The New Deal Reformers led the 1930s stock market regulatory revolution, which most notably created the Securities and Exchange Commission (SEC). They were politically ambitious and power-hungry bureaucrats who consecutively influenced our financial market system via legislation and enforcement. In that regard they made the market what it is today.

The Reformers initially arose from the rubble of the 1929 Crash and ensuing Great Depression, which left America economically afraid and generally suspicious of any free market system. What was once viewed as routine—such as speculation, pools, insider trading, borrowing on margin, and combined investment and commercial banking—was now eyed as abusive and near-criminal, if not in fact illegal in all instances.

Crowd mentality blamed tough times on speculative abuses. Politicians promoted reform—declaring new regulations and legislation aimed at permanently eliminating the abuses. But this widely held platform, on which generations of reform was later based, was flawed.

It is totally unclear how the financial markets would have evolved had the reformers been contained, but the markets would have evolved somehow, and clearly differently than they have. And it is also unclear that we ever needed reform in the manner that it occurred.

First of all, contrary to public opinion, the Great Depression was not an adverse reaction to 1920s speculation. While almost everybody believes (and believed then) that speculation was to blame, it simply isn’t true. The world always needs a scapegoat for what it doesn’t understand and can’t rationally explain. And the rich and greedy make a villainous image that is emotionally and often morally easy to believe in.

But, the fact is that the Crash and Great Depression were worldwide events that began abroad and eventually were imported into America. Second, the whole mess worsened here because of our own central bank’s dismal monetary policies and tactics. The Federal Reserve shrank our money supply by 30 percent from 1928 to 1938. Few serious students of economics believe 1929’s aftermath would have been nearly as severe as it was had the Fed loosened the monetary reins instead of tightening them. Some believe the upshot would have been no worse than what happened after 1987’s market plunge of comparable magnitude (when the Fed acted with greater wisdom and tactical capability). Finally, the Great Depression was a clear worldwide reaction to government-mandated trade barriers here and abroad. Was 1920’s speculation to blame for the 1930s? No! The government was. It is ironic that Uncle Sam thought it was its job to blame business and then apply the curative for abuses created in Washington, D.C.

So, it’s hard to know if we ever really needed regulation in the form in which it evolved. First, legislation aimed at reform makes little difference in alleviating the strains of a worldwide downswing. Second, as a shield against fraud, regulation makes an even weaker weapon. There has never been a shortage of con men and bunko artists, before or after the 1930s reforms. There will always be abuses and abusers, and the more laws there are, the more clever will be the folks who try to get around them. Who’s to say that abuses are purely negative (as you’ll see perversely in reading about Crooks, Scandals and Scalawags)?

The government always seems to somehow believe that if it weren’t there to keep us honest, we’d all swindle each other. Not true. Without The Reformers, our markets would have evolved—they just would have evolved differently. Yes, some folks who were swindled probably wouldn’t have been. But then again, others who were swindled probably wouldn’t have been had the SEC not been there. In some ways, the SEC and governmental reform provide a false sense of security for many folks that makes them vulnerable to abuse. Those folks, for example the victims of penny stock operators and current Ponzi schemes, would clearly be better off had regulation not lulled them into believing that bunko artists aren’t still widespread. Lefevre correctly foresaw that point in the Saturday Evening Post in 1934.

Had The Reformers been heeled by a different political leash, the markets would have evolved in ways we can never fully fathom now. It just didn’t happen that way. Clearly there would have been more self-regulation and self-regulatory authorities, and there probably would have been more state regulatory effort if there had been less federal effort. It would have been different.

But in some ways it would be the same. Ultimately—via Adam Smith’s “invisible hand”—competition is the real regulator of the markets. Without it, as we have recently seen in Eastern Europe, government falls apart. It is competition in the financial markets that eventually weeds out those who perform poorly in favor of those who do well.

Ironically, the Reformers themselves were real pieces of artwork. Winthrop Aldrich, Joseph Kennedy, James Landis, and William O. Douglas were overzealous and extremely ambitious for personal power—extracted through politics. E.H.H. Simmons wasn’t. Yes, he was also reform-minded. But as their predecessor, he was urging self-regulation to control fraud as early as 1924. Once the Crash came (while he honeymooned), the ignorant public was embittered and out for blood, and his gentler ways were never again seriously considered.

Aldrich helped draw up the Banking Act of 1933, which divorced commercial from investment banking. The very bank he headed became the first to adhere to the banking reforms when he dissolved its profitable investment banking affiliate, setting the example for the rest of Wall Street. Was that a good idea? Apparently not, because we are undoing his handiwork now. And, as with all other regulators, Aldrich ultimately sought to use the prestige earned from his regulatory efforts to seek the more lofty political position as Ambassador to England.

Kennedy was a scumball and ambitious social climber who ended up—guess what—also as Ambassador to England. This is the guy that married the mayor’s daughter and cheated on her mercilessly while playing almost every financial scam that would soon be declared illegal. Contributing to the Democratic party, he bought social prestige and Roosevelt’s favor. After putting in a year as the SEC’s first chairman, he became an Ambassador to England, schmoozed with political bigwigs and watched three sons climb the political ladder—very high.

