All the Presidents' Bankers (22 page)

Wiggin, Acquirer and Deceiver

The top bankers found ways to make their personal losses work for them. One strategy was tax evasion (even in the Mellon era of lax tax policy, evasion was a useful ploy). Wiggin made the most money from this maneuver. His secret was the creation of shell companies; he established six private corporations, three in the United States and three in Canada (which would be discovered during the Pecora hearings) to hide his wealth before the Crash.
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During the bull market, he had organized investment pools that bet on shares of Chase Securities and Chase National Bank to inflate their values. He also cut some of his friends in on the action, and made sure that everyone borrowed from Chase to pay for their holdings. His family extracted $8 million of loans from Chase, even though they could have afforded to buy stock without the loans.
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They used those loans to purchase more stock to inflate its values further.

Wiggin knew he was covered no matter what happened. Shortly before the Crash, he shorted shares in his own bank by borrowing shares from various brokers at prices he anticipated would fall, at which time he would buy the shares in the market at lower prices and return them to the brokers, making money on the difference. When the Dow stood at 359 on September 23, 1929 (the market had topped out twenty days earlier at 381), he placed what would be a hugely profitable bet that Chase’s stock would fall.
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He might have united with the rest of the Big Six to save the markets after the meeting with Lamont, but his short would net him a tidy fortune.

Before shorting those shares, Wiggin executed another profitable and shady strategy, using his bank’s funds to plump the shares up. He placed $200 million of his depositors’ money into trusts that speculated in Chase stock, thus participating in the very pool operations that artificially boosted its price during the run-up to the Crash. He pocketed $10.4 million from these trades, including $4 million from shorting the shares he drove up (after he drove them up) during the two-week period preceding the Crash.
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His justification for selling his own shares while Chase Securities was pushing customers to buy them was that the price was “ridiculously high.”
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He had,
in effect, bet against all the other Chase shareholders who had trusted in his hype about the firm.

As the decade counted down its final minutes, the New Year’s Eve parties held in the midst of the glittering business and banker community flowed with prohibited elixirs, lavish gaiety, and sumptuous feasts. In the Grill Room at the Roosevelt Hotel in New York City, known as “the Grand Dame of Madison Avenue,” the wealthy clanked their champagne flutes at midnight to the strains of Guy Lombardo’s first live rendition of “Auld Lang Syne” (which became an annual tradition).
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The ditty blared on radios across the land. Relief mixed with exhaustion and a tepid, manufactured optimism punctuated the close of the 1920s. On December 5, 1929, speaking at a Chamber of Commerce conference, President Hoover had said, “The cure for such storms is action; the cure for unemployment is to find jobs.”
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A defiant President Hoover, a nonintrospective Treasury Secretary Mellon, and the Big Six allowed themselves to imagine they had dodged a bullet.

But the worst was yet to come. The country would plunge into a Great Depression, a third of the nation’s banks would close, and unemployment would rise to capture one of every four employable citizens.

CHAPTER 6

T
HE
E
ARLY
1930
S
: T
ENUOUS
T
IMES
, T
AX
-E
VADING
T
ITANS

“We are thoroughly justified in