The Hellhound of Wall Street

by Michael Perino

  With that, the two men immediately set to sniping at each other, until Mitchell finally appealed to Norbeck to intercede: “I presume, Senator Norbeck, your committee is after the facts, and not after the creation of a wrong impression in regard to these matters.” The banker demanded that he be permitted to make a statement clarifying his testimony from Tuesday. He wanted to mitigate whatever damage he had caused himself.

  Pecora wanted none of it. “Whatever wrong impression was created yesterday,” Pecora again countered, “was created by your testimony, because you were the only witness who testified yesterday, isn’t that a fact?”

  Mitchell again tried to blame Pecora and his leading questions, but Pecora cut him off after just a few words: “I was not testifying. I was asking you questions, and certainly if anything that I assumed in my questions was incorrect you had every opportunity in answering those questions to point that out. Now, you want to point it out, after twenty-four hours.”10

  Norbeck gave Mitchell a chance to make a short statement, but Pecora continually interrupted to contradict the defenses Mitchell now offered. As he had done with Gray, Mitchell tried to ignore Pecora. At one point, Mitchell referred to General Sugar’s estimated earnings, and Pecora asked whether those estimates had ever been realized. Mitchell didn’t answer, and Pecora kept at him, asking the banker some variation of that same question six times in a row until Mitchell finally conceded that he did not know the answer. “Well,” Pecora responded, “if you are going to give us a complete explanation of these things, wouldn’t it be better to first fortify yourself as to the facts of actual earnings instead of taking merely estimated earnings?” Mitchell again charged that Pecora was being “very unfair.”

  It was the same claim that Insull and Stuart had made a week before. And although Pecora had seemed bullying at times during those hearings, he didn’t now. Having so thoroughly discredited Mitchell on that first day, Pecora now came across as a dogged and fearless investigator, unwilling to cower before this famous New York banker. Mitchell, on the other hand, seemed like a powerful man who had been caught in a moment of unguarded candor and who was now furiously trying to backpedal his way out of trouble.11

  Pecora was particularly keen to make sure that Mitchell did not downplay the lack of disclosure to the shareholders. When Mitchell noted that the shareholders “furnished” the $25 million for the transaction, Pecora again cut him off: “One moment there. You say the $25,000,000 was furnished by the shareholders. You do not mean by that that when the shareholders put up that $25,000,000 they knew it was going to be used to finance this sugar transaction, do you?”

  Mitchell still seemed perplexed as to how the purpose for the offering was any of the shareholders’ business. “I hardly think there was any necessity for [them to know].”

  Pecora bore in: “Just answer my question: Did they or did they not know what was going to be done with it?”

  “As far as I know,” Mitchell responded, “they did not.”

  Whenever Mitchell tried to squirm out of his answers, Pecora pinned him back down, frequently relying on his incredible memory for the details of the material he raced through in Shearman & Sterling’s library. When for example, Pecora said that the “sugar industry was in a state of collapse,” Mitchell denied it: “Oh, I hardly think you can say that.” Pecora did not miss a beat. “Let me read your own language out of your minute book right on that.” There, repeated several times, was the word “collapse.” Here was the crucial difference between Pecora and Gray: Pecora had all the facts at his fingertips and if someone tried to dodge and weave he was ready.

  When Mitchell completed his statement, he remained unapologetic. Yet again, he said, it was “unfair to look upon this as something that has been foisted on an unsuspecting public or that there is anything criticizable in this. . . . [T]here is nothing which from the standpoint of the banker, in that which he has done, that is criticizable. If there is, I cannot find it.” Mitchell appeared both puzzled and offended. Why should he have to explain the reasons for his business decisions in this hearing room in Washington? How could this former prosecutor question his motives? Perhaps Mitchell truly believed he and the bank had done nothing wrong, but that was the point. Mitchell could only see the deal “from the standpoint of the banker”; the standpoint of the investor was something that did not seem to enter his consciousness or affect his conscience. Mitchell’s explanation had done nothing to undercut the impression Pecora made on the first day of the hearings—City Bank and Mitchell had a cavalier disregard for the bank’s shareholders.12

  Pecora was now completely in charge of the hearing room and at times he genuinely seemed to be having fun. Pecora wanted to return to the Anaconda Copper pools that Gray had questioned Mitchell on the previous spring. Mitchell was astounded. “I cannot conceive of the committee having further interest in it.”

