a rubber ball off his steely demeanor. As he declared in his opening statement on May 23, 1933, “If I may be permitted to speak of the firm, of which I have the honor to be the senior partner, I should state that at all times the idea of doing only first-class business, and that in a first-class way, has been before our minds.”84

  On May 27, days after Morgan was grilled by the Pecora Commission85 and before Lamont was sworn in to testify on June 2,86 Lamont wrote Adolph Ochs, publisher of the New York Times, to challenge the paper’s uncharacteristically negative editorial comment regarding Morgan’s use of preferred lists to distribute stock. Lamont condemned Pecora’s handling of the investigation, describing his preferred clients as “men who are prepared to take a chance with their money.”87

  The Nation took a different view, charging that Pecora’s commission only scratched the service of deceit and condemning Morgan generally: “Morgan and Company, and their fellow private investment bankers, may declare and believe that even in these transactions they render important services. Actually, their services are not only useless but definitely anti-social and obstructive.”88

  During the Pecora hearings, The Nation proclaimed Morgan “one of the greatest enemies our society ever had,” characterizing “most of the devious and damaging corporate strategies which have brought us into our present hole” as “developed and perfected and varnished with respectability by him. He was no rescuer. He lived on wrecks. He thrived on depression. He built nothing. He pounced upon what other people built.”89

  Pecora’s investigation focused in particular on three of the 1929 issues made available to clients on the preferred stock list—United Corporation, Allegheny Corporation, and Standard Brands—which subsequently dove in value, with citizen investors taking the biggest losses.

  The Allegheny Corporation, the Van Sweringen brothers’ web of railroad companies, which had once been the cornerstone of Morgan’s foray into the stock issuance business, incensed the public the most. Allegheny shares were parceled out to 227 clients and close friends at $20 a share at a time when the market price for them was $35–$37. Not only were other financiers in on the deal; some of the men were now holding public office. These included former Treasury Secretary William McAdoo (Leffingwell’s former boss during the Wilson administration, now a California senator on the Senate Banking Committee), Norman Davis (FDR’s ambassador at-large in Europe), and, most tellingly, current Treasury Secretary William Woodin.

  Morgan said these men “were selected because of established business and personal relations, and not because of any actual or potential political relations,” adding that “we conduct our business through no means or measures of ‘influence.’”90 In a sense, what he said was true: given the position of power and substantial relationships that the Morgan firm enjoyed, it was not necessary to give away stock to gain influence.

  As a sort of denouement to the Morgan hearings, the final man of the Big Three bankers to be called before Pecora was Wiggin. His crimes were the most intricately executed, it turned out. Through a collection of shell companies listed under various family member names, Wiggin had bagged $4 million in profits while his clients lost money during the Crash. He was ultimately fined $2 million in a civil suit but escaped any federal or criminal repercussions.

  Compared to Mitchell’s actions, Wiggin’s schemes were more shocking to the Wall Street community. Wiggin was considered a “reserved,” “rather scholarly man” whereas Mitchell was a “genial extrovert with a talent for headlines.”91 Wiggin had not only been Chase chairman, for which he officially made $275,000 per year ($3.8 million in today’s dollars). He also served on the boards of fifty-nine other corporations that paid him a salary, and he used his position to troll for business, which was not against the law but gave him an unfair advantage in financial-corporate dealings. In the hearings he also defended a series of loans his banks made to their own officers (which enabled them to speculate on their own stock) on the grounds that such moves helped them develop “an interest in their institution.” Again, this was not illegal, but it was certainly unsavory.

  Federal Deposit Insurance

  The Federal Deposit Insurance Corporation, established by the second Glass-Steagall Act (also called the Banking Act of 1933), was supposed to be an emollient for bankers that chose to keep the commercial banking business. It would back depositors by insuring their deposits in case of a bank failure. As such, it provided banks with a safety net, too, as it mitigated the possibility of bank runs by scared citizens trying to extract their money in times of panic.

  Though he supported the Banking Act, Aldrich criticized the premise of having a federal guarantee on deposits. “The unlimited guarantee puts a premium on bad banking. . . . [It is] very dangerous from every point of view,” he later asserted.92 Roosevelt, too, was concerned that the FDIC would enable banks to take too many risks, knowing the government would back their customers’ deposits if necessary. Aldrich warned FDR that “unfortunate circumstances would ensue if the bank deposit insurance provisions contained in the Glass Bill were enacted into law.”

