Perhaps, at least in this case anyway, there was no single villain. Samuel Insull Sr. would soon be captured off the Turkish coast and returned to the United States to stand trial for fraud. In 1934, he was acquitted of all charges. Even before that jury verdict, Owen D. Young, the chairman of General Electric, founder of RCA, and a leader of the Insull creditors, told Pecora that Insull was no rogue. Although Americans’ faith in the business community was shattered, scandal had not touched Young, whose name was floated as a potential presidential candidate or perhaps secretary of state, and he retained an air of authority and propriety even in the winter of 1933. But Young was widely criticized when he told reporters after testifying before the bankruptcy trustee, “After all, the most you can say of that old man [Insull] is that he had too much confidence in this country and his own companies.”
That was not what the public wanted to hear; they presumed Insull guilty, a presumption that was only strengthened by his hasty flight for Europe. Young, however, did not change his view. He told Pecora that Insull was simply a “victim” of the byzantine corporate structure he created, “which got even beyond his power, competent as he was, to understand it.” Young admitted that even he could not understand how all the utility’s intricate parts fit together, and if Young couldn’t understand it, that effectively meant no one could. There was no way, Young concluded, to “get an accounting system which would not mislead even the officers themselves of that complicated structure.”
For Young, the utility company’s collapse was the product not of fraudulent financial shenanigans but of that complex structure and Insull’s ill-advised decision to borrow heavily as the economy continued to head south. But the very impenetrability of the utility empire raised a concern more fundamental than finding the one single miscreant responsible for the debacle, a concern that was at the heart of what Norbeck and Pecora were trying to accomplish in the hearings. “If I am right in thinking,” Young testified, “that Mr. Insull himself was not able ultimately to understand that structure, how can the ordinary investor, buying shares or buying obligations . . . be expected to know, or even to inform themselves, conscientious and able as they might be, really as to the value of those securities?” Couldn’t federal regulation of these securities sales help to rectify this problem? Pecora asked. Young agreed; it would be useful to have a federal law providing “for very complete publicity, so that investors themselves may know exactly the situation.”14
With no overt criminality to uncover, Pecora’s examination of Junior was limited mostly to pointing out the huge paper profits Junior and other members of his family earned on an option to buy the stock of one of the Insull holding companies. Pecora, in his first public test, was clearly trying, perhaps a bit too hard, to deliver on Norbeck’s promises of sensational disclosures, but he was faced with an intractable factual problem—Junior never sold his stock.
Junior naturally and, indeed, quite persuasively argued that his paper profits were irrelevant: “I don’t think you can just saw off the transaction at any one time and say a fellow got a benefit which he did not exercise, when he has stuck with the ship and gone down with it.” He explained that he never felt “free to sell the stock. Although I might have legally done so, morally I felt bound, and I lived up to that moral obligation.” Because Junior stood by the shareholders, he patiently explained, he should not be treated with obloquy. “I consider that a man who is an officer of the company, who may have been said to have gotten privileges from that fact, but who held his stock right down through the crash, is in a different position than if he . . . sold that stock.”
At this point, Norbeck jumped in to help Pecora, but if anything he made matters worse. “Not knowing the crash was coming,” the senator sneered, “that is what he gets credit for. If he had known it was coming, then there is no certainty that he would have held it.” Junior would not budge—he “sank with the ship,” he again explained. Norbeck continued to bluster, just as he had with Whitney the previous spring. He now heaped the pent-up anger of weeks of criticism about his investigation on the young businessman: “It does not take courage to stick with it, if he does not know the ship is going to sink.”
