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 for a reform within the banking community itself.
1The 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.”
2Now 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.
3With public opinion now even more firmly on his side, Roosevelt was not yet ready to let “the money changers” off the hook. The public was still clamoring for federal legislation. Bankers, as one newspaper put it, needed a “legal straight-jacket” if the country was going to avoid a repeat of the “sickening story of exploitation” Pecora revealed. The president knew that he had to keep that anger alive if he was going to pass real financial reforms, and the way to do that was to keep the pressure on Wall Street. The day after his first fireside chat, Roosevelt met the new chair of the Banking and Currency Committee, the Florida Democrat Duncan Fletcher. Fletcher could have used his seniority to take charge of the powerful Commerce Committee, but over the winter Roosevelt had persuaded him to lead this one instead, a move that prevented Carter Glass, the senator who so hated sensational congressional hearings, from doing so. At his initial meeting with Fletcher, it was Roosevelt who suggested that the next target of the investigation should be the private bankers, especially J.P. Morgan and Company.
4Incredibly, Untermyer was still lobbying the president to take over as counsel. He wrote the presidential adviser Raymond Moley that “as soon as the Committee is re-constituted, if it desires to have me go forward with an investigation . . . I shall be prepared to do so.” Moley gave Untermyer no encouragement. He thought it was not the administration’s role to dictate to a Senate committee who its counsel should be, but he did little to disguise his preference for Untermyer. Moley never really gave Pecora a chance. “He is too blithe on important matters, too ready to dispose by a jest,” one contemporary wrote of the Brain Trust coordinator. Moley had worked briefly on the Seabury investigation of Tammany Hall and that experience colored his view of Pecora. It was purely guilt by association. “Untermyer would have been preferable to the man ultimately selected,” Moley wrote in his memoirs. “For Ferdinand Pecora’s experience had been that of an assistant district attorney in a generally incompetent office.”
Not content to lobby just the president, Untermyer wrote again to Norbeck, although he was no longer chair of the committee. Untermyer had “never known the people in such an unsettled, distressed state of mind. I realize as keenly as anyone the necessity for uncovering and uprooting some part of the rottenness of the great financial institutions of New York. I recognize also that this is but a beginning and that the surface has hardly been scratched.” The lawyer flattered Norbeck for his “reckless courage” in uncovering these abuses during “the present terrorized condition of the country” and made his pitch for the job. “It is hardly necessary for me to repeat that if there is any way in which I can help, the Committee has only to command, for my heart is and has been for thirteen years wrapped up in this reform, which should be no longer delayed.”
Roosevelt had no intention of switching horses. He was weary of Untermyer’s incessant self-promotion and annoyed that the lawyer constantly leaked news of their meetings in order to bill himself as a crucial adviser. Besides, the president, who knew a good thing when he saw it, was not about to dump Pecora. Pecora met with Roosevelt shortly after the inauguration and was reappointed as counsel on March 13, 1933.
5
Pecora would guide the hearings for a little more than a year. During that time all the leading bankers on Wall Street traipsed before the committee, but the investigation was never more intense than in the spring of 1933, when J. P. Morgan Jr. came to Washington. The intrepid attorney was now facing off against Morgan’s longtime lawyer, John W. Davis, the man originally considered to run the short-selling investigation. Davis still abhorred congressional investigations, and he was convinced that Pecora intended this one to be a “witch hunt.” At every turn he opposed Pecora’s investigatory efforts. Thomas Lamont, who just six weeks earlier had pleaded with Roosevelt to intercede in the banking crisis, was now vociferously complaining to the president about Pecora’s handling of the Morgan investigation. None of it was of any use; Roosevelt was squarely behind the investigation. The president ignored Lamont’s protests, and the committee continually expanded the authorizing resolution, cutting off Davis’s objections.
6Public anticipation of the younger J. P. Morgan’s appearance before the committee was tremendous, and when the hearings finally started in late May, they were a media circus, completely dominating the other news coming out of Washington. The crowds gathering to see the reclusive Morgan swamped Room 301 and the hearings were moved to the larger and more ornate Senate Caucus Room down the hall. Overruling Pecora’s previous request to ban photographers, the senators authorized newspapers to attach klieg lights to the room’s chandeliers. Extra telegraph lines were brought into the Senate Office Building so that reporters could get their stories out more easily.
Morgan’s last name was filled with mystique, and one newspaper report portrayed him as “the twentieth-century embodiment of Croesus, Lorenzo the Magnificent, [and] Rothschild” all rolled into one, but in reality the shy Morgan was a pale imitation of his legendary father. It was the firm’s practices, rather than Morgan himself, that were really on trial.
Despite the hoopla, the hearings were, to some degree, a disappointment. “In truth,” Pecora wrote in his memoirs, “the investigation of the Morgan firm elicited no such glaring abuses” as the City Bank hearings. As with Insull, Pecora was again trying hard to prove otherwise, and he ended up skating very close to the line of demagoguery. When he revealed that for two years the Morgan partners paid no income taxes, it was the front-page headline across the country. He neglected to mention that because of their huge capital losses in the Depression, they had no taxes to pay. “It is no criminality,” the New York Evening Post observed. “Mr. Pecora only makes it seem so.” It may not have been illegal, but if it had been no one at the Internal Revenue Bureau would have noticed. One tax return Pecora put in evidence contained this notation: “Returned without examination for the reason that the return was prepared in the office of J.P. Morgan and Company and it has been our experience that any schedule made by that office is correct.”
