All the Presidents' Bankers (19 page)

For now, crisis was still far in the distance, and bankers raked in cash. In 1927, the Morgan Bank was the leading syndicate manager of bond issues, with just over $500 million. Postwar foreign bond issues comprised a third of the Morgan managed offerings. National City Bank and Kuhn, Loeb followed close behind.

The rush to extend foreign loans and sell foreign bonds to American investors would prove disastrous. In a talk before the International Chamber of Commerce in Washington on May 2, 1927, Mitchell’s rival Lamont warned investors of what he saw as a potentially ugly situation, though he was probably also concerned that Morgan was losing its standing as the leading international bond house: “American bankers and firms [are] competing on an almost violent scale for the purpose of obtaining loans in various foreign money markets overseas. . . . That sort of competition tends to insecurity and unsound practice.”

The bankers’ reckless underwriting of loans (without any useful regulation from Washington to curtail it) would implode at the public’s expense. Losses on the Latin American bonds sold to investors to raise money for loans would come from the pockets of investors and take a toll on the American economy, as would the stock market crash.

Hoover’s Prep for President and Bankers’ Support

Coolidge shocked the nation when he announced in early August 1927, while on summer break in South Dakota, that he would not seek reelection.
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As the country digested the news, Mellon snuck in one more round of tax cuts. The US economy stood on the precipice of a six-year run of stock market growth and record high Wall Street profits, which masked underlying problems: home prices had softened in 1926, car sales dropped in 1927, and construction would level off in 1928.
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Inequality had increased dramatically, threatening economic stability. The whole system was buckling.

But such signs of weakness were not the stuff of great political rhetoric, so when Herbert Hoover won the 1928 presidential election, he declared, “We in America are today nearer to the final triumph over poverty than ever before in the history of any land.”
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Americans might have been somewhat skeptical, given their growing difficulties in finding jobs and small business loans, but the financial leaders were pleased at the vote of confidence. It buoyed the market, and all of their plans and fortunes along with it.

Hoover proceeded to select a cabinet reflective of his status as the “first millionaire to reach the White House.” Other millionaires in his inner circle included Henry Stimson, Andrew Mellon, James Good, Charles Francis Adams III, Robert Patterson Lamont, and James Davis. They filled six of his top ten posts.
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That Mellon, “one of the four richest men on this continent,” according to
The Nation,
remained in the Treasury secretary post showed the growing strength of those with money in Washington, despite obvious conflicts of interests. As
The Nation
wrote of Mellon, “During eight years he has so administered that office that $3.5 million in refunds, credits, and abatements of income taxes has gone to wealthy individuals and corporations.” The magazine further pointed out, “On the eve of the coming in of the new Administration, the Senate has voted an inquiry into his eligibility to hold his post—from which a person interested in commerce or trade or in the liquor industry, is barred. His own Aluminum Company of America has escaped the prosecution proposed for it by the Federal Trade Commission, and has received large refunds of taxes.”
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In his public post, Mellon took care of his own interests.

The bankers were happy with Hoover. He offered a sense of continuity with the Harding and Coolidge policies, which had lined so many bankers’ and brokers’ pockets with so much cash. The stock market roared the first six months of Hoover’s term, from a slump in March 1929 to record highs that fall.

Gathering Clouds

As for the Morgan Bank, while foreign loans and financial diplomacy were near to de facto chief executive officer Lamont’s heart, domestic business, including industrial financing, was also a staple of income. As such, after his winter holiday in late 1928, Lamont began working on a new kind of domestic business: a large loan to the Van Sweringen brothers’ holding company.

A decade earlier, the “unprepossessing, reclusive and hard-working bachelors” had begun building a major railway system through the acquisition
of the New York, Chicago, and St. Louis lines. Using a pyramid structure of holding companies, they borrowed heavily from banks to speed up the process. They shared their forthcoming aggressive acquisition plans with the Morgan Bank, which believed the secured loan of $25 million to them represented the first step in a growing and profitable relationship.

Russell Leffingwell, a Morgan partner and former assistant Treasury secretary to President Wilson, and his Morgan partner associate George Whitney harbored strong reservations about the bubbling market. While traveling abroad in March 1928, Lamont received a cable from the Morgan offices: “the market is boiling.” Leffingwell was increasingly troubled, while Lamont remained an optimist.
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Perhaps it was all his time abroad that blinded him to the machinations of the domestic stock market, or the more shady practices of his competitors, but he decided to get more involved with the market nonetheless.

For years, J. P. Morgan & Company had limited the underwriting of securities it offered the public (or for “public offering”) to high-grade, less risky bonds, for governments and large corporations. Its policy was not to underwrite what it perceived as riskier stock issues for public distribution. The company wasn’t interested in acting as a securities broker for little people.

But the frenzied stock speculation and profits had affected Lamont and many of the other Morgan partners who became millionaires trading stocks for their own account. They decided to pursue a risky holding company strategy for clients: combining several companies into a single holding company against which they could then sell new securities—to the public, no matter what the condition of that web of firms.

In January 1929, Lamont oversaw the planning of two large domestic financings based on this new strategy. One of them was a large package for the Van Sweringen brothers: a $35 million bond issue combined with $25 million in preferred stock and $25 million in common stock. Funds would be used to back the newly formed Alleghany Corporation. The Morgan Bank purchased $25 million in common stock at $20 a share, part of which it sold to the public at $24 a share. The Morgan name, which had been so profitable with loans and bonds, would now “bank” on the stock market, following on the heels of National City Bank, which had issued its first stocks in 1927. This thirst for Wall Street domination would provoke market collapse, as no firm wanted to be left out of the speculative festivities.

