naked capitalism

Submitted by DoctoRx, who comments on the economic and financial scene at EconBlog Review.

In a few months during what was likely the worst financial crisis of the Great Depression- the tumultuous events of early 1933 culminating in closure of all banks in most states and then FDR’s sweeping bank “holiday”, a man who had previously been a relatively obscure assistant district attorney helped galvanize the public to support real reform of the financial system, met several times directly with Roosevelt to plot strategy, and made the cover of Time. Almost overnight, he became so famous that the ongoing and previously desultory Senate Banking and Currency Committee’s investigation of the Crash, of which Ferdinand Pecora had been named the fourth Chief Counsel, has ever since been known as the Pecora Commission (or Pecora Investigation) rather than by the name of the presiding Senator.

Pecora, an immigrant from Sicily and the son of a cobbler became a national sensation because of his brilliant interrogation of a series of Wall Street icons such as Charles Mitchell, head of National City (renamed Citicorp in later life) and J. P. Morgan (“Jack”, the son). His interrogation of Mitchell was so devastating that Mitchell was forced from office immediately after Pecora et al finished with him.

Roosevelt felt he needed an energized public to push through financial reforms, and Pecora delivered the goods. The Pecora Investigation is given a great deal of credit for creating the momentum for the signature legislation between 1933 and 1935 that helped save Wall Street from its own excesses. When the investigation wrapped up, FDR named Pecora to become a founding commissioner of the newly-formed Securities and Exchange Commission, which he soon left to serve as a Supreme Court Judge for the State of New York.

Alarmed by increasing aggressiveness of the financial community in pushing back against these laws, Pecora published “Wall Street Under Oath” in 1939 to aid the New Dealers’ push back against the push-back. This book, now out of print, is an astonishing “read” in light of the financial events of the past decade.

According to the charts on www.dshort.com, the current broad stock averages are down exactly as much in real terms from 2000-2009 as from 1929-38. If one adjusts for different levels of dividend payouts and competing Treasury interest rates as a discount factor, as well as tax rates, it appears that the current 9-year bear market is worse this decade than it was then. Thus this review of a book written a decade after the beginning of the Great Crash is timely.

Because “Wall Street Under Oath” is out of print and because the issues involved in the financial crisis 2007-9 and the 1990’s bubble and subsequent crashes are well-known, this review shall quote liberally from Pecora’s book and editorialize little.

The Preface, which is the only part of the book available on the Web, lays out Pecora’s purpose in writing the book:

Under the surface of the governmental regulation of the securities market, the same forces that produced the riotous speculative excesses of the “wild bull market” of 1929 still give evidences of their existence and influence. Though repressed for the present, it cannot be doubted that, given a suitable opportunity, they would spring back into pernicious activity.

Frequently we are told that this regulation has been throttling the country’s prosperity. Bitterly hostile was Wall Street to the enactment of the regulatory legislation. It now looks forward to the day when it shall, as it hopes, reassume the reins of its former power.

That its leaders are eminently fitted to guide our nation, and that they would make a much better job of it than any other body of men, Wall Street does not for a moment doubt. Indeed, if you now hearken to the oracles of The Street, you will hear now and then that the money-changers have been much maligned. You will be told that a whole group of high-minded men, innocent of social or economic wrongdoing, were expelled from the temple because of the excesses of a few. You will be assured that they had nothing to do with the misfortunes that overtook the country in 1929-33; that they were simply scapegoats, sacrificed on the altar of unreasoning public opinion to satisfy the wrath of a howling mob blindly seeking victims.

These disingenuous protestations are, in the crisp legal phrase, “without merit.” The case against the money-changers does not rest upon hearsay or surmise. It is based upon a mass of evidence, given publicly and under oath before the Banking and Currency Committee of the United States Senate in 1933-1934, by The Street’s mightiest and best-informed men. . .

After five short years, we may now need to be reminded what Wall Street was like before Uncle Sam stationed a policeman at its corner, lest, in time to come, some attempt be made to abolish that post.

