Posted by Moss M.Jacques

When Washington Took On Wall Street

By Alan Brinkley

Vanity Fair written for June 2010

Nearly 80 years ago, on Capitol Hill, Ferdinand Pecora forced J. P. Morgan Jr. and other “banksters” to reveal the corruption that had fueled the Great Depression—bringing shame on the financial industry and resulting in new laws to curb abuses. Today, with Republicans having threatened to block reform and Goldman Sachs fighting fraud charges, the author looks back at the Pecora Commission hearings, which riveted America, and asks why there is no comparable investigation now.
 

J.P. Morgan Jr. was terrified. He was the most famous and arguably the most powerful banker in the United States, and also among the most secretive. But in May 1933, in the aftermath of the greatest financial crisis in the history of the United States, he was being called to testify before the Senate Committee on Banking and Currency to explain how the catastrophe had occurred. Morgan dreaded the prospect, in part because it was a painful reminder of his famous father’s unhappy experience testifying before the 1912 Pujo Committee, which had investigated the “money trust” (and was partly responsible for the creation of the Federal Reserve Board). The elder Morgan, mercilessly interrogated, had died shortly after the hearings. Many of his associates, not least his son, had blamed his death on his public humiliation.

Now it was the younger Morgan’s turn. Known to friends and associates as Jack, he was 65 years old and semi-retired. He feared that he might not be able to answer the committee’s questions, and he was even more afraid that he might lose his temper. His partners rehearsed Jack Morgan for days, peppering him with hostile and insulting questions. In the meantime, the Morgan bank’s powerful lawyer, John W. Davis, tried to keep the committee at bay. A onetime Democratic presidential nominee, Davis had helped pass a New York law barring any investigation of private bankers, and he argued in court that the Morgan bank was therefore entitled to privacy. But the U.S. Senate passed a resolution requiring the bank to open its books. The bank reluctantly complied and agreed to let Morgan testify.

He was to be questioned by Ferdinand Pecora, a former prosecutor who was now the special counsel to the committee. Pecora was known to be tough and unrelenting, and the prospect of his cross-examination attracted enormous publicity. There was front-page coverage on newspapers across the country. A large and eager crowd swarmed the Senate Office Building. “They thronged about the door and packed the corridor nearing the committee room,” The New York Times reported, “so that in the morning those who had business inside had to fight their way through. Only a large detail of policemen and a rope prevented a similar scene in the afternoon, and even motorcycle policemen wearing cartridge belts and revolvers were called to police the room.”

Pecora cross-examined some of the most powerful bankers in America. His goal was to lift the veil on a clubby, secretive world.

Pecora’s questioning of Morgan was only partly an effort to tease out information about the bank’s internal practices. Pecora knew that the enigmatic quality of the Morgan bank had given rise to myriad conspiracy theories and a broad popular belief that the bank exercised a malign and hidden global power—as Goldman Sachs and other banks are seen by some to exercise today. Pecora also hoped to stoke the public’s wrath toward the financiers, whom most Americans held responsible for the Wall Street crash. And he knew how to deploy both menace and ridicule. But Morgan swallowed his fear and marched into the packed room, “massive and dignified, but less grimly masterful than his father, in a manner which could not fail to be impressive,” the Times noted.

“I state without hesitation,” Morgan said at the conclusion of his carefully written opening statement, “that I consider the private banker a national asset and not a national danger.” Pecora had an impeccable sense of timing. He almost immediately asked Morgan a single question: “What is your business or profession?” When Morgan replied, “Private banker,” the audience burst into laughter. His humiliation was only just beginning.
Modern Parallels