His successor, Landis, used his SEC position as the pendulum from which to swing back and forth between prestigious academic and public administrative positions. Yet en route he committed and was convicted for tax evasion, did time and was barred from practicing law. He might have done better as a con artist. It will always be unclear whether or not he committed suicide.

Finally, after serving as the SEC’s third and most active chairman, super-ambitious Douglas was appointed to the Supreme Court! This liberal darling was also a womanizer who prided himself in personally mixing Roosevelt’s martinis and marrying a series of ever-younger wives. There’s little doubt Douglas used his position to catch the eye of Roosevelt and assure his own future; with no formal background or experience in business, economics or Wall Street, he did so with little thought as to whether or not what he was doing was good or bad for the economy’s long-term future.

Did any of these egocentrics have much of an impact on our market system? Sure! Did they contribute more than a Charles Dow, a Charles Merrill, or a Ben Graham? No way! Despite all their basically well-meaning attempts to discourage aspiring crooks, regulation doesn’t hold a candle to the impact of competition in the long run. Regardless, had we gone without the Reformers, there’s no telling how our markets would be operating right now. Better? Worse? Who knows for sure? I certainly can’t know because I can’t backseat-drive history. It’s a matter of opinion at best, but it certainly would have been different without them. For that reason, the Reformers are among the 100 Minds That Made The Market.

E.H.H. SIMMONS

ONE OF THE SEEDS OF TOO MUCH GOVERNMENT

The stringent federal regulations that bombarded Wall Street and left crooked opportunists reeling in the 1930s were partially the result of an ambitious antifraud campaign initiated by E.H.H. Simmons. During a record-breaking six-year presidency of the New York Stock Exchange (NYSE) between 1924 and 1930, Simmons crusaded for a new, more trustworthy Wall Street to replace the old one, which had included unscrupulous speculators, swindlers, and fly-by-night bucket shops.

The nephew of straight shooting railroader E.H. Harriman (from whom Simmons got his initials), Simmons firmly believed that Wall Street was no longer able to clean its own house and that to protect the American economy, he and Uncle Sam first had to protect its investors. He advocated, “Crooked business is the worst enemy honest business has.” It was a heartfelt view, if a naive one.

“If I could reach all the investors of America—and who is not an investor nowadays?—I would try to impress upon them the menace of the bucket-shop keeper and the security swindler,” he wrote in a typical, heartfelt editorial in 1925. In his first year as president, the private and moral-minded Simmons recruited Chambers of Commerce and newspaper editors nationwide to help him inform the uniformed investor of the typical swindler’s actions. He himself wrote articles, gave speeches, and courted politicians, advocating stricter laws and stricter enforcement. Too often, he said, politics played a role in acquitting popular stock market criminals of crimes.

Simmons aimed much of his attack at bucket shops, which gave investors virtually no chance of winning profits, yet had been accepted by society as a virtual institution. Wild plunger Jesse Livermore made his first million via bucket shops in the early 1900s, but he was the rare exception—most folks lost heavily. (See Livermore for a more detailed description of bucket shops.) Simmons called the buckets “a civic, moral and economic cancer” that went undetected. Bucket shops were so common and entrenched in society back then—like off track betting is now—that people and law enforcement officials seldom saw them as a menace. And although Simmons carried on about them for a good decade, it wasn’t until 1934 that the Securities Exchange Act outlawed them.

Fake stock promoters—like those selling stock in phony gold mines and underwater Florida land—also got the boot from Simmons. He worked with state and federal authorities to eliminate such crooks and boldly encouraged fellow stock market members to turn in suspicious colleagues. “The honor of the institution and the honor of its members must be maintained at all times. That can best be done by obeying and conforming to the rules of the Exchange,” he declared.

Simmons was basically your average old-fashioned policeman who liked to see justice served and who happened to work on Wall Street. He was born in Jersey City, New Jersey, graduated from Columbia in 1898 and bought a stock exchange seat in 1900. He became a partner in a brokerage firm, Rutter & Cross, and became a governor on the exchange in 1909. Thereafter, he rose rapidly, becoming exchange vice president in 1921, then president in 1924. Married and widowed twice, he was popular with members of the exchange, the press, law officials, and investors who looked to him as someone they could trust.

In turn, the NYSE grew rapidly. Under Simmons’ leadership, the exchange underwent its greatest expansion in history with sales exceeding all previous records. Much of that was owed to the booming market of the 1920s. But regardless, he expanded the Exchange’s physical facilities, adopted a new ticker system, increased membership by 275 seats and broadened its ties with foreign stock exchanges. London deemed him the “busiest man in the world” because when he vacationed in the city, he always ended up studying its financial works.

The stock market was everything to him, but ironically his presidency ended without the glitz and glamour you might have expected. Sure, there were still the appreciative ceremonies and all, but Simmons left his position after being absent from the exchange during the 1929 Crash. At age 52, he had been honeymooning in Honolulu when the market crashed, leaving vice president Richard Whitney in charge as acting president. What Whitney did with his temporary power vaulted him into the presidency the next year—and Simmons back into private life. This didn’t reflect badly on Simmons—he, in fact, returned as vice president of the exchange a few years later.

