The Hellhound of Wall Street

Pecora was already there when Mitchell, nicely tanned from his Bermuda trip, strode briskly into the room surrounded by his retinue of lawyers and bank assistants, the latter hauling the stacks of documents the committee had subpoenaed. It was a tremendous display of legal firepower. Flanking Mitchell were the two partners from Shearman & Sterling, Guy Cary and Garrard Winston. With them was James Harry Covington, a former congressman and founder of the powerhouse Washington law firm that bore his name, Covington & Burling.

This was the first time that Pecora and Mitchell had met face-to-face and, like many before him, the New York lawyer was struck by Mitchell’s powerful appearance and brash self-assurance. Mitchell towered over the pocket-size Pecora. With his thick neck, firm jaw, and iron-gray hair he had the air, in the words of one of his salesmen, of a “commanding officer,” a man “of indomitable will . . . who would not surrender.” Pecora professed not to be intimidated by the legendary banker. He claimed that he never was “consciously overawed by being suddenly brought among persons whose names meant something,” despite his teenage attempts to glimpse J. P. Morgan. “[T]here were many persons who may have been considered great by large segments of the public, and who have turned out to be stuffed shirts. I found a number of those in the course of my investigation.” That assessment had the benefit of thirty years of hindsight. It is hard to imagine that Pecora was totally free of trepidation as he stood there that morning, and word was that many of his meals of late had gone untouched.²

When we see congressional hearings today the legislators are invariably arrayed behind a large, curved dais. The witnesses sit at a small table set in the well and the spectators are in the chairs at the back, very much like a courtroom. Room 301, however, was configured much differently in 1933. In those days there was no dais; instead, a large, baize-covered mahogany trestle table occupied the center of the room. The senators—sometimes as many as a dozen but at other times only one or two—sat around the long table. Pecora was to Norbeck’s right, a cigar, ashtray, and matches in front of him and a glass of water within easy reach. There was nothing separating the senators from the witness; Mitchell was right there at the table, senators on either side of him and Pecora across the way. Mitchell’s lawyers were sitting just behind him. With all the reporters, assistants, and spectators crowded around the perimeter of the room, it felt less like a trial and more like theater in the round.³

The room looked much as it did for the Insull hearings, with one glaring exception—the photographers were gone. Pecora, whom many accused of sensationalizing the hearings, had banned them, concluding that they had been disruptive and “disconcerting” to the witnesses. “There is no reason,” he later said, “why a person who takes the stand in response to a subpoena should be subjected to any of the unpleasantness beyond that which might be embodied in the examination itself.” While that ban may have protected the witness, it had another benefit as well—it was now much harder for senators to mug for the camera.⁴

Although Pecora may not have been intimidated by Mitchell, it was clear that he faced a formidable task on that small stage. Bankers had certainly taken their lumps since the crash. Membership in the Investment Bankers Association was plummeting about as fast as the stock market indices as firm after firm collapsed. Those that remained found their already tattered reputations disintegrating even further for their failure to uncover the Kreuger & Toll fraud, for selling Insull securities, and in the face of the worsening banking crisis. Indeed, just that morning, Federal Reserve officials in Chicago reported that the city’s banks would have to close before the week ran out if public calm could not be restored. By the afternoon, Cleveland bankers were reporting that withdrawals were increasing at an alarming rate and they asked the state’s governor to declare a statewide holiday. New Jersey passed an emergency law authorizing state banks to require a ninety-day notice for withdrawals, and the Guarantee Trust Company of Atlantic City immediately put limitations in place. The reverberations from Michigan were spreading.⁵

Still, as far as the public was concerned, the worst problems remained at regional banks. City Bank was still considered a fortress, its balance sheet “the envy of every bank in the United States.” Men like Mitchell, the leaders of the largest New York banks, and the banks themselves still retained at least some vestiges of the aura of invincibility that surrounded them at the height of the market bubble. “The prestige and reputation of these institutions,” Pecora wrote, “was enormous. They stood, in the mind of the financially unsophisticated public, for safety, strength, prudence, and high-mindedness, and they were supposed to be captained by men of unimpeachable integrity, possessing almost mythical business genius and foresight.”

Indeed, it was that image more than anything else that City Bank had been selling for the past fifteen years. National City’s advertisements told investors that they could have confidence in the reliability and integrity of City Bank and its securities affiliate. From their first days in the company’s bond-selling class, neophyte salesmen “were sold good and hard, all day long on the soundness—if not infallibility—of the wonderful old institution we were going out to represent. . . . We were told to sell the Institution to people first and then it would be easy to sell them securities.” Over the next few days, Pecora had to prove to the American public that the bank’s sterling image was and always had been a mirage.⁶

It was not going to be easy. Pecora still knew very little about the inner workings of Wall Street. Nonetheless, he had several distinct advantages over previous counsel. Most important, he had done his homework on City Bank; he was far more thoroughly prepared than he had been for Insull. He was also much more comfortable after his earlier trial run. Sure, he would have liked to interview Mitchell and the other witnesses at least once before the hearing. Without those interviews he would have to improvise, but that didn’t bother Pecora. He was incredibly fast on his feet from years in the courtroom and years of extemporaneous stump speeches for Tammany Hall. In fact, the prospect of jousting with Mitchell on the fly “exhilarated” him.

