All the Presidents' Bankers (20 page)

By the fall of 1929 Chase had acquired six major New York banks, making it the second largest private bank in the world, next to Mitchell’s National City. The rivalry that would reverberate for decades—different men, same pursuit—characterized the relationship of Wiggin and Mitchell, the two outsiders who would fight for their spot in history, on Wall Street, and in the world—and for whom it would all turn out very wrong.

Charles Mitchell, Salesman and Mega-Banker

In 1921, when Mitchell became president of National City, the bank had four offices. Within three years it had fifty, and by 1929 it was the largest distributor of securities in the world, with one hundred branches in twenty-three countries. Its motto was: “When it comes to investing your money, solid facts outweigh whispered rumors.”
⁸⁶
In other words, bank with us—
trust us.

Personifying the modern banker-titan, Mitchell aggressively pursued investors as if they were prey. Behind his desk at National City Bank’s headquarters hung a portrait of George Washington, reflecting one of his favorite maxims—that “the typical US system is the concentration of responsibility in the hands of one accountable individual.”
⁸⁷

As competitive in his private life as in business, he believed himself to be just such an individual—intoxicated with the game of banking and his prowess at it. Enjoying “exercise and combat,” he kept fit and alert by “frequently walk[ing] from his home at 933 Fifth Avenue to his office at 55 Wall Street,” according to
Time
.
⁸⁸
Navigating that five-and-a-half-mile walk, Mitchell revealed himself as a precursor to the Wall Street “masters of the universe” portrayed in the 1980s by Tom Wolfe in
Bonfire of the Vanities.
For a time, he believed himself to be, and was, invincible.

Mitchell sold corporate bonds to a growing investor class at far more than they turned out to be worth.
⁸⁹
In doing so, he made National City a financial supermarket. During the 1920s, its securities arm underwrote more than 150 bond issues, raising nearly $11 billion, or 21 percent of total US issuance.
⁹⁰

In 1928 and 1929, Mitchell (who became chairman in 1929) earned $1.2 million in total compensation, two hundred times the average American’s salary of $6,000.
⁹¹
His family resided in a six-story townhouse in Manhattan with sixteen live-in servants, plus chauffeurs. He had another mansion in Southampton, Long Island. He earned about $1 million more than Wiggin did at Chase, or Lamont did at Morgan.

In early 1929, Mitchell, a consummate salesman, pushed his employees to sell nearly 2 million shares of National City stock to the public for $650 million. According to
Time,
“National City through its security affiliate National City Co. had put on the most flamboyant high-pressure bank stock selling campaign in all history.”
⁹²

But when the market wobbled in early March 1929, the great bamboozler got scared. All of a sudden, he needed backup to keep his stock price up. But he failed to convince the New York Fed to dump funds into the market to save, among other things, his shares, so he took matters into his own hands. On March 26 he announced, over the Fed’s objections, that he would provide $25 million from his bank, and an additional $5 million if necessary, to keep the escalating call money rate that banks charge on loans to brokers—who, in turn, lend the money to their clients to help them purchase stock—stable at 15 percent, amid fears that it would reach 20 percent. His move suggested he had more information about the true condition of the capital markets than the public.

“So far as this institution is concerned,” Mitchell said, “we feel that we have an obligation which is paramount to any Federal Reserve warning, or anything else, to avert, so far as lies within our power, and [
sic
] dangerous crisis in the money market.”
⁹³
Though not with personal money, Mitchell nearly single-handedly kept the party raging. Many leading bankers and industrialists were grateful that his move saved the market and possibly the country’s financial systems.
⁹⁴
A banker had trumped the Federal Reserve.

Mitchell’s tactics didn’t ingratiate him with certain congressmen belaboring under the illusion that the Fed didn’t normally act to the bankers’ benefit. George Norris, a Republican senator from Nebraska, pronounced the obvious: Mitchell was on the side of “the gamblers in Wall Street [and] has shown no sympathy with the Federal Reserve Act. . . . Such defiance of the principles of the act ought not to be countenanced by the board.”
⁹⁵

Senator Carter Glass of Virginia called for Mitchell’s resignation from the New York Fed Board.
⁹⁶
But Mitchell remained.
⁹⁷
The day after his heroics, Mitchell quixotically warned, “I feel that with the immediate pressure passed, the people will do well to bear the credit condition in mind, and in stock activities to see that their margins are maintained and that they lean less heavily upon the credit structure.”
⁹⁸
He knew he had propped up a system that was teetering, if not on the brink of toppling completely.

Mitchell’s solo maneuver worked, temporarily—like the collective efforts of Morgan in 1907. National City shares and the Dow Jones skyrocketed through the spring, summer, and early fall. Mitchell had other motives for his macho antics. He was trying to protect what would have been his coup d’état deal, a page right out of the Wiggin book of major acquisitions, and in pursuit of his rival. He sought to merge National City Bank with the Corn Exchange Bank Trust Company and establish the world’s largest bank. In the deal, National City shares would be used to buy Corn Exchange shares, for which Mitchell had to maintain a price of $450 per share.

This was no small deal. On September 29, 1929, the
New York Times
prematurely blared the headline “The Ruler of the World’s Largest Bank,” dramatizing the moment that Mitchell discovered he would be the leader of the world’s biggest bank, overseeing what would be $1.73 billion in deposits and 201 branches, 103 of them in New York City.

