The Hellhound of Wall Street

Baker had been sitting in Room 301 for two days watching Pecora dismantle Mitchell and Rentschler. Both were still there. Mitchell had temporarily retired to the spectator’s row directly behind Baker. The “personification of American rugged individualism,” one reporter noted, now stayed close to his attorneys, all of them sitting politely and quietly with their hands folded in their laps. It would, the reporter noted, “unquestionably take a steamshovel to get [Mitchell] away from the enclosure of those high-priced, wise looking lawyers.” With the committee room still jammed with spectators, many loitering around the door because they had nowhere to sit, the soft-spoken Baker seemed afraid to answer even the simplest question for fear that Pecora would do to him what he had just done to Mitchell and Rentschler. Within the first few minutes of his testimony, Baker consulted a memorandum handed to him by his lawyers, and Pecora asked an innocuous question about whether the banker had a good or poor memory.

It was a fitting start to a laborious day. Baker constantly battled Pecora on every point. Getting nowhere with him, the lawyer brought the company’s corporate secretary, Harry Law, to the stand. He was no more helpful. Law couldn’t answer a question without long pauses and whispered conversations with lawyers and the other executives from the bank. He incessantly twirled company documents in his hands as the whole room waited for his answer. Pecora was sure that Baker in particular was not being candid with him, and the lawyer wanted the record to reflect how long both men were taking to answer his questions. At one point he admonished Baker for the constant coaching he was getting: “Mr. Baker, do you consider yourself qualified, as the president of the company, to answer these questions, or do you think that someone else can answer them more accurately?”

What Pecora was trying to pull out of Baker and Law was the story of how the National City Company ceaselessly flogged City Bank’s stock. The sales push during the crash, it turned out, was not an anomaly. Starting in 1928, the company intensely marketed City Bank stock to the public, not only to raise the price of the stock, but because broad stock ownership benefited the bank. Stockholders became just another group to whom the bank could cross-sell its other financial products. Rentschler put it somewhat more diplomatically, testifying that there were “a great many collateral conditions flowing to the bank because of it” so that “it was a very desirable thing for [the bank] to broaden our contacts [and] to make it possible for more people to become stockholders in our bank.” Broad ownership was an integral part of the bank’s financial supermarket strategy, and the number of City Bank shareholders mushroomed from 15,000 in 1927 to 86,000 at the time of the hearing.⁴

The National Banking Act, the federal law governing nationally chartered banks, prohibited City Bank from directly trading in its own securities, but Mitchell and the other executives saw no reason why the company could not trade the bank’s shares. It was not, after all, a national bank. As Pecora had begun to show late the previous afternoon with Rentschler, however, the bank was walking a fine line. In bank branches without employees of the affiliate, bank employees would take orders for stock. The affiliate benefited enormously from the bank’s large capital base. It could borrow up to 10 percent of the bank’s capital to finance its activities in the securities markets. In 1928, as City Bank’s stock price skyrocketed, Mitchell split the stock five for one, decreasing its price by 80 percent, so that more middle-class buyers could afford it. National City salesmen were constantly pushed to sell the bank’s stock, and even received premium commissions when they did so, giving them even greater incentives to urge the stock on their customers. Because the trustees who ran the company were City Bank officers and directors, the line prohibiting national banks from securities trading was, at the very least, decidedly smudged, if not entirely obliterated.⁵

Rentschler, of course, didn’t see it quite that way, although he conceded that the company had cut back on trading City Bank stock after the crash and said that it was not nearly as aggressive as it had been at the time of the boom. Pecora reminded Rentschler that “a national bank may not buy or sell its own shares” and then asked, “Do you consider that those provisions of the national banking act were violated in spirit if not in letter through this medium of its investment affiliate . . . engaging in those transactions?”