The only continuing unknown was the senators. In a criminal trial, Pecora commanded the floor and he had nearly total control over the flow of testimony during his examinations. Here, the senators could jump in at any time. At their best, the senators functioned almost like a Greek chorus, commenting on the significance of the facts Pecora had just pulled out of a witness. At their worst, they just got in the way. Pecora saw it during the Insull hearings—senators like Robert Reynolds awkwardly and ineptly trying to score debating points or grandstanding for the assembled reporters. Maybe there would be less of that now that the cameras were gone, but Pecora couldn’t be sure.⁷

The lawyer also had no shortage of inspiration on that late February morning. Success would mean enormous acclaim, the continuation of the hearings into the next Congress, and a good chance that the federal government would finally regulate the financial markets. There was another motivation as well. Since the committee’s announcement in late January that it would investigate City Bank, Pecora and Norbeck had received hundreds of letters from former customers and investors, all with tales of ruin from following the bank’s advice. To be sure, many of those letters hardly qualified as inspiring. Some were from obvious cranks and spun wildly implausible conspiracy theories. A fair number were angry and spiteful, urging Pecora to “go after these unscrupulous crooks with gloves off.” Many suggested that Mitchell needed to go to prison (preferably one with hard labor) and one thought that having a “few Bankers shot at Sunrise” might be in order.⁸

Other letters, however, contained incredibly moving tales of personal and financial loss as well as severe economic deprivation. Years later Pecora recalled how important those letters had been to him during the course of the investigation. They came from people who had been utterly devastated by investing with City Bank and who were barely hanging on as the economy tumbled into the abyss. Many mentioned Mitchell by name, painting him as an incredibly callous man, indifferent to the losses they had suffered.

Helen Kirst, a widow from San Francisco, told a tale that was repeated again and again in that thick file of letters. The bank’s sales force convinced her to sell her portfolio of safe government bonds in order to buy the bank’s stock, which they assured her was not only safe, but would yield her a much better return. “Naturally believing them to be honorable and a bank of highest standing and integrity I was [gullible].” The longer she held the stock the more nervous she became. She repeatedly asked the local manager to sell the City Bank stock and he repeatedly refused to do so. When the stock collapsed she was left penniless and she wrote Mitchell to complain. Mitchell wrote back a short reply. He was, he claimed, “sorry” that she had lost money, but it was really her own fault. After all, she “shouldn’t have gambled.”⁹

A. H. Nicander from Douglaston, New York, also trusted the bank and its affiliate. “The fact that the National City Co. is a subsidiary of the National City Bank, one of the largest banking institutions in the country, led me to believe that any issues sponsored by them was [sic] of unimpeachable security,” he wrote. “I am one of the army of unemployed, having had that status for almost three years, have three dependents, have come to the end of my resources and am attempting to obtain relief work. I had faith in the industries of the country and invested the larger part of my savings in them, and due to this faith I have now been reduced to indigency.”¹⁰

And then there was Christopher Lane, an elderly Brooklyn man. “I am writing this from McGrath’s Funeral Parlor [in] Brooklyn,” he told the investigator. “My wife is lying in her casket in the next division. She died of pneumonia. Had I hoarded my $10,000, I could have taken her to the South for the winter. . . . When you see Mr. Mitchell, you might ask him if it comes within your jurisdiction, why his Company or Bank, so trusted, could palm off such poor stuff on an old retiring teacher.”¹¹

Pecora needed to begin to tell those stories to two related audiences that day. The first was the flagging members of the committee. Other than Norbeck, most of the senators still seemed to have little enthusiasm for continuing the investigation, especially with the congressional session ending in less than two weeks. If the investigation were to continue into the next Congress, Pecora would have to convince those indifferent senators of one of two things: either that investigating Wall Street was necessary in order to implement crucial reform legislation, or, if nothing else, that it was great publicity for them amid the ever worsening economic crisis.

The other audience was, of course, the cadre of reporters in Room 301 and, just as important, their readers across the country. As hard-bitten as many of the reporters seemed, they were, after all, not immune to the devastation around them. “I come home from the hill every night filled with gloom,” one Washington reporter wrote in his diary. “I see on streets filthy, ragged, desperate-looking men, such as I have never seen before.” After the Insull hearings, Pecora knew the way to make his case was not to dwell, at least on that first day, on the minutiae of complex securities transactions. There would be time for that kind of testimony in the coming days.

Instead, his initial focus had to be money, favoritism, inequity, and privilege. If he was going to succeed in puncturing that aura of invincibility surrounding the bank, he would have to show that Mitchell and his fellow officers were greedy men who cared little about the consequences of their actions and thought that they were above the law. If he could tell that kind of simple morality tale, he could create the kind of outrage he needed, the kind of outrage that would enable him to plumb more arcane securities matters, to continue the investigation into the next Congress, and, perhaps, to provide a bit of vindication for Mr. Lane and the others. As Frances Murphy, another elderly widow, put it in a letter to Pecora, “I can only hope that it will be within your power to make the offenders realize the extent of their guilt and that justice, in some form, will be accorded to the innocent, and ignorant, depositors.”¹²

Pecora knew he needed to make a splash that day, but he still started slowly, easing into the examination by quizzing Mitchell about the organization of the bank’s securities affiliate, the entity that allowed it to engage in the kind of investment banking functions otherwise forbidden at nationally chartered banks. The friendly, cooperative pose that Mitchell struck with Pecora in their first phone call had vanished, replaced by a tone that was both arrogant and condescending. He had the manner of a powerful man irked at wasting his time on a mundane and insignificant task. When in the first few minutes Pecora asked him when the agreement organizing the affiliate was prepared and when it became effective, Mitchell responded dismissively: “I assume that it did at the time of the organization, Mr. Pecora. I can not conceive it as being otherwise, but I would have to look it up.”¹³

