The Hellhound of Wall Street

by Michael Perino

  In all this Norbeck saw a well-orchestrated attempt to discredit his investigation. He even heard from his brother back in South Dakota that “Wall Street men” were there looking for dirt on him. Norbeck was livid and he lashed out at his critics. He complained bitterly that there was “too much money on the other side” being used to thwart his efforts, and he predicted that “there will be more resignations as the enemies of the investigation are able to reach them.” But he refused to give in.32

  Then, just when it looked like things couldn’t get any worse, one of the men Pecora had subpoenaed for the City Bank investigation, John D. Ryan, died from a massive heart attack. The sixty-nine-year-old Ryan was a director of City Bank and the chairman of the board of Anaconda Copper, one of the stocks City Bank had allegedly manipulated. It certainly looked like his unexpected death might seriously undermine the investigation, but Pecora tried to assure reporters that it was not a problem. Ryan had fully cooperated with the committee, promptly turning over all documents the committee requested. “At no time did he join with other officials of the bank in resisting our efforts to get at the facts in the National City situation.” But those denials hardly helped. After all, if he had been cooperating when others weren’t, wouldn’t that necessarily impede the investigation?33

  Besides, after everything else that had happened, it was not entirely clear that anyone believed Pecora anymore. That was particularly true in the heartland, where the natural reaction of many people was to distrust anything or anyone from New York. The Aurora Monitor, a Missouri newspaper, thought that Pecora’s selection damned the whole investigation. For his prosecution of the Anti-Saloon League’s William Anderson, the paper said Pecora “ought to be serving a life sentence in state’s prison.” The paper, no fan of Wall Street, wondered “just how much conscientious ruthlessness can be expected of this cheap little heeler, since discarded even by Tammany?” The “idea of getting a cast-off Tammany legal hack to investigate the Stock Exchange . . . is so ridiculous and in addition so tainted with suspicion of its good faith that even the United States Senate brand of intelligence ought to have comprehended it.” They even saw fit to attack his religious convictions—the convictions that had made Pecora an outsider in the Italian community in New York. “Pecora claims to be a Protestant,” the Monitor declared, and “if he is it is probably because he can be more useful to Tammany as a professing Protestant than as a frank Romanist.”34

  Pecora, like Norbeck, had to do his best to disregard the criticism and the setbacks. He had to this point poured almost all his energies into City Bank, knowing that those hearings would make or break the investigation. It was the right strategy, but it meant that Pecora had largely ignored the next big task that was looming before him—conducting the Insull hearings. Although Pecora knew they were just the opening act, they would still be wickedly complicated. With his first public appearance as the committee’s counsel now just days away, he could ignore them no longer.

  Chapter 7

  JUNIOR

  Norbeck had made elaborate promises for the Insull hearings, telling reporters that they would be “the most sensational yet.” Rumors swirled that the testimony might implicate “scores of prominent persons.” Insull was the biggest corporate collapse of the day, and the Senate hearing room was packed tight with dozens of reporters and photographers. The latter, with their flashes constantly blazing, jostled for the best views, a contemporary reporter wrote, of the “many, many celebrities . . . celebrities among the witnesses, celebrities among the sitting senators, celebrities among the correspondents, celebrities among the thrilled onlookers.” They were all there waiting for a bombshell.

  With Samuel Insull still safely in Greece and with the nearly daily disclosures from the criminal case and the bankruptcy proceedings, the reality was that there probably wasn’t much new to discover. These hearings were simply a three-day dress rehearsal for City Bank. Some of Pecora’s performance, however, suggested that he might not yet be ready for opening night.1

  Not that Pecora wasn’t trying, but he was working at a distinct disadvantage. This was his first time on the national stage, and unfortunately he was operating in an area about which he knew comparatively little. It wasn’t even his investigation. Although Norbeck’s staff had been working on it for months, they really hadn’t turned up anything new. With all his work on City Bank, Pecora could devote little time to understanding Insull’s devilishly complex organization. The Insull utility empire was a towering pyramid, with layer upon layer of holding companies, sometimes with ownership interests in each other, piled atop a welter of operating systems that stretched from Maine to the Midwest. The utility companies Insull controlled produced about one-eighth of the country’s electricity. Even the most adept and sophisticated corporate practitioner would need months even to begin to understand it all. Pecora had just a few days.