Simmons died at age 78 in 1955. During his lifetime, he kept his private life as discreet as possible, though he was never able to hide his fierce values and moral code. His high ethics were characterized in a speech he gave up-and-coming stock market trainees one day in 1926. Urging them to dedicate themselves to their jobs, as menial as they might seem, Simmons said, “It really means the satisfaction and the contentment which comes from having done your job well, having measured up to requirements of your conscience and having accumulated for those dependent on you a competence which will make them comfortable. . . .”

He called for intelligent effort and warned against “living only for the moment.” A visionary, Simmons cautioned, “Do not bind your intelligence to your desk and your thoughts to your books . . . let your thoughts and your intelligence go outside and look over the world and study the situation and see how you can improve.”

It’s easy to see why Simmons saw peril in a freewheeling capital markets system that allowed market rigging to prosper and why he fought to change this. But it’s harder to see why he didn’t foresee the risks to business of governmental intervention. As stated earlier, he claimed, “Crooked business is the worst enemy honest business has.” In looking back on it today, one wonders if he wouldn’t have realized that while crooked business is a peril, excessive government is a far worse enemy.

WINTHROP W. ALDRICH

A BLUE BLOOD WHO SAW RED

Banker Winthrop Aldrich was the antithesis of the back-slapping good ole boys who dominated Wall Street until the early 1930s. He was the kind of banker who walked with “stiff, cold strides” straight to his desk—without meandering through the office; the kind of banker who frowned on long lunches unless important business needed discussing. Since he had no desire to play their game, he lacked the heart to preserve it. So, in 1933, as the financial community recovered from the 1929 Crash and ensuing Depression, Aldrich dealt the fatal blow to the “fraternity,” calling for the separation of commercial banking and investment banking. His drastic points of reform were incorporated in the landmark Glass-Steagall Act, or Banking Act, of 1933—one of the bigger feathers in the New Deal administration’s cap, which led to the abolishment of Wall Street’s century-old, elitist banking fraternity.

Reserved, distant and fiercely moral, Aldrich used to say, “I never smile south of Canal Street.” (Wall Street is, of course, south of Canal Street—implying that he never smiled on Wall Street.) A descendant of Mayflower pioneers, he was born in Providence, Rhode Island in 1885. The son of an influential senator and the tenth of 11 kids, he graduated from Harvard Law School in 1910 at 25. The fact that his sister married John D. Rockefeller, Jr. helped him gain entrance to prestigious Wall Street law firms, and his marriage to a prominent Manhattan lawyer’s daughter in 1916 all but guaranteed his success.

Content with his flourishing law career, by chance or by Rockefeller’s blessing, Aldrich became president of Equitable Trust Company when its president suddenly died. “I’m not a banker,” he protested, “I’m a lawyer”—but to no avail. With an uncanny memory, calm rationale, and sharp, quick mind, he made an excellent banker. So, when Equitable merged with Chase National Bank in 1930, he became Chase’s new president. Here, Aldrich began to clash personally and ethically with Chase chairman Albert Wiggin, who was rather flamboyant with Chase’s capital.

Where Wiggin believed in investing his bank’s funds in speculative securities via a securities affiliate—as was common back then at large commercial banks-Aldrich insisted on a more conservative approach. Once the onslaught of the Great Depression engulfed America, he won support from other oncerned directors who suddenly saw events more to Aldrich’s conservative way of thinking than they had before. With their support, he ousted Wiggin and finally succeeded him as chairman in 1933 for the next 20 years.

“It is impossible to consider the events which took place during the past ten years without being forced to the conclusion that intimate connection between commercial banking and investment banking almost inevitably leads to abuses,” Aldrich once said. Immediately, he set out to shake up the banking industry with his own brand of New Deal reform—he began dismantling the system. (Further description of this system and how it worked can be found in the chapters describing National City Bank chairman Charles Mitchell and Albert Wiggin.) The existing system allowed major commercial banks to take advantage of the wild 1920’s bull market profits via insider information, interlocking directorships, a virtual monopoly on major security underwritings, and a ready-made market—bank customers—on which they dumped their securities. Aldrich found the system preposterous, and, to the horror of folks like Wiggin, Morgan and other back-slappers, he came out publicly against it.

Somber-faced with cold, disapproving blue eyes, Aldrich cried, “The spirit of speculation should be eradicated from the management of commercial banks.” In his famous speech made March 8, 1933, he surprised his colleagues by calling for sweeping reform in the banking industry. After previewing the not-yet-passed Glass-Steagall Act, he decried it as not being drastic enough! Aside from separating commercial from investment banking, which the act already called for, Aldrich’s demands included:

1. Any partnerships or corporations taking deposits must abide by the same regulations as commercial banks.

2. No firm dealing in securities can accept deposits.

3. No officer or member of a partnership dealing in securities may hold office in any bank (and vice versa).

Every one of Aldrich’s points was aimed at reducing the banking fraternity’s hold on the capitalist system. Under his say, speculative ventures would be eliminated in commercial banks, and insider information would be harder to obtain. The third point, for example, would forbid a J.P. Morgan partner from holding a director’s seat on the Chase National Bank board. In the past, the Morgan director and Chase board might have shared insider information regarding any clients they might have had in common and used it to their own advantage.