Pecora was unfazed; he had handled countless hostile witnesses before. In fact, Mitchell’s arrogance and disdain were precisely what Pecora wanted to show. So he continued to ask more detailed questions about the affiliate’s organizational structure and the relationship between it and the bank. Mostly, Mitchell claimed not to know the answers; he had not “refreshed” his memory about those matters. Pecora saw it differently; he thought Mitchell was “not giving evidence of complete candor.” Perhaps that was so, but it seems more likely that Mitchell considered this just one more tedious visit to Congress, one that would require little preparation since the others had gone so well. When Pecora pressed him for answers, Mitchell would simply turn to Garrard Winston. Winston would check the assembled documents or consult with the bank employees in attendance and whisper the answer to the banker, and Mitchell would repeat it for the record.¹⁴

As this laborious process was repeated, it became clear that the bank’s lawyers were still attempting to run out the clock. They told Pecora that due to an inadvertent “oversight,” the minute books for the securities affiliate had not been brought to Washington. That oversight claim is hard to accept. Pecora had spent hours with those books at Shearman & Sterling and they were at the core of the investigation. A few days earlier, one of Pecora’s assistants had specifically instructed the bank’s lawyers to bring them to the hearing. These were supposed to be the best lawyers in the country. They simply forgot to bring the documents to Washington?¹⁵

In the first hour that morning Pecora’s deliberate pace, Mitchell’s vague grasp of details, his constant hushed conferences with his lawyers, and the missing documents all slowed the hearing to a crawl. A journalist who sat through the hearings described “the monotonous flow of questions and answers” during these slack interludes as “like the mumbling of bees pecking at the flowers in a summer garden on a sultry afternoon.” The reporters were bored and the senators were getting antsy; they wanted drama and, so far, they weren’t getting any. Of course, Pecora had a purpose—before he got too confrontational with Mitchell he wanted to lay a foundation for questions he would ask later on in the hearings. It was what a careful lawyer did. The senators, on the other hand, wanted to cut to the chase, and so Senator James Couzens, the white-haired and jowly Michigan progressive, decided to jump in.¹⁶

In some ways, there was no one in the room more qualified than Couzens to question Mitchell. Many politicians are business neophytes, but not James Couzens. He was one of Henry Ford’s original partners and the former general manager of Ford Motor Company. He had helped build the company from the ground up, and there were more than a few knowledgeable observers who gave Couzens as much credit as Henry Ford for the company’s success. Like Mitchell, Couzens had even built up a nationwide network of salesmen, although they sold Model Ts instead of stocks and bonds. After a decade of building Ford into one of the largest corporations in the country, however, Couzens had grown restless. “There comes a time,” he told an interviewer, “when the fun of making money is all gone. . . . The battle is won; the goal is achieved; it is time for something else.” It was a sentiment that Mitchell never came close to uttering. Ford and Couzens had famously split a few years later, with Ford buying out Couzens’s stake. That made Couzens a multimillionaire, by far the richest man in the Senate when he arrived there in 1922.¹⁷

In his public life, Couzens espoused a simple philosophy, one that seemed diametrically opposed to Mitchell’s. “I want,” Couzens explained, “to do what I can to see that life is not made a burden for the many and a holiday for the few. I want to do that which will contribute the greatest good to the greatest number.” That statement was more than just empty political rhetoric. Couzens’s most famous act at Ford was his crusade for a more equitable sharing of profits between the shareholders and employees. He instituted a plan that reduced the hours of Ford employees while at the same time raising the company’s minimum wage to the then unheard-of amount of five dollars a day.

Couzens was well aware of how bad things were in the country. As a result of his great wealth and prominent position, he was inundated with letters from people asking for small gifts, most of which contained harrowing stories of distress. Each received a courteous and sympathetic reply explaining that the senator confined his giving to charitable organizations, and he was as good as his word. He gave away nearly $30 million of his own fortune to provide indigent children with health care. Accounting for inflation, Couzens’s philanthropy put him on a level of generosity equal to the gifts of Bill Gates and Warren Buffett.¹⁸

In the Senate, Couzens quickly became a thorn in the side of the rich and powerful. He famously battled Andrew Mellon in the mid-1920s over the Treasury secretary’s plan to reduce income taxes on the wealthiest Americans, an early iteration of “trickle-down” economics. Couzens actually thought the government should raise their taxes, and his opposition to Mellon’s proposal led him to investigate the Internal Revenue Bureau, an inquiry that publicized a host of tax loopholes. Couzens’s high-profile investigation of a Treasury Department bureau incensed Mellon. In retaliation, he authorized a tax suit against Couzens, claiming the senator had underpaid his taxes when he sold his Ford stock. Much to Mellon’s chagrin, the suit showed that Couzens had actually overpaid. There was a hint of the lingering animosity over that episode in the hearing room that morning. Garrard Winston previously worked at Treasury for Mellon. In the Washington-Wall Street revolving door at the time, Winston was named a director of the affiliate the day after he left Treasury, in 1927. While still in government, Winston had publicly defended the retaliatory tax suit against Couzens. At one point in the hearings that morning, Winston was giving so much assistance to Mitchell that Couzens asked if he was a City Bank employee, and proposed that the committee could make everybody’s life easier if they just put Winston directly on the stand. The Shearman partner simply winked at Couzens and went back to advising Mitchell.¹⁹

Like other midwestern progressives, Couzens had long been a critic of Wall Street. As early as 1928, Couzens warned President Coolidge that Wall Street was headed for disaster. Couzens possessed a rigid moral code and firmly believed in conservative commercial banking. Banks, he thought, took in deposits and made short-term loans. They shouldn’t be stock and bond promoters. Couzens couldn’t help but believe that had business leaders acted less recklessly and more ethically, the crash might have been avoided. Because of these and other progressive views, Couzens was accused of being a radical. Some called him a “scab millionaire” and, like Roosevelt, a traitor to his class. His response was straightforward: “Yes, I’m radical as hell when I see an evil that ought to be ended.”