  As the hearing date grew closer, Pecora quickly read through as much of the company’s records as he could, but it was futile. No matter how much ground he covered, no matter if he read documents until dawn, there was no way he could do justice to the topic in the short amount of time he had. Of course, the truth was that the whole enterprise was misguided from the start, just as the Kreuger investigation had made little sense. The only thing to be gained from Senate hearings on those already disclosed scandals was the chance for senators to express some righteous indignation and to satisfy Norbeck’s repeated promises that he would investigate the collapsed utility companies. The most Pecora could hope to accomplish was to reveal a few more details about a story everyone already seemed to know.2

  Nor could the retreaded Insull hearings compete with the other news that would soon dominate the papers, almost totally eclipsing the celebrity witnesses in Washington. That week, the Senate voted to repeal Prohibition, good news for a population that was greatly in need of a legal drink. The excitement over that development was short-lived, however. On Valentine’s Day, the eve of the first hearing day, Michigan’s newly elected governor William Comstock announced that he was shutting down the state’s banks for eight days, euphemistically dubbing it a “holiday.” A month earlier, Ernest Kanzler, the chairman of one of Detroit’s largest banking chains, had told the chief national bank examiner from Chicago: “We have got to get considerably more money or the whole group is going to collapse.” The money did not come; indeed, over the next month millions continued to flow out of the banks and a holiday was the only way to prevent their complete collapse. The announcement was front-page news across the country, although this was hardly the first warning sign that the banking sector was in serious trouble.3

  There had been a host of bank failures before Michigan—more than 5,300 since the start of 1930. The biggest was the grandly named Bank of United States in New York, a bank with more than 400,000 depositors, largely Jewish and Italian immigrants, who when they opened their accounts had mistakenly thought it was affiliated with the federal government. On December 10, 1930, there were runs as word began to leak out that the bank was in trouble. Depositors, many of whom were unemployed in the Depression, raced to the bank and stood in long lines in a cold, wet rain to get their money. The state banking superintendent Joseph Broderick tried to get Wall Street firms, including City Bank and J.P. Morgan, to come to the bank’s rescue, but the elite Wall Street institutions appeared to have little interest in aiding a retail bank, “especially,” a Wall Street historian noted, “one run by outsiders that catered to immigrants.” New York banking authorities shut it down without warning the next morning.4

  The depositors, it soon became clear, were right to be worried about their money. The bank was the victim of massive criminal mismanagement by its majority stockholders, two former garment merchants named Bernard Marcus and Saul Singer. They were using the bank’s capital to speculate in the bank’s own stock, which they then tried to sell to depositors and friends through high-pressure sales techniques. When that failed, they would sell it to the bank’s own affiliated
companies. There were, in addition, millions in bad real estate loans, suspect and shady loans to board members, and a host of other risky banking practices. Marcus and Singer eventually went to prison, not for their criminal mismanagement of the bank, but for their fraudulent attempts to cover it up.5

  Over the next year after the high-profile collapse, the frequency of bank failures accelerated as people began to wonder about the safety of the banking system as a whole. In just one week in June 1932, twenty-six Chicago banks went under, pushed along by the Insull collapse. The bank failures spurred runs on both insolvent and solvent banks, including the city’s largest, and presumably most stable ones. By October 1932 the situation looked better, and Hoover’s Treasury secretary, Ogden Mills, confidently proclaimed that the administration had saved the banks. It proved to be a temporary reprieve. Bank failures and runs were again mounting after the election, and citizens in small towns and large cities across the country saw “armored cars rushing to threatened banks” and “moneybags unloaded by guards with guns.”

