The Hellhound of Wall Street

by Michael Perino

  With public opinion now even more firmly on his side, Roosevelt was not yet ready to let “the money changers” off the hook. The public was still clamoring for federal legislation. Bankers, as one newspaper put it, needed a “legal straight-jacket” if the country was going to avoid a repeat of the “sickening story of exploitation” Pecora revealed. The president knew that he had to keep that anger alive if he was going to pass real financial reforms, and the way to do that was to keep the pressure on Wall Street. The day after his first fireside chat, Roosevelt met the new chair of the Banking and Currency Committee, the Florida Democrat Duncan Fletcher. Fletcher could have used his seniority to take charge of the powerful Commerce Committee, but over the winter Roosevelt had persuaded him to lead this one instead, a move that prevented Carter Glass, the senator who so hated sensational congressional hearings, from doing so. At his initial meeting with Fletcher, it was Roosevelt who suggested that the next target of the investigation should be the private bankers, especially J.P. Morgan and Company.4

  Incredibly, Untermyer was still lobbying the president to take over as counsel. He wrote the presidential adviser Raymond Moley that “as soon as the Committee is re-constituted, if it desires to have me go forward with an investigation . . . I shall be prepared to do so.” Moley gave Untermyer no encouragement. He thought it was not the administration’s role to dictate to a Senate committee who its counsel should be, but he did little to disguise his preference for Untermyer. Moley never really gave Pecora a chance. “He is too blithe on important matters, too ready to dispose by a jest,” one contemporary wrote of the Brain Trust coordinator. Moley had worked briefly on the Seabury investigation of Tammany Hall and that experience colored his view of Pecora. It was purely guilt by association. “Untermyer would have been preferable to the man ultimately selected,” Moley wrote in his memoirs. “For Ferdinand Pecora’s experience had been that of an assistant district attorney in a generally incompetent office.”

  Not content to lobby just the president, Untermyer wrote again to Norbeck, although he was no longer chair of the committee. Untermyer had “never known the people in such an unsettled, distressed state of mind. I realize as keenly as anyone the necessity for uncovering and uprooting some part of the rottenness of the great financial institutions of New York. I recognize also that this is but a beginning and that the surface has hardly been scratched.” The lawyer flattered Norbeck for his “reckless courage” in uncovering these abuses during “the present terrorized condition of the country” and made his pitch for the job. “It is hardly necessary for me to repeat that if there is any way in which I can help, the Committee has only to command, for my heart is and has been for thirteen years wrapped up in this reform, which should be no longer delayed.”

  Roosevelt had no intention of switching horses. He was weary of Untermyer’s incessant self-promotion and annoyed that the lawyer constantly leaked news of their meetings in order to bill himself as a crucial adviser. Besides, the president, who knew a good thing when he saw it, was not about to dump Pecora. Pecora met with Roosevelt shortly after the inauguration and was reappointed as counsel on March 13, 1933.5

  Pecora would guide the hearings for a little more than a year. During that time all the leading bankers on Wall Street traipsed before the committee, but the investigation was never more intense than in the spring of 1933, when J. P. Morgan Jr. came to Washington. The intrepid attorney was now facing off against Morgan’s longtime lawyer, John W. Davis, the man originally considered to run the short-selling investigation. Davis still abhorred congressional investigations, and he was convinced that Pecora intended this one to be a “witch hunt.” At every turn he opposed Pecora’s investigatory efforts. Thomas Lamont, who just six weeks earlier had pleaded with Roosevelt to intercede in the banking crisis, was now vociferously complaining to the president about Pecora’s handling of the Morgan investigation. None of it was of any use; Roosevelt was squarely behind the investigation. The president ignored Lamont’s protests, and the committee continually expanded the authorizing resolution, cutting off Davis’s objections.6

  Public anticipation of the younger J. P. Morgan’s appearance before the committee was tremendous, and when the hearings finally started in late May, they were a media circus, completely dominating the other news coming out of Washington. The crowds gathering to see the reclusive Morgan swamped Room 301 and the hearings were moved to the larger and more ornate Senate Caucus Room down the hall. Overruling Pecora’s previous request to ban photographers, the senators authorized newspapers to attach klieg lights to the room’s chandeliers. Extra telegraph lines were brought into the Senate Office Building so that reporters could get their stories out more easily.