This wasn’t the bank buying its own shares, Rentschler insisted, because it had been done through the artifice of the affiliate. But he did acknowledge that “in the light of experience I am perfectly willing to say to you I prefer that the National City Co. not sell shares.” Even Rentschler thought it was unwise for the bank to be pushing its stock so aggressively. That concession, however, was not enough for Pecora, who still wanted to explore the details of just what the affiliate had previously done to market the bank’s shares. And it was on that point that he was getting nowhere with Baker or Law.⁶

It didn’t help matters that neither Pecora nor the senators had a firm grasp on the mechanics of stock transactions. At various points, the senators, for example, seemed to be assuming that City Bank was issuing new stock to investors, thereby reaping huge windfalls as the bank’s stock price continued to climb, when in reality it was simply acting as a broker for sales of already issued stock. Pecora did manage to show that the company had borrowed 30,000 shares of stock from Mitchell in the spring of 1929, paying him interest in the process. By the time the company returned the stock in July, it owed Mitchell $128,850, another little payday for the bank’s chairman. It would have made a nice point about the many ways that Mitchell was able to profit from his position as chairman of the bank (for lending his stock for three months, the company paid him five times his annual salary), but Pecora had a different point in mind. Wasn’t this, he asked Baker, an example of the company shorting the bank’s stock? Given all the hostility toward short sellers at the time, it was an explosive charge. Baker denied it and the two battled for the better part of the day over what constituted a short position.

After two hours of persistent questioning, Baker finally conceded that National City was technically short at one point in 1929, but he remained adamant that it was only a temporary imbalance between the purchase and sale transactions it was executing for customers. Pecora’s questioning was tenacious and he ultimately got the admission he wanted, but in truth his theory made no sense. Pecora was trying to show that the aggressive promotion was designed to push City Bank’s stock price higher. If that was what the company was doing, why would it sell City Bank stock short, a bet that the stock price would go down? It wouldn’t. Nonetheless, the newspapers dutifully reported the next day that City Bank had shorted its own stock. Apparently, the reporters didn’t understand the stock market any better than Pecora did.⁷

Despite the false steps, Pecora was able to draw a compelling picture on Thursday that City Bank had consistently tried to control trading in its stock—control it apparently used to run up the price. The most significant step in cementing that control was in 1928 when the bank removed its stock from the New York Stock Exchange, the largest, most prestigious stock market in the country and the natural place to list shares if the bank intended to broaden ownership as much as possible. Baker claimed the bank was concerned that leaving the stock on the exchange might allow it to be manipulated, but that claim seemed implausible on its face. He pointed to only a handful of small trades and price movements that alarmed him. It sounded like a pretense, an impression that Pecora immediately tried to underscore.

On the basis of that slender reed—on trades constituting a minuscule fraction of the outstanding City Bank stock—Baker contacted Mitchell, who also claimed that he had “been much disturbed regarding recent speculative movement” of the bank’s stock. Mitchell agreed that delisting the stock was necessary. Activities on the New York Stock Exchange, he wrote, “only intensify speculative interest which can not be of any possible advantage to us.” The New York Stock Exchange at first refused—it said investors relied on the existence of the market, which made it easier to buy and sell City Bank shares. Without approval from City Bank’s shareholders, the exchange would not delist the stock. It was only a temporary roadblock. The bank obtained approval and the stock was delisted in January 1928.

If the bank’s goal was to prevent a wild run-up in the stock price and to lessen speculative interest, it was singularly unsuccessful. Delisting turned the company into the primary market maker for City Bank stock. City Bank stock, once only thinly traded on the New York Stock Exchange, was now in some weeks being sold by the company at a rate of more than 90,000 shares. The numbers seem small by today’s standards, but they were huge in 1928 and 1929. The National City Company was the largest investment bank of the day, and it did more business in City Bank stock than in any other individual stock. And although the whole purpose of delisting was theoretically to limit speculative interest, Baker admitted that City Bank did nothing to dampen this activity; in fact, the company encouraged it. Throughout 1928 and 1929 National City was engaged in an “extensive campaign” to sell the bank’s shares. The sales pitch was the usual palaver—a hint of insider knowledge and a smattering of exclusivity combined with an overwhelming sense of urgency. “Charles Mitchell had confided to certain trusted National City salesmen,” one customer was told, “information to the effect that the National City Bank stock was a good buy. This was to be passed along to special clients only.”⁹

With the company aggressively pushing the stock and with the stock split, the volume of City Bank trading nearly doubled and the price skyrocketed, reaching a peak in 1929 of $580. Accounting for the split, City Bank’s stock was now selling for the equivalent of nearly $3,000 a share. Baker denied that the company tried to control trading in City Bank stock, “except when the market seemed to be moving too fast in one way or the other, and then we would undertake to do it.” As of January 1928 the stock had nearly quadrupled in price in a little over a year and a half. That growth rate apparently suited the bank and the company just fine.

