The biggest money in investment banking was in originating deals directly with the issuers. J.P. Morgan and Kuhn Loeb dominated the major issuers, so National City continued to underwrite the bonds of newer, riskier ones—utilities and airplane manufacturers, municipalities, and a host of foreign governments ranging from European countries devastated by World War I to shaky Latin American dictatorships. Some of these bonds looked like huge gambles, but they quickly became market darlings as the company continued to assure investors that its extensive research staff had examined them thoroughly and given them its seal of approval.9
Mitchell proved to be as good a motivator as he was a bond salesman, and his timing was excellent; he assumed the helm of the securities affiliate just before the sale of Liberty Bonds during World War I primed the burgeoning middle class to buy securities. Within a few years, the National City Company had 1,400 employees with branches across the country and around the globe. It was the largest securities distributor in the country, selling $1 billion worth of bonds annually in a decade when stock and bond sales more than tripled. Mitchell viewed his vast securities-selling organization no differently than he would any chain store. Like any large retailer, Mitchell’s goal was to reduce his “unit cost” by generating a huge volume of business. “Our newer offices,” he told the sales trainees, “are on the ground floor. . . . [We] are getting close to the public . . . and are preparing to serve the public on a straightforward basis, just as it is served by the United Cigar Stores or Child’s Restaurants.” City’s chain stores, Mitchell insisted, should sell securities “like so many pounds of coffee.” Indeed, not content to wait for customers to walk through the doors, Mitchell had his salesmen waiting for potential buyers in train stations, attending churches on Sundays, and “knocking at the doors of rural houses like men with vacuum cleaners or Fuller brushes.” No one had ever sold securities this way before—Mitchell was transforming the investment banking industry.10
A s Mitchell was overseeing National City’s phenomenal expansion, Frank Vanderlip’s term in charge of the bank came to an abrupt halt. City Bank’s aggressive overseas expansion included heavy investments in Russia. After the 1917 revolution, the new government nationalized banks and City Bank took a major hit. James Stillman died just a few months later; his son James Jr. was named chairman, and he soon forced Vanderlip out of the presidency. Stillman the younger was nowhere near the banker his father was, but it hardly mattered. Times were flush and City Bank had just become the first billion-dollar bank.
The good times, however, evaporated with the recession of 1920-21. As the economy turned south, it soon became all too clear that no one during the boom years had paid close enough attention to the quality of the loan portfolio. The worst situation was Cuba. During World War I, Cuba had a monopoly on sugar in the United States market. After the war, prices continued to boom even as more land was converted to cane production and refineries sprouted everywhere. All that expansion needed capital and City Bank was there to meet the demand. In 1919 alone, the bank opened twenty-two branches in Cuba, telling its shareholders that sugar was produced there “under very favorable conditions economically” and that the industry was on a “sound basis.” Soon City Bank held nearly 20 percent of the loans outstanding in the Cuban banking system. It had wagered an astounding 80 percent of its total capital on Cuban sugar, a huge, risky, and ultimately foolish bet. In November 1920, the United States lifted wartime controls, producers from outside Cuba came on line, and prices tumbled from twenty-two cents to a penny a pound. Sugar firms failed left and right, local Cuban banks closed, and the Cuban government eventually declared a debt moratorium that lasted into 1921.11
In the face of that disaster there was no way the younger Stillman, already in the midst of a very public and very messy divorce, could hold on to the presidency. He resigned in May 1921 and the board decided that Mitchell, then just forty-three, was the right man to clean up the mess. The new bank president wrote to Vanderlip that he was humbled by the selection. He had not sought the job “as it has been my feeling that the possibilities in the Company itself were sufficient to gratify my every ambition.” City Bank’s prominence and its importance in the economic structure of the country, he recognized, meant that he owed a duty not just to the bank’s shareholders but to the public at large. “I am fully mindful,” he wrote, “of the quasi-public position which The National City Bank must hold, and cognizant as I am of my own shortcomings, I can indeed approach the work with none other than a feeling of solemnity.”12
Neither solemnity nor his lack of experience in commercial banking translated into long deliberation. The new bank president acted quickly and decisively, writing off bad loans, closing weak overseas branches, and instituting more stringent centralized controls. Mitchell’s timing was again fortunate—the recession was short-lived, transforming once sketchy loans into solid ones. And although he claimed never to have aspired to his new position, he quickly consolidated his own power to ensure that he was the undisputed ruler of the bank. Immediately, he insisted that the board institute a bonus system for the bank’s senior executives, telling shareholders that bonuses would “concentrate the attention of the officers upon service to the institution” and thereby reap “larger returns to the shareholders.” In his pitch for bonuses, Mitchell never even mentioned how those bonuses might affect City Bank’s “quasi-public position.”