  Morgan’s last name was filled with mystique, and one newspaper report portrayed him as “the twentieth-century embodiment of Croesus, Lorenzo the Magnificent, [and] Rothschild” all rolled into one, but in reality the shy Morgan was a pale imitation of his legendary father. It was the firm’s practices, rather than Morgan himself, that were really on trial.

  Despite the hoopla, the hearings were, to some degree, a disappointment. “In truth,” Pecora wrote in his memoirs, “the investigation of the Morgan firm elicited no such glaring abuses” as the City Bank hearings. As with Insull, Pecora was again trying hard to prove otherwise, and he ended up skating very close to the line of demagoguery. When he revealed that for two years the Morgan partners paid no income taxes, it was the front-page headline across the country. He neglected to mention that because of their huge capital losses in the Depression, they had no taxes to pay. “It is no criminality,” the New York Evening Post observed. “Mr. Pecora only makes it seem so.” It may not have been illegal, but if it had been no one at the Internal Revenue Bureau would have noticed. One tax return Pecora put in evidence contained this notation: “Returned without examination for the reason that the return was prepared in the office of J.P. Morgan and Company and it has been our experience that any schedule made by that office is correct.”

  Other disclosures prompted similar outrage and suggested a market in which the favored few had unerodible advantages over the ordinary investor. Pecora was able to show that the J.P. Morgan firm had preferred lists of clients to whom it doled out financial sure things—stocks that it sold for below market prices. Those recipients of Morgan’s generosity were a who’s who of the political, social, and financial elite of the day, including the former president Calvin Coolidge, leading bankers (Charles Mitchell among them), former and current cabinet officers (including Roosevelt’s Treasury secretary William Woodin), a Supreme Court justice (Owen Roberts) and, for good measure, the aviator Charles Lindbergh and the American World War I hero General John “Black Jack” Pershing. The favors weren’t illegal either, but the former Democratic National Committee chairman John J. Raskob’s thank-you note seemed to best encapsulate the public’s suspicions about what lay behind them. “I appreciate deeply the many courtesies shown me by you and your partners,” he wrote, “and sincerely hope the future holds opportunities for me to reciprocate.” For Pecora, that sense of obligation (“the silken bonds of gratitude in which it skillfully enmeshed the chosen ranks,” as he put it in his memoirs) was one of the key sources of the firm’s power.

  In the opening statement John Davis penned for him, Morgan defended the private investment banker as “a national asset and not a national danger.” Regulation was unnecessary because he conformed his conduct to a far more exacting code than any law could ever articulate. Morgan, Pecora wrote, believed profoundly “in the invincible rectitude of his own regime”; but as the hearings progressed, that view became a minority opinion. “Here was a firm of bankers,” the New York Times wrote, “perhaps the most famous and powerful in the world, which was certainly under no necessity of practicing the small arts of petty traders. Yet it failed under a test of its pride and prestige.” Walter Lippmann, a usually reliable defender of Morgan, now asked Washington to put limits on “the sheer power of so much privatel
y directed money.”

  Pecora had nothing to do with the incident that, more than anything, evaporated Morgan’s air of mystery, although the grilling he was giving the banker precipitated it. Carter Glass had grown annoyed at what he saw as a “Roman holiday” that was diverting attention away from his now reproposed banking bill. Glass began to attack Pecora. The lawyer, he said, was wasting everybody’s time asking arcane questions that were of “no significance to a man of ordinary intelligence.” Glass’s former assistants at Treasury were both partners at the firm, and the senator roared at Pecora that he did “not intend to see any injustice done to the House of Morgan.” Senator Couzens came to the investigator’s defense. Pounding the table, Couzens barked, “I insist that Mr. Morgan be treated like anyone else here!”