As he sat in Room 301 that morning, Couzens was exhausted. He was in the thick of the frantic efforts to prop up the collapsed banks in his home state. Indeed, it was Couzens’s rivalry with Ford that helped spark the Michigan bank closure in the first place. Couzens, who had been investigating improper RFC bank loans, insisted that Ford subordinate his substantial deposits in a Michigan banking group as a condition for the RFC loan that would have kept the banking group open. Ford refused and threatened to withdraw all his money from Detroit banks, a move that would have precipitated a full-blown panic. It was then that Michigan’s governor stepped in and declared a holiday. The senator was under most circumstances belligerent, blunt spoken, and downright crotchety. “I’ve never known a man,” one contemporary remarked, “whom you could count on to be unpleasant to the extent that you could him.” Couzens relished a good fight, and now, a week after his confrontation with his former business partner, the already caustic business critic seemed even more ornery. With the banks back home shuttered—in his opinion because of the dishonesty and greed of the men who ran them—and with Couzens already getting heat in the press for the role he played in the Michigan crisis, the senator appeared to be in no mood for coddling bankers, especially prominent ones from New York.²⁰

While Couzens undoubtedly had the business stature to challenge Mitchell, he was not a lawyer, and his initial attempt to quiz the Wall Street banker was inept. Couzens wanted to talk about how the affiliate made all its money. When a corporation sells securities to the public, in most cases it doesn’t do so directly. The corporation retains an investment bank and sells the securities to it. The investment bank is essentially a wholesaler; it turns around and sells those securities to investors at a somewhat higher price, profiting on the markup. Peering at the banker seated across the table from him through his large round glasses, Senator Couzens asked how City Bank went about determining the difference between those two prices, known as the “spread.”

Most likely Couzens just wanted to make Mitchell squirm, but Mitchell was not a man who squirmed easily. If, instead, it was an attempt to get an admission out of Mitchell, it was a terribly clumsy one. Whatever else Mitchell might have been he was far from dumb. One of his associates wrote that when he met with Mitchell, what struck him most was that his “remarkable mind functioned as a huge machine. I could almost see it spinning as a great wheel in a Power House.” Senator Couzens’s question didn’t trip up the banker for even a moment: “I would not grant your expression, gullibility of the public.” Mitchell then carefully and patiently explained the many factors that went into determining a spread: “I think you will grant very readily, Senator Couzens, that there is a great deal of difference between selling, for instance, a bond of the State of New York and selling a bond of the primest [sic] of our railroads. Sales requirements, methods of distribution, are very different, and different in their cost, and that is all represented in the spread.”²¹

If Pecora was chafing at the senators’ amateurishness, he didn’t show it. He stuck with his plan. A good showman knows that you have to leave the audience wanting more. And, as the lunch break approached, Pecora appeared to want to leave the assembled reporters with something juicy to write about. It was time to establish Mitchell’s motive for pushing the affiliate to churn out $20 billion in securities in the ten years before the crash (nearly $3 trillion in today’s dollars).²²

Pecora asked Mitchell about the management fund—the bonus pool at the bank—and what it was designed to do. Mitchell was more than happy to explain; indeed, he seemed eager to demonstrate how clever he had been to devise it. The securities affiliate wasn’t really a commercial bank, he informed Pecora, it was an investment bank and it “selected as its executives men who would normally be of the type to hold partnerships in private banking and investment companies.” Those private partnerships were “extremely lucrative,” and for City Bank to compete with them it had to offer the executives of its affiliate “some share in the profits that they should make.”

Mitchell’s explanation was more than just incomplete; it simply didn’t make sense. The management fund, as Pecora quickly showed, applied not just to the employees at the affiliate, but also to the commercial banking executives. That, and the generalities of Mitchell’s answer, raised a host of questions. What incentives did the management fund create for those executives and were those incentives the right ones for a bank that was a “quasi-public” institution? If City Bank was attracting executives who would normally “hold partnerships in private banking and investment companies,” how would their different investment approaches and greater appetites for risk change the bank? What did the shareholders know about the operation of this bonus pool? How big was “some share” of the profits?

From his investigation, Pecora had a pretty good idea what the answers to those questions were. Now, he continued to grill Mitchell on the details of how the bonus pool operated. What was immediately apparent as Mitchell spoke was that his conceptions about appropriate compensation were radically different from those of the average American. He explained that to properly incentivize his men their salaries “were held at what was regarded as a low figure,” just $25,000. That low figure was more than twice what Pecora made in his best year and thirty-three times the average annual income in 1929.

The primary compensation for Mitchell and the other officers was the management fund. After deducting an initial 8 percent return for the shareholders, the officers collectively shared 20 percent of all the remaining profits. In broad strokes, City Bank’s management fund looked similar to compensation in hedge funds today, and for Pecora, it provided the same incentive for excessive risk taking. In fact, it might have created even greater incentives for risk. A hedge fund typically collects 20 percent of all profits, but the executives at City Bank had “nothing to gain and everything to lose, individually, by a conservative policy” because their profit sharing did not kick in until the bank had crossed that initial 8 percent threshold.

There was another factor, as well, that pushed the executives to ever riskier securities offerings. Every year it took more and more sales to get the management fund into the black. Mitchell was continuously expanding his far-flung securities-selling network. By 1929 it had offices across the country linked by the latest information technology of the day. The overhead on the system was enormous, and City Bank had to sell larger and larger amounts of securities just to break even. “I say without fear of contradiction,” the former City Bank salesman Julian Sherrod wrote, “that hundreds of millions of dollars have been lost through investments that were originated primarily to pay operating expenses of a large, expensive and unnecessary system of distribution.”²³

Payments out of the management fund were made twice a year, so the executives eligible to participate in it had incentives to focus on short-term profits, not long-term performance. As Pecora had Mitchell spin out the details, Senator Couzens was nonplussed and jumped back into the questioning, this time much more effectively. Couzens had authorized his fair share of bonuses back at Ford. Bonuses in and of themselves didn’t bother him. What bothered him, especially given his deeply ingrained suspicion of financiers, were the incentives these particular bonuses created. “And, as you look at it in retrospect,” the senator asked Mitchell, “do you think that was a good system to set up for a financial institution?”