  Pecora’s response was playful: “Have you any further interest in it?”

  Mitchell was emphatic: “Most decidedly no.”

  It is easy to imagine the smile on Pecora’s face when he replied, “No. Well, I have just a little additional interest in following up certain lines that apparently were not pursued when you were before the committee last year.”

  The previous spring, Mitchell had dismissed Gray’s attempt to question the propriety of the transactions used to manipulate Anaconda stock with only thinly veiled contempt. Within a few minutes of answering Pecora’s questions and apparently still reeling from the first day’s testimony, Mitchell was willing to concede that “on the back-look” it was “unfortunate” for the bank to be involved in these kinds of stock market operations. “I would not do it again,” Mitchell concluded. “I would rather look to the time when we would be completely out of that sort of thing. I do not believe that it is a thing that we should be doing, Mr. Pecora.”

  “When did you first reach that conclusion?” Pecora wanted to know.

  “Oh,” Mitchell replied, it was just recently, at about “the same time that many of us began to feel the headache from that which had gone before.”

  Pecora reminded Mitchell that “the headaches of some people have been so extensive they have forgotten when they commenced.” Mitchell murmured his assent, but he apparently believed that contrition or real regret were unnecessary. The public should be satisfied with his admission of error, no matter how belatedly it had come.13

  As Pecora took charge, the senators were much less intrusive, seemingly content with their Greek chorus role. Pecora showed, for example, that at the time the securities affiliate was participating in an Anaconda Copper stock offering, worldwide copper prices were dropping by a third. It was still a good investment, Mitchell said, prompting Senator Brookhart to chime in: “Were you selling your own stock then?”

  When Mitchell said that City was indeed selling, Brookhart retorted with derision: “Had you reached the conclusion that it was about time to get rid of it; is that the idea?”

  Mitchell’s anger rose for the second time that day. “That is not the way,” he responded hotly, but Brookhart cut him off: “That is the way you did it.”

  It happened rarely to the smooth-talking bond salesman, but for a moment he seemed to splutter: “That is not the fair way to do it.”

  Brookhart and Mitchell had finally found something on which they could agree: “I admit it is not,” the senator replied.14

  That afternoon, for the first time since the City Bank hearings had begun, someone other than Mitchell occupied the witness chair. Right after the lunch recess, Norbeck swore in Gordon Rentschler, the forty-seven-year-old president of City Bank. The son of an Ohio manufacturer, Rentschler grew up in a small Midwest town and then attended Princeton, where he graduated, as class president, in 1907. Like Mitchell, he was a tall, physically imposing man, although Rentschler’s thick, round glasses, jovial smile, and “boyish enthusiasm” tended to soften his appearance.

  A few years after returning to Ohio to take over the family business, he m
et Mitchell, and the two men quickly became friends. Indeed, it was Rentschler—his company manufactured, among other things, sugar-processing equipment—whom Mitchell sent to assess local conditions in Cuba. It was Rentschler’s idea to form General Sugar, and he was one of the men put in charge of it. In 1923, Rentschler became the youngest City Bank director and shortly thereafter began working for the bank full-time. He was soon tapped as Mitchell’s heir apparent. The two men were extremely close; they were frequently spotted walking together on Mitchell’s daily constitutional from his Upper East Side home to his Wall Street office, immersed in conversation about City Bank business. In 1929, Rentschler became president of the bank when Mitchell was named its chairman.15

  Given Rentschler’s history with the bank, it would have been quite natural for Pecora to start by asking him about General Sugar, but he didn’t. Pecora asked Rentschler if he remembered a City Bank board meeting held in November 1929, about two weeks after the crash. The bank’s executives were overextended in the market. They had been buying the bank’s stock on margin and it, along with everything else, was tumbling. The executives were getting hit with margin calls and, if they didn’t come up with the money, the stock would be sold. So the bank’s board decided to help them out. It authorized lending the top one hundred executives up to $2.4 million (hundreds of millions in today’s dollars), most without security, all interest-free. A City Bank official later conceded that to get that kind of loan without security—let alone interest free—a borrower “would have to have some really good story.” The story here, at least according to the board resolution, was about the need to keep up the executives’ spirits in those trying times. The loans were necessary, the board stated, for “protecting such officers in the present emergency, and thereby sustaining the morale of the organization.”