Ironically, Chase, the very institution Aldrich headed, violated every one of his outrageous reforms. So, courageously, he began adapting Chase to his list of new rules—and his shareholders readily went along with his game plan. He gleefully dissolved the Chase securities affiliate and removed its investment banking department, except for the handling of government securities. Not once throughout the entire ordeal did he attempt to win acceptance from his peers or a pat on the back from his opponents. It was full speed ahead, regardless of what anyone thought: Wall Street hated him with a vengeance, and the Roosevelt administration fully encouraged him. Aldrich got the red-carpet treatment at the White House and was able to see his suggestions go down in the history books.

In his 20th year as Chase chairman, Aldrich severed his business ties to accept the ambassadorship to the Court of St. James for four years. After struggling with the relationship between America and Great Britain, he returned to the States in 1957, and threw himself back into business, managing his and the Rockefellers’ financial affairs. Aside from banking and finance, Aldrich found the time to serve on the International Chamber of Commerce and dabble in a handful of other civic affairs. He was a celebrated philanthropist involved with seemingly every charitable organization ever created including various hospitals, the New York branch of the Girl Scouts, Tuskegee Institute, and the American Cancer Society. He headed World War II’s largest relief effort—the Allied Relief Fund—and would later receive honorary degrees from Columbia, Georgetown, Harvard, Colgate, Brown, and several other universities. A world traveler who wintered in Nassau, Bahamas, Aldrich was survived by five daughters and one son when he died—while still quite active—in 1974.

You can’t reform a group if the entire group stands opposed to the reform—in that case, all you can do is put the whole group in jail. To reform a group, you have to split off factions from the group who will act as the leaders for reform. This is what Aldrich did. From his blue-blooded background he wasn’t money-hungry like many of Wall Street’s self-made moguls. His whole background, from birth, to law school, to Rockefeller connections was more oriented toward preserving position than building it. To Aldrich, moral rectitude was the correct path to preserve his position. At the time he was correctly reading the direction of the political winds. Without Aldrich you wouldn’t see the “reformed” securities and banking industries in the format in which they currently exist.

JOSEPH P. KENNEDY

FOUNDING CHAIRMAN OF THE SEC

When you think of Joe Kennedy, you recall his legacy of political giants. What Wall Street notes, however, is a speculator who kicked and scratched his way to some $500 million—and the perks that went with it, like a well respected name. But what the “Street” should remember is his role as the founding chairman of the Securities and Exchange Commission (SEC).

His story starts with his scrambling for millions—the kicking and scratching part. Kennedy was unrelenting and unscrupulous, a womanizer, and social climber who was often in it for his ego. Whether it was taking a mayor’s daughter for his wife or contributing to a President’s campaign till in return for a political appointment or two, Kennedy had a fistful of strategic moves that took him wherever he wanted.

His drive was always a matter of pride. The carrot-topped son of a popular small-time Boston-Irish politician wanted admittance to Boston’s high society—which was, of course, impossible for a person of poor background. Perhaps that was why he wanted it so much—because it was so out of reach. This hunger produced a driven man who allowed nothing to get in the way of his ambitions. So, as a Harvard grad who almost played pro ball, Kennedy stormed into banking via his father’s political connections. By age 25, in 1913, he was America’s youngest bank president at a small bank his dad had formed.

Kennedy was charismatic. And when he was happy, you knew it. A wide grin showed off his voracious teeth, and his bright eyes crinkled through round spectacles. With his dynamic and amiable personality, freckle-faced Kennedy made a sprawling network of contacts that brought him a variety of jobs before he landed on Wall Street. First, he married well, winning the Boston mayor’s daughter. Then he ran a local pawnshop, dabbled in real estate, managed a Bethlehem Steel shipyard, served on a utility’s board and, finally, managed a brokerage office for Hayden, Stone and Company (long ago merged into Shearson).

In 1923, Kennedy struck out on his own—“Joseph P. Kennedy, Banker”—and quickly established himself as a lone wolf on the Street, though he also worked with syndicates. Without conscience, but with a shrewd mind, Kennedy would “advertise the stock by trading it.” When the public bought in, he pushed up its price and sold out; and then Kennedy sold short as the stock drifted back down to its normal price. He was a manipulator of unusual skill. Kennedy once told a friend, “It’s easy to make money in this market. We’d better get in before they pass a law against it!”

In a maneuver typical of Kennedy but unusual for most folks, Kennedy once returned a favor to a Yellow Cab executive when Yellow Cab stock was in the midst of a bear raid, having dropped from 85 to 50. Acting as the stock’s sugar daddy, Kennedy set up shop in the Waldorf-Astoria running a shoring-up operation which he warned his friend could cost as much as $5 million. The Waldorf was a convenient location for his unending string of floozies. There he installed a ticker tape, and from his bedside, bought and sold Yellow Cab, using various brokers to conceal his position. He pushed the stock below 48, up to 62, down to 46, then stabilized it at 50 to confuse the bears. En route, instead or costing $5 million, it cost relatively little, and Kennedy claimed a hefty take for himself.