Other disclosures prompted similar outrage and suggested a market in which the favored few had unerodible advantages over the ordinary investor. Pecora was able to show that the J.P. Morgan firm had preferred lists of clients to whom it doled out financial sure things—stocks that it sold for below market prices. Those recipients of Morgan’s generosity were a who’s who of the political, social, and financial elite of the day, including the former president Calvin Coolidge, leading bankers (Charles Mitchell among them), former and current cabinet officers (including Roosevelt’s Treasury secretary William Woodin), a Supreme Court justice (Owen Roberts) and, for good measure, the aviator Charles Lindbergh and the American World War I hero General John “Black Jack” Pershing. The favors weren’t illegal either, but the former Democratic National Committee chairman John J. Raskob’s thank-you note seemed to best encapsulate the public’s suspicions about what lay behind them. “I appreciate deeply the many courtesies shown me by you and your partners,” he wrote, “and sincerely hope the future holds opportunities for me to reciprocate.” For Pecora, that sense of obligation (“the silken bonds of gratitude in which it skillfully enmeshed the chosen ranks,” as he put it in his memoirs) was one of the key sources of the firm’s power.
In the opening statement John Davis penned for him, Morgan defended the private investment banker as “a national asset and not a national danger.” Regulation was unnecessary because he conformed his conduct to a far more exacting code than any law could ever articulate. Morgan, Pecora wrote, believed profoundly “in the invincible rectitude of his own regime”; but as the hearings progressed, that view became a minority opinion. “Here was a firm of bankers,” the New York Times wrote, “perhaps the most famous and powerful in the world, which was certainly under no necessity of practicing the small arts of petty traders. Yet it failed under a test of its pride and prestige.” Walter Lippmann, a usually reliable defender of Morgan, now asked Washington to put limits on “the sheer power of so much privately directed money.”
Pecora had nothing to do with the incident that, more than anything, evaporated Morgan’s air of mystery, although the grilling he was giving the banker precipitated it. Carter Glass had grown annoyed at what he saw as a “Roman holiday” that was diverting attention away from his now reproposed banking bill. Glass began to attack Pecora. The lawyer, he said, was wasting everybody’s time asking arcane questions that were of “no significance to a man of ordinary intelligence.” Glass’s former assistants at Treasury were both partners at the firm, and the senator roared at Pecora that he did “not intend to see any injustice done to the House of Morgan.” Senator Couzens came to the investigator’s defense. Pounding the table, Couzens barked, “I insist that Mr. Morgan be treated like anyone else here!”
Pecora, who had been working around the clock, no doubt appreciated the support, but he was perfectly capable of taking care of himself. In no mood for Glass’s upbraiding of his methods or his motives, he gave as good as he got. “I want to assure Senator Glass,” Pecora angrily shot back, “that the compensation of $255 a month which I am receiving for these services is no incentive to me to render these services or continue to render them.” The gathered crowd gave a huge round of applause to the feisty counsel, leaving Glass to complain, “Oh yes; that is what it is all about. We are having a circus, and the only things lacking now are peanuts and colored lemonade.”
Glass’s remark caught the attention of a Ringling Brothers promoter, who brought Lya Graf, the circus’s thirty-two-year-old midget, to the hearing room the next day. As the senators on the committee were embroiled in a rancorous executive session, during which Glass wanted to severely curtail Pecora and Pecora threatened to resign, Graf came into the hearing room. After shaking hands with Morgan, at the promoter’s suggestion, she promptly plopped down onto the famous banker’s lap. The committee implored newspapers not to print the photographs, but only the
New York Times complied. The iconic pictures of the smiling and grandfatherly Morgan bouncing Graf on his knee humanized Jack and further undermined the view of investment bankers as otherworldly supermen. The fallout for Graf was decidedly worse. She fled to her native Germany in 1935 to escape the constant jokes about the incident. Two years later, the Nazis classified the half-Jewish Graf as a “useless person” and she was eventually killed in the gas chambers at Auschwitz.
7Glass failed to squelch the hearings; indeed, Roosevelt himself stood behind the investigator, announcing that he wanted the hearings to “go through without limit.” With the Morgan hearings captivating the country and the popular president’s benediction, Ferdinand Pecora quickly became a media darling. In the same week in June 1933, the investigator’s photograph graced the covers of both Time and Newsweek. To the editors at Time, unaware of Samuel Untermyer’s backroom machinations to steal Pecora’s job, Pecora was a “Roland for an Untermyer,” a reference to Charlemagne’s most courageous and loyal knight. Reporters praised Pecora’s prosecutorial experience, complimented him on his “penetrating, analytical mind,” extolled his relentless cross-examination skills, and fawned over his sparkling dark eyes, “which reveal determination and intelligence.” They were gleeful whenever the bantam lawyer transformed “some cocky banker . . . from assurance into a perspiration.” They “looked with astonishment at this man who, through the intricate mazes of banking, syndicates, market deals, chicanery of all sorts, in a field new to him, never forgot a name, never made an error in a figure, and never lost his temper.” They delighted in reporting that “the sharp rapier of the Senate inquisition,” who continued to make a pittance, was facing off against the highest-priced and best-known legal talent in the country.
At times, eager to satisfy the public’s voracious appetite for information on the “committee’s dynamic little chief investigator,” the papers veered into detailing the kind of minutiae normally reserved for puff pieces about movie stars. Pecora stood five feet five inches and weighed 140 pounds. His favorite outdoor sport was golf. He loved to play pinochle. He took “regular sun-lamp treatments.” He disliked going to bed and, in fact, did his best work at night. In the middle of eighteen- or twenty-hour days, Pecora liked to refresh himself with a large bowl of ice cream. When he finally made it to bed, he would continue to read while smoking “large expensive cigars.”