In the end, Junior may not have been as honorable as he was trying to make himself out to be, but he certainly wasn’t the kind of greedy and unscrupulous executive that Norbeck hoped to parade before the American public. Pecora, for his part, seemed to be trying too hard. He appeared to want to prove himself on this first day, and he ended up pushing a weak hand too aggressively. Hectoring Junior was not a great start; it made both Pecora and Norbeck come across not as tenacious investigators, but as bullying and abusive.15
By the second day, however, Pecora seemed more at ease. At one point in the afternoon, Owen Young was reflecting on his own purchase of $48,000 in Insull holding company stock in the late 1920s. “You will remember,” Young told the committee, “that at that time there was a great boom on. Some of us can only barely recall it.” Pecora quickly cut him off, “And others painfully recall it.”16
In fact, Pecora generally had much more success with the bankers who took the stand on day two than he had with Junior. First up was Charles G. Dawes, perhaps the biggest celebrity among the celebrity witnesses. Dawes had been Coolidge’s vice president, a former ambassador to Great Britain, former head of the RFC, and, to top it all off, a Nobel Peace Prize winner for his work restructuring German war reparations. None of that, however, was why he was there. Dawes was the recently resigned chairman of the Central Republic Bank and Trust Company of Chicago, which had loaned buckets of money to Insull.17
There was a good deal of anger at Dawes and his bank going into the hearing, anger that had nothing to do with its Insull loans. In the Chicago banking panic the previous year, the RFC lent $90 million to Central Republic only weeks after Dawes had resigned as RFC chairman and took over control of the faltering bank. It was far and away the RFC’s biggest loan. Chicago had a 40 percent unemployment rate at the time and this one loan was actually three times larger than all the loans the federal government made to the states for direct relief to the unemployed, homeless, and hungry in 1932. When the public learned that Hoover had personally authorized it, they concluded that politics, not need, was driving the federal response to the Depression. That the bank subsequently failed despite the massive infusion of cash did nothing to improve the public’s mood.18
Now as Dawes faced Pecora, he admitted that his bank had violated “the spirit” of an Illinois law that prohibited banks from lending more than 15 percent of their capital and surplus to any one company. Technically, the bank did not violate the statute, because the loans were made to separate legal entities, but Pecora was able to draw a stark picture of reckless lending by a bank that ultimately had to be bailed out by the federal government. All told, the bank lent close to 50 percent of its capital and surplus to various Insull companies in forty-one distinct loans.
Dawes’s bank was hardly alone in its earnest desire to lend money to Insull, even if doing so ran afoul of those lending restrictions. The president of Illinois’s Continental Bank once cornered Junior at a party and told him, “Say, I just want you to know that if you fellows ever want to borrow more than the legal limit, all you have to do is organize a new corporation, and we’ll be happy to lend you another $21,000,000.” Insull’s bookkeeper, Phil McEnroe, said the bankers were no different from the grocers who used to accost his mother as she shopped. “We have some nice lettuce today, Mrs. McEnroe; we have some nice fresh green money today, Mr. Insull. Isn’t there something you could use maybe $10,000,000 for?” To the extent that the investigation succeeded at all the previous spring, it had shown short sellers and other market operators engaged in unethical or outright illegal practices. This was hardly news to the public, for whom those actors were already highly suspect. Now, for the first time, Pecora showed commercial bankers engaged in a reckless grab for profits that pushed hard on the boundaries of legal behavior. With those revelations
coming right on the heels of the Michigan closures, there seemed, at last, to be some hope that the investigation might actually succeed.19
The hopeful signs in Pecora’s performance on that second day of testimony weren’t just from the disclosures about imprudent lending. Most of those were already well known anyway. On that second day, he began to show why Bainbridge Colby had called him the best cross-examiner in New York. Pecora had been relentless with Junior; in fact, he was too relentless, continuing to push the Insull heir even after it was pointless to do so. That initial experience might have chastened another lawyer, but not Pecora, who refused to let Dawes downplay the significance of his bank’s actions. Unlike the first day, however, Pecora now had more to work with.