Always manipulating public relations to his much-loved family image, he said with false innocence, “I woke up one morning, exhausted, and I realized that I hadn’t been out of that hotel room in seven weeks. My baby, Pat, had been born and was almost a month old, and I hadn’t even seen her!” Such was the demeanor of the father of a future U.S. president. Pat probably never noticed her father’s absence, but poor Rose must have wondered where hubby was and what he was doing. Presumably it wasn’t merely the Yellow Cab stock operation that exhausted him in that bed. A few months later, when Yellow mysteriously plummeted again, it was Kennedy who was blamed by his former friend for the decline—and threatened with a punch in the nose! The presumption was that Kennedy, with his knowledge of the stock and its market, stepped back into the market and drove it down via short selling. No one ever knew for sure. But it’s possible.

Befitting his personality—that of a social pariah—Kennedy took on Holly-wood, where few Wall Streeters had ventured prior to the 1920s. During his cinematic stint, he financed a movie-theatre chain. He later sold it to RCA for half a million and made two films, including a costly silent flop with actress-girlfriend Gloria Swanson. While Swanson actually ate the losses, Kennedy basked in free publicity, laughing off his million-dollar loss. What he really lost was a girlfriend, and there was always another one of those to be had.

In 1928, in a move of uncanny vision, Kennedy unloaded his movie securities for $5 million (to help create RKO) and did likewise for his other securities in preparation for hard times. With amazingly good timing, Kennedy said, “Only a fool holds out for the top dollar,” and when the Crash hit, he was able to watch the market from a safe distance, keeping his fortune intact. In the 1929 Crash, while he held stocks that were hit, they were offset for by an equal number of short positions that rose in value. The Crash left him unscathed. There is a legend, which he probably promoted at the time, that he sold short heavily as the market crashed and made a killing. Not true—merely legend. His short sales were a hedge, and he did not profit in a material way from the Crash. He maintained.

Meanwhile, he took stock of his life. Now that he had made his pile, he wanted to make it respectable. But he wasn’t actually too successful at it. It would be up to his sons to truly salvage his reputation, which was far from sparkling. But he tried. He started out the only way he knew how—he made more connections. But this time he went straight to the top, courting presidential hopeful Franklin Roosevelt by oiling his campaign fund with more than $150,000, which was a lot for those days. Of course, you never can have too much money, and as the Kennedy and Roosevelt families grew closer, Kennedy borrowed Roosevelt’s son to secure prestigious English Scotch franchises just before Prohibition was repealed. And, he was somehow allowed to ship in the booze for “medicinal” purposes before the law was actually appealed! This is the period of Kennedy’s life when he was tagged a “bootlegger,” which was neither terribly material to his wealth or life, but it was to his image.

When Roosevelt was elected, the mid-1930s became the self-proclaimed “President-maker’s” favorite years. He was picked by Roosevelt and elected to chair the newly-established Securities and Exchange Commission. Democrats shrieked at Kennedy’s selection as an abomination. They figured he would do nothing to hamper the activities of his old friends on Wall Street. It was an appointment likened to letting the wolf out to guard the sheep. But Roosevelt was satisfied with Kennedy’s promise to stay out of the market—and, the President mused, he “knows all the tricks of the trade!” Roosevelt supposedly muttered something to Kennedy’s detractors to the effect that, “it takes a thief to catch a thief.” Surprisingly, the charming Kennedy won over his harshest critics in his one year at the SEC, diligently outlawing most of the methods he had used to amass his fortune. Supposedly Kennedy’s knowledge of how to manipulate stocks was central to the New Deal version of how to reform the securities industry. Realistically, I think he was picked as a pay off for his efforts and money on Roosevelt’s behalf, and I haven’t seen any evidence that his SEC functioning was more than perfunctory.

Still, Kennedy’s SEC stint did much to scrub up his image. That allowed Roosevelt to move him on to a more prestigious position—U.S. Ambassador to Great Britain—just what the doctor ordered for an Irishman who grew up with a chip on his shoulder!

As World War II ended, with the Roosevelt world gone and with Kennedy older and slower, he turned again to business, but this time focused on real estate. His prime purchase was the world’s largest commercial building, Chicago’s Merchandise Mart—which he bought in 1945 for $13 million and 20 years later was worth $75 million, throwing off more than $13 million of cash annually. Various estimates of his net worth in the mid-1960s place it on the high side of $200 to $400 million.

In some ways the 1960s had to be the high point of his life as son, John, was elected President. But it was also the end, emotionally and physically. His heart started giving him problems and he suffered a stroke in 1961. Later, John’s death was like a cloud over his heart. A series of heart attacks left him incapacitated for the first time in his life. Robert’s assassination in 1968 couldn’t have helped. He died the next year, after funneling his fortune into intricate trust funds for his children and grandchildren to avoid Uncle Sam’s take.