8The
Boston Globe dubbed him “Fighting Ferdinand”; for others he was the “hellhound of Wall Street” or the “Icy Latin.” Although he had been a Democrat for nearly two decades, Will Rogers quipped: “If the Republicans ever decide to enter another Presidential candidate they better hire this little Pecora to run for ’em. He is the best bet I see right now.” One enterprising barber in New York who shared the same last name hung this advertisement in his shop window: “D. Pecora, Barber, Let Us Investigate Your Scalp.” Few lawyers ever achieve that kind of public acclaim. As for Irving Ben Cooper, the lawyer who quit in a huff after just a week as committee counsel, the rumor around Washington, according to Norbeck, was that he was “quite a little envious of Mr. Pecora’s position, and is wondering why he himself is not in the limelight.”
9
With Pecora keeping the pressure on Wall Street, the initial path to federal securities and banking legislation was relatively unobstructed. “The first months of the New Deal,” the historian Arthur Schlesinger wrote, “were to an astonishing degree an adventure in unanimity.” Roosevelt turned to securities even before the Morgan hearings were held, knowing that the continuing clamor over City Bank and the intense interest in Morgan would ease passage of reform legislation. Before March was out, Roosevelt sent to Congress a draft of a bill regulating how securities were sold to the public. “This proposal,” the president wrote, “adds to the ancient rule of caveat emptor the further doctrine, ‘Let the seller also beware.’” As with the emergency banking legislation, he steered away from more radical approaches. He rejected proposals from some in his administration to create an agency that would direct the flow of capital in the economy, deciding which industries and which projects were entitled to funding. Adhering closely to Brandeis’s progressive prescription, Roosevelt wanted to preserve the markets while regulating their excesses and abuses.
The final bill, drafted by three of Felix Frankfurter’s former students (James Landis, Benjamin Cohen, and Thomas Corcoran, collectively known as the Happy Hot Dogs), did not require the government to approve new issues or, as an initial draft had done, give the government the power to revoke securities “not based upon sound principles.” As Roosevelt told Congress, the “Federal Government cannot and should not take any action which might be construed as approving or guaranteeing that newly issued securities are sound in the sense that their value will be maintained or that the properties which they represent will earn profit.” Instead, the Truth in Securities Act was modeled on the legal requirements already in place in Britain and it put “the burden of telling the whole truth on the seller.” There would be no more skimpy prospectuses like the ones City Bank distributed to investors. New securities could now only be sold if investors were given all the information they needed to make an informed decision about whether to buy them. Not only issuers, but their investment bankers as well, would be liable for any materially false or misleading representations or omissions in their offering documents. Requiring sunlight, as Brandeis said twenty years earlier, was the best way to police the markets and the best way to avoid a repeat of the Minas Geraes and Peruvian bond offerings.
House Speaker Sam Rayburn had the task of moving the securities bill through Congress, and he was quite conscious of the connection between the bill and Pecora’s confrontation with Mitchell. “Today,” he said, “we are forced to recognize that the hired managers of great corporations are not as wise, not as conservative, and sometimes not as trustworthy as millions of Americans have been persuaded to believe. . . . In this bill, we demand not only a new deal, we also demand a square deal. Less than this no honest man expects nor a dishonest man should have.” Rayburn had comparatively few difficulties. Public opinion was strongly in favor of the bill, and even such stalwart conservative newspapers as the Wall Street Journal remarked that the bill “is in the main so right in its basic provisions that the country will insist on its passage.”
Investment bankers put up some resistance, but with the political climate so against them, it was comparatively mild. John Foster Dulles, one of the Street’s designated spokesmen (and the future secretary of state), was by far the most strident critic, claiming the bill would undermine the entire financial system of the country. No one in Washington seemed to be taking those dire predictions seriously; the groundswell for reform was simply too strong. On May 27, 1933, while Pecora continued to examine J. P. Morgan Jr. in the Senate Caucus Room, the president signed the Securities Act. Advocates for robust federal control of the capital markets continued to deride it as an inadequate “nineteenth-century piece of legislation.” But nearly eighty years later, its provisions remain securely in place, and the disclosure philosophy it articulates is still the touchstone for federal regulation of the securities markets.
10Three weeks later, near the end of the first hundred days, Roosevelt signed the Banking Act of 1933, more commonly known as Glass-Steagall. The expanded branch-banking features that proved so objectionable the previous winter were still there. Indeed, the bill was even more expansive than the one Huey Long killed in his filibuster. In a direct nod to the City Bank hearings, it gave the Federal Reserve the power to remove officers and directors of national banks if they were operating the bank in an unsafe or unsound manner. There would be no more morale loans either; national banks were barred from loaning money to their own executives. After the trashing Pecora had given securities affiliates, it was not terribly surprising that the ban on them was still firmly in place. Nationally chartered banks were given a year to sever their affiliates, and private investment banks were prohibited from accepting deposits.
When Glass reintroduced his bill on March 9, 1933, some bankers—if only in a vain attempt to restore a semblance of their tattered reputations—were already on board. Winthrop Aldrich, the chairman of Chase National Bank, urged Congress to pass legislation to reform the banking sector and he pledged to divorce Chase from its securities affiliate. “The spirit of speculation,” he declared, “should be eradicated from the management of commercial banks.” James Perkins, who was doing everything he could to clean up City Bank’s sullied image, met with Roosevelt at the White House on the first day of the national banking holiday and promptly announced that his bank would get rid of the National City Company.
Not everyone in the banking community, however, was so amenable to reform. W. C. Potter of the Guaranty Trust called Aldrich’s move the “most disastrous” one he had “ever heard from a member of the financial community.” J. P. Morgan Jr. predicted that separation of investment and commercial banking would seriously undermine his firm’s ability to provide capital for America’s future growth. Anger over City Bank’s misuse of its affiliate effectively muted these concerns. “To reverse a popular saying of the day,” wrote the SEC historian Joel Seligman, “the period of the First Hundred Days of the Roosevelt administration was that rare time when money talked and nobody listened.”