Puffing on his underslung pipe as he sat through the questioning, Dawes insisted that, despite the violation of the 15 percent limit, his bank had acted prudently and responsibly. Dawes was as theatrical as Pecora and he insisted as he pounded on the table, “At the time these loans were made, all of them were supposed to be well secured on the basis of existing values.” After his failure with Junior, it would have been understandable if Pecora let Dawes get away with that justification. After all, this was the former vice president of the United States and a Nobel laureate. Pecora, however, seemed unfazed by Dawes’s star power, and he politely cut the heart right out of Dawes’s justification.
“It is agreed,” Pecora asked, “is it not, that the policy underlying these banking laws . . . bears no relationship, as such, to the question of security underlying loans so made?”
Dawes puffed on his pipe and responded in the only way he could, “That is true.” And it was true—there was nothing in the statute that permitted greater loans when they were properly secured.
“It simply establishes the principle that a bank should not put more than 10 or 15 percent of its eggs in one basket,” Pecora continued. “So that principle was violated, regardless of the security underlying the loans?”
The Nobel laureate stared at Pecora and answered matter-of-factly, “Certainly.” In just a few questions, Pecora had neatly eliminated Dawes’s entire defense. All Dawes could try to do was to absolve himself of responsibility. The loans, he said, were made at a time when he was unconnected with the bank.20
On Friday morning, Pecora faced his last substantial witness in the Insull hearings. Across the table was Harold Stuart, Insull’s white-haired and distinguished investment banker from the Chicago-based Halsey, Stuart & Co. Stuart, too, was under indictment in Chicago for mail fraud, although he too would be acquitted in 1934. Stuart, the man who refused to join National City when the bank acquired his bond-selling firm in 1916, had built Halsey, Stuart into a scaled-down, midwestern version of the National City Company. Stuart, like Mitchell, helped forge a vast retail bond-selling network. He prospered by specializing in utility securities, one of the emerging industries that the more established investment banks avoided. Like Mitchell, Stuart was not shy about employing less than genteel methods to sell securities, and he too had been wildly successful as a result. Over the years, Stuart and his team of bond salesmen hawked hundreds of millions of Insull securities to middle-class investors and small country banks. Halsey, Stuart, therefore, provided a great test run for the next week’s City Bank hearings. Here too Pecora showed flashes of great legal ability and hints of what approaches and inquiries might work in the City Bank hearings. But, even more than with Junior, there were also signs that Pecora was way out of his depth.21
No stunning revelations came out of Stuart, but Pecora was at least able to get some sense of what testimony worked with the press and what didn’t. His first efforts were largely a failure. Pecora started with a whirl of testimony about the creation of one of the Insull holding companies. To anyone not well-versed in the intricacies of corporate finance, the testimony was only so much gibberish about debentures, detachable warrants, and prior preferred stock. It took hours and either it went over the heads of the assembled reporters or they were thoroughly bored by it. Their stories the next day gave it, at best, only a cursory nod.
Reporters instead focused on two more basic themes: how much money Halsey, Stuart made and what the bond dealer did and failed to do when it sold all those Insull bonds to small investors. Instead of dissecting and explaining complex transactions, they latched onto simple anecdotes. Most of the next day’s news stories repeated the tale of Evaline MacNeil, the Halsey, Stuart customer who lost money when the firm induced her to replace government bonds with Insull securities, never bothering to tell her that Halsey, Stuart owned a big stake in the utility giant. Reporters also didn’t want to dwell on nuances, but rather to regale their readers with simple and straightforward deceptions, such as the way Halsey-Stuart tried to disguise its ownership interest in Insull by placing its holdings in the name of a midlevel corporate executive. The press loved to ridicule the inanities of the 1920s. One of their favorites was Halsey, Stuart’s attempt to drum up business by putting a University of Chicago professor on the radio to dispense investment advice. Dubbed the Old Counselor, the professor, who taught English, not economics, was chosen for his mellow voice, not his investment acumen. His knowledge was irrelevant anyway because Halsey, Stuart wrote all his lines.