  Pecora, who had been working around the clock, no doubt appreciated the support, but he was perfectly capable of taking care of himself. In no mood for Glass’s upbraiding of his methods or his motives, he gave as good as he got. “I want to assure Senator Glass,” Pecora angrily shot back, “that the compensation of $255 a month which I am receiving for these services is no incentive to me to render these services or continue to render them.” The gathered crowd gave a huge round of applause to the feisty counsel, leaving Glass to complain, “Oh yes; that is what it is all about. We are having a circus, and the only things lacking now are peanuts and colored lemonade.”

  Glass’s remark caught the attention of a Ringling Brothers promoter, who brought Lya Graf, the circus’s thirty-two-year-old midget, to the hearing room the next day. As the senators on the committee were embroiled in a rancorous executive session, during which Glass wanted to severely curtail Pecora and Pecora threatened to resign, Graf came into the hearing room. After shaking hands with Morgan, at the promoter’s suggestion, she promptly plopped down onto the famous banker’s lap. The committee implored newspapers not to print the photographs, but only the New York Times complied. The iconic pictures of the smiling and grandfatherly Morgan bouncing Graf on his knee humanized Jack and further undermined the view of investment bankers as otherworldly supermen. The fallout for Graf was decidedly worse. She fled to her native Germany in 1935 to escape the constant jokes about the incident. Two years later, the Nazis classified the half-Jewish Graf as a “useless person” and she was eventually killed in the gas chambers at Auschwitz.7

  Glass failed to squelch the hearings; indeed, Roosevelt himself stood behind the investigator, announcing that he wanted the hearings to “go through without limit.” With the Morgan hearings captivating the country and the popular president’s benediction, Ferdinand Pecora quickly became a media darling. In the same week in June 1933, the investigator’s photograph graced the covers of both Time and Newsweek. To the editors at Time, unaware of Samuel Untermyer’s backroom machinations to steal Pecora’s job, Pecora was a “Roland for an Untermyer,” a reference to Charlemagne’s most courageous and loyal knight. Reporters praised Pecora’s prosecutorial experience, complimented him on his “penetrating, analytical mind,” extolled his relentless cross-examination skills, and fawned over his sparkling dark eyes, “which reveal determination and intelligence.” They were gleeful whenever the bantam lawyer transformed “some cocky banker . . . from assurance into a perspiration.” They “looked with astonishment at this man who, through the intricate mazes of banking, syndicates, market deals, chicanery of all sorts, in a field new to him, never forgot a name, never made an error in a figure, and never lost his temper.” They delighted in reporting that “the sharp rapier of the Senate inquisition,” who continued to make a pittance, was facing off against the highest-priced and best-known legal talent in the country.

  At times, eager to satisfy the public’s voracious appetite for information on the “committee’s dynamic little chief investigator,” the papers veered into detailing the kind of minutiae normally reserved for puff pieces about movie stars. Pecora stood five feet five inches and weighed 140 pounds. His favorite outdoor sport was golf. He loved to play pinochle. He took “regular sun-lamp treatments.” He disliked going to bed and, in fact, did his best work at night. In the middle of eighteen- or twenty-hour days, Pecora liked to refresh himself with a large bowl of ice cream. When he finally made it to bed, he would continue to read while smoking “large expensive cigars.”8

  The Boston Globe dubbed him “Fighting Ferdinand”; for others he was the “hellhound of Wall Street” or the “Icy Latin.” Although he had been a Democrat for nearly two decades, Will Rogers quipped: “If the Republicans ever decide to enter another Presidential candidate they better hire this little Pecora to run for ’em. He is the best bet I see right now.” One enterprising barber in New York who shared the same last name hung this advertisement in his shop window: “D. Pecora, Barber, Let Us Investigate Your Scalp.” Few lawyers ever achieve that kind of public acclaim. As for Irving Ben Cooper, the lawyer who quit in a huff after just a week as committee counsel, the rumor around Washington, according to Norbeck, was that he was “quite a little envious of Mr. Pecora’s position, and is wondering why he himself is not in the limelight.”9