That scornful gibe worked, because it made a simple and powerful point about Mitchell’s testimony. Mitchell had originally pitched his bonus plan as a way to “concentrate the attention of the officers upon service to the institution.” Later, his justifications for the bonus system spoke volumes about his own personal motivations. “Unless the man of energy and perhaps ability,” he said, “can see within the organization for which he is working a point that he can possibly reach that has great material benefit attached to it, I say unless he can see that his work is going to be somewhat . . . dulled.”

Couzens and Pecora saw it very differently. The officers at City Bank were paid potentially enormous amounts, but only if they were able to sell vast amounts of securities. And, since they did not bear the cost of securities that went down in value, they had incentives to sell as many securities as possible, even if they were of dubious quality. The affiliate, Pecora wrote, was “a gigantic, foolproof device for gambling freely with the stockholders’ money, taking huge profits when the gambles won, and risking not a penny of their own money if they lost.”²⁴

To be sure, the institution as a whole might be concerned about preserving the reputation that it was trying so hard to sell to investors. After all, every failed deal that City Bank pawned off on its customers tarnished that reputation a little bit more, presumably making it that much harder to make the next sale. But with bonus checks calculated every six months and the market booming, such long-term considerations were probably only distant, fleeting thoughts to the average City Bank executive, if they occurred at all.

All of these disclosures were clearly rubbing Couzens the wrong way, so the truculent senator pushed his point even further. “I understand,” he said, “you have quite a national reputation as a salesman and a financier, both. . . . Which are you, a better salesman or a better financier?” It was classic Couzens, confrontational and in-your-face. Mitchell tried to shake it off. He smiled and asked whether Couzens thought that was a fair question. Couzens, never one to back down, said he thought it was and that he would be willing to answer it himself.

Now it was Pecora’s turn to jump back into the questioning. He cleverly played off Mitchell’s reluctance to describe himself as a salesman to lay a trap for the banker. Mr. Mitchell, he asked innocently, since the affiliate was primarily in the business of selling securities, didn’t he earn his salary more as a salesman than as a financier? Mitchell, as expected, again denied he was just a salesman. In his “loftiest moral tone” Mitchell explained to Pecora that City Bank did not just sell securities, it “manufactured” them.

But Mitchell stuck with it; he had been describing City Bank’s business in these terms for years, a fact that Pecora surely knew as he questioned the banker that morning. “It may be in your mind Senator Couzens,” Mitchell reiterated. “At the same time, that has an analogy that I do not consider amiss. A large part of the business of the National City Co., and a large part of the executive brains, is devoted to the development of long-term credits suitable for public investment.”²⁶

According to Mitchell, City Bank’s job was no different than Ford’s. It didn’t manufacture cars; it manufactured another kind of consumer product—investment securities. And not just any securities; City Bank “manufactured” securities that were “safe and proper” for investors. It was the same rhetoric City Bank used in its sales training classes and in its advertisements. Trainers told the new recruits that the company had its own “yardstick” by which it measured the quality of its offerings. That yardstick, the trainer assured his class, “would never be shortened.” The company’s advertisements touted its “sound securities,” which were offered to the public only after they had been thoroughly investigated by its expert staff. It was a claim that Pecora intended to test over the course of the hearings, and Mitchell’s boasts about creating only securities that were “suitable” for its customers gave Pecora a great launching point for that inquiry. Indeed, this little bit of testimony would come back to haunt Mitchell and the other City Bank executives in week two of the hearings as Pecora marched them through the long list of securities that City Bank thought fit that criterion.²⁷

Just before the noon lunch break, it was time for Pecora to show just what City Bank’s compensation scheme meant to Mitchell’s bottom line. He first wanted to know how Mitchell and the others divvied up the management fund. There were some minor differences between the bank and the affiliate, but basically it was done in two ways, Mitchell said. The board’s executive committee allocated half the fund, deciding the share each executive would get based on his value to the company. Since Mitchell was a member of that committee, he had a strong hand in determining his own bonus for the year. It was an enormous conflict of interest. For the second half of the fund, however, Mitchell tried to cast himself as an enlightened business leader. Mitchell gave his subordinates the opportunity to anonymously vote on his share. “I do the rather bold thing of placing myself on a pedestal,” he proclaimed, “where the officers can throw all the stones that they will at me without my knowing from whom the stone comes, and I take their final net as the maximum which I will receive.”

While Mitchell may have considered himself enlightened, it is not entirely clear that Mitchell’s subordinates relished the opportunity to throw those stones, a point that Pecora was quick to make. Mitchell had “a voice in fixing the apportionments” of the management fund that the bank awarded to his stone-throwing subordinates, didn’t he? Mitchell conceded he did, but maintained that he did not know how they voted for him. That promise of anonymity, however, may have been small solace to Mitchell’s underlings. Mitchell was famously autocratic, ruling the bank by fear and the constant threat of dismissal if someone’s performance dipped.²⁸

When his subordinates anonymously voted on Mitchell’s share, they signed a ballot indicating what share they thought their fellow executives should get of the remaining fund. It probably would not have been very difficult to match up the anonymous ballots with the signed ones. In constant anxiety about the security of their own jobs, were Mitchell’s subordinates confident enough in the anonymity of the process to vote Mitchell the share they thought he really deserved? It is hard to know today, but each year Mitchell took home about 40 percent of the bank’s management fund and about 30 percent from the securities affiliate. “Mitchell,” Pecora wrote, “asked for stones, but was given bread.”²⁹