For Senator Brookhart the conclusion was obvious—City Bank was far more efficient at “booming” its stock than the New York Stock Exchange had been. Norbeck agreed; hadn’t the company encouraged investors to buy City Bank stock and helped along the price run-up? Baker remained unsure how to answer, but his response hardly helped his case: “I didn’t—I certainly was not trying to stop business.”

Baker claimed he “was interested in both,” but Brookhart didn’t believe him. “What did you do to protect the public?” the Iowa senator demanded. “I have not seen anything yet that was done to stop all this vast loss they have sustained as a result of all these transactions.”

As usual, Brookhart had overstated the case—the general market bubble, not just City Bank’s activities, played a huge role in the bank’s soaring stock price. Still, most listeners probably agreed with the senators—the bank did everything it could to push things along.

The affiliate’s central market role and its great desire to see a soaring City Bank stock, Pecora also showed, created a huge conflict of interest for the company, both with respect to pushing City Bank stock and in pushing the securities the affiliate had underwritten. City Bank’s depositors frequently sought the bank’s advice on investments. “And in order for a bank to give that kind of advice disinterestedly,” Pecora wanted to know, “it should not be interested in pushing any particular security, should it?”

Baker tried to duck the question, but Pecora kept at him: “Mr. Baker, you would not hesitate to say, would you, that the advice which a bank gives to a depositor, in response to the depositor’s request for such advice concerning investments, should be wholly unselfish and disinterested on the part of the bank and should be designed to serve the depositor’s interests?”

The conflict was patently obvious—of course the bank would prefer the securities its affiliate offered. Baker would not, however, admit the obvious; he thought the bank could give “unselfish and disinterested advice.” Pecora didn’t; he was sure that the “temptation” to act in the best interests of the bank was too strong. Even though a few moments earlier Baker had testified that the company’s employees “were interested in promoting the interests of the bank in any way we could,” he never quite admitted that those interests colored the investment advice it offered its customers. He didn’t really have to; Pecora had made his point.¹¹

Pecora ended the day by showing that just a few months after the stock market crash, the company participated in a stock pool—euphemistically known as a trading account—to boost the price of City Bank’s stock. It was just the kind of manipulative activity that Baker had so forcefully claimed earlier in the day that the bank had sought to avoid and the reason it had delisted its stock from the New York Stock Exchange. Now, in the company’s bid to drive up the stock price after its disastrous post-crash plummet, the company granted an option to a brokerage firm called Dominick & Dominick (a firm that just happened to be owned by one of the bank’s directors) to buy blocks of City Bank stock at progressively higher prices. As in any pool, the members would then trade the stock back and forth with each other in an attempt to stimulate buying interest and increase the stock’s price. Baker denied any knowledge that the option was part of a pool operation, a claim Pecora easily deflected.

Pecora never explored the reason for the pool, but it seems clear that the primary intended beneficiary of this manipulative scheme was none other than Charles Mitchell. Just two months before the letter was sent, Mitchell had borrowed millions from the J.P. Morgan company in his failed bid to save the Corn Exchange merger, pledging his City Bank stock as collateral. Mitchell still owed Morgan $6 million. If the bank’s stock price fell any more, the stock Morgan held (it was now, temporarily at least, the second largest City Bank shareholder) would be worth less than the outstanding balance on the loan. Mitchell might be a “good friend” of Morgan, but money was money. Morgan might well demand additional collateral or even foreclose on the loan to limit its losses.

A rising stock price would alleviate that risk; it was an effect that the option was clearly designed to achieve. By setting the exercise prices of the options at successively higher tiers, City Bank was encouraging Dominick & Dominick to drive the price upward; it was the only way for the trading firm to continue to profit on the option. “Our only desire,” Baker admitted, “was to see the stock move up.” This, of course, was the same Baker who, after seeing fifty shares trade on the NYSE, was so concerned about manipulation that he recommended delisting the stock. Now he was granting an option on 32,000 shares to facilitate a pool to help boost the stock price. And this was the same Mitchell who wrote that manipulative trades “can not be of any possible advantage to us.” Fear of manipulation apparently no longer applied when Mr. Mitchell’s money was on the line.