The Pecora Commission, as the Senate investigation came to be known, was a spectacular event in the darkest days of the Great Depression. It had a lasting impact on the public’s image of the financial world, and it helped make possible new laws and regulations aimed at preventing a Depression-size calamity from befalling the country again. What few anticipated was how fragile those laws and regulations would eventually prove to be—and how, in time, the tide would turn. The abuses highlighted by the Pecora Commission have clear parallels with the abuses that led to the financial meltdown of the past two years. Where the parallel breaks down is in comparison with the Pecora Commission itself. Congress has been remarkably decorous about investigating what went wrong. No Wall Street executives have been questioned for days at a time by a skilled interrogator. The Obama administration’s financial-reform bill—which would establish new procedures for seizing and dismantling failed banks, and also diminish the prospect of taxpayer-funded bailouts—faces strong, perhaps unanimous, Republican opposition. Even if the bill passes, it would represent a relatively modest response to the existing range of problems. In April, the Securities and Exchange Commission agreed (on a split vote) to file civil charges against Goldman Sachs, alleging that the firm defrauded some of its investors by selling them a portfolio of highly risky mortgage-related securities. The S.E.C. further charged that Goldman did not inform clients that the securities they were purchasing had been selected with the help of an investor who was expecting to profit from their decline in value. So far, the charges do not name any figures in Goldman’s senior management.
Pugnacious Prosecutor

J. P. Morgan was definitely senior management—he was a third-generation scion of a great banking family. Ferdinand Pecora was decidedly not. He had been born in Sicily in 1882, one of seven children of a struggling cobbler. In 1887, the Pecoras moved to New York, where they lived in a cold-water apartment in Chelsea. Like many immigrant children, Ferdinand went to work at a young age (delivering milk and newspapers). But he also conscientiously attended the local public schools, graduated from high school as class valedictorian, considered (and then rejected) a career in the Episcopal ministry, and finally applied to New York Law School, having already clerked for a law firm across Wall Street from the august Morgan bank, an institution so secretive that its imposing building carried no sign or name, only the number 23 on the door. (When asked in front of the Senate committee how clients found their way to his bank, Morgan said smugly, “Most of them know the address.”) Pecora was admitted to the bar in 1911, the previous year he got married, had a son, moved to an apartment on Riverside Drive, and began to involve himself in politics. He campaigned for Theodore Roosevelt’s Progressive Party in 1912. By 1916 he was an admirer of Woodrow Wilson’s, and a Democrat. And in 1918, through connections at Tammany Hall, the Democratic political machine of New York, he was appointed an assistant district attorney.

Pecora was a natural litigator—tall, strong-jawed, with bountiful, wavy black hair and a penchant for cigars, which he often brandished to dramatic effect during cross-examinations. He was strikingly energetic and pugnacious (if mostly soft-spoken). Early in his career as a prosecutor, he specialized in, among other things, investigating the bottom end of the brokerage business, what were known at the time as bucket shops—sellers of fraudulent securities. Among his early achievements was sending the state superintendent of banks to jail for taking bribes. Pecora was, and remained, not just a Wilsonian but a Brandeisian—sharing Justice Louis Brandeis’s belief that “bigness” in corporations and banks was the enemy of democracy. In 1929, Pecora was a prominent Democratic candidate for district attorney, but to his great disappointment he was nudged aside for a Tammany favorite. By early 1930, he was settled in private practice and ostensibly out of politics. His withdrawal from public life lasted only three years.
Setting the Traps

The months between the election of Franklin Roosevelt to the presidency, in November 1932, and his inauguration, in March 1933, were among the most turbulent and frightening in American history. By the end of 1932, unemployment had reached 25 percent. More dangerous, the banking system seemed to be unraveling with remarkable speed, a victim—as many individuals had been—of the stock-market crash, which wiped out more than 80 percent of the value of securities. Across the nation, small banks were failing at an accelerating rate, thereby helping to bring down larger banks. With a lame-duck and much-reviled president, and a Congress soon to be replaced, the government seemed paralyzed.

But in the final months of Herbert Hoover’s repudiated Republican administration, Peter Norbeck, a senator from South Dakota and the chair of the Senate Banking Committee, proposed an investigation into the very banks that his committee had championed (and coddled) for years. Norbeck understood the depth of the crisis, and he made earnest efforts to attract a progressive and weighty figure to serve as special counsel for his investigation. The people he tried to recruit included Harold Ickes (soon to become Roosevelt’s secretary of the interior), Samuel Untermyer (a major figure on the Pujo Committee), and Samuel Seabury (a lawyer who had spearheaded the effort to remove the corrupt and discredited Jimmy Walker from the mayoralty of New York). So unpromising did the investigation seem that all three men declined the position. Irving Ben Cooper, a rising lawyer known for his dogged prosecution of fraud, finally accepted the job—but resigned within just a few days, complaining that Senator Norbeck was not giving him enough authority.