Knowing that failing to resolve the Cuba debacle “would have meant pretty nearly the destruction of our institution,” Mitchell left for Cuba. He spent eighteen-hour days asking question after question at plantations and sugar mills around the country. Mitchell wouldn’t write off the loans; doing so would have reduced the bank’s capital too much, hurting its capacity to make new, sound loans and making it that much more difficult for the bank to right itself. Ever the gambler, Mitchell chose instead to invest even more money in Cuba. He consolidated the bank’s holdings in a newly formed company, the General Sugar Corporation, which immediately became one of the largest sugar operations in the country. Going more heavily into the sugar business was a bold move for the bank, one that would only work if sugar prices rebounded. By 1922, Mitchell assured shareholders the strategy was working; the situation was “well in hand.” To employees he was even more upbeat. “We are on our way to bigger things. The National City Bank’s future is brighter, I believe, than it has ever been.”13
Mitchell was true to his word, and over the next seven years he brought to the bank the same retail spirit he had used to transform the National City Company. “What General Motors was doing for the automobile and Proctor and Gamble for household products,” Citibank’s historians wrote, “National City now did for financial services.” Mitchell envisioned City Bank as the “bank for all,” and he scored huge public relations successes when the bank began accepting deposits of as little as one dollar and began making personal loans as small as fifty dollars. Those decisions were hailed as the “death-knell of the loan-shark business in New York” and a “new adventure in democratic finance.” By 1929, the bank had more than 300,000 personal accounts, all waiting for City Bank and the National City Company to “tell them what to do with their savings.” These “small but developing capitalists,” as Mitchell called them, would be customers not only for banking and trust services, but also for the affiliate’s securities offerings.14
Always pushing to reduce the bank’s unit costs, Mitchell expanded aggressively. He sold large amounts of stock—increasing capital eightfold over the 1920s—and then used that money to acquire other banks and trust companies. He also took advantage of a change in federal law that finally permitted City Bank to open branches. By 1929, the bank had dozens scattered throughout New York City. Mitchell stationed bond salesmen and trust officers in each one, making it that much easier to cross-sell to his customers. By the mid-1920s, City Bank wasn’t just the largest bank in the country, it was one of the largest corporations, rivaling in size U.S. Steel and American Telephone & Telegra
ph. Affiliate offices continued to spread across the country—there were sixty-nine in fifty-one cities in 1929—all connected by 11,000 miles of private wire. There were company offices throughout Canada and in London, Amsterdam, Geneva, Tokyo, and Shanghai, all originating new bond offerings for the salesmen to peddle. The affiliate continued its run of record annual profits. In 1927 it had sales of $2 billion, was adding a thousand new customers a month, and had built its own new thirty-two-story office building.15
Through it all City Bank’s stock price soared. In 1928, the stock was approaching $800 a share, too expensive for the middle-class investors Mitchell wanted most to attract. Mitchell split the stock five for one, but it rose again, this time to almost $600 a share. By the fall of 1929, in the midst of an enormous boom in bank mergers, Mitchell was negotiating a combination with the Corn Exchange Bank. The deal would give City Bank far more branches than any other bank in New York. More than that, it was a capstone for Mitchell’s ambition. The deal garnered nationwide attention because it would, in Mitchell’s words, make City Bank “not only . . . the largest and most powerful, but the most solid institution in the world.” Shareholder approval was all that was needed to complete the deal, and it was widely assumed to be a foregone conclusion.16