11Ironically, just as City Bank had created the final impetus for Glass- Steagall, its successor created the final impetus for its repeal more than six decades later. Separation of commercial and investment banking officially remained in place until 1999, when President Clinton signed the law repealing those provisions of Glass-Steagall. Unofficially, strict separation had already slowly begun to erode in the 1980s and 1990s. The financial industry and a chorus of academic critics attacked it as an ill-conceived, anachronistic, and unnecessary restriction standing in the way of financial institutions trying to diversify their businesses and compete on the global stage. In response, federal banking regulators and the courts slowly began to permit commercial banks to engage in securities-related activities and then allowed bank holding companies to acquire investment banking subsidiaries.
Those trends culminated in the 1998 merger of Citibank, as it was then known, and the Travelers Group. Citigroup was immediately the world’s largest financial services company, a full-service firm that combined consumer, commercial, and investment banking with insurance and investment management. The scale of this new financial department store—it had nearly $700 billion in assets and $50 billion in revenue at the time the deal was announced—was enormous, far larger than Charles Mitchell could ever have envisioned. Efforts to repeal Glass-Steagall had been kicked around in Congress for a decade, but the announced merger suddenly made them a legislative priority, with Citigroup leading the push for abolition of those Depression-era restrictions. Federal regulators had permitted the merger, but if Glass-Steagall remained the law, they would have required the combined company to shed many of its nonbanking businesses. Repeal foreclosed that contingency, which was all to the good as far as many commentators were concerned. Citigroup, two business writers noted in 2002, “is so well-diversified that there seems little chance of it running into crippling financial problems.”
12Back in 1933, the most controversial provision of the Glass-Steagall bill was not the elimination of securities affiliates, but the creation of federal deposit insurance. When the Michigan senator Arthur Vandenberg called for a federal deposit guarantee as the City Bank hearings were winding down, it was far from a novel proposal. Over the previous fifty years, 150 bills guaranteeing bank deposits had been introduced in Congress, and every one of them was defeated. Representative Henry Steagall, an Alabama Democrat, introduced one of the last proposals in April 1932, telling then Speaker of the House John Nance Garner that it was a potent political weapon in a climate of cascading bank failures.
“You know,” he warned, “this fellow Hoover is going to wake up one day and come in here with a message recommending guarantee of bank deposits, and as sure as he does, he’ll be reelected.” Hoover, of course, never did, and Steagall’s proposal never made it out of the House. Garner, however, was now vice president, and he told Roosevelt the provision was necessary to restore confidence in the banks. “You’ll have to have it, Cap’n,” Garner told the president. “The people who have taken their money out of the banks are not going to put it back without some guarantee.”
Roosevelt disagreed. He held his first press conference before the banks were reopened and he told reporters that he was opposed to deposit insurance. After the Panic of 1907, eight states had tried it and in eight states the system had either collapsed when too many banks failed or the measure had been declared unconstitutional. Like the bankers, Roosevelt saw the proposal as requiring stronger banks to subsidize weaker ones, thereby creating disincentives for prudent management. Throughout the debate, Roosevelt continually threatened to veto any bill that contained an insurance provision, but he eventually succumbed to the overwhelming political pressure. Deposit insurance ultimately proved to be one of the finest innovations of the New Deal. Even the economist and ardent free-market proponent Milton Friedman recognized it as “the most important structural change in the banking system to result from the 1933 panic.”
13
Ever since the inauguration, Richard Whitney, well aware of the strong public distaste for the financial community, had quietly been making the case that federal regulation of the exchange was unnecessary. Repeating much the same strategy it had employed with Hoover, the exchange adopted a number of reforms to head off any proposals. When the Pecora hearings recessed for the summer, Wall Street stepped up its offensive by launching a direct assault on the already passed Securities Act. The legislation, it argued, was drying up capital and undermining economic recovery because legitimate investment banks and issuers were so afraid of liability that they were forgoing offerings. Roosevelt scoffed at those claims, as did Frankfurter, who argued that Wall Street was looking “not to improve but to chloroform the Act.” Indeed, Frankfurter was convinced that the dearth of new securities offerings was not the result of fear of liability, but the product of a bankers’ strike. Roosevelt held firm, even though more-conservative members of his administration were also urging amendment. “There will be,” the president told reporters, “mighty few changes, if any, in the Securities Act this winter.”
The president could afford to maintain a strong stance against the financial community because he was still getting plenty of ammunition from Pecora. As the hearings resumed in the fall of 1933, the lawyer continued to show bankers behaving badly. Among the most shocking disclosures concerned Albert Wiggin, the former chairman of Chase National Bank, City Bank’s longtime rival. Pecora carefully showed how Wiggin had used a series of privately owned corporations to surreptitiously trade Chase’s securities. In the midst of the 1929 crash, Wiggin was part of the group of Wall Street leaders who tried to prop up the market. Or at least that was what the public thought. In reality, Pecora showed that at the same time Wiggin was actually shorting Chase’s stock (in effect betting that the price of the stock would continue to drop) on money he borrowed from Chase. Wiggin had once been one of the most popular bankers on the Street, but the disclosures thoroughly destroyed his reputation.
Whitney continued trying to thwart Pecora’s investigation. The stock exchange president was furious when Pecora hired John Flynn, a reporter and persistent exchange critic, as an investigator. When Flynn showed up at the exchange with a questionnaire that Pecora wanted delivered to all exchange members, Whitney was so mad that he actually had to leave the room to compose himself. When he returned he was dismissive. “You gentlemen are making a great mistake,” he declared. “The Exchange is a perfect institution.”