Pecora then walks the reader through the high points of the investigation, much of which involves then-legal abuses. Among them was the tie-in of commercial banking with the securities business, an “innovation” pioneered by the predecessor of Citibank. He shows that the Justice Department under William Howard Taft found this practice illegal, but no one enforced it, and by the time Pecora looked for that opinion, the original document had vanished (!), leaving only a carbon copy.

Echoes abound. The House of Morgan is shown floating untouchably above the fray, whereas “Citicorp” (National City Bank/National City Corp. at the time) is the low-end villain. How much did the Commission detest National City? Here is Time magazine in “Damnation of Mitchell” from March 1933:

‘Mitchell more than any 50 men is responsible for this stock crash.’ – U. S. Senator Carter Glass, November 1929.

Last week, Charles Edwin Mitchell was brought to trial. He could not see his judges-they were that inchoate multitude, the U. S. people. Verdict (uttered in a vast mumble of expletives as evening headlines followed morning): that Charles Edwin Mitchell, as chairman of the largest bank in the U. S., had been a thoroughly wicked banker.

The trial was not the kind which is explained in any handbook of civics. It took place in the headlines and in Room 304 in the U. S. Senate office building where sits the Senate Committee on Banking & Currency. Defendant Mitchell had been charged with no crime. . . There was no attorney for the defense. There was, however, a prosecution. It consisted of 1) six to a dozen Senators and 2) a man quite as remarkable as any of the Senators, Ferdinand Pecora.

One of the Senators . . . was Virginia’s patrician Carter Glass, but, bored by Senatorial exhibitionism, he never attended.” . . .
Ferdinand Pecora, most brilliant lawyer of Italian extraction in the U. S., finished public schools at 12. At 18, after loping through his brother’s law books, he was managing clerk of a law firm. Even on the most complex cases (which he, tireless, likes best) he never needs notes, never forgets a word of testimony once it is on the record. One of his most famed convictions was that of former New York State Superintendent of Banks Frank H. Warfer for his part in the failure of Manhattan’s City Trust Co. in 1929. At 47, his black eyes flash, his black hair bristles.

Last week . . . Mr. Pecora put on the show. Banker Mitchell proceeded to say enough to damn himself to the satisfaction of the Committee, Mr. Pecora and a large part of the U. S. people . . .

Ed. The hearings adjourned for the weekend; bankers went wild in the opposite direction of the public mood. The Time article continues:

. . . bankers high & low throughout the land, while not condoning the acts of 1929, loudly proclaimed that last week the greater villains were U. S. Senators who would risk the credit of the U. S. by putting scandal into the headlines when Confidence had already received body-blows at St. Louis, New Orleans, Michigan and in many another state (Ed.: the banking crisis).

But the Senate Committee had succeeded in getting its man. On Monday morning at 9 a. m. Charles Edwin Mitchell, 66, resigned . . . hours later the directors of National City Co. accepted the resignation of President Hugh Baker. Mr. Mitchell and Mr. Baker returned to Washington for further grilling.

The book is long on irony and avoids dwelling on the pathos of the era. The one personal victim described in any detail is used to lead to the larger point:

Mr. Edgar D. Brown was a resident of Pottsville,Pa. In 1927, he had $100,000 and was looking forward to a trip to California for his health. In 1933, he had nothing, and was clerking for the poor board of Pottsville. Here is his story, typical of those of a great many others, as graphically told to the Senate Committee.

What happened to Mr. Brown was that he went to National City Company, the securities affiliate of National City Bank, and trusting that the Company would have the same probity as the bank affiliate whose good name it used, was put first into speculative bonds on margin and then, having complained to the broker that these bonds were losing value, he explained to the Committee that the broker responded:

Mr. Brown: “Well, that is your fault for insisting upon bonds. Why don’t you let me sell you some stock?”. . .
Mr. Pecora: Did he buy stocks for your account?
Mr. Brown: Might I answer that facetiously? Did he buy stocks! (Great and prolonged laughter.)