  Many of the loan recipients were the same men who had received bonuses from the management fund, men, Rentschler argued, with earning power and assets. It looked like “their obligations were good obligations to take.” Unfortunately, the executives proved to be poor credit risks. By the time of the hearing, only about 5 percent of the loans had been paid back, and City Bank never tried to collect the remainder. “[N]ow taking a hind look at it,” Rentschler conceded, “it is a different picture.” So different in fact that the bank wrote off a substantial portion of the loans and, in a process that at this point must have sounded familiar to the assembled audience, transferred the balance to the National City Company. “[W]ould you say,” Pecora asked, clearly unperturbed by his row with Mitchell that morning, “that the bank was bailed out of those loans under that process?”

  Rentschler didn’t care for the question any more than Mitchell: “Whatever word you wish to use. The bank was relieved of these loans; yes, sir.”

  Pecora seemed to enjoy taunting the City Bank executives with that phrase, so he kept at it: “You have heard that term used before, ‘bailed out,’ haven’t you? . . . It is used in the common parlance of Wall Street, isn’t it?”

  “Well, I suppose so. But I do not use it.”

  “You think it has a harsh sound to the ear, is that it?”

  Rentschler did not answer; he just smiled at Pecora. What could he say? The lawyer had just shown how the bank’s executives had, in effect, helped themselves to the shareholders’ money.16

  What amazed the committee even more than those generous interest-free loans was Rentschler’s candid admission just a few moments later that at the same time the bank was granting them to its executives, it was selling out the accounts of its customers, the customers whom it had convinced to buy City Bank stock. Rentschler seemed puzzled by the question. Of course they were selling out the customers; “it is the absolute rule of the bank,” he said, “to preserve its assets that are secured in any manner.” As a business matter, the bank had little choice but to do so. What it didn’t have to do was to extend loans to its executives simultaneously. The combination, more than anything else, solidified the impression that the market was not a level playing field and that these bankers were coldhearted and greedy. Only small, unconnected investors would bear the costs of their imprudent investments; the insiders would simply bail themselves out.17

  City Bank proved less solicitous of its lower-level employees’ morale. On the same day in February 1927 when it sold stock to fix its Cuban problem, City Bank instituted a stock purchase plan that permitted certain higher-level bank employees to buy City Bank stock. Suddenly, in December 1929, the bank decided to extend the plan to lower-level employees, permitting them to buy stock on installment over four years while paying interest on the unpaid balance. Under the plan, those employees purchased 60,000 shares for $200 a share. The monthly payments were then deducted directly from the employees’ checks.

  City Bank was still requiring the employees to meet their obligations under the plan. The market for City Bank stock, Pecora quickly established, was $40 per share and it had recently traded as low as $25 per share. “And the National City Bank has not done anything to sustain the morale of its employees with regard to those stock commitments of theirs under this plan, has it?” Pecora asked.

  Rentschler insisted that the employees were “entirely well satisfied” with their participation in the plan and that City Bank’s morale was as “strong and fine” as any in the country.

  It was a ludicrous claim that would have been hard for anyone in the room to believe, so Pecora decided to take advantage of it. “As a matter of fact,” Pecora followed up, “after paying their installments as they have fallen due since December of 1929 to date, most of the employees who subscribed for stock under this installment plan still owe more than the stock is worth in the market; isn’t that so?” Rentschler admitted that was true.

  “And the only way they could be relieved of payments is by resigning their positions; isn’t that so?”

  “Yes,” Rentschler replied.

