The Hellhound of Wall Street

The first witness on Wednesday morning was Horace Sylvester, the head of the company’s municipal bond department. This was not his first appearance in the limelight. He was a well-known municipal bond expert, but as far as the general public was concerned he was better known as a peripheral player in the molding of an American legend. In October 1926, Sylvester’s eleven-year-old son, Johnny, was extremely ill; doctors said he might die. To cheer his ailing son, the banker wired Yankee slugger Babe Ruth, Johnny’s idol, asking for a signed baseball. Airmail packages arrived at the Sylvester home carrying balls signed by both World Series combatants, the Yankees and the St. Louis Cardinals. Ruth, however, thought Johnny’s plight needed an even bigger gesture. In what quickly became part of Ruth lore, the Babe promised to hit a home run for the boy. Then he went out and hit three. When Johnny recovered, breathless news reports attributed his cure to the Bambino, whose larger-than-life performance raised the boy’s spirits. Horace Sylvester’s son was suddenly “the most famous little boy in America.”²

Horace Sylvester could have used something to raise his own spirits on that first day in March 1933. The forty-nine-year-old banker with the round face, thin mustache, and pronounced wattle was in Room 301 to clear up a bit of mysterious testimony that Pecora had elicited the day before. Sylvester’s testimony that Wednesday moved the City Bank disclosures from the immoral, unethical, and improper to what seemed like something that, if not outright illegal, showed a complete and utter disregard for City Bank’s shareholders, Sylvester’s obligations as a corporate officer, and whatever diaphanous tissue separated the bank and the company.

Just after lunch on Tuesday, Pecora briefly suspended his inquiry about the Minas Geraes bonds to put National City’s treasurer, Samuel Baldwin, in the witness chair. Baldwin’s testimony was brief and cryptic, and what it revealed sounded fishy. In 1931, National City handled a huge $66 million bond offering for the Port Authority of New York. One day shortly after the company completed the offering, Baldwin got a call from Sylvester asking Baldwin to give him $10,200 in cash and to charge the amount as a “syndicate expense” to the Port Authority offering. Baldwin never learned what the cash was for but he testified that it was unusual to pay expenses in cash. “Do you know,” Pecora asked, “of any other instance of a similar character where a sum of money amounting to several thousand dollars or more was drawn out in cash and charged to expenses?” Never, Baldwin replied, while he was treasurer. Pecora dropped the subject after establishing that independent auditors never examined the company’s accounts, but alerted the committee (and the reporters) that Sylvester would be in Washington the next day.³

Now with Sylvester in Room 301, Pecora cleared up the mystery surrounding this odd transaction. Sylvester gave the cash to a City Bank employee named Edward Barrett who in turn “loaned” the money to John Ramsey, the Port Authority’s general manager. Ramsey was “in a financial jam” and, although City Bank’s policies prohibited it from making an unsecured loan to him, Barrett didn’t want to leave his friend in the lurch. Barrett went to Sylvester and the municipal bond manager decided to make this “accommodation” for Ramsey because Ramsey was “a good moral risk.” The transaction was never recorded as a loan, Sylvester never knew the terms of the loan, and he never pressed for it to be repaid.⁴

Having exhausted Sylvester’s knowledge, Pecora turned to Norbeck. “Mr. Chairman, I ask that a subpoena be issued for Mr. Edward F. Barrett, returnable tomorrow.” Before Norbeck could respond, however, Sylvester spoke up, “Mr. Pecora, Mr. Barrett is in the room if you would like to see him.” Pecora whirled around, “Oh, is he?”

Barrett took the stand. His story did little to show that City Bank employees were jealously guarding shareholder interests. He claimed to have a note for the loan, but did not know where it was and, in any event, it was a note to Barrett personally, not to the company. The banker did not have a good explanation for why the loan was made in cash rather than by check, other than that Ramsey needed the money right away. Barrett testified that it was supposed to be a temporary loan (just “two or three weeks or a month”), but nearly two years later no interest or principal had ever been repaid and Barrett had not even asked Ramsey to do so. Barrett explained his reluctance: Ramsey’s “salary had been cut two or three times, and I knew that he could not make any payment, and I did not want to embarrass John Ramsey.”

“Precisely,” Barrett replied. “The one reason that I went to help him was because he was a friend of mine, and a very good friend of mine for ten years’ standing, and I have always found him a very high-standing fellow, and I wanted to help him if I possibly could.”