  By December 1932, the Reconstruction Finance Corporation, a government agency established earlier in the year to make loans to cash-strapped banks, had to rescue banks in Wisconsin, Pennsylvania, Minnesota, and Tennessee. In part, the upwelling in bank runs was due to Congress’s disclosure of RFC loan recipients, a move prompted by popular anger over the decision to bail out politically well-connected banks but to leave the unemployed largely on their own. The RFC was derided as “Wall Street’s three-billion-dollar soup kitchen.” Unfortunately, disclosure of the RFC recipients only increased pressure on the named financial institutions and created even greater public uncertainty over the solidity of the nation’s banks. Bank runs were infectious and the contagion spread from largely rural banks, to small cities, and then to larger ones. Soon Hoover administration officials were staving off bank runs in Iowa (where twenty-six banks failed in a single day), Illinois, and Minnesota. Then came Chattanooga, Little Rock, Mobile, St. Louis, and Memphis. A month later more runs were cropping up, this time in San Francisco, Baltimore, Kansas City, Nashville, and Boston.6

  There were local and state holidays before Michigan. On Halloween 1932, Nevada ordered a voluntary bank holiday that ultimately lasted until well into December. The Nevada banks were small with interconnected ownership and big undiversified portfolios of livestock loans. In a time of rapidly falling commodity prices, those banks were doomed—with sheep selling for just twenty-five cents a head, the ranchers were simply not going to pay back the eight dollars a head the banks had lent them. In fact, many ranchers who could no longer even afford to feed their herds resorted to wholesale slaughters, dumping the carcasses in nearby canyons. At the time, however, the Nevada holiday was considered a “minor,” largely local problem without national implications.7

  Other states tried their best to disguise their interventions. Two weeks before the Michigan holiday, the Hibernia Bank and Trust Company in New Orleans was teetering on the edge. Fresh off his success in killing the Glass banking bill, Huey Long came to the bank’s rescue, helping to arrange a $20 million loan from the RFC and the Federal Reserve. Federal funds were due to arrive on Monday, February 6, but the bank was too short on cash to make it through its Saturday hours. Not wanting to disclose the bank’s precarious position, Long needed a pretext to keep the banks closed. After his aides talked him out of declaring a holiday in honor of the Louisiana pirate Jean Lafitte, Long roused the city librarian from bed, instructing him to find some significant historical event on February 4 that would justify the governor declaring a state holiday. The groggy librarian found nothing, although he did determine that the United States had severed diplomatic relations with Germany on February 3, 1917. That was enough for Long, who decided that such an important decision must have taken two days rather than just one. Governor Oscar Kelly Allen, Long’s flunky, declared February 4 a state holiday in honor of the sixteenth anniversary of that event, much to the surprise of the local German consulate. Few were fooled by this transparent ruse.8

  Michigan was different and far more serious than these previous tremors. There were, to be sure, logical reasons to view Detroit as an anomaly, to treat it not as a harbinger of the demise of the entire banking system but as an isolated crisis like Nevada or Louisiana. Detroit was a one-industry town hard hit by the Depression. It had the highest unemployment rate of any major city in the country and its banking system was none too stable. Most of the nominally independent banks there were chained together into two competing holding companies, one controlled by Henry Ford and the other owned by a group of Detroit business leaders. When one bank in a chain was imperiled, as was the case in February 1933, the whole structure was likely to topple.

  Yes, it was possible to argue that Detroit was unique, but that was not how Americans saw it. Detroit was for them the industrial heartland of the American economy—booming automobile production was a huge part of the boisterous economy of the 1920s. If a statewide closure could happen in Michigan, many reasoned, it could happen anywhere. A bank closure wasn’t just a bank closure. All sorts of other businesses closed as well; with their money frozen in the bank they simply couldn’t operate. Steel, copper mining, railroads—virtually every industry in the United States was all but shut down. The economy had ground to a screeching halt. And, if businesses couldn’t operate, that meant they laid off even more employees.