How much bread did he end up with? Through the management funds and his “low” salary, City Bank paid Mitchell over $3.5 million from 1927 to 1929. It is hard to even contemplate what those numbers must have sounded like to the people gathered in Room 301. Pecora was making $255 a month as counsel for the committee. The senators were earning $9,000 a year, congressional pages about a tenth of that amount. Newspapers had cut reporters’ salaries in half as they began to feel the economic squeeze. Factory workers, if they were lucky enough to have a job in February 1933—unemployment in the manufacturing sector was 45 percent—were making about $17 a week. If you were able to get relief in New York, you could expect to get $10 a week. Even in the bubble years, Mitchell’s income put him in rarefied company. Of the four million or so tax returns filed each year from 1927 to 1929, only a few hundred had income above $1 million. Measured in current dollars, Mitchell earned nearly a half billion dollars in those three years.³⁰

Senator Brookhart, the progressive Republican from Iowa, who had been largely silent during the morning, was shocked. “Congress is making a big noise about reducing the salaries of these $1,600-a-year Government clerks. Would not it be a good idea for them to consider regulating the salaries of these national-bank presidents, first?” Mitchell wisely avoided answering. “That is something,” he said, “you will have to answer yourself.”³¹

But regulating salaries was not what Pecora was after. Just before the chairman called the noon recess, Pecora spelled out precisely the point he was trying to make in case anyone in the room had missed it that morning. It wasn’t just shock value, although that was certainly part of his calculus. Pecora was trying to show, as Senator Couzens had suggested earlier, that the bonus plan created inordinate incentives for “unwise security selling methods, and unwise and unsound banking methods.”³²

After lunch, Pecora returned to the kind of factual details he started off with in the morning session. As the hearing went on, it became clear to Mitchell that this appearance before the committee was radically different from his earlier one, and that Pecora was a lawyer far different from Gray. As Pecora asked one precise and detailed question after another, he gradually saw a change in Mitchell, who, as he later recalled, “seemed to be wondering where I got the information from upon which I based these questions. I don’t know whether he had been told . . . that I had spent three days from morning till midnight examining these minute books.” Mitchell thought someone had given Pecora “a lot of inside information,” and so as the hearing wore on, Mitchell became more frank and candid in his answers. He had no choice; Pecora already knew what he would say. Indeed, by the afternoon Pecora must have known that he couldn’t have asked for a better witness than the “self-confident” Mitchell, who “was convinced of his own integrity” and seemingly clueless about the impressions his answers made.³³

Two significant disclosures dominated the early part of the afternoon. Pecora stuck with his questions about the management fund, this time focusing on 1929, the year of the crash. The securities affiliate made its initial profit distribution to executives in July, as the stock market continued to boom. The October crash wiped out those profits and the executives should have been entitled to nothing for the year. But Mitchell, who had again taken the lion’s share of the fund, recommended to the directors that he and the other officers be allowed to keep the money they had received in July. They would just call it an advance on future bonuses.

Would it “not have been fairer to the company,” Pecora asked, “for [the officers] to have made a refund?” Mitchell refused to concede the point. He tried to argue that the executives were entitled to keep the money despite the affiliate’s losses for the year. What about those “advances”? Pecora queried. Did Mitchell or any of the other executives have their subsequent bonuses reduced because of the advances? Mitchell had no choice but to admit that there had been no profits in the past three years and, he was “sorry to say,” no prospects for any in the current depression. Calling the distributions advances thus “proved a very inexpensive gesture.” Mitchell and the other executives never returned any of that money, showing about as much regard for their duty to the shareholders of the bank, whom they theoretically worked for, as for its customers. Indeed, as would become apparent in the next few days, Mitchell never even saw fit to disclose to the bank’s shareholders just how much he and the other officers were taking through the management fund. Why should he? “Mr. Mitchell’s whole attitude,” Pecora wrote, “was not that of the servant, but of the master, of his institution.”³⁴

In the afternoon, Pecora also began to lay out some of the unwise securities-selling methods this compensation scheme created, focusing first on the slim information City Bank typically provided to investors. The former Bull Moose progressive was adhering closely to the progressive playbook. Other People’s Money, Louis Brandeis’s then two-decade-old chronicle of the Pujo investigation, advocated increased disclosure as the best way to clean up Wall Street abuses. “Sunlight,” the future Supreme Court justice wrote, “is said to be the best of disinfectants; electric light the most efficient policeman.”

If investment bankers had to disclose not only their fees but also all the material information about the securities they offered, investors would be adequately equipped to make up their own minds about what to buy and what to shun. Like much of progressivism, it was a modest and moderate reform. The government would not be in the business of deciding what securities were safe enough to sell. Disclosure was simply an attempt to make the market for securities function more efficiently. It was also the reform Roosevelt pushed during his presidential campaign. Perhaps burned by some of his own investment failures, Roosevelt once described stocks as “a package too often sold only because of the bright colors on the wrapper.” Candidate Roosevelt proclaimed that federal law should “let in the light.”³⁵

To make this point, Pecora returned to the spreads that Senator Couzens had brought up in the morning session. Spreads were a focal point in Brandeis’s critique and now Pecora walked Mitchell through a standard bond sale. In a hypothetical deal, City Bank would buy a bond with a face value of $100 from the issuing company for $90, and then sell that bond to investors for $97.50. So, in a $10 million bond issue, City Bank would immediately pocket $750,000. Did the affiliate, Pecora wanted to know, tell investors about the spread?

The answer, of course, was no; City Bank never told customers what it was making on the deal. Nor, for that matter, did any other United States investment bank. Mitchell, who viewed securities selling as no different from any other form of retailing, was “perplexed” at the point Pecora was making: “If I go in and buy a pound of coffee there is no indication as to what the grocer paid for it and what profit he got for it.”