  Much of Aldrich’s concern centered on the industry’s confusion over its liability. Though he conceded that a temporary guarantee was useful, he said, “My suggestion is that if it is necessary to have a permanent form of deposit guarantee system, the temporary system in the Banking Act of 1933, with its limited guarantee and limited contributions, should be adopted. But I earnestly believe we should seek by every practical means to make any kind of permanent deposit guarantee unnecessary.”93

  His point was both valid and self-serving. On the one hand, banks that knew they had an implicit government guarantee and could use that assurance to explore new methods of taking risk would be bad for the system. On the other hand, banks that thought they were “better” at risk management than others didn’t want to be held liable for others’ foibles. Aldrich was in the latter camp.

  Aldrich shrewdly saw the direction of the political winds and positioned his company accordingly. Beyond sticking it to a rival, he believed the future of banking resided on the commercial side of the business, and that Chase would be best positioned to capitalize on it after the Banking Act passed. Indeed, without Aldrich and Perkins’s support for FDR and vice versa, it’s possible that the act never would have passed. The powerful bankers’ backing pushed it through in an even stricter form than Glass had envisioned. The Banking Act of 1933 was approved by the House on May 23, as the Pecora hearings were ongoing.94

  Morgan joined the chorus of bankers and politicians blaming the Fed for the financial chaos of the past few years. In his final statement to the Pecora Commission on June 9, 1933, h
e characterized the crash as “the great inflation”:

  It is true that the failure of the then Federal Reserve Board to take the necessary measures to control the inflation in time encouraged the speculative frenzy, which carried the market quotation out of bounds. . . . The great inflation. The cheap money policy of the last half of 1927, the indecisive policy of 1928, and the Board’s veto of a dear money policy in the first half of 1929—these are the cause of the great super inflation of that period and of all the disastrous consequences.

  By the time those words entered the public record, Morgan was yesterday’s news. Aldrich and Perkins had outmaneuvered him. Morgan’s political power on the national stage, along with the praise and criticism it attracted, would become subordinate to these rising bank titans and the new regulations they promoted.

  A week after the Morgan testimony was completed, on June 16, 1933, FDR signed the second Glass-Steagall Act. He was surrounded by a group of men that included Senator Glass, Representative Steagall, Senator McAdoo, and others. The bankers were not present in body, but Aldrich and Perkins were there in spirit that day, as was their alliance on the matter with FDR.

  The deposit guarantee aspect of the act, the creation of the Federal Deposit Insurance Corporation, went into effect on January 1, 1934.

  The Glass-Steagall Act and the New Deal

  With the force of a man who would lift the power of the presidency to a new level, FDR signed fifteen major bills into law within his first hundred days in office, including the Banking Act, and created a slew of new agencies. Tens of thousands of people returned to work. FDR pledged billions to save homes and farms from foreclosure, provide relief for the unemployed, guarantee savings, and support the banks.

  Though the substance of the first part of FDR’s New Deal centered around fortifying the banking system (the cornerstone of financial capitalism) and US financial power (through the Glass-Steagall—or Banking—Act and the Truth in Securities Act of 1933, which required better disclosure from the financial community), FDR moved quickly to other initiatives.

  He backed the Agricultural Adjustment Act of 1933, a sweeping farm-relief bill designed to subsidize farmers for the sharp drops in prices of their crops; for the first time, the government paid farmers not to plant, so supply could be capped until demand and prices increased.

  FDR also established the Federal Emergency Relief Administration in May 1933, which ran until December 1935. The $3.3 billion public works program provided unemployed people with various government jobs. In 1935, the plan divided into the Works Progress and Social Security administrations.

  Toward the end of his first hundred days, FDR signed the National Industrial Recovery Act, which created the National Recovery Administration to regulate industry pricing, hours, and wages, and to stimulate the economy. The act also included a provision for collective bargaining by unions.

  Many critics, at the time and more recently, fixed on the notion that the government should not bear so much responsibility for the public welfare. But in the context of the power play between the president and the bankers, it can be viewed another way: FDR sought to preserve presidential power, and hence the country’s preeminence relative to other nations, by taking more control over the economy. He did not get rid of the market, capitalism, or banking; he merely rearranged it, or regulated aspects of it, in a way that empowered the federal government.

  FDR’s legacy would lead Democratic and Republican presidents alike to invoke the power of the federal government to preserve economic stability in ways they deemed necessary for the overall population, though few presidents would be able to do so while balancing such a tight alliance with the nation’s key financiers.

  FDR restored public confidence in banking. He propped up capitalism and saved the bankers from themselves, with their blessings. In addition, his actions instigated a changing of the guard in the banking industry, which saw a new generation of less risk-taking, more public-minded (though still exceptionally powerful) internationalist bankers take their positions at the top of the American and global banking hierarchy.

  There were no hard feelings levied at FDR from the Morgan contingent, but there were remaining issues to iron out. On October 2, 1933, Leffingwell wrote FDR: “I want to congratulate you upon what you have accomplished in the seven months since you took office. The country today is scarcely recognizable as the country it was on March 4th, when all the banks were closed.”