Subsequently, Mr. Brown was put into stock after stock, and:

About October 4, 1929 he went into the National City bank branch in Los Angeles and ‘asked them to sell out everything.

Mr. Brown: I was placed in the category of the man who seeks to put his own mother out of his house. I was surrounded at once by all of the salesmen in the place, and made to know that that was a very, very foolish thing to do.
Mr. Pecora: That is, to sell your stocks?
Mr. Brown: Especially to sell the National City Bank Stocks. . . I then received an unsolicited wire from their agent in the East (Brown reading) “National City Bank now 525. Sit tight.”. . .

A few weeks later came the crash. Mr. Brown was naturally sold out, most of his capital irretrievably gone. His efforts to borrow money from the bank in which he had placed such confidence were met with the suave reply that a loan was impossible ‘unless the borrower has assured earning power and could pay off the loan within six months.’ But Mr. Brown then had no such earning power, he was ‘forty years of age-tubercular-almost totally deaf-my wife and family are depending on me solely and alone and because of my abiding faith in the advice of your company I am today a pauper.’

In one of his very few personal outbursts rather than lawyerly phraseology, Pecora editorializes: “Just another little man wiped out, a victim of high-pressure salesmanship!

The reader can feel the outrage of Pecora, initially a Teddy Roosevelt Progressive and later of course an ardent New Dealer.

Pecora the author does not allow his doggedness and work ethic to show, with perhaps an inadvertent exception. He describes the workings of a “pool” manipulating the stock of a small alcohol producer poised to benefit from the expected repeal of Prohibition. Of course, as soon as it became clear that Prohibition would be repealed, in mid-1933, the pool dumped the stock, which quickly halved in price. The New York Stock Exchange allegedly was unable to find evidence of the stock manipulation. Despite his crushing workload in Washington, Pecora personally went to New York and recounts:

Finally, the writer (Ed.: Pecora) received a letter from Mr. Richard E. Whitney, as the Exchange’s President, informing him that the investigation had brought no evidence of wrongdoing to light, and that ‘there were no material deliberate improprieties in connection with transactions in these securities.’

This information left the writer incredulous. He (Ed.: again, Pecora himself) . . . investigated for the Committee with his own limited facilities. It required only a few days to come upon written proofs of the pool operations described above, among the records of the brokerage firm of W. E. Hutton and Company, in which Mr. Ben Smith (Ed.: manager of the pool) then had his office. The writer, incidentally, had been assured that W. E. Hutton and Company’s office had previously been visited and was still being examined by the Exchange’s investigators in its own sweeping search for the truth. The writer is still uncertain why those investigators had not succeeded in finding it.”

How droll a wit the man had! (And we wonder today what legal or illegal collusion would be revealed from a review of non-public documents.)
The final two chapters are the most important from a modern perspective. Chapter 13, “After the Investigation,” begins:

The investigation was not completed until June, 1934. But long before that date the defects it had laid bare in our financial structure had already led to the institution of a sweeping program of reforms. The old regime of unlimited license may be said to have definitely come to an end. (Ed.: But it came back.) The testimony had brought to light a shocking corruption in our banking system, a widespread repudiation of old fashioned standards of honesty and fair dealing in the creation and sale of securities, and a merciless exploitation of the vicious possibilities of intricate corporate chicanery. (Ed.: Which also came back.) The public had been deeply aroused by the spectacle of cynical disregard of fiduciary duty on the part of many of its most respected leaders; of directors, who conveniently subordinated their official obligations to an avid pursuit of personal gain; of great banks, which combined the functions of a bank with those of a stock jobber; of supposedly impartial public markets for the sale of securities, actually operated as private clubs for the individual benefit of their members.” (Ed.: The Establishment has been successful in inhibiting real outrage.)