Meanwhile, Norbeck was hearing from former New York district attorney Joab Banton about another candidate: Ferdinand Pecora, whom Banton called “the best-qualified lawyer” in the country for a job like this. Bainbridge Colby, a former Bull Moose stalwart and briefly Woodrow Wilson’s secretary of state, made the same suggestion, describing Pecora as “the most brilliant cross-examiner in New York.” In late January, six weeks before Roosevelt’s inauguration, Pecora signed on as special counsel to the banking committee. He assembled a talented group of attorneys and financial experts and quickly plunged into the hearings.

Within weeks of his appointment, Pecora became the unquestioned star of the investigation. The press started calling it the Pecora Commission, which became its quasi-official and enduring name. Pecora’s staff burrowed into the vast archives of the major banks and collected a staggering amount of information on almost every aspect of American finance, much of it never before seen outside the closed doors of the banking world. The records of the commission, now in the National Archives, comprise tens of thousands of pages of documents. All this digging aided Pecora’s cross-examinations and proved to be of enormous importance to subsequent legislation. But what made the investigation so powerful was not so much the data (for which Pecora had a phenomenal memory). Its greater importance was in the theater of the event, something of which Pecora was brilliantly aware. His cross-examinations produced enormous press attention for months on end. Pecora’s dogged, determined, and almost always calm approach to questioning—much enhanced by the generous use of subpoenas—was, as he certainly intended, remarkably dramatic and highly popular.

In the course of over a year of public investigations, Pecora cross-examined some of the most powerful and famous bankers and businessmen in America. He used his subpoena power to put people on the stand for day after day. He cross-examined Samuel Insull, the utilities mogul, who fled the country a year later; Richard Whitney, the president of the New York Stock Exchange and a man with close ties to Morgan, who surprised many in the audience by confirming what most lawyers knew but many citizens did not—that “no public agency … exercises any regulatory power over [the stock exchange]”—and who within a few years would wind up in jail; Thomas W. Lamont, Morgan’s most important partner; and many others.

Pecora’s goal was to lift the veil on the clubby, secretive world of banking, a world to which he believed no one—government, investors, press—had adequate access. He bored into what he considered the corrupt (if not necessarily illegal) practices of the great banks, asking seemingly mundane questions that drew his targets into his traps. Albert Wiggin, president of the Chase National Bank, who resigned in disgrace after it was revealed that he had been short-selling his own bank’s stock, was one such victim. But short selling was only a part of Wiggin’s extra-curricular profitmaking.

Even as Wiggin ran one of the nation’s largest banks, he served as a director or trustee of 59 corporations, some of which he himself quietly came to control or were controlled by Chase or its “independent” investment arm, the Chase Securities Corporation. “Many of these corporations from which Mr. Wiggin received … helpful additions to his regular earnings,” Pecora acidly recalled, “received large loans from the Chase National Bank”—large loans at presumably very favorable terms. The arrangement fell somewhere between back-scratching and extortion. One such company, Metpotan, which Wiggin controlled, announced a total profit of a mere $159,000 in the years between 1928 and 1932; in the same period, Wiggin took out profits from Metpotan totaling more than $10.4 million. He was frequently offered stock from customers of the bank at a reduced price, in return for unspecified considerations. When Pecora asked him why the Alleghany Corporation sold the company’s stock to him at almost half the market value, Wiggin responded, “I assumed it was a favor and I was very glad to take it.” Other companies provided similar favors. Pecora asked Wiggin why he had indulged in such practices:

Wiggin: “Just to be helpful to the key men of the institution.”

Pecora: “Helpful to key men?”

Wiggin: “Of the institution; yes, sir … ”

Did the companies, Pecora asked, “have anything to do with the Chase Securities Corporation?”

Wiggin: “No, but I was very much interested in having the men in Chase Securities Corporation make money.”

John G. Townsend, senator from Delaware, jumped into the questioning: “What actual service did they render to you that they should receive such participation?”

Wiggin: “None.”

Pecora: “You wanted them to make money outside of their salaries?”

Wiggin: “Yes.”

The commission called the practice “inimical to the interest of the banking institution.”