These were the lessons from the Stuart testimony. Keep it simple. Don’t dwell on the details. Humanize the story. If Pecora was going to succeed, those were the lessons that he would have to put to good use when Charles Mitchell took the stand.22
The Insull hearings proved to be a good dress rehearsal not just as a way to test themes for his audience, but also when it came to the mechanics of the hearings. This was Pecora’s first experience sharing the courtroom floor with, in effect, a coterie of co-counsel, the senators on the committee, and he was beginning to see that his goals for the hearings might not always match theirs.
His first lesson came early in the Stuart testimony when the North Carolina Democrat Robert Reynolds strolled into the hearing room and plopped himself down at the table. Reynolds was a gregarious playboy who was then married to his fourth wife, a former Ziegfeld Follies dancer. Although banking was not high on Reynolds’s agenda, he rarely missed an opportunity for self-aggrandizement. After just a few minutes of listening to the testimony, a reporter quietly handed Reynolds a note suggesting a question the senator could pose. Reynolds immediately jumped to his feet, silenced Pecora and bellowed at Stuart, “Is it not true that you took money from one pocket and put it in the other pocket?” Stuart could only stare at the debonair senator and never, in fact, even answered the question. Reynolds nonetheless immediately resumed his seat, looking quite satisfied as the photographers rushed to snap his picture. Pecora returned to his questions, and about five minutes later, Reynolds turned to the reporters behind him and whispered, “Hey, give me some more dope.”23
Pecora had successes in those three days of Insull hearings, and he certainly did not seem cowed when facing off against celebrity witnesses. But his performance was troubling on a much deeper and much more fundamental level. It was more than his shaky start with Junior. It was his inexperience with the inner workings of Wall Street. The testimony involving the Chicago commercial bankers was easy. Illinois had a clear statute and it wasn’t hard to tote up the loans and show how the bank had evaded the limits placed on them. Stuart, too, was easy, in at least some respects. It was not hard to see the silliness of the “Old Counselor” or to point out what investors were never told when Halsey, Stuart offered them securities. But to really examine Stuart, to really provide a foundation for constructive federal legislation, Pecora needed to be comfortable with bond-and-stock-selling operations. If he wasn’t, it would be all too easy for witnesses to keep him off balance and prevent him from showing where they had strayed. It was the kind of knowledge, to borrow Pecora’s line about Junior, that might have been expected of one in his position.
It was the kind of knowledge that Pecora didn’t seem to have or at least wasn’t showing. Indeed, at times Pecora see
med glaringly ignorant of even the most basic facets of stock and bond underwriting. He seemed surprised, for example, that investment banks formed syndicates of underwriters, each of whom took a small piece of the offering, as a way to reduce their risk. This simple strategy had a long history, but it seemed entirely new to Pecora, who attempted to portray it as a nefarious scheme to deceive investors.
At one point, Pecora even seemed baffled about whether a particular syndicate agreement was an attempt to manipulate the price of a security already trading on the New York Stock Exchange (what he claimed) or an offering of entirely new stock (what it actually was). Senator James Couzens, perhaps the most knowledgeable person on the subcommittee when it came to corporate finance, was incredulous at the entire line of questioning. “What is counsel trying to do?” he asked Pecora. “To prove by this witness that the market is rigged or maintained without customer demand?” Yes, Pecora responded, that was exactly what he was trying to do.24
Missteps like that may have given knowledgeable observers reason to worry about whether Norbeck had chosen the right lawyer. Sure, Pecora had little time to prepare for the Insull hearings and there certainly wasn’t any doubt about Pecora’s ability to handle himself in the hearing room. But maybe Untermyer was right; maybe Pecora, as well-meaning as he was, simply wasn’t up to the task. Maybe he didn’t know the securities markets well enough to be effective. After all, if he was struggling with Stuart, how was he ever going to be able to handle Mitchell?
The Hellhound of Wall Street Page 15