He then goes on to explain the major Acts of reform:

The Banking Act of 1933, which separated commercial banking from “security flotation and market plunging”;
The Securities Act of 1933-“the so-called ‘Truth in Securities’ bill”;
The Securities Exchange Act of 1934; and
The Public Utility Holding Company Act of 1935.

The amount of opposition, even after the Acts were passed, was immense. The book quotes Silas Strawn, former President of the American Bar Association and the U. S. Chamber of Commerce, who opined: “I believe there is an abundant market for securities, if the Securities Act did not prevent their issue and distribution”.

As if the Depression itself were not inhibiting IPOs!

The final chapter establishes Pecora as a 20th Century Nostradamus. Titled “A Word about the Future”, it first provides some humble quotes from 1933 from Charles Mitchell and Otto Kahn (Kuhn, Loeb), which quotes are most interesting for the lack of similar apologies from today’s generation of dancing financiers. He then continues:

The more business recovered, however, and the stronger it felt, the more openly and bitterly did Wall Street oppose any sound program of reform. In place of the humble disclaimers of omniscience of March, 1933, the titans of finance developed once again an arrogant self-confidence and a dogmatic assurance that any attempt to restrain their own activities must inevitably mean the ruin of the country.

Even so mild a measure as the creation of the Federal Deposit Insurance Corporation became a target of vehement resentment. . . .

The ‘Truth in Securities’ bill was condemned as a measure which would ‘hinder legitimate business without accomplishing any essential purpose.’ To the Merchants’ Association of New York ‘it was almost self-evident’ that practically no individual dealer or banking house would assume the personal liability provided for in the Act.

The above and other pointed comments were but lead-ins to Pecora’s main villain:

. . . The real center of warfare, so to speak, remained the New York Stock Exchange. . .
“In one field after another, the necessity for some measure of public control, where private ownership failed to meet its social responsibilities, has been recognized. Public utilities-railroads-“business affected with a public interest”-banks-industry generally, all came to regard public supervision as normal and beneficial.

But there was one important outpost that resisted the tide of progress-the New York Stock Exchange, the last citadel of ‘rugged individualism.’ Since its foundation in 1791, it exercised complete control over its own practices and jealously guarded its self bestowed privileges. Despite the fact that it was intimately intertwined at a thousand point with vital interests of the public, it knew no law but its own will. . .

The disclosures of the shocking practices and base uses to which the Exchange was customarily put, stripped it of its mystery and sanctity, and dissipated the awe with which it had been regarded. Fighting at every step, it finally went the way of all flesh. Like the humblest of us all, even the might Stock Exchange must now recognize the existence and authority of the United States Government. . .

The book ends with a warning:

. . . It is certainly well that Wall Street now professes repentance. But it would be most unwise, nevertheless, to underestimate the strength of hostile elements. When open mass resistance fails, there is still the opportunity for traps, stratagems, intrigues, undermining-all the resources of guerilla warfare. These laws (Ed.: the aforementioned Acts) are no panacea; nor are they self-executing. More than ever, we must maintain our vigilance. If we do not, Wall Street may yet prove to be not unlike that land, of which it has been said that no country is easier to overrun, or harder to subdue.

And with that, Judge Pecora concludes the summary of his case. Each reader can judge how well our modern era has done in heeding his warning.

Congress is nowadays from time to time heard to mumble about a new Pecora Commission. Let us not forget the massive pump and dump stock shenanigans of the late 1990s which led only to one-off trials and the limited Sarbanes-Oxley law. Let us recall that no Congress since the passage of Sarbox has passed important legislation to limit or prevent the housing and credit bubbles or, the power of Big Finance. We note that the President’s two main finance and economic advisers are Robert Rubin protégés.
It therefore would appear that the chance that this Administration and Congress will truly take on Big Finance in any way, shape or form as did Ferdinand Pecora in alliance with Franklin Delano Roosevelt will remain vanishingly low unless, perhaps, a yet greater calamity engulfs our financial system and it would then be expedient for politicians to turn on their current allies in Big Finance.