When the Securities Exchange Act was proposed, in early 1934, Whitney led the fight against it. The atmosphere had changed substantially in a year. The economy’s precipitous decline had been arrested, and anger at Wall Street was no longer white-hot, making the exchange leader’s efforts all the more effective. Whitney rented a house in Washington (nicknamed the Wall Street Embassy) and railed against the proposed bill, claiming it would “destroy the free and open market for securities” and turn Wall Street into “a deserted village.”
Backing Whitney were the leaders of the regional stock exchanges that then dotted the country. Eugene Thompson, head of the Association of Stock Exchanges, testified that the bill was the equivalent of curing a case of hiccups by “severing the head of the patient.” Letters and telegrams flooded congressional offices as business leaders, whom Roosevelt had alienated in his first year in office, lined up to oppose the bill. General Electric’s chief executive, Gerard Swope, said that passage would be a “national disaster,” while the former Federal Reserve chairman Eugene Meyer predicted it would lead to “state control of industry.” The Republican congressman Fred Britten was even more hysterical, claiming the object of the bill was to “Russianize everything worthwhile.” As the hue and cry intensified, the initially overwhelming editorial support for the bill melted away.
It was, by far, the biggest fight yet against a New Deal measure, and it was at least partially successful. The initial bill was redrafted, some of the provisions that Wall Street found the most objectionable were eliminated or carved back substantially, and Roosevelt even agreed to make the Securities Act less severe. In many controversial areas, the statute mandated nothing, but simply delegated authority to an administrative agency (originally the Federal Trade Commission) to write rules addressing the subject. But Roosevelt refused to back down further, asserting that “the country as a whole will not be satisfied with legislation unless such legislation has teeth in it.” Fighting over the bill lingered into the spring, but the president finally signed it on June 6, 1934.
The Securities Exchange Act for the first time required stock exchanges to register with the federal government and submit to the oversight of the new administrative agency the act had just created, the Securities and Exchange Commission. The statute also imposed some federal control over margin trading, restricted stock pools and other forms of manipulation, placed strict limits on corporate insiders trading in their own securities, and created a system under which companies that trade on the exchanges are required to periodically disclose material information to investors. The federal government, Will Rogers noted, had finally managed to put “a cop on Wall Street.”
14
Peter Norbeck was on the sidelines for almost all the action. He lost the chairmanship of the Senate Banking and Currency Committee on March 4, 1933, and moved out of the spacious offices adjoining Room 301. When the committee discussed who the counsel for the investigation should be in the next Congress, Norbeck praised Pecora’s work. It was Pecora’s efforts, he told the committee, that were responsible for the investigation’s excellent results. Still, for all his good words, Norbeck seemed more than a little resentful about the plaudits Pecora was earning. A year earlier Norbeck believed the investigation was his best chance to accomplish something of lasting importance in Washington. Some, like John Flynn, the muckraking financial journalist who worked for Pecora, agreed. “It was Norbeck,” Flynn wrote in 1934, “big, honest, calm, filled with common sense, who made this investigation of Wall Street, who kept doggedly at the probe . . . and who, more than any other man, gave to the investigation its tone, its character, and direction.”
Even Flynn, however, acknowledged that Norbeck’s biggest contribution was his good sense in hiring Pecora. Norbeck was a savvy politician, and he knew who would get credit for Mitchell and for everything else that would thereafter come down the pike. The results, he said, were more important than the credit, but he clearly regretted that despite his hard work he would never be known as the senator who uncovered Wall Street’s sins. “It is now being referred to generally as ‘Pecora’s investigation,’” he wrote Stewart near the end of March 1933, “but that part is natural.”
15With his move to the minority, Norbeck lost most of his power and influence. The substantial Democratic majority did not need his vote to pass legislation. He had not supported Roosevelt like some of his progressive colleagues and so the president had no need to reward him. Old-guard Republicans thoroughly distrusted him. Peter Norbeck was very much alone in the Seventy-third Congress. Although he came to support much of the New Deal legislation, he was instrumental in passing none of it, not even Roosevelt’s farm relief laws—the kind of laws he had spent a decade trying to enact. But he was a strong advocate for Roosevelt’s securities legislation, telling his colleagues, “We have got to break down every crooked organization so that we can throw the fear of God into them and let them know there is a law in the land.”
By 1936, Norbeck had even changed his mind about Roosevelt. He praised the president for “introducing a little humanity into government . . . where it has been outlawed from some time.” Breaking with his party, the South Dakota senator endorsed the president’s reelection in 1936. It was one of his last political acts. At the time of the endorsement he was battling malignant tumors in his mouth and jaw, and he died back home in South Dakota on December 20, 1936.
16
In March 1938, Richard Whitney was indicted for embezzlement. It was a shocking downfall for the face of Wall Street and an enormous scandal for the financial community given Whitney’s veneer of rectitude and his persistent admonitions that federal regulation of the exchange was unnecessary. “Wall Street,” the Nation wrote, “could hardly have been more embarrassed if J. P. Morgan had been caught helping himself from the collection plate at the Cathedral of St. John the Divine.” Even Roosevelt was shocked. “Not Dick Whitney!” the president reportedly exclaimed. “Dick Whitney—Dick Whitney, I can’t believe it.”
With his New Jersey estate and East Side town house, it was enormously expensive for Whitney to maintain the lifestyle of a proper country squire. Even worse, he had an irresistible penchant for speculative stocks. In 1926 Whitney used over $100,000 in securities from his deceased father-in-law’s estate as collateral for a loan to prop up his sagging portfolio. Whitney’s money troubles worsened after the crash, even after he borrowed millions from his brother, the Morgan partner George Whitney, and virtually anyone else on the Street he could hit up. In 1930, Whitney, who was treasurer of the New York Yacht Club, took $100,000 of the club’s securities as collateral for even more loans. The pattern continued until 1937, when Whitney lifted bonds and cash from the stock exchange’s Gratuity Fund, a trust for the widows and orphans of exchange members.