Mitchell had to agree; he had been saying the same thing for years. The company’s customers knew very little about the securities it offered and the firm encouraged investors to rely on its “experienced advice.” So, Pecora asked Mitchell again, did he think buyers should have information on spreads? Mitchell was at least candid: “I have been unable myself to really see the desirability of it.” He did claim that he thought investment bankers “ought to work toward giving additional information to the public. But whether [information about spreads] is pertinent, whether it is something that would really aid a buyer to determine the true intrinsic merit of that which he buys, I must say I am very much in doubt.”

Mitchell remained unconvinced. “I do not consider that spread is pertinent information. Maybe it is.” It was, in other words, a mystery to this Wall Street tycoon why a customer, trying to evaluate the advice it was getting from City Bank, would care about the company’s profit margins on the various securities it offered. Wouldn’t the company have an incentive to push the securities on which it stood to make the most money? Mitchell apparently could not, or would not, see the issue. Despite his pronouncements to the bond training class at the company that caveat emptor was not good enough for the sacred relations between the securities affiliate and its customers, that seemed to be precisely what the firm was practicing.

Mitchell was hardly alone among business and financial leaders on this score. Many of them, despite the progressive call for greater disclosure, still seemed to adhere to the contemptuous sentiments of Henry O. Havemeyer, the president of the American Sugar Refining Company. He thought that the public had no right to know anything about the internal operations of the company before buying its securities. “Let the buyer beware,” he proclaimed at the turn of the century. “That covers the whole business. You cannot wet-nurse people from the time they are born until the day they die. They have got to wade in and get stuck and that is the way men are educated and cultivated.”³⁶

Because of Mitchell’s blindness on the importance of spread information, Pecora pushed back on the banker’s claim that he was “heartily in favor of fuller information.” Wasn’t City Bank the largest investment bank in the world? “It would not have been unbecoming,” Pecora suggested, “for the National City Co. to have taken the lead in bringing about a change in custom with regard to putting out fuller information to the public?”

About eighteen months earlier, Mitchell said, and explained that City Bank had “learned much” from its mistakes during the boom years. Of course, City Bank was hardly alone in making errors: “We have all made mistakes, and a man that can not profit by it certainly is not very worthy.” Now, Mitchell repeated, the bank was trying to lead the way to a better investment banking industry: “We are trying to blaze the way for investment finance into a higher ground than it has been.”

Late in the afternoon, as the light began to fade outside, Senator Smith Wildman Brookhart, a lame duck insurgent who would be out of the Senate on March 4, decided to change topics. Brookhart was one of the most colorful characters on the Banking and Currency Committee. It was said that his ten years in the Senate had changed neither his pants nor his philosophy. Nominally a Republican, he viewed the members of the party’s right wing “old guard” as his mortal enemies, and he had long advocated “control of Wall Street.” He introduced one of the bills to criminalize short selling. A crack rifle shot, a great political barnstormer, and an “incorrigible Progressive,” Brookhart was, according to a Washington journalist of the day, “one of the best inflamers that Iowa ever produced.” Unfortunately, he was far from an intellectual powerhouse, and he knew little about the financial and banking communities that he continually railed against. Norbeck said that not only was Brookhart “the most easily fooled man in Washington,” he never even realized afterward that it had happened.³⁸

The Iowa senator had been shocked at Mitchell’s salary, and he had heard at lunch from at least a dozen of the spectators filling Room 301 that they had lost their life savings when City Bank’s stock collapsed. How much of the bank’s stock did Mitchell own, Brookhart asked, and did he sell any of it before the crash? Anyone who had done his homework would not have asked the question, at least not that way. In his defense, Brookhart had just returned from Iowa, where he had been confined to bed with a case of double pneumonia. Still, the senator had, however unwittingly, given Mitchell the perfect opening to explain how honorably he had acted toward the shareholders. In fact, Mitchell proclaimed, he was the largest buyer of City Bank stock in 1929; he had boldly stepped in to buy the bank’s stock in the middle of the crash to sustain the share price and “protect our shareholders.”

Ever the firebrand, Brookhart scoffed at that response. He accused Mitchell of being unsympathetic to the shareholders who were wiped out when the bank’s stock cratered. Forgetting or ignoring for the moment the bonuses he had raked in during the boom years, Mitchell shot right back. His response wasn’t sympathetic, it was indignant. “If anybody here in the room, or anybody that you know, has suffered a loss in gross that I have in City Bank stock, then you know somebody that I do not,” Mitchell insisted. “I, individually, have suffered a greater loss from the market failure in National City Bank stock than any other individual in the United States.”³⁹

If Mitchell was looking for sympathy or commendation, he wasn’t going to get it from Pecora. In the coming days, Pecora would reveal that Mitchell’s actions were not quite as honorable as the banker claimed. For now, however, Mitchell’s boasts about his stock purchases gave Pecora the opening he needed to throw his last bomb of the day. Pecora’s next question highlighted the real difference between the average grandstanding senator and Pecora, the skilled courtroom advocate. Brookhart had no idea what Mitchell would say when he asked his question; he only hoped the banker would be embarrassed by the answer. Pecora knew precisely what had happened when he asked Mitchell, “Well, Mr. Mitchell, did you also sell during the year 1929 any substantial portion of your holdings of National City Bank stock?”

At first Mitchell ignored the question and went right back to trumpeting his purchases. He owned more stock now than ever, he finally concluded after a long, rambling response. That kind of answer might have worked with the committee’s former counsel, but it wasn’t going to throw off Pecora. Pecora patiently let Mitchell finish his answer and then politely repeated his question. “No . . . my question was: Have you also sold very extensively of your holdings in that period or before the end of that year?”