Perhaps it truly was a loan; the transaction, after all, occurred about six weeks after National City underwrote the bonds, hardly the ideal time to bribe an official. Sylvester was adamant on that point, pounding the table and denying any wrongdoing. It would have been a silly bribe in any event—Ramsey had no authority to award bond offerings to National City or any other investment bank. Indeed, the Port Authority subsequently refused to accept Ramsey’s resignation (he explained that he thought he was receiving a loan personally from Barrett, which was why he made out the note to Barrett). Sylvester was indicted for forgery, but the charges against him were dismissed.

But if it wasn’t a bribe it was a blatant misuse of company funds, although one that now hardly seemed surprising. If nothing else, Pecora had shown over the past eight days that City Bank’s executives gave little thought to the obligations they owed the bank’s shareholders. After the millions in morale loans and the bonuses, $10,200 seemed like nothing, but that $10,200 firmly cemented public perceptions of City Bank. “Of course this was not a bribe, or a bid for future business from the Port Authority,” the Nation wrote sarcastically. “Heaven forbid! It was just a generous kindly act to take care of a good man who happened to be in a jam. Why not give him $10,200 of the stockholders’ money and overlook such matters as collateral and interest? That’s the way to make friends for the bank!”⁵

The real star of that second-to-last day of the hearings was not Horace Sylvester; it was the New York Stock Exchange president Richard Whitney, who was making his return engagement in Washington. It had been almost a year since Whitney’s previous appearance before the committee. So much had changed in the interim, not only in the success of the investigation and the skill of the lawyer prosecuting it, but in the country at large. A death rattle seemed to be reverberating through the banking sector. The diffuse anger at Wall Street had crystallized into a sharp rage directed at the elite leaders of the financial markets, not just shady short sellers and pool operators. And, with that change in the investigation and that change in the country, there was something of a change in Whitney as well.

A day earlier in Cleveland, Richard Whitney, the man who professed ignorance the previous spring of any illegal activities on the exchange, upbraided the “ephemeral prophets” of the “boom” days. He still could not see that the New York Stock Exchange had ever acted improperly or had failed to protect the people who bought and sold in the securities markets. It was the American people as a group, he asserted, who “were careless of the qualifications of many of those who were entrusted with positions of importance and power.” The public was lulled into a false sense of security. It gave its “confidence too readily” and it was too willing to proclaim the heads of profitable companies “business or financial geniuses.” Whitney certainly sounded like he was talking about Mitchell, although he never invoked his name. As he told his audience in Ohio, “his remarks were listened to with awe and his lightest statements were accepted as the words of an oracle, without inquiry into his qualifications and training and without much thought of the soundness of his enterprise.”

Despite his criticisms of the gullible masses, Whitney sounded downright progressive as he called for more fulsome disclosures, stricter accounting rules, and uniform laws regulating the issuance of securities, all to safeguard the investors who provided capital to industry. It was quite an about-face for a man who, just six month earlier, expressed grave doubts about Congress’s ability to adequately frame such laws. “More frank and more complete information,” he now conceded, might have avoided the huge run-up before the crash.⁶

But that small concession to the propriety of regulation was about all he could muster. Whitney’s “maddeningly unshakable rectitude,” his overweening pride in the New York Stock Exchange, in his class, and in himself remained intact. He still ardently defended the exchange and the great service it provided for the United States. “Speculation,” he self-righteously declared, “has built this country” and the government had no business regulating it or the market on which it occurred. Indeed, trying to regulate speculation was futile, as Whitney earlier told a House committee. “You are trying to deal with human nature,” he explained. “Speculation is always going to exist in this country just as long as we are Americans.”

Even the censures in Whitney’s Cleveland speech were not nearly so pointed as they at first seemed. Whitney still considered the leaders of Wall Street to be men of honor and conviction—the “ephemeral prophets” he singled out were largely foreigners like Krueger, not American financiers like Mitchell. But after all that had taken place in that hearing room over the previous week and a half and all that had taken place in the country since Michigan had closed its banks, his defense seemed hollow, the remnants of a bygone age.⁷