On Monday, April 11, 1938, he was sentenced to five to ten years in New York State prison. On Tuesday, a huge crowd gathered to catch a glimpse of the handcuffed Whitney as he left the Tombs in Lower Manhattan. Five thousand more waited at Grand Central Station, where Whitney was put on a train for the trip up the Hudson River to Sing Sing, along with two extortionists, an armed robber, and a rapist. When he arrived, Whitney passed through yet another crowd surrounding the prison gates. Once inside, he exchanged his blue serge suit, polo coat, and gray felt hat for ill-fitting prison garb and became prisoner 94835. His fellow prisoners were in awe; several raised their caps or stepped aside as he walked past and one sacrificed his sheets so that Whitney, who didn’t have any yet, would not have to go without. Even the guards were respectful. “All men who came in Thursday, Friday, Saturday, Monday or Tuesday,” one guard growled, “and Mr. Whitney, please step out of the cells.”
Whitney was by all accounts a model prisoner—at first assigned to mop-ping and general cleanup, he eventually taught in the prison school and played first base for the prison baseball team. Indeed, in 1938 Whitney’s old Groton headmaster, Endicott Peabody, paid him a visit. Peabody was the same headmaster who led the prep school when the young Franklin Roosevelt was there, and he asked Whitney the same thing that he asked the president when he called—was there anything he could do? “Yes,” Whitney replied, “I need a left-handed first baseman’s mitt!” Whitney was released from prison in August 1941, the earliest date on which he was eligible for parole. His ever loyal brother, George, paid back everything that Dick Whitney had borrowed or embezzled. Barred from the securities industry, his estate and other properties auctioned off to pay creditors, Dick Whitney briefly managed a Cape Cod dairy. He spent the remainder of his life in Far Hills, New Jersey, and died on December 5, 1974.
17
On March 21, 1933, Charles E. Mitchell was arrested at his home for tax evasion. At his arraignment, he proclaimed in a loud, clear voice, “Not guilty.” Standing by his side was Max Steuer, the greatest trial lawyer of his day, the man who had twenty years earlier won the acquittal of the owners of the Triangle Shirtwaist Factory on manslaughter charges, the man who had convicted the executives of the Bank of United States, and the man Norbeck’s staff wanted to hire to run the investigation. Steuer reportedly made a million dollars a year and, after years of winning one hopeless case after another, he was offered far more cases than he could actually take. He could afford to be choosy. “I take only,” he said, “criminal cases when the client is innocent. . . . Having right on my side, I ought to win most of the time.” That was not exactly true—sometimes Steuer took cases for the money; the word around Wall Street was that he had demanded a $100,000 retainer from Mitchell and that Mitchell was so strapped for cash that he had to pass the hat among his friends to raise it. Steuer was also known to take cases for the challenge; he took them because no one said they could be won and he won them anyway. And with preachers in New York decrying tax evasion as “unchristian” and “injurious to the spiritual health of the nation,” this one certainly looked like a lost cause. Whatever the reason, Steuer the legal magician was now representing Sunshine Charlie.
18The lawyer’s strategy was to portray Mitchell as a “patriot” and “blameless optimist” who had been wrongly fingered as the scapegoat for the Depression. Mitchell testified that he had acted in good faith; he had relied on Shearman & Sterling, which told him that the tax transactions were perfectly legal. So why was he on trial? Mitchell was a victim. “Mob psychology,” argued Steuer, “is now in control. Who is to be made the victim—the little fellow? No, we want big fish. And Charles E. Mitchell is the big fish.” Steuer urged the jury not to succumb to that mob mentality. The “law gives you an absolute right to resort to every legal means and device for the purpose of avoiding tax payments,” Steuer reasoned, painting Mitchell as no different from the average taxpayer who doesn’t want to pay a dime extra to the federal government. Mitchell had engaged in perfectly legitimate “tax avoidance,” not illegal “tax evasion.”
Steuer, once again, lived up to his reputation. When the jury pronounced Mitchell not guilty after a six-week trial, Mitchell burst into tears. Steuer was sporting, according to Newsweek, a “cat-that-swallowed-the-canary smile” as Mitchell thanked him, and the two men swept out of the Federal Court House and headed over to the Bankers’ Club to celebrate, surrounded by a jubilant crowd of Wall Street brokers and runners. The United States attorney general, Homer Cummings, was so shocked by the outcome that he felt compelled to announce he still believed in the jury system. Other commentators saw a classic case of jury nullification—Mitchell seemed like a “good fellow,” according to the New Republic, and since “every other rich man has sold securities to establish losses” there seemed little reason to throw just this one in jail for it.
The government amended the tax code in 1937 to plug a variety of tax loopholes, and it continued to press civil charges against Mitchell. In 1938, the United States Supreme Court ruled that the banker owed $1.1 million in back taxes and penalties. He could have declared bankruptcy, but claimed it wasn’t the “square” thing to do. He eventually settled with the government and paid off everything he owed J.P. Morgan and Company, although he lost the Fifth Avenue mansion and the other houses to foreclosure. At least as far as his debts were concerned, Morgan’s assessment seemed to be right—Mitchell was a “good, sound, straight” fellow. In 1934, he formed his own firm and the next year he became chairman of the investment bank Blyth & Co., where he would remain for the next twenty years. On December 14, 1955, he died, again a wealthy and respected Wall Street banker. Those who remembered his dramatic appearance in the Pecora hearings two decades earlier apparently still believed that Sunshine Charlie had unfairly been made the scapegoat of the crash and the Great Depression.