  Leffingwell had a number of qualms regarding FDR’s bank reforms, but it was a regulation (referred to as Regulation Q in the Banking Act) prohibiting interest payments on demand deposits that he claimed as “being reductive to bank deposits and therefore deflationary.” By restricting bankers from raising interest rates to entice customers to provide them with their deposits, especially in times when inflation might cause rates to rise, Regulation Q was restricting their access to capital, their lifeblood. Of all the stipulations of the Banking Act, it was Regulation Q that evoked the greatest condemnation from the bankers, and it would be the first part of the act to be obliterated several decades later.

  Jack Morgan kept in touch with FDR on a friendly basis, but he decided to let Leffingwell do the legal arguing. The two bankers remained, Leffingwell said, at the service of FDR and Treasury Secretary Henry Morgenthau, and would publicly support their monetary policy objectives.95

  As a pivotal year in the rising power of the presidency and the next generation of commercial bankers came to a close, Aldrich was summoned by FDR for a private wrap-up meeting at the White House.96

  The two men had forged an important political-financial alliance. The Big Three retained enough liquidity and funds to summarily outperform their weakened competitors, who didn’t have the same access to capital. The public felt safer. And though Aldrich would disagree with some banking legislation to come, he and FDR were satisfied that a year that had begun in the malaise of a panic-stricken nation and credit-frozen financial system had worked out quite well for them both.

  Decades later, Aldrich’s and Morgan’s banks combined to become JPMorgan Chase, regaining all the commercial and investment banking abilities that Aldrich had separated, after the Clinton administration repealed the Glass-Steagall Act in 1999.

  CHAPTER 7

  THE MID- TO LATE 1930S: POLICING WALL STREET, WORLD WAR II

  “We cannot afford to accumulate a deficit in the books of human fortitude.”

  —Franklin Delano Roosevelt, June 27, 19361

  BY 1934, THE COUNTRY APPEARED TO BE SLOWLY EMERGING FROM THE GREAT Depression. Though unemployment was still near 22 percent, the national mood was lifting thanks to confidence in FDR’s New Deal programs coupled with the rising trust in the banking system that the president had carefully engineered.

  A. P. Giannini, head of San Francisco–based Bank of America, was a veteran banker yet new to the game of political and financial alliance. He saw the Banking Act of 1933 as a way to broaden his bank’s geographical and influence reach, and he was as delighted as his New York counterparts that some power would be diffused from the Morgan Bank. In addition, deposit insurance was a godsend for Giannini; it was hard enough to engender trust for a West Coast bank nationally, but the addition of insurance helped level the playing field. Even Regulation Q, which prohibited banks from paying interest on demand deposits (i.e., checking accounts) and capped the interest rates they could pay on savings accounts, helped him comparatively.2

  During the mid-1930s, the financiers who were focused on commercial banking pushed the FDR administration forward with additional regulations, while the private bankers remained sidelined. This internal power struggle in the industry coincided with a recession that shook up some of FDR’s banker alliances, as financiers began to think that it was time to reduce government intervention in the economy. All those domestic fights would fade, however, as it became increasingly clear that the country was headed to war, much to the chagrin of the isolationists in Congress. During that progression, FDR would
find himself returning to all of his banker friends for support. As they had during World War I, the bankers would rally behind their “chief” regardless of their personal grievances, though this time they would be insistent about their requirements for a less constrained policy on the flow of capital. The Morgan bankers were well equipped to navigate wartime economics, and they knew the value of aligning with the president. Other bankers, like Aldrich and Perkins, would quickly find their way.

  Policing Wall Street

  The very structure of the US banking system had been dramatically altered under the Glass-Steagall Act of 1933. But there remained a need for a federal body to enforce the laws that would ostensibly keep the stock and bond markets from being manipulated by the financiers. To deal with this matter, the Fletcher-Rayburn bill, which would become known as the Securities Exchange Act, was introduced on February 10, 1934. It met with an intense and immediate opposition campaign chiefly engineered by Morgan confidant Richard Whitney, now president of the New York Stock Exchange. Many grievances remained in the Morgan realm over the Glass-Steagall Act, but establishing an entity to police the stock exchange was adding fuel to the fire. Plus, Whitney wasn’t exactly the cleanest of operators, as 1938 indictments and time in Sing Sing would reveal.

  The bill was proposed to deal with the kind of securities fraud and violations that had been amply demonstrated in the Pecora hearings. It was designed to give the Federal Trade Commission power to regulate all aspects of organized exchanges, and to outlaw an array of shady market practices including excessive margin buying, wash sales (fake sales initiated by banks solely to lure the public with the illusion of true demand), and pool operations (where prices could be rigged by the larger financial firms that gathered together to push prices up and then sell their shares before the public knew what was happening).3