Mitchell hedged, but finally conceded that there had been some “personal transactions” in the later part of 1929. Pecora pressed on and a few questions later, the truth tumbled out. At the end of 1929, Mitchell sold 18,300 shares of City Bank stock to establish an investment loss and then turned right around and bought the stock back for exactly the same price in early 1930. There was absolutely no economic reason for the transaction; it was a sham, done with only a single goal in mind.

No one in the room could have expected this. A cold hearing transcript rarely provides clues as to the reactions of the spectators, but there were really only two possibilities—either stunned silence or shocked murmuring. This was supposed to be a hearing about stock-selling practices, but Pecora had just succeeded in making one of the leading bankers in the country—a man of theoretically “unimpeachable integrity”—admit to what might have been criminal tax evasion. The confident man who walked into the committee room irked at the banality of yet another congressional hearing was now facing the real prospect of incarceration for a personal transaction that had nothing to do with stock exchange practices, but had a great deal to do with public perceptions of his character and his motives.

Pecora didn’t want to leave any doubts about the transaction Mitchell had just admitted, so he had Mitchell spell out all the details. How big a loss did Mitchell report on just this one transaction? There was a bit of jockeying, but the number that finally came out was large even by today’s standards; in early 1933 it was colossal—$2.8 million. Yes, Mitchell admitted, due to that single transaction he did not have to pay a penny of taxes for 1929, the same year he took home $1.1 million in salary and bonuses. Pecora had just one final question: “By the way, that sale of this bank stock that you referred to in the latter part of 1929 was made to a member of your family, wasn’t it?”

Pecora was gentleman enough not to disclose that the member of Mitchell’s family on the other side of this trade was his wife, Elizabeth. The portrait of a greedy banker willing to use any artifice to hang on to every cent of his enormous salary was now complete, and Pecora had Norbeck adjourn the hearings for the day.

It was all over before five o’clock. In a little more than four hours of testimony, Pecora, in concert with the senators on the committee, had managed to punch some gaping holes in the veneer of invincibility and respectability surrounding City Bank and in the unimpeachable integrity of Charles Mitchell. Mitchell and his associates were not dispassionately looking out for the interests of depositors, securities customers, or even the bank’s shareholders. Pecora was understated when he described their motives in his memoirs; they had, he said, “a lively interest in their own financial profits as well.” In truth the picture Pecora painted on that first day of testimony was of a corporation run with only a single purpose in mind—to maximize the financial returns of its officers, especially its chairman. Nothing else seemed to matter. Not the shareholders, who were kept in the dark about how much the officers were raking in; not the customers, who trusted the institution to provide them with sound financial advice; and certainly not the federal government, whose tax bills could be easily evaded with a couple of ledger entries.⁴¹

If Pecora’s goal was to create outrage, he succeeded magnificently. The only thing dividing most newspapers was which part of the testimony was more outrageous. The Washington Post went with the bonuses (the paper ran the line “Huge Pay Told” over Mitchell’s picture). For the New York Times, it was the taxes—“Mitchell Avoided Income Tax in 1929 by ‘$2,800,000 Loss,’” its headline read. Given Mitchell’s prominence, the most common reaction was surprise and shock. “Charles E. Mitchell, president of the National City Bank, and a man who has always been held in high regard,” one paper wrote a few days later, “admits a cheap dodge to avoid paying income taxes in 1929.” The Wall Street Journal’s coverage was, perhaps not surprisingly, notably different. It thought the most significant aspect of Mitchell’s testimony was his huge purchases of City Bank stock during the crash. The Journal gave only cursory treatment to the bonuses and, as for taxes, merely buried near the end of the article that there had been “temporary transactions in connection with taxation.”⁴²

The New York papers reported the news stories, but their editorial pages were strangely silent. This was not true in the Midwest, where editors typically needed little prompting to criticize Wall Street. The Capital Times of Madison, Wisconsin, for example, praised the “strong calcium light” Pecora was shining on City Bank. The editors saw the bonuses as a “vicious accelerator” of the Great Depression. “Perhaps few things could be worse or more corrupting and insidiously devastating,” the editors wrote, “than paying officers of a bank, which underwrites extensive bond issues, a bonus. That is one institution where a bonus shouldn’t even be permitted in the front door.”

The mood in Congress was ugly. Brookhart was furious, although that was hardly a surprise since he believed that Wall Street “was the particular invention of the devil.” As he devoted more time to the Detroit banks, Senator Couzens faded from the hearings, but he was especially indignant about Mitchell’s tax dodge given his own running battles with Treasury. The idea that a business leader like Mitchell would try to avoid paying his proper taxes through this kind of ruse infuriated him.

On the floor of the Senate the next day, Burton K. Wheeler, the progressive Montana Democrat, roared, “It seems to me that the best way to restore confidence in banks would be to have them take these crooked presidents out of the banks and treat them the same as they treated ‘Al’ Capone when he avoided payment of the income tax.” Soon bankers everywhere were derided with a new nickname—“banksters.” Carter Glass, a vehement states’ rights advocate, offered his own peculiarly Southern quip: “There is a big scandal down in Georgia. The fact has just been discovered that a white woman is married to a banker.”⁴³

The previous summer, Agnes Meyer, that perceptive Washington chronicler, had expressed her anger at “New York bankers” who had “proved that they are no heroes. The wealthy classes as I have learned to know them through the depression are not much to be admired. They are overcome by fear and selfishness.” The worst were the bankers. “If the general public realized the ignorance, smallness, futility and greed of the average N.Y. banker,” she wrote in her diary, “I think they would certainly hang a few of them, beginning I hope with Charlie Mitchell.”⁴⁴