Not everything had changed in the intervening year, at least not on the other side of the mahogany committee table. Some committee members, in particular Senator Brookhart, learned nothing from Pecora’s systematic examination of City Bank. As soon as Whitney took the witness stand Brookhart, who now had only two days remaining in his Senate career, began to hurl seemingly random questions at him, jumping from the Better Business Bureau, to balancing the federal budget, to rehashing testimony Whitney had given the previous spring. Brookhart still had nothing, other than rumor and hunch, to back up his questions, and Whitney continued to easily repel them in the same weary and dismissive tone he exhibited the previous spring. At one point, Brookhart asked Whitney why the Better Business Bureau never complained about the practice of stabilizing bond prices during an offering, to which Whitney disdainfully replied, “I do not claim that that is an unethical practice, Senator Brookhart, as I have stated.” Brookhart’s response was suitable for a schoolyard squabble, not a Senate hearing room: “Well, I do.”⁸

Pecora had a far more precise plan for his confrontation with Whitney. The only entity capable of policing the exchange was the exchange, and Pecora wanted to know how vigilantly it was walking its beat. Asking Whitney whether the federal government needed to regulate the exchange would elicit a sure negative response. So, instead of asking the question directly Pecora began with a laundry list of precautions and disciplinary actions the exchange never took. The exchange, he asked, never audited the companies that sought to be listed there? No, Whitney replied, but a year earlier it had begun requiring new listings to have an independent audit, although it was unwilling to impose that mandate on existing listings. Did the exchange examine the “character” of a company’s officers and directors? Yes, when it was first listed. “And don’t you think it would be just as advisable to exercise that same kind of supervision by inquiry even after a corporation had succeeded in having its securities listed?” Pecora asked. Whitney agreed, but explained that at that point the officers and directors were “entirely beyond” the exchange’s control. It had no power to remove them; its only power was to remove the company from trading on the exchange, but it almost never did that.

In truth, the New York Stock Exchange’s listing standards were the highest in the country. The bigger problems were with other exchanges, where issuers could list their securities without these kinds of disclosures. But even the New York Stock Exchange radically reduced the effectiveness of its required disclosures through its inability or unwillingness to investigate applications for listing. “So lax was the ‘self-regulation’ of the Exchange authorities,” Pecora wrote, “that even the formally condemned abuses were actually detected and punished only on the most infrequent occasions.”⁹

Reporters described the confrontation between the two men as “fencing,” but it was more like surgery. Pecora’s careful cataloging of the limits of exchange enforcement was far more effective than trying to wring either an admission of wrongdoing out of Whitney or a concession that outside regulation was necessary. Whitney, to be sure, tried to argue that no one could stop those bent on outright fraud, not even the federal government. But Pecora, who had little tolerance for Whitney’s evasions, was able to show that the exchange failed to take even the most rudimentary steps to police listed companies.

Whitney said he couldn’t answer Pecora’s question without referring to some internal exchange documents. An increasingly weary Pecora remained polite but insistent that he wanted Whitney’s “own knowledge” as to what really happened, not some canned answer about the exchange’s formal procedures.

“Can’t you tell me, from the wealth of knowledge and experience that must have come to you during those years”—Whitney tried to cut in, but Pecora just talked right over him—“whether or not the exchange affirmatively takes any action seeking to check up or to confirm the statements made to it by corporation officers seeking to have their securities listed?”

At no point did Pecora ask Whitney to admit that the exchange was aware of wrongdoing. Pecora surely knew that the self-righteous exchange leader would never do that. But each time Whitney admitted that the exchange could not or did not oversee its listed firms he was making the case that self-regulation was not enough.¹⁰

Whitney still clung to his belief that the exchange never erred, that it maintained a perfectly “free and open market” in securities. But, given its lackadaisical methods and the pervasive wrongdoing Pecora had already shown, Whitney’s denials were no longer convincing. Pecora, for example, asked him whether he now thought that verifying company information was important. Whitney seemed appalled that Pecora wanted him to question the integrity of the gentlemen who listed their stock on the exchange—verifying information would mean “the presumption of dishonesty rather than honesty.”

When the exchange did take a look at various types of speculative activity going on in its midst, it appeared to have a rather idiosyncratic definition of what it meant to maintain a “free and open” market. Whitney admitted that stock pools were allowed under exchange rules, but also claimed that the exchange existed for only one purpose—“to allow the ready action of the law of supply and demand.”

Pecora could not see how those two statements were compatible. The whole point of a pool was to move prices away from the price the market had set under normal buying and selling conditions. A free and open market, Pecora asked, was not one that was controlled in this way, was it? Whitney said he didn’t know what a controlled market was, to which Pecora sarcastically replied, “Well, Mr. Whitney, I am trying to use words that are simple in their meaning, but if I am using words that you do not understand I will try to change them.”