Kennedy was an enigma. A social climber, womanizer, mad scrambler, market manipulator, movie mogul, government regulator, Ambassador, real estate tycoon, and President’s father. He is very hard to summarize briefly. But whenever I think of Kennedy, I think of the many things he did in early eras that were taboo in later ones, and his ability to adhere to the social and legal mores of the day. You have to be reminded by the founding chairman of the SEC to honor the law. You have to also be reminded by Kennedy’s evolving lifestyle and business style that what is legal and acceptable today may be very illegal 10 or 20 years from now. Staying flexible is a requirement for surviving in the financial markets.

JAMES M. LANDIS

THE COP WHO ENDED UP IN JAIL

Ahard-nosed, hard-driving and hard-drinking law professor-turned-securities regulator forced a resistant Wall Street to prepare for drastic change following 1929. As a main architect of the Securities Act of 1933 and one of its first enforcers, James MacCauley Landis defined and directed that change and helped shape a new, regulated, and reformed Wall Street.

A chain smoker and workaholic who drove too fast and drank too much, Landis typified the staunch, serious, and overzealous policeman out to get his man. Standing 5′7”, with thinning hair, tight lips, and big jowls—a real sourpuss face—he wore dowdy, rumpled suits and kept his hands stuffed in his pants pockets. Gulping black coffee and smoking two packs of Lucky Strikes each day, he was nicknamed “Cocksure” Landis for his self-assured arrogance and inability to take criticism.

Known as an independent thinker, Landis was called to Washington from his Harvard professorship and Cambridge home to help draw up the Securities Act in 1933. He wrote tough enforcement provisions, including making non-compliance of a subpoena a penal offense. He called for fines and prison terms for all parties involved with fraudulent securities sales, from company directors to underwriters and lawyers. Landis also devised a “stop order” that allowed the commission to freeze an issue if its paperwork looked suspicious. The legislation was a hit with the reform-hungry New Deal crowd and its popularity vaulted Landis into upper-crust capital circles. But back on Wall Street, the press said Landis symbolized “a New Deal brain-truster with somewhat radical tendencies and an inclination to go off half-cocked on high-sounding but impractical reforms.”

Impractical or not, most of Wall Street adopted the new Securities Act which went into full effect on July 7, 1933. That day, 41 firms filed statements with the Federal Trade Commission (FTC) Securities Division, the first agency to carry out the law. Together, the firms paid out $8,000 in registration fees to issue $80 million in stock after 20 days. It was the beginning of a new Wall Street—and Landis remained in Washington to make sure it stayed that way.

In 1933, just as he prepared to head back to Harvard, Landis was appointed to the FTC by President Franklin Roosevelt. He worked day and night—even keeping a cot in his office—to develop the rules and regulations that carried out the Securities Act. That year, he prevented or suspended 33 illegal issues. In 1934, when a senator’s amendment created the Securities and Exchange Commission (SEC) to replace the FTC, Landis was named to that, too. He wrote most of the SEC’s first opinions while serving under the first SEC chair, Joe Kennedy.

A year later, on the day before his 36th birthday in 1935, Landis took Kennedy’s place as the $10,000-per-year SEC chairman. He promised to uphold Kennedy’s cooperative stance with Wall Street as much as possible, while vowing to prosecute all stock frauds. For instance, he expelled stock operator Michael Meehan from three major stock exchanges on charges of manipulating stocks via “matched sales” in Bellanca Aircraft. The liberal press hailed him! Years later, he’d say, “The Securities and Exchange Commission has to be both a crackdown and a cooperating agency, depending on the circumstances. I don’t think we have soft-peddled anything.”

More than prosecuting individual violators, however, Landis was left the task of deconstructing what was then “the” corporate way of life—the holding company. The controversial and much-hated Public Utility Holding Act of 1935 called for giant holding companies to divest themselves of all subsidiaries not geographically or economically linked. Trying to be Mr. Nice Guy and still uphold cooperation between government and business, Landis “suggested” the holding companies “voluntarily” divest themselves. But Wall Street hated him, and perhaps not without reason. All basic notions of capitalism are based on freedom, which at its most extreme means anyone can do anything, and pressure from Washington was restrictive and therefore threatening to Wall Street, which for 100 years had been the citadel of freedom in finance. The holding companies fought the law all the way from inception to passage, so they weren’t about to voluntarily divest themselves of anything without a major legal battle.

Landis chose to convince them with a big splash—to make an example of the world’s largest utility holding company, Electric Bond and Share Company. First, he gave the company one more chance to register with the SEC by December 1, 1935. No luck; Electric Bond wouldn’t budge. Then, two days after the deadline passed, the firm’s president personally visited Landis to declare it would sue the SEC! That was when he struck: As the smug president strolled out of Landis’ office, Landis picked up the phone and put down the meter to start a lawsuit he had prearranged before his visitor had arrived—before Electric Bond could get its suit started. Landis won. By January, 1937, the courts backed the SEC and demanded the holding companies comply with the legislation. Landis triumphantly declared the losers had “cut their own throats.”