It wasn’t until the spring of 1929, when the market suffered a sharp break, that Lamont turned more cautious. In May, after liquidating seven substantial holdings (including Chase National Bank, General Foods, and Humble Oil),
he raised about $4 million in cash from the sale of securities—for himself. But then his own isolationism took hold; he didn’t make these sales public to the rest of the nation buying Morgan-backed securities. He didn’t have to legally, but still he chose to protect the information; it would do the market no good if word got out that bankers were cashing in their chips.

Besides, there was still money available in case something went wrong thanks to the safety net that the Morgan Bank and others had pushed for after the Panic of 1907: the Federal Reserve. The primary tool of the Federal Reserve to influence credit conditions was the discount rate that each regional Federal Reserve bank charged the other banks for loans. Because this rate was generally kept below market rates, banks had an incentive to borrow the reserves they needed to finance their rapidly expanding activities. Throughout much of the 1920s, discount window borrowings represented more than half of total Federal Reserve assets.
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In practice, that meant banks used their “membership” with the Fed to suck up money for speculative and risky lending purposes. They could lend that “easy” money at a profit to client companies or encourage investors to buy bonds of Latin American countries or stock of budding American companies that were packaged by National City Bank or Chase, while also lending to investors to buy into the pooled trusts they created from blocks of shares in those same companies. The more shares in the trusts bought with borrowed money, the more the prices of those shares and trusts rose, and the more new investors borrowed to invest in them.

The bigger the banks were, the more they were aware of looming problems with the shares of various trusts and companies because they had more information about them given their involvement in underlying loans and bond payments. It was always the case that banks knew more about the quality of loans and the bonds that financed them than investors. Missed payments to banks, whether on international or corporate bonds, meant an unhealthy situation was arising. To provide extra capital in the face of common disaster, the New York banks would increase loans and investments to their own accounts from October 2 to October 30 (mostly in the last week of October) by $1 billion and increased their reserves by nearly $250 million. Loans from smaller banks dropped by $800 million.
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The banks would attempt to keep ordinary investors from extracting their cash (often their life savings), even as values plummeted. The trusts might have been engineered and marketed “for the public” to buy securities alongside the big players, but when push came to shove, the masters were there to garner fees for their trusts and inflate stocks in their portfolios.

None of the starry-eyed free-market types, who promised that trusts were safe, ever mentioned the extent to which they were propped up by borrowed money and debt. That wouldn’t matter as long as the stock bubble remained inflated. But the trusts and stocks began trading up to 150 times earnings, puffed up by leverage debt and smarmy hype, not inherent value. That meant, as Bertie Charles Forbes would write in mid-November 1929, that “when things popped, they would pop badly.”
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As bankers and other citizens returned from their summer vacations on Labor Day 1929, New York City was a sweltering cauldron of putrid smells and record heat. The Dow’s temperature had also risen—to an all-time high of 381. The protracted bull market in stocks had enabled corporations to finance cheaply by issuing stocks rather than bonds or finding the cash with which to pay old debts or expand.

Merging to Power

Every chief financier had his preferred method of amassing influence and power during the 1920s. Mitchell chose to grow National City Bank’s “Everyman” deposits and disperse them in epic global speculation. Lamont’s position was more closely aligned with the US and other governments, as it had been during and after World War I. Chase’s chairman, Al Wiggin, executed his own buying spree—of other banks.

Wiggin’s pedigree was grittier than that of some of his upper-crust compatriots. He began his career in 1885 as a bank clerk in Boston.
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He joined Chase as a vice president in 1904 and rose to the post of president in January 1911; by 1917, he had become chairman of the board.
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Wall Street legend had it that Wiggin was the “only man who ever refused a Morgan partnership.”
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According to
Time
magazine, he was an intense poker player and was known around Wall Street as “the man with a million friends.”
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“Tall, heavy, slightly pop-eyed,” Wiggin created his own alliances in banking and business by joining all the clubs he could. An avid golfer like Lamont, he was known to be “never more dangerous to his opponent than when behind.”
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Relative to the Morgan clique, Wiggin was an outsider to Washington power-elite alliances. He focused on growing his power through acquisitions of banks and club memberships. He collected banks like he collected etchings. His reign at Chase was one big buying spree, capped by merging two of the oldest banks in the financial district; Chase National and the Mechanics and Metals National Bank. The marriage was announced on February 12, 1926.
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The newly combined Chase National possessed just over $1 billion
in assets, ranking second only to National City Bank’s $1.25 billion. Wiggin maintained his position as chairman of the board of directors over the combined company.

The well-connected Gates McGarrah, chairman of the board of the Mechanics and Metals National Bank, became chairman of the executive committee of Chase. In addition to his many prominent local positions, McGarrah was also a member of the general board of the German Reichsbank, the American director under the Dawes plan, a post from which his international influence would blossom in the early 1930s. In February 1927, McGarrah was appointed chairman of the New York Fed.

Unlike Mitchell, Wiggin cautioned against excess in the mid-1920s, even while engaging in its spoils. Like Mellon and Coolidge, Wiggin was opposed to excessive debt, public or otherwise. In January 1927, he publicly praised the government’s policy of steadily reducing the public debt since 1920, calling it “one of the most wholesome financial developments of the period” in his annual report to stockholders, where he urged “the use of the present Government surpluses in further scaling down the debt.”
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He foresaw something potentially dangerous about the speculative boom and believed that while surpluses existed in banking and other businesses, they should be utilized to pay down federal debt. In early 1927, he had warned that the “revenues of 1926 are probably abnormally great, reflecting, as they do, the incomes of 1925. A great expansion of bank credit was being expended in capital uses and when business activity and speculative enthusiasm were very high. Bank expansion of this kind cannot safely continue and in its absence . . . it is well to use the present surplus . . . in reducing public debt.”
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