  In a time of 25 percent unemployment, snaking breadlines, and massive homelessness, it is hard to imagine that many employees would have taken that step. It would have been “practically the equivalent,” Pecora later wrote, “to voluntarily enlisting in the ranks of the unemployed.” The City Bank clerks were certainly stuck; “content” seemed a bit of a stretch. In fact, the true situation may have been much worse than Pecora presented at the hearings. One Chicago man wrote to Norbeck charging that when employees satisfied their obligations, they were fired. “I knew one man, married, and with a family, with a salary of $175 per month forced to turn over $60 of that amount for his stock. At the completion of it he was discharged. Many of the employees are destitute—practically all of them in want.”18

  As Rentschler sat in the Washington hearing room more than three years later, he still failed to see the inequity of the situation. Executives, he claimed, had purchased under the installment plan as well and just like the lower-level employees, they too were required to pay the full purchase price. All the employees, he insisted, were “treated exactly alike.” After the testimony about the morale loans, Pecora failed to share Rentschler’s assessment of the equity of the situation. “It is not recorded,” he noted sarcastically in his memoirs, “what the faithful employees, in the privacy of their own hearts, thought of these noble and equalitarian sentiments.”19

  Why did the bank do it? Pecora’s theory was simple—Mitchell and the other officers were indifferent to anyone but themselves. That certainly seemed to be the case, but there was a more immediate motive, a motive that Pecora did not address in the hearing room that day. When the stock market crash came, Mitchell was still trying to complete his blockbuster merger with the Corn Exchange Bank, the deal that would transform City Bank into the largest financial institution in the world. Under the terms of that deal, Corn Exchange shareholders could elect either to get 0.8 shares of City Bank stock for each of their shares or to get $360. So long as City Bank’s stock price remained above $450, the Corn Exchange shareholders would take the stock. But the price was dropping fast; as the s
tock market crashed it was already well below $450 and heading further south. A cash deal would have cost City Bank $200 million, money that it had no desire to spend. So Mitchell and the other executives launched a concerted effort to push the stock price upward.

  “Flashes” hummed over National City’s private wires during the last week of October 1929, urging its salesmen to push the bank’s stock. The heavy selling of the previous few days, the president of the securities affiliate, Hugh Baker, argued, “has produced a situation which we regard as distinctly opportune for our customers and our prospects. . . . Remember our stock sold recently around $580 a share.” The “exceptional conditions which made this price possible,” Baker concluded, “are fast disappearing and in fact are about gone.” At the same time, the affiliate and the bank’s officers jumped into the market and began heavily buying the bank’s stock.

  Mitchell, too, was part of the effort. On Tuesday, October 29—the last day of the crash—Mitchell went to see George Whitney, a Morgan partner and the brother of the New York Stock Exchange president Richard Whitney. He established a $12 million line of credit with the firm, drew down $10 million, and began to buy City Bank stock furiously. Months after the City Bank hearings, J. P. Morgan Jr. would explain to Pecora that his firm made the loan to Mitchell and loans to other leading bankers because, “They are friends of ours, and we know that they are good, sound, straight fellows.” Mitchell and Morgan were apparently quite good friends, because the loan was incredibly risky. It was, to be sure, well secured by Mitchell’s City Bank stock. The Morgan firm was not nearly as optimistic about that stock as Mitchell; it valued the stock at $200 a share, well below what it was then trading for in the market. Nonetheless, the loan still amounted to more than 5 percent of Morgan’s net worth.20

  The buying spree proved to be a futile effort and, in hindsight, it never had a chance of succeeding. The tsunami of selling was simply too strong; the millions that Mitchell and the other executives poured into City Bank stock made absolutely no difference. City Bank stock was at $320 by the end of that Tuesday and settled at around $300 in early November. Mitchell abandoned the effort, paid $4 million of the $10 million back to Morgan, and prevailed on the bank’s stockholders to vote down the Corn Exchange deal. A month later, with the affiliate holding a large number of the City Bank shares it had purchased in the open market, the installment-buying plan was opened to lower-level employees. Putting the stock in the hands of the employees rather than selling it back into the market would, the bankers thought, take additional downward pressure off the stock. Of course, they were wrong about that, too.21