The pool worked, but only briefly. Dominick & Dominick made a tidy little profit of about $350,000 as City Bank’s stock price began to rise. The increase, however, was short-lived. As 1930 wore on, the stock price dropped further in value and Mitchell eventually gave Morgan a mortgage on his Fifth Avenue home and his houses in Tuxedo Park and the Hamptons to secure the outstanding loan. By 1933, virtually none of that balance on the Morgan loan had been paid, but Morgan had not yet foreclosed on its good friend.¹³

The third hearing day was a slog and lacked the riveting disclosures of the first two days. There was, however, little doubt that Pecora had already accomplished much of what he set out to do. In the space of three days, Pecora showed that City Bank—that paragon of banking virtue, one of the largest and most respected banks in the world—was engaged in the same kind of petty stock promotions as the Bank of United States, the failure of which helped spark the banking crisis then gripping the country. Just like that much smaller and less prestigious retail bank for immigrants—the bank that City Bank would not deign to rescue when it got in trouble late in 1930—City Bank was speculating in its own stock and selling it to the bank’s own depositors. Were the Bank of United States’ bad real estate loans any different from City Bank’s bad Cuban loans? Hadn’t the two banks done precisely the same thing with their mistakes—dumped them into their affiliates? The Bank of United States authorized highly suspect loans to its board members. Were they really any different from the City Bank “morale” loans? And hadn’t the former garment manufacturers who ran the Bank of United States, Marcus and Singer, been shipped off to jail?

The Nation made that connection. It called the City Bank revelations “the largest bank scandal . . . since the failure of the Bank of United States. It all recalls the ancient music-hall quip: ‘If you steal $25, you’re a thief. If you steal $250,000, you’re an embezzler. If you steal $2,500,000, you’re a financier.’”¹⁴

Less than two months before the City Bank hearings, the president of the American Bankers Association argued that there was no need for Congress to pass new banking laws, especially laws that would strip commercial banks of their affiliates. Americans need only rely on the “honesty and efficiency” of the men who ran the country’s largest banks, who “continued to command public confidence . . . because they conformed conscientiously to principles of sound public service.” Was there anyone who still believed that was true? Certainly not Joseph Kennedy, who lamented, “The belief that those in control of the corporate life of America were motivated by honesty and ideals of honorable conduct was completely shattered.”¹⁵

And certainly not the editors who had been shocked in Wednesday’s testimony to hear how shabbily City Bank had treated its own employees, forcing them to continue to pay for now nearly worthless stock at greatly inflated prices. The “morale” loans to the higher executives stood “in ugly contrast with the manner in which the same officials are still compelling their lower-caste employees to repay loans for similar purposes, but at the original high mark of the market prices. There can be no sympathy with men who do such things.” The “indecent callousness” with which these high-level bankers treated lower-level employees “marks them as men set apart from their fellows as betrayers of their trust not merely as bankers, but as human beings.”¹⁶

The editorial sections of the New York papers remained quiet, but the president-elect, making his last cabinet selections and preparing to enter the White House, had taken notice. He was amazed at what he heard and astounded by the lack of editorial comment in New York—a silence he would later attribute to the press’s lack of “moral indignation.” Outside New York, the papers were beginning to express that precise sentiment. The Philadelphia Record called the “disgusting revelations . . . cheap skullduggery.” The Hartford Courant , which had to this point been a reliable defender of Wall Street, now saw why the public had become so disenchanted with the financial community. The “average citizen . . . sees himself as the innocent victim of the catastrophic consequences of the wild speculation that characterized an era of false prosperity,” the editors observed. Even the Wall Street Journal thought that the failure to inform the bank’s own stockholders of the size of the bonuses the executives were collecting from the management fund was troublesome. “Certainly, Mr. Mitchell’s testimony affords further basis for demands for greater corporate publicity,” they dryly noted.¹⁷

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