Mitchell’s proposed consolidation, the fifth major merger in three years, was the culmination of a three-year trend that spawned fifty bank mergers in New York City alone, from which seventeen corporate entities had emerged, cutting competition by 65 percent. Smaller banks would succumb to the big New York banks’ dominance, as would the nation.
⁹⁹
History was clear on this:
the big banks won. With consolidation, there would come more deposits, influence, and control. Mitchell knew this. He counted on it.

But when the Corn Exchange price took a dive during the jitters that ultimately led to the main crash, the deal was off. Not even Mitchell’s furious buying through his securities affiliate could sustain it.
¹⁰⁰
As National City stock plunged and his dreams of becoming a global banking superpower crumbled, Mitchell had other headaches. He couldn’t sell enough shares in his company to meet his personal loan payment to the Morgan Bank. As a result, the House of Morgan temporarily became the second largest stockholder in National City.
¹⁰¹
(Mitchell was not alone in owing money to Morgan; even Charles Dawes, the Nobel Peace Prize winner, did, but his ego was prepared to handle it.)

With so much at stake, Mitchell had no choice but to remain the market’s public cheerleader, to try to turn things around by sheer will and showmanship. Despite substantial wobbling, even in early October 1929, Mitchell proclaimed to the
New York Times,
“The industrial condition of the United States is absolutely sound and our credit situation is in no way critical.”
¹⁰²
It was classic Mitchell salesmanship, the kind for which he earned the nickname Sunshine Charley. And yet the pending market crash was intrinsically connected to the public’s dumping of bonds, stocks, confidence, and trust in the shady securities that Mitchell and voracious bankers had created.

In an October 19, 1929, letter to Hoover on the situation, Lamont tried to both calm him and blame random forces for the market tremors, an excuse that would come up during the investigations and would continue to be used by many bankers and economists whenever meltdowns occurred. Lamont wrote that “every protracted market on either the up or down side of the stock market (or of commodity markets, for that matter) has its excesses.” As a postscript, he noted, “The developments of the last few days in the stock market would seem to indicate that nature is already operating pretty vigorously.”
¹⁰³
In fact, nature had nothing to do with it. This crisis was all about the exploits of man.

All hell broke loose anyway.

CHAPTER 5

1929: T
HE
R
OOM AT
23 W
ALL
, C
RASH
,
AND
B
IG
-S
IX
T
AKE

“There is a panic now—among stock gamblers.”

—Senator Carter Glass, October 1929

T
HE BELLS OF
T
RINITY
C
HURCH IN LOWER
M
ANHATTAN CHIMED NOON ON THAT
cool, overcast Thursday, October 24, 1929. Their clangs were reminiscent of those that had marked the decade’s start. At the same hour, on September 16, 1920, a wagonload of explosives erupted in front of the Morgan Bank, presumably destined to kill Jack Morgan. Jack survived. Less lucky were the thirty-three civilians killed and more than one hundred wounded.
¹

Now, as the decade approached its climactic close, Morgan was across the Atlantic in Britain, far from the chaos engulfing the population. It would be Thomas Lamont who would act on behalf of the firm and in shades of its former patriarch to try to save the markets.

Black Thursday, as it would be called, was a day of reckoning: for the stock market, as share prices of companies plummeted in a frenzy of trading; for
former President Calvin Coolidge, who had presided over much of the 1920s boom; and for recently elected President Herbert Hoover, who had emphasized in campaign advertisements that “the slogan of progress is changing from the full dinner pail to the full garage.”
²

More critically, it was a day of reckoning for the “Big Six” bankers, who represented the collision of old and new money, speculative versus productive capital use, and the preservation of power and influence at the epicenter of civilized society. Four of them strode from their nearby offices through teeming crowds toward a spartan yet stately three-story building at 23 Wall Street—the heart and soul of the House of Morgan. Charles Mitchell was the first man to enter the building, the sighting of which set Wall Street abuzz with conjecture. (He had the most to lose.) Just afterward, Al Wiggin walked over from the Chase bank, one block north. He was followed by William Potter, president of the Guaranty Trust Company, and Seward Prosser, chairman of the Bankers Trust Company.
³

A day earlier, the stock market had experienced its largest single-day drop ever. Not only shares fell; so did the country’s spirits. The ideal of shared prosperity was shattered. As John Kenneth Galbraith later put it, “By the summer of 1929 the market not only dominated the news. It also dominated the culture.”
⁴
Its subsequent plunge was thus a decline of greater than financial ramifications. Not everyone was
in
the market, but the mood of those speculating in stocks (fewer than 1 percent of the population) dictated the story of the economy’s endless possibility. The media did their part to stoke the enthusiasm, which in turn fueled their most active manipulators: the bankers, or “operators.” Plus, when stocks fell, so did bonds, and so did people’s ability to borrow money to hire, pay, or sustain businesses.

The legendary action that J. P. Morgan had undertaken to “save the markets” more than two decades earlier with a similar group of bankers was foremost in everyone’s mind. Expectations and hopes ran high for a repeat performance.

These 1920s bankers weren’t deer caught in the headlights of market mayhem. They knew much more about why the market was tumbling than the unsuspecting public. They were aware that the margins (or collateral backing loans) they had tried to collect from customers would put many out of business. They understood that inflated stock and bond prices were the result of their words and strategies and how flimsy that kind of support was. Lamont and Wiggin had taken profits on their personal trades. They also knew that international bonds were poorly constructed and backed by shaky collateral.