The Hellhound of Wall Street

On Thursday morning, the last day of the hearings, Pecora was ready to question Mitchell again, but there was no dramatic confrontation between the two men, no Perry Mason moment when Mitchell admitted the error of his ways. Pecora asked Mitchell a few housekeeping questions about when the banker first saw the Lehmann opinion, the opinion by the solicitor general that found securities affiliates violated the National Banking Act. Mitchell could not recall clearly. That was it. Mitchell left the stand in a matter of minutes. So why did Pecora insist that Mitchell remain in Washington? Most likely, he was just being careful. He could not be sure how any of the remaining witnesses would testify. If subsequent testimony implicated Mitchell, Pecora wanted him available. That didn’t happen, and now it appeared that Pecora, having insisted that Mitchell remain in Washington, needed to put him briefly on the stand in order to justify his decision.²

Over the previous nine days, Pecora had presented nearly all the examples he identified in his investigation “of how a bank should not conduct a stock-selling and stock-speculation business.” Now, with that work out of the way, most of the last day was consumed with testimony that Norbeck had wanted the City Bank hearings to address. In the scheme of things, this testimony was not terribly important. There was the consolidation of three farm-equipment manufacturers into a company called Oliver Farm Equipment. National City made a nice profit when it arranged the merger, and there was some unseemly squabbling between it and another Wall Street firm about precisely how those profits should be divided, but there was nothing terribly scandalous in the transaction. The same was largely true of the Lautaro Nitrate Company, a Chilean corporation controlled by the Guggenheim family. When National City offered its securities it never disclosed to prospective investors the profits it would make and it never disclosed substantial risks inherent in the company’s business. They were, to be sure, valid points to raise at the hearing, but they were points Pecora had already made several times with the other offerings. Day ten’s testimony was simply more of the same.

Pecora wanted to share some of the remaining limelight with his assistants who had worked so hard over the previous six weeks, so Julius Silver handled most of this questioning. Silver was a smart and competent lawyer (he would eventually become the CEO of Polaroid), but only a few minutes after he took the floor, it was clear why the press was so captivated by Pecora. Silver was clinical and dispassionate—he asked the right questions, but there was nothing memorable in his examination.

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.”

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

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