With the booming stock market, Mitchell and other Wall Street leaders were celebrities, and the press chronicled their business pronouncements and their social lives with equal ardor. Mitchell employed a “highly organized publicity machine” to build him up as “a symbol of the great American banker of the twentieth century,” a transformative figure who had revolutionized the way that commercial and investment banks did business. In a time when Wall Street was considered the stage on which strode “the aristocracy of American intelligence,” Mitchell was front and center. He was “the ideal modern bank executive,” someone who had risen faster than anyone else on Wall Street by the sheer force of his personality. Mitchell’s successes and those outsize public perceptions of Wall Street genius spurred his own grandiose visions of his place in the financial and business pantheon. “He saw himself as a man of destiny,” wrote a biographer at the time. “If John D. Rockefeller had become the master of oil he would become the master of money.”17
With his celebrity and his wealth came all the trappings of Wall Street success—the limestone mansion on Fifth Avenue and the summer homes in Southampton and Tuxedo Park, all with their own live-in staffs. Mitchell lived flamboyantly and spent lavishly. He took annual European trips, shot grouse on the Scottish moors, and made six-week yacht cruises to the Caribbean. When Mitchell traveled for business, it was always by private railcar, complete with kitchen and chef. He was the epitome of the crass, nouveau riche gate-crasher. He drove big cars at reckless speeds. His wife was a music patron, but Mitchell called the opera a good place “to catch up a couple of hours’ sleep.”
In the 1920s, Tuxedo Park was still synonymous with high society and upper-class living. Mitchell outraged the town’s old guard by building his massive home, aptly named Hillsdale, on the highest spot in town so that everyone had to look at it. They may have been annoyed, but they still came to his elaborate parties. The Vanderbilts, Hearsts, and Astors were frequent guests, as were President Coolidge and the Treasury secretary, Andrew Mellon. Even the queen of Romania, touring the country in 1926, requested to stay at Hillsdale, which she remarked made her own palaces look barren. Mitchell was in every way the great Wall Street success story. The handsome, powerfully built self-made millionaire was rugged individualism personified.18
On January 1, 1929, in a sign of his stature in the banking world, Mitchell was named a director of the New York Federal Reserve. Benjamin Strong, the bank’s governor until his death in October 1928, had tapped Mitchell for the post. Mitchell, he thought, was “truly one of the ablest of our bankers” even though he had been, to that point, a “bitter critic” of the Federal Reserve. The relentless market booster was now a caretaker of the solidity and safety of the financial system, and he wasted no time in shaking up the place.
The Federal Reserve was becoming concerned that stock market speculation, much of it driven by margin stock purchases, had gotten out of hand. At the time, investors could buy stocks for as little as 10 percent of their value, borrowing the rest from the broker and putting up the purchased stock as collateral. The broker would in turn borrow the money in what was known as the call loan market. Call loan rates had skyrocketed to 12 percent by the end of 1928, and companies like Standard Oil, General Motors, and RCA decided that this was the best way to invest their idle cash. New York banks were equally ebullient; they could borrow from the Federal Reserve for 5 percent and immediately lend the money at 12. It was a great system for everyone concerned so long as stock prices continued to rise. The lenders were making easy money with little risk because the collateral underlying the loans could be sold immediately. Margin magnified the stock buyer’s gains. A 10 percent rise in price would give the investor a 100 percent return. Of course, a 10 percent decline would wipe the investor out, but no one, apart from the Federal Reserve, seemed very worried about that possibility in early 1929. This was the New Era. Many uttered what nearly always proves to be the most expensive phrase in investing: “This time is different.”