To be sure, Pecora’s naïveté about how stock markets worked was still very much in evidence. The investigator chastised Whitney for not being able to see in 1928 and 1929 that prices were wildly inflated, but it was hardly a fair charge. Bubbles are easy to spot, but usually only after they have burst. “Mr. Pecora,” Whitney complained, “you are talking about [the] judgment of hindsight. We did not have it then, nor did but very few, if any, have it then.” Pecora remained unconvinced: “Mr. Whitney, don’t you think . . . the New York Stock Exchange . . . owes some measure of responsibility to the public to watch those prices and when they get out of line to sound some kind of public warning?”

Whitney was, understandably, incredulous. “If you will tell me, Mr. Pecora, how I, as president of the New York Stock Exchange, might do that I will be glad to have you do so, and will endeavor to act accordingly. But I will say that if the president of the New York Stock Exchange at that time had issued such warnings . . . he would have been laughed at.” Whitney was right when he told Pecora that the exchange did not have “either the facility or the ability to be the oracle as to how prices should fluctuate, or to set forth whether a price is too high or too low.” It could not be the “dictator of what prices should be” on a daily basis.¹³

Still, Pecora’s careful examination of the exchange president was far more successful than the committee’s awkward encounter a year earlier. By the end of the day, the picture Pecora painted was not, as Whitney claimed, of a forum in which the forces of supply and demand met freely to determine prices. Pecora saw a darker purpose to the exchange. The exchange “was in reality neither more nor less than a glorified gambling casino where the odds were heavily weighted against the eager outsiders.” Pool accounts were rampant. “The public who bought these stocks at dizzily mounting prices,” Pecora wrote in his memoirs, “did not do so merely because of impersonal market forces; they were the victims of a determined, organized group of market-wise operators, armed with special information and special facilities and backed generously with bankers’ credits.”

For his part, Whitney decried such gambling while still trying to defend speculation. Whitney granted that there was a “delicate” line distinguishing the two which turned only on the impossible task of divining the intent of the trader. He insisted that legitimate speculation predominated on the exchange, but in the end even that assertion crumbled in the face of Pecora’s skilled questioning.

Whitney, of course, said that he had no way of divining intent. “Then how are you able to recognize any line that distinguishes an honest or proper kind of speculative trading from an improper kind or gambling kind, if you have no way of ascertaining the intent?” Pecora asked. “[A]s far as you know to the contrary the majority of the speculative buying might be of the gambling variety, might it not?”

Federal regulation was needed, Pecora concluded, because Whitney and the other leaders of the New York Stock Exchange were doing nothing about the gambling or the manipulations. Everyone in the country seemed to know that there was a pool in R.C.A. stock organized in March 1929 by Michael Meehan, a specialist and member of the New York Stock Exchange. The pool netted its participants $5 million in one week, but the exchange didn’t see the need to investigate it until the summer of 1932, after testimony about it in the Banking and Currency Committee that spring. Three years on, many of the relevant documents were destroyed. The exchange found no wrongdoing. Since pools didn’t violate stock exchange rules, the exchange would have certainly reached the same conclusion if they examined every scrap of paper. It was, to Whitney, just the operation of the free and open market.¹⁵

With those manipulations and the exchange’s hands-off approach, Pecora simply couldn’t see that the market performed a legitimate function. But his view was a little too jaundiced. By creating a place where investors could easily sell securities, the market lowered the costs of raising capital for American businesses. Whitney was right—speculation in securities was an essential part of the American economy. All Pecora saw was that this “glorified gambling casino” was unregulated. Pecora had shown that the exchange did not vigorously exercise its regulatory prerogatives and that its prices were not solely the product of supply and demand. To make the case for federal regulation he only needed to underscore the importance of the exchange to the United States economy. Didn’t the New York Stock Exchange constitute “the greatest market for securities in this country, if not in the world?” Weren’t its quotations accepted “as substantial evidence of the value of securities to which they relate?” Securities were often accepted as collateral for bank loans and, in fact, were more readily accepted because of the active market the exchange created, correct? Whitney, naturally, had no choice but to accept all those propositions.

Well, if all that was true, Pecora continued, then the operation of the stock exchange was “of interest to the entire country,” wasn’t it? Again, Whitney had no choice but to agree—he had, after all, just proclaimed that speculation on the exchange had built the United States.