  Bank closures meant that those merchants who stayed open would no longer accept checks, and in those days nearly everyone paid for nearly everything with checks. If families were low on cash, how would they pay the rent or buy food or gas? After these “holidays,” banks invariably paid depositors pennies on the dollar. With no federal deposit insurance, that kind of failure might wipe out a lifetime of savings overnight. The unemployed who were just scraping by with meager savings might quickly find themselves evicted from their homes or in the breadlines snaking through the cities. It was no wonder that, first in nearby Ohio, Indiana, and Illinois and then across the country, people rushed to their banks, regardless of whether they seemed solvent or shaky. They wanted their money and they wanted it now. Whatever remnants of trust Americans had in the financial system were stripped away. Michigan was the tipping point that transformed public unease into full-blown panic.9

  President Hoover, in a futile attempt to get Roosevelt to come out in support of his economic agenda during the interregnum, captured the worsening mood of the country, a mood that Roosevelt would later echo in his own Inaugural Address. “The major difficulty,” President Hoover wrote to Roosevelt, “is the state of the public mind, for there is a steadily degenerating confidence in the future which has reached the height of general alarm.” If Roosevelt spoke now to support Hoover, the president-elect could remove that fear, preventing “the fire” from spreading. Hoover was essentially asking the incoming president to support his economic program, to repudiate the New Deal before he even assumed office. Roosevelt had no intention of endorsing policies he had run against and he certainly wasn’t going to take responsibility without the power of office. His response to Hoover was delayed, but his assessment of the financial system was even graver. It was, Roosevelt asserted, common knowledge that a great many banks were unable to pay their deposits in full; that problem, however, was so “deep-seated that the fire is bound to spread in spite of anything that is done by the way of mere statements.” Roosevelt was right—after Michigan the fire had become an inferno.10

  Even repeal prospects and the Michigan bank closures, however, were soon crowded from the front page when, on the first day of the Insull hearings, a delusional thirty-three-year-old unemployed bricklayer from New Jersey named Giuseppe Zangara made an unsuccessful assassination attempt on Franklin Roosevelt. All six shots missed Roosevelt, who had just finished a brief speech in Miami’s Bayfront Park, but the Italian immigrant fatally wounded Chicago’s mayor, Anton Cermak, who was standing on the running board of the convertible carrying Roosevelt. The papers were filled with tal
es of Roosevelt’s fearless heroism—how the president-elect insisted that the Secret Service drive back to retrieve the fallen mayor, how Cermak was rushed to the hospital cradled in Roosevelt’s arms, and how, later that evening, Roosevelt was completely at ease, sleeping soundly throughout the night. The near miss and Roosevelt’s poise under fire did more than just bolster his popularity; they gave Roosevelt an ineffable but powerful mystique. Letters to Roosevelt suggested that God himself had spared Roosevelt so that he could be “the Saviour of Our Country.” Here, it seemed, was the man destined to lead embattled Americans out of their troubles.11

  A few weeks later, Time magazine published their assessment of Zangara, the would-be assassin: “Most illiterate dagoes have the killer instinct, especially when their animal comfort is disturbed.”12

  Pecora’s first witness was Samuel Insull Jr. When Junior was a boy he had dreamed of becoming a poet or a playwright. On February 15, he was probably wishing he had gone one of those routes. Instead, by the early 1920s he had become his father’s heir apparent and, up until the utility organization went into receivership, the president of one of the holding companies. The son of the disgraced utilities czar did his best to maintain a polite and smiling façade; he was humble, although hardly humiliated, and earnest in the face of this searing public inquiry. Junior was short, balding, and impossibly young—he was just shy of his thirty-third birthday when he appeared before Pecora. To Pecora, Junior seemed “more bewildered than anything else”; he lacked “the knowledge that might have been expected of one in his position.” Junior may have been hazy on some of the details, but he managed to come across as reasonably forthright and honorable. He looked, in other words, nothing like the villain Norbeck wanted him to be.13