But what made the commission the sensation it became was Pecora’s questioning of perhaps the two greatest figures in American finance: Charles E. Mitchell and J. P. Morgan.
Worthless Bonds

‘Sunshine Charley” Mitchell, as he was often, and somewhat incongruously, called, was the imperious chairman of National City Bank (decades later renamed Citibank). He became its president in 1921 and expanded it into the largest bank in the nation. But not content with ordinary, conservative commercial banking, Mitchell created what was ostensibly an independent investment bank that would allow City to sell securities—a step that led to much the same kind of disaster that many banks experienced after their massive losses in the securities markets in 2008–9. The independence of City’s investment bank was almost entirely fictional—“a masterpiece of legal humor,” the popular historian Frederick Lewis Allen observed at the time. The boards of the commercial bank and the investment bank were virtually identical, funds from the commercial bank helped finance the investment bank, and investors could buy stock in both companies simultaneously.

Mitchell had turned the new investment bank into the largest such institution in America, with almost 2,000 employees and offices around the world. “Instead of waiting for investors to come,” one business analyst noted at the time, “he took young men and women, gave them a course of training … and sent them out to find the investors.” This practice, the analyst added, was “revolutionary.” Mitchell was extraordinarily aggressive in pushing his young salesmen, and by the mid-1920s City was facilitating sales by providing large loans to investors who counted on rising stock prices to allow them to pay back their debts. Mitchell soon moved well beyond the reckless credit mechanisms that were becoming common on Wall Street. He not only hunted for investors; he searched for new securities his bank could peddle, no matter how risky they might be.

In 1927, he had begun selling Peruvian bonds. Pecora called Hugh Baker, president of the investment company, to the stand and read into the record a 1923 memo from the bank’s foreign desk, which reported to Victor Schoepperle, City’s vice president in charge of South America. The memo warned that, “Peru has been careless in the fulfillment of contractual obligations” and cited material from the London Times that accused the teetering country of “broken pledges” and “flagrant disregard of guarantees.”

Pecora: “On the whole, Mr. Schoepperle’s report … was against financing any Peruvian credits, wasn’t it? … It was considered a bad risk; isn’t that so?”

Baker [squirming]: “I assume that must have been his reason there.”

Pecora: “Do you know whether the memorandum was considered by the executive officers of your company?”

Baker [evasive]: “I am quite sure that that was discussed, although … the specific memorandum I do not recall.”

Pecora: “Well, now, if this memorandum was discussed there was nothing in it, was there, that encouraged the officers in floating this loan?”

Baker [defeated]: “Certainly not at that particular time.”

Despite the fears of City’s own agents in New York and Peru that the securities were likely to be virtually worthless, the bank ignored the warnings and sold the Peruvian bonds to customers for $90 million before their value collapsed. Undeterred, Mitchell soon moved on to equally risky Brazilian, Cuban, and Chilean bonds—a practice similar to the heedless way in which mortgage markets ignored the risks of moving into shaky real estate properties in the years leading up to the 2008 collapse. By the end of 1927, City had pushed its stock price up to almost $3,000 a share. Two years later, it had fallen to just over $100, and by the end of the 1932 the bank itself was on the brink of collapse.
“A Beaten Man”

Mitchell’s National City Bank was far from the only reckless and imperiled bank in the early 1930s to be pilloried by the Pecora Commission. Public hostility to bankers generally was broad and deep. “The best way to restore confidence in our banks,” Senator Burton Wheeler, of Montana, angrily declared, making few distinctions among the institutions, “is to take these crooked presidents out of the banks and treat them the same as [we] treated Al Capone.” It was not just populist firebrands who proposed retribution. The Roosevelt administration conveyed to Pecora that “the prosecution of an outstanding violator of the banking law would be the most salutary action that could be taken at this time. The feeling is that if the people become convinced that the big violators are to be punished, it will be helpful in restoring confidence.”

Pecora chose his targets carefully, bringing to the stand bankers whose personality and behavior he thought would outrage what Time magazine called “that inchoate multitude, the U.S. people.” Almost no one could attract attention like Charley Mitchell. He was, Edmund Wilson wrote somewhat sardonically in 1933, “the banker of bankers… Like an emperor, sat Mitchell, dynamic, optimistic and insolent, sending out salesmen in all directions as he preached to them, bullied them, bribed them.”