By 1937, Landis was tense and weary, with little family life to speak of. His wife regularly attended Washington social functions on her own. If someone asked for her husband, she’d reply, “What husband?” The marriage was crumbling, and he’d neglected his two daughters. His obsession with his work and booze was costing him his health—he suffered a series of bouts with influenza before the doctor demanded a lighter workload.

As much as he disliked the idea, Landis resigned in 1937 to return to Harvard Law School as dean. Unfortunately, he lingered in his SEC position—as a favor to Roosevelt, skipping a needed vacation—long enough to catch flak for that year’s deep recession. Stock prices hit the lowest they’d been since the Great Depression, and the New York Stock Exchange president openly blamed the SEC. Landis retaliated, blaming the crisis on speculators who had returned to the market because of New Deal prosperity. What’s better—prosperity with a few crooked speculators or depression with no opportunity but everyone on the up and up? Sort of makes you wonder if Landis didn’t like it better with the world in depression.

Landis was remembered politically as a realist who didn’t expect rapid change. By drafting and adhering to legislation, he expected reform to evolve gradually. He felt regulation was a process that would occur naturally—without harm to the economic process—if not made uniform and rigid.

For being such a careful and patient planner, Landis had an extremely erratic life. Besides his SEC career, at one point or another he: Had his own law practice (Joe Kennedy was his number-one client); served as Civil Aeronautics Board chairman; reorganized and directed the Office of Civil Defense; authored a few books on law; served on the National Power Policy Commission; campaigned for President Roosevelt’s third term; and for a while, became active in local school politics. His love life was no less hectic. While married and working at Harvard, post-SEC, he fell in love with his married secretary. They eventually both divorced their first spouses and married each other.

Born in Tokyo in 1899, the son of Presbyterian missionaries, Landis came to America in 1912 to attend private school. By 1921 he worked his way through Princeton University as a justice of the peace and he received a law degree from Harvard in 1925. After clerking for the prestigious Supreme Court Associate Judge Louis Brandeis, he landed at Harvard as an assistant professor of law and made full professor at 26, the youngest in Harvard’s history. From Harvard, he embarked on his Washington career.

Landis died in 1964 at age 64. He was found face down in his 40-foot-long swimming pool at his 10-room Westchester, New York home—with traces of alcohol in his blood. Although he swam every day, it was rumored—falsely—that he’d committed suicide. Just days previously, Landis had been suspended from practicing law in New York State for a year because of a year-old conviction on income tax evasion. Imagine that! The head cop breaking the law. In 1963. Landis pleaded guilty to failing to file Federal income tax returns for the years between 1956 and 1960; he received 30 days in prison and paid some $92,000 in back taxes and fines. He didn’t mean any harm, he’d said—he was just too busy. One doubts if the firms and people he pressed in his securities regulation career would have gotten very far with him had they used the same excuse.

Is the world a better place with all of the securities regulations that Landis helped put in place? Most folks assume so. But I don’t think anyone can tell. The world is so fundamentally different now, almost 75 years after the first New Deal securities legislation, that it is impossible to say how the securities world would have evolved had the Roosevelt administration and Congress blinked five times, looked the other way, and avoided securities regulations until the securities markets naturally returned to higher prices. One could argue, as the New York Stock Exchange did, that prices might have returned to 1920s levels much faster with the presence of the SEC. But who knows? The world is what it is, and it is partly what it is because of the serious role Landis took in playing cop to Wall Street.

WILLIAM O. DOUGLAS

THE SUPREME COURT JUDGE ON WALL STREET?

It’s ironic that 36 years as one of history’s most controversial Supreme Court Justices all but obliterated the memory of William O. Douglas as the third Securities and Exchange Commission chairman. His SEC term was the very thing that vaulted him to the Court in the first place. As SEC chairman for 19 months between 1937 and 1939, Douglas sparked a “revolution in financial morality.” He picked up where James M. Landis, his predecessor, left off and made his one of the most ambitious chairmanships in the SEC’s history.

Douglas, like the leading liberal he was, immediately denounced the stock market as a “private club” with “elements of a casino.” Despite early 1930s legislation—like the Securities and Exchange Act, which he called “a nineteenth-century piece of legislation”—Douglas sought to make the market still more accessible to the public and free from insider abuse. A deep hostility towards “the goddam bankers” drove him to incite more competition among investment banking houses in order to prevent banker monopolies. He also followed through with Landis’ enforcement of the Public Utility Holding Company Act and attempted to consolidate SEC enforcement of the over-the-counter markets. Not all his attempted coups worked out, but he was able to build a coherent, workable policy for the next generation of reformers. Douglas said he made the effort out of concern for “the preservation of capitalism.” Yeah! Right! And the government is here to help you too. It is very hard to be concerned about capitalism and see bankers as “goddam” all at the same time.