19
As the hearings came to an end in June 1934, the most important task for Roosevelt was naming the first SEC commissioners. The laws, as Pecora wrote in his memoirs, were neither a “panacea” nor “self-executing.” The lawyer told the president much the same thing at the time, commenting when Roosevelt signed the Securities Exchange Act, “It will be a good or bad law depending on the men who administer it.” Years later, he denied having any interest in the job, but it is clear that he desperately wanted to be the SEC’s first chairman. Perhaps, having been so responsible for its creation, he thought he deserved the job.
In addition to owing him for his work on the investigation, the president owed Pecora a political debt. In the fall of 1933, in an attempt to wrest control of New York politics away from a Tammany Hall weakened by the Seabury investigations, Roosevelt and the Bronx political leader Edward Flynn formed the Recovery Party and put up a slate of candidates to run in that year’s citywide elections. Earlier that year, John Curry, the Tammany leader who had thwarted Pecora’s ambitions to run for district attorney in 1929, had pleaded with Pecora to run on the Tammany ticket, and Pecora had the satisfaction of turning him down flat. But Pecora could not turn down the president, who personally asked him to accept the Recovery nomination. He campaigned only on weekends so as not to take away from the investigation, and he even managed to win an endorsement from Untermyer, who called him “fearless” and “independent”; but it was to no avail. Tammany lost the mayoral race to the Republican, Fiorello La Guardia. The anti-Tammany vote for district attorney split between Pecora and the Republican candidate and Tammany brazenly stuffed ballot boxes to send its candidate to victory. Pecora said he was glad to have lost the election. Still, seven months later perhaps he now hoped he could use his willingness to run as a lever to get the chairmanship he really wanted.
20Raymond Moley, never a fan of the tenacious investigator and increasingly turning in favor of business and away from the New Deal, had other ideas for the SEC chairmanship. Worried that the commission “might fall under the domination of men who had no knowledge of the practical operation of the stock exchange,” Moley submitted a list of eight names to the president. Pecora was not on it. A few days later, when he learned of Pecora’s interest in the job, Moley “verbally added his name to the list.”
At the top of Moley’s list was Joseph P. Kennedy, father of the future president. It was a startling choice. Kennedy had made part of his fortune in the stock market, helping to run the kind of manipulative pools that Pecora’s investigation exposed. “It is easy to make money in this market,” he told a friend at the time. “We’d better get in before they pass a law against it.” Ardent New Dealers were stunned at the possibility of having such a man oversee the financial community. The Washington Daily News argued that Roosevelt “cannot with impunity administer such a slap in the face to his most loyal and effective supporters.” John Flynn labeled Kennedy a “grotesque . . . economic parasite” and was incredulous that he might lead the commission. “I say it isn’t true. It is impossible. It could not happen.” Chairman Fletcher urged the president to appoint Pecora, and there was some editorial support for the intrepid investigator, but more for James Landis, the Harvard academic who had helped draft both securities acts.
Roosevelt did not cave. Having angered the financial community so much over the preceding year, Roosevelt decided he needed to mollify it. It was a perfect bit of Roosevelt manipulation from the same man who described his encounter with a Senate delegation this way: “I was good. I saw Barkley and the others, and with my right arm I said, ‘Not one inch will I give in, not an inch!’ But with my left hand I said, ‘Boys, come and get it.’” More pointedly, Roosevelt didn’t view Pecora as an administrator; in the president’s mind Pecora was always a highly skilled lawyer and investigator, but no more. On June 30, 1934, Roosevelt selected Kennedy with instructions that his fellow commissioners should appoint him as chairman. The Interior secretary, Harold Ickes, who had turned down Pecora’s position in January 1933, wrote in his diary that Roosevelt had great confidence in Kennedy. The new chairman was likely to be honest, both because “he has made his pile” and because he “would now like to make a name for himself for the sake of his family.” More importantly, Kennedy knew “all the tricks of the trade,” or as Roosevelt, smiling, later told those closest to him, “Set a thief to catch a thief.”
As for Pecora, the president appointed him to the commission, but gave him the shortest available term, just one year. Pecora had only asked for a one-year appointment—his financial resources were badly depleted and the SEC salary was nearly as puny as the one he made as an investigator—but he was furious about the chairmanship. He thought he had an agreement from the president that he would be chairman. Returning to Washington from New York, the lawyer hoped to prevail on his fellow commissioners to override the president’s wishes. Indeed, the rumor swirling around Washington was that if Kennedy were selected as chairman, Pecora would resign at once rather than serve under a man he had exposed in his investigation.
It was over ninety degrees in Washington on the afternoon of July 2 when the newly designated commissioners gathered at the FTC’s headquarters, and Pecora was reportedly in a “fighting mood.” The commissioners were slated to be sworn in at three, but the session was delayed two hours as Pecora and Kennedy sat intransigently in separate rooms while their fellow commissioner James Landis engaged in shuttle diplomacy between them. Landis finally convinced Pecora not to resign, although in truth it was highly unlikely that the ever loyal Pecora seriously considered embarrassing Roosevelt. The now disappointed investigator dutifully went out to have his picture taken with the new chairman and his fellow commissioners.
Despite the criticism, Kennedy handled the job well, striking a careful balance between enforcing the new statutes and encouraging capital investment. In his first nationally broadcast speech, which was piped in live to the New York Stock Exchange floor, Kennedy reassured the Street that the new agency did not hold “grudges.” Nor did the members of the commission, he said, “regard ourselves as coroners sitting on the corpse of financial enterprise. On the contrary, we think of ourselves as the means of bringing new life into the body of the securities business.” When Kennedy left the commission late in 1935, even Flynn admitted that he had been its “most useful member.” It seems unlikely that Pecora, who at this point inspired nothing but fear and loathing on Wall Street, would have been nearly so effective.