The Federal Reserve was in an unenviable position. If it raised rates it could harm the broader economy, not just put a crimp on stock speculators. And, of course, if the market came crashing down it would be the Federal Reserve that would take the brunt of the criticism, a prospect that no regulator relishes. So it took more timorous steps. In February, it twice warned member banks not to borrow money “for the purpose of making speculative loans.” On March 4, 1929, when Hoover was inaugurated, he urged the Federal Reserve to do more, prompting daily meetings of the board. The Federal Reserve made no announcements, but after an unprecedented Saturday meeting on March 23, the market was spooked. That Tuesday, prices plummeted on huge volume, and as banks reduced their call market loans, rates zoomed to 20 percent. It looked like the party was over.19
Strong’s recommendation of Mitchell had been contingent on having a “nice talk” with Mitchell that emphasized that “so long as he is a member of the board of directors he should be willing to accept the decision of the directors in all matters and not indulge in outside criticism.” Apparently the talk didn’t take, because Mitchell came to the rescue of the staggering stock market, announcing that City Bank would borrow $25 million from the New York Federal Reserve to prevent liquidation of margin loans, “whatever might be the attitude of the Federal Reserve Board.” Mitchell’s edict, in the words of the economist John Kenneth Galbraith, was “the Wall Street counterpart of Mayor Hague’s famous manifesto, ‘I am the law in Jersey City.’” The Federal Reserve and Hoover remained silent, unwilling to openly challenge Mitchell. Or at least that was the way it seemed to outsiders. In truth, Mitchell had acted with the approval of the New York Federal Reserve’s new governor, George L. Harrison.20
After City Bank’s intervention, call loan rates declined and the market continued its upward trajectory. Senator Carter Glass, never a fan of the stock market and always protective of his Federal Reserve, was livid at Mitchell’s apparently defiant attitude. Mitchell, the senator said, slapped the Federal Reserve “squarely in the face,” treating its policies “with contempt and contumely.” He was unfit to serve on the board and should resign immediately. But to everyone else, Mitchell was a hero. A New York Times editorial proclaimed that Mitchell had “saved the day for the financial community. No one can say how great a calamity would have happened had he not stepped into the breach at the right moment.” Mitchell, it seemed, had refused to be browbeaten by know-nothing Washington bureaucrats. He had single-handedly prevented a panic and saved the great bull market. Maybe he was indeed the heir to J. P. Morgan.21
The market euphoria of spring barely survived the summer. Stock prices were choppy in September but unmistakably trending downward after the market’s peak just after Labor Day. In
October 1929, the Yale economist Irving Fisher uttered what would prove to be one of the more durable quotes linked to the Great Crash. “Stocks,” Fisher confidently predicted after an alarming dip in early October, “have reached what looks like a permanently high plateau.” Mitchell and Fisher saw eye to eye. The two were “Wall Street’s official prophets,” but they were far from alone in their optimistic assessments. Most everyone was exuberant; Mitchell and Fisher were simply more visible and more insistent.
In September, as he boarded a liner for a European vacation, Mitchell assured investors “things have never been better”; there was simply “nothing to worry about in the financial situation of the United States.” As late as October 21, after a particularly bad day on the market, Mitchell, now arriving back in New York, tried to calm welling public panic. The market readjustment, he told reporters, “had actually been an encouraging sign” and, in fact, had already “gone too far.”
The crash began two days later, not as a nauseating one-day plummet, but as an agonizing weeklong plunge into the abyss. The sell-off that began in earnest on the afternoon of Wednesday, October 23, fed on itself as speculators abandoned their positions and margin accounts were sold out. On Black Thursday, almost 13 million shares changed hands, three times the previous record. As the averages continued to fall, the Morgan partner Thomas Lamont, Mitchell, and other leading bankers tried to support the market—just as J. P. Morgan had done to stave off the Panic of 1907. They pooled resources and sent Richard Whitney out to the floor of the New York Stock Exchange to ostentatiously purchase U.S. Steel and other leading industrial stocks at above-market prices.
The Hellhound of Wall Street Page 10