A political liberal, Douglas was born in 1898 in Maine, Minnesota, the son of a poor Presbyterian minister who died early in Douglas’ life. His mother moved the family to Washington where he almost died of infantile paralysis. From then on, he was sickly and weak and threw all his energy into school work. Recovering from his physical condition by challenging himself to climb mountains, he pushed on in his studies to graduate from Idaho’s Whitman College in 1920, paying tuition earned with migrant farm work during the summers. Eventually, after a brief teaching stint, he hopped a New York-bound freight train with hobos and enrolled in Columbia Law School. Three years later, at 27, he graduated second in his class, joined the prestigious Columbia Law faculty, briefly worked for a high-powered Wall Street law firm, then moved to Yale in 1928.

Between 1929 and 1932, Douglas worked with the Department of Commerce on producing various financial studies, like one on bankruptcy reorganizations, a topic that grew popular during the Great Depression. Soon, he became known as an expert in financial law, and in 1936, was appointed to the SEC under Joe Kennedy, its first chairman. Although he seemed distant and shy around strangers, both Kennedy and President Franklin Roosevelt took an immediate liking to Douglas, and he quickly became the President’s “adviser, friend and poker companion.” He prided himself on mixing Roosevelt’s martinis. Wall Streeters probably thought he was practicing to deliver a different form of elixir to Wall Street.

A year later, Roosevelt offered him the SEC chairmanship. Douglas took office at a time when Wall Street was particularly vulnerable: One of its most well-known heads, New York Stock Exchange President Richard Whitney, had just been convicted of embezzling some $3 million—a scandal that dealt the financial district a severe blow on top of the worst economic conditions since the Depression. Douglas emphasized his leadership would “be a period of action.”

Douglas succeeded in creating more “action” than came from Kennedy’s cooperative approach with business and Landis’ steady, patient negotiations. He exploited the political implications of Whitney’s conviction and demanded the NYSE reform itself, or the SEC would do it for them. He demanded more than superficial change. Within hours of Whitney’s expulsion from the Exchange, he said, the “reorganization of the Exchange should not be a mere sham but thoroughgoing and complete in actual fact. The former philosophy of Exchange government should be abandoned not merely on paper, but in practice.”

Whether Douglas was capable of carrying out his threats of overhauling the NYSE, himself, was questionable, but the Exchange didn’t want to find out, and it carried out his demands. It added a 13-point Douglas-driven reform program including frequent and detailed audits of member firms; the banning of brokers doing business with the public from maintaining margin accounts; the establishment of a 15:1 ratio between broker’s indebtedness and working capital, and a new requirement forcing members to report all uncollateralized loans to other members.

In the case of over-the-counter stock market regulation, Douglas tried his best. However, the 6,000 or so O.T.C. brokers and dealers operating in 1938 were not ready to be gathered centrally, and Douglas rightfully felt it “impractical, unwise and unthinkable” for the SEC to try to regulate directly the sprawling, independent agents. He was able to keep them somewhat in line, though, with his famous line: “Government would keep the shotgun, so to speak, behind the door, loaded, well oiled, cleaned, ready for use, but with the hope it would never have to be used.” Whether Douglas actually ever had such a weapon “behind the door” was questionable. Author Robert Sobel believed that, like Kennedy and Landis before him, Douglas lacked the money, staff and power to actually carry out his threats—but his points had been well taken.

In 1939, when Justice Louis D. Brandeis resigned from the Supreme Court, Douglas asked his friends to lobby Roosevelt for his nomination. “Somewhat later,” he recalled, “I got a phone call from F.D.R., and, when I got to the White House, I thought he was going to draft me as chairman of the Federal Communications Commission, which was then in terrible trouble. He teased me a bit for five minutes and then offered me the Court job.” Douglas was confirmed by the Senate by a vote of 62 to 4—at 41 becoming the youngest Justice since 1811, with the dissenters thinking he was a Wall Street reactionary! During his stint on the Court, the New York Times said Douglas “championed the right to dissent.” Before retiring in late 1975, he wrote important decisions in bankruptcy, rate-making, mergers and securities law.

Douglas, an ardent free-speech advocate, was later criticized for publishing an article about conservationism in Playboy, speaking out against the Vietnam War and condemning the government for what he called its witch hunts for Communists in the 1950s. Even his personal life was condemned, as he was married four times to progressively younger wives. His first marriage, during which he had two kids, lasted from 1924 to 1954 and his second, nine years. His third marriage was to a 23-year-old in 1963. In 1966, less than a month after divorcing number three, he married a 23-year-old blonde-haired, blue-eyed college co-ed at age 67! I guess he really was liberal. By the way, that was two years before he got his pacemaker installed!

Some say all of his regulatory success regained investor confidence and paved the way for the post-World War II, 1950s bull market. Others, particularly Wall Streeters of his day, thought all his actions just beat the devil out of anybody’s urge to speculate, which paved the way for the doldrum markets of the 1940s. It depends on with whom you talk. Liberals saw Douglas as a champion who busted the bad guys—and conservatives simply saw him as a liberal scalawag. Who knows how his four wives saw him. This author tends to believe that laws have a big impact on Wall Street in the short to intermediate term, and only cosmetic impact in the long term. Douglas clearly made a big impact. Do we still feel it today? That is less clear. Yet someone had to finish off the Democratic Party’s initial assault on Wall Street, and Douglas was just the man to do it.