21Indeed, Roosevelt was right about Pecora’s unsuitability for administrative work and about his unwillingness to reach a cooperative hand out to Wall Street. Although Pecora’s relations with Kennedy were amicable, he at times thought the chairman’s rapprochement with the financial community went too far, and he constantly found himself taking a harder line when it came to implementing and interpreting the new regulatory structure. After a year and a half of ruthlessly exposing financial wrongdoing, Pecora’s “broad faith in human nature” had been forged into a hardened and indelible cynicism. He thought that the corporate form itself had been “twisted out of its original and socially useful character and has become a weapon in the hands of promoters as powerful as machine-guns in the hands of gangsters.” Accompanying his deep-seated suspicions was a healthy dose of boredom; he seemed a little lost after the thrill of the investigation in the mundane details of getting the agency up and running. He resigned from the SEC after only six months to take an appointment from New York’s governor, Herbert Lehman, as a judge on New York’s Supreme Court, the state’s oddly named trial court. Pecora yearned for positions of status as a tangible sign of his accomplishments; it was probably why he wanted the first SEC chairmanship so badly. Appointment to the bench, he said, fulfilled a lifelong ambition.
22Less than a year later, Pecora turned down Roosevelt’s offer to reprise his Senate inquiry; this time to lead an investigation of American Telephone & Telegraph on behalf of the Federal Communications Commission. Family considerations seemed to play the overwhelming role in his decision to decline the offer. His wife, Florence, wrote a moving and very personal letter to the president, pleading with him to find someone else for the job. “I suffer from extreme nervousness and melancholia and am constantly under medical attention,” she told Roosevelt. “More than ever I do need Ferdinand with me. For years I gave him to the public with all good grace. Won’t you please let me have him at least at this particular juncture of my life?”
Instead of going back to Washington, Pecora accepted the nominations of both the Democratic and Republican parties for a full fourteen-year term on the court and, for once, he easily coasted to victory that November, a feat he repeated in 1949. In 1938, he became the president of the National Lawyers Guild, an organization of progressive lawyers founded in protest to the American Bar Association’s exclusion of African Americans and Jews. As dictatorships proliferated around the world, Pecora responded to critics who said that a sitting judge should not take such a position. “There has been no time,” he argued, “when the natural rights of equality before the law, liberty of thought and freedom of speech has been so much in need of preservation by those who believe in democratic principles.” Pecora believed reflexively in moderate progressivism and he offered a fiery denunciation of the organization a year later when it became apparent to him that much of the Guild’s leadership was linked to the Communist Party.
23The year after he won reelection to the bench, the Democratic and Liberal parties nominated Pecora for mayor of New York. It was an ironically bitter three-way race with the Independent candidate Vincent Impellitteri and the Republican Edward Corsi. The famously righteous and independent Pecora was accused of having organized-crime links and was derided as nothing but a Tammany hack. The always energetic and hardworking Pecora was the oldest of the three, and Corsi insisted that “Grandpa Pecora” was too old to be mayor. Pecora defended himself, calling the allegations of mob ties “ridiculous,” proclaiming “no political boss has every put a collar on me in thirty years of public service,” and demonstrating his vigor with every impassioned speech. True to form, however, he took the high road in the campaign, refusing to sling mud, and ultimately he placed second to Impellitteri. His political career now over, Pecora returned to private practice, but he never gave up the fight to protect the weak and powerless. In 1966, he was one of a group of lawyers and retired judges who fought to prevent the elimination of the New York City Police Department’s Civilian Complaint Review Board.
24“No memory of having starred,” Robert Frost once wrote, “atones for later disregard / Or keeps the end from being hard.” Although written thirty-five years earlier, his poem poignantly captured Pecora’s life. As he neared his ninetieth birthday, Pecora, the man who lived for acclaim, had little of it. The hearings—his brief moment on the public stage—had long since faded from the public’s memory. Even his unsuccessful mayoral campaign lay more than two decades in the past. Pecora died on December 7, 1971, a few months after suffering a heart attack. He spent his last days at the Polyclinic Hospital in New York, where he liked nothing more than to recount for his nurses how he put Wall Street under oath.
In those last days with his nurses, Pecora was trying to reclaim a tiny portion of the admiration and recognition that he had garnered in those hearing rooms in Washington nearly forty years earlier. He would have been gratified to know that his death warranted a long obituary in the New York Times, although even the Times thought the most memorable incident in the hearings was when Lya Graf sat on J. P. Morgan Jr.’s lap. The forty years since his death did little to bolster his reputation. Indeed, up until the Great Recession that began in late 2007, Pecora’s name was virtually unknown, even among those who made their living in and around Wall Street. And to those who had heard of him he was most often not a brilliant and courageous lawyer, but simply a flashy showman.
While the man and his astounding legal performance may be forgotten, his legacy lives on. Every initial public offering, every bond deal, every trade on the New York Stock Exchange or NASDAQ is subject to a regulatory apparatus that did not exist when he took Washington by storm in 1933. Every time companies disclose bad news because securities regulations require them to do so, investors can thank Ferdinand Pecora. And even though financial regulation is in dire need of updating, it remains a vast improvement over the laissez-faire approach that he helped usher offstage. In the turmoil that roiled the financial markets in 2008, bank failures were a small percentage of what they were during the Depression, and there were no bank runs, in large part because Ferdinand Pecora helped blaze the path for federal deposit insurance. The Securities and Exchange Commission has been fairly criticized for its regulatory and enforcement lapses over the last few years, but for most of its history it has been considered one of the ablest of Washington administrative agencies.
Nearly eighty years ago, in the depths of the worst economic crisis in this country’s history, Ferdinand Pecora showed what a well-run and well-researched Washington investigation could accomplish, and although congressional hearings too often descend into bluster and posturing, the Pecora hearings remain a model to which future investigations can aspire. All they need is a Hellhound.