Mitchell’s power and arrogance were on full view when Pecora began his questioning. Mitchell assumed, Pecora later recalled, “the loftiest moral tone, no matter how questionable the transactions were with respect to which he was interrogated.” He responded to questions vaguely but also with a false and grating modesty. When asked if City was the largest investment company in the world, Mitchell replied, “I would not want to make any boast about that, Mr. Pecora.” Mitchell himself did not disclose very much. But Pecora deposed investors who had bought City’s offerings largely with borrowed money, sometimes amounting to 90 percent of the cost, assured by the company that rising prices would soon cover the outlay. One investor who had sunk his savings into Peruvian bonds, and lost everything, testified that he had complained to the bank and had received the response “Well, that is your fault for insisting upon bonds. Why don’t you let me sell you some stock?” Such testimony aroused visible anger in the hearing room.

Later, Pecora homed in on Mitchell’s compensation and income taxes. For the last three years of the stock-market boom, Mitchell had received bonuses of more than $1 million a year. Pecora revealed that Mitchell had paid no taxes in 1929, in part because of a loss created by the sale of 18,300 shares of diminished City stock. “By the way,” Pecora asked, as if it was an afterthought, “that sale of this bank stock … in 1929 was made to a member of your family, wasn’t it?” It soon became public that Mitchell had sold the shares to his wife. The loss had been completely phony. Not long after, Mitchell resigned from his bank. (Pecora later described watching him walk alone from the Senate Office Building to Union Station, “carrying his own suitcase—a beaten man.”) Shortly afterward, Mitchell was indicted for tax evasion (and later acquited), and ended up paying a $1 million civil fine. Senator Carter Glass, of Virginia, a member of the commission and himself a banking expert, said at the time that “Mitchell more than any 50 men is responsible for this stock crash.”
Titan vs. Showman

Only J. P. Morgan could overshadow Mitchell’s dramatic appearance before the commission. It created the greatest publicity of the year-long investigation. The Richmond Times-Dispatch called Morgan “the twentieth-century embodiment of Croesus, Lorenzo the Magnificent, Rothschild; the lordly Mr. Morgan, financier and patron of the arts; the unreachable Mr. Morgan, with his impregnable castle at Broad and Wall Streets and his private army of armed guards; the austere Mr. Morgan, to whose presence only the mighty are admitted.” Now, the reporter noted, he was “in a committee room and upon his bare brow the gaze of the ‘peepul.’”

The hearings were moved from the committee’s normal chamber to the large and ornate Senate Caucus Room, which was flooded with lights and filled with reporters and microphones. The audience was restive and often noisy. Senator Glass, angry at lesser bankers but awed by Morgan, called it “a circus, and the only things lacking now are peanuts and colored lemonade.”

Pecora had made relatively little headway against Morgan’s surprisingly amiable testimony—the coaching had apparently paid off. He knew that the Morgan bank had abandoned its fabled conservatism and had, instead, helped create giant holding companies to increase the value of securities. When Pecora asked what “useful public purpose” these new corporations served, the Morgan bankers had no answer beyond the fact that the corporations diversified investor opportunities. Even so, Pecora could not identify any specific activities by Morgan that were in fact illegal. But several days into the questioning, he revealed that Morgan had paid no income tax at all in the years 1930, 1931, and 1932. The nonpayment of taxes was not in fact a dodge; it was a result of the enormous investment losses sustained after 1929. But Pecora, not averse to pushing a few hot buttons if he thought it might help, used the revelation to inspire lurid headlines about “tax evasion.”

Morgan, outraged, privately described Pecora as a “dirty little wop” and a “sharp little criminal lawyer.” Other Morgan partners described him as a cheap demagogue and a crass showman. Thomas Lamont, Morgan’s senior partner, declared that no one would take this sideshow seriously. But nothing could have been further from the truth. The Morgan hearings dominated the newspapers for days. In the midst of the hearings, Pecora himself appeared on the cover of Time magazine (which, in its mostly positive coverage, described him as “swarthy,” “kinky-haired,” and “olive-skinned”).