  With Pecora keeping the pressure on Wall Street, the initial path to federal securities and banking legislation was relatively unobstructed. “The first months of the New Deal,” the historian Arthur Schlesinger wrote, “were to an astonishing degree an adventure in unanimity.” Roosevelt turned to securities even before the Morgan hearings were held, knowing that the continuing clamor over City Bank and the intense interest in Morgan would ease passage of reform legislation. Before March was out, Roosevelt sent to Congress a draft of a bill regulating how securities were sold to the public. “This proposal,” the president wrote, “adds to the ancient rule of caveat emptor the further doctrine, ‘Let the seller also beware.’” As with the emergency banking legislation, he steered away from more radical approaches. He rejected proposals from some in his administration to create an agency that would direct the flow of capital in the economy, deciding which industries and which projects were entitled to funding. Adhering closely to Brandeis’s progressive prescription, Roosevelt wanted to preserve the markets while regulating their excesses and abuses.

  The final bill, drafted by three of Felix Frankfurter’s former students (James Landis, Benjamin Cohen, and Thomas Corcoran, collectively known as the Happy Hot Dogs), did not require the government to approve new issues or, as an initial draft had done, give the government the power to revoke securities “not based upon sound principles.” As Roosevelt told Congress, the “Federal Government cannot and should not take any action which might be construed as approving or guaranteeing that newly issued securities are sound in the sense that their value will be maintained or that the properties which they represent will earn profit.” Instead, the Truth in Securities Act was modeled on the legal requirements already in place in Britain and it put “the burden of telling the whole truth on the seller.” There would be no more skimpy prospectuses like the ones City Bank distributed to investors. New securities could now only be sold if investors were given all the information they needed to make an informed decision about whether to buy them. Not only issuers, but their investment bankers as well, would be liable for any materially false or misleading representations or omissions in their offering documents. Requiring sunlight, as Brandeis said twenty years earlier, was the best way to police the markets and the best way to avoid a repeat of the Minas Geraes and Peruvian bond offerings.

  House Speaker Sam Rayburn had the task of moving the securities bill through Congress, and he was quite conscious of the connection between the bill and Pecora’s confrontation with Mitchell. “Today,” he said, “we are forced to recognize that the hired managers of great corporations are not as wise, not as conservative, and sometimes not as trustworthy as millions of Americans have been persuaded to believe. . . . In this bill, we demand not only a new deal, we also demand a square deal. Less than this no honest man expects nor a dishonest man should have.” Rayburn had comparatively few difficulties
. Public opinion was strongly in favor of the bill, and even such stalwart conservative newspapers as the Wall Street Journal remarked that the bill “is in the main so right in its basic provisions that the country will insist on its passage.”

  Investment bankers put up some resistance, but with the political climate so against them, it was comparatively mild. John Foster Dulles, one of the Street’s designated spokesmen (and the future secretary of state), was by far the most strident critic, claiming the bill would undermine the entire financial system of the country. No one in Washington seemed to be taking those dire predictions seriously; the groundswell for reform was simply too strong. On May 27, 1933, while Pecora continued to examine J. P. Morgan Jr. in the Senate Caucus Room, the president signed the Securities Act. Advocates for robust federal control of the capital markets continued to deride it as an inadequate “nineteenth-century piece of legislation.” But nearly eighty years later, its provisions remain securely in place, and the disclosure philosophy it articulates is still the touchstone for federal regulation of the securities markets.10

  Three weeks later, near the end of the first hundred days, Roosevelt signed the Banking Act of 1933, more commonly known as Glass-Steagall. The expanded branch-banking features that proved so objectionable the previous winter were still there. Indeed, the bill was even more expansive than the one Huey Long killed in his filibuster. In a direct nod to the City Bank hearings, it gave the Federal Reserve the power to remove officers and directors of national banks if they were operating the bank in an unsafe or unsound manner. There would be no more morale loans either; national banks were barred from loaning money to their own executives. After the trashing Pecora had given securities affiliates, it was not terribly surprising that the ban on them was still firmly in place. Nationally chartered banks were given a year to sever their affiliates, and private investment banks were prohibited from accepting deposits.