The most bizarre event of the Morgan hearings was a stunt inspired by Carter Glass’s use of the word “circus.” While the senators were out of the room, in executive session, a press agent took advantage of their absence to create publicity for Ringling Bros.—a breach of security that would be unthinkable today. The press agent marched a 21-inch woman named Lya Graf into the Caucus Room, shouting, “Gangway … The smallest lady in the world wants to meet the richest man in the world.” He placed the tiny Graf on Morgan’s lap, in front of dozens of photographers. Morgan blustered gamely. “Why I’ve got a grandson bigger than you,” he said. “But I’m older,” Lya replied. There was a short argument over whether she was 20, as Lya claimed, or 32, as her press agent announced. “Where do you live?,” Morgan asked her. “In a tent, sir.” she replied. When the press agent asked Lya to take off her hat, Morgan complimented her on it. Several chroniclers of the exchange wrote that in a strange way the encounter—which was widely reported—seemed to have humanized Morgan. That was small comfort to Morgan himself, whose façade of power—faceless, remote, unutterably private—had been repeatedly punctured.
Pecora’s Prediction

The Pecora Commission continued its work for another eleven months, deposing many more bankers and financiers. It came to an end in the spring of 1934. The hearings themselves created a cyclone of outrage and generated broad popular support for Roosevelt’s financial agenda. The final Senate report, released in June, lauded the creation of the Securities and Exchange Commission and predicted that it would “materially abate, if not eradicate, abuses that caused much economic distress.” The report also endorsed the Glass-Steagall Act, which for the first time required a strict separation of commercial and investment banks. (Charley Mitchell’s ill-fated investment company, and others like it, would henceforth be illegal.) “The magnitude of a corporation,” the report warned, “is no justification for its existence or propagation.” But the most important result of the Pecora Commission was not its specific recommendations. In the aftermath of the hearings, many Americans came to consider the notion of bankers as wise guardians of the public trust to be archaic, even absurd. The term “banksters” became a common description of the lords of finance. (Some 75 years later, when Lloyd Blankfein described Goldman Sachs as “doing God’s work,” the ridicule of “banksters” emerged briefly again.)

Pecora had hoped to chair the new S.E.C. Instead, to the dismay of many observers, Roosevelt appointed Joseph P. Kennedy. The attorney Jerome Frank described the appointment as “like setting a wolf to guard a flock of sheep.” But Pecora agreed to serve on the commission and quickly developed a good working relationship with Kennedy—who turned out to be a much better leader of the S.E.C. than his critics had expected. Pecora eventually accepted an appointment as a New York State Supreme Court justice, a position he held until his retirement, in 1969, at the age of 87. He died two years later.

The Senate report on the Pecora Commission expressed optimism that the new legislation might help create “the undivided cooperation of industrialist, financier, and investor, with a mutual recognition of their reciprocal rights and duties.” Pecora himself was more skeptical—he possessed a grim faith in the buoyancy of financial malfeasance. In 1939, six years after he had begun his inquiry, he published a decidedly earnest book, Wall Street Under Oath, recounting his experiences and reflecting on the commission that bore his name. “Under the surface of the governmental regulation,” he wrote, “the same forces that produced the riotous speculative excesses of the ‘wild bull market’ of 1929 still give evidences of their existence and influence… It cannot be doubted that, given a suitable opportunity, they would spring back into pernicious activity.”

Pecora did not live to see the truth of his predictions borne out. Deregulation, which had begun to gather momentum in the 1970s, made enormous progress over later decades. In 1999 the Glass-Steagall Act was repealed—opening the door to the Mitchell-style fusion of commercial and investment banking (and with similar consequences). The S.E.C. in the early 2000s was significantly weakened. Inevitably, the financial crisis that began to unfold in 2008 would bring the Pecora Commission back into public visibility. It has been cited frequently as a model for exploring and confronting the financial woes of our own time, but the response of contemporary congressional investigations has been almost invisible. The current congressional inquiry into the banking industry, chaired by former California state treasurer Phil Angelides, calls itself the “Angelides Commission” in obvious homage to the Pecora Commission. So far, at least, it is an anemic copy, lacking anything like the tenacity and impact of Pecora’s investigation; instead, showboating and modestly informed members of Congress berate witnesses without eliciting any useful disclosures—only self-serving apologies. where is our ferdinand pecora? asked a headline on the New York Times op-ed page in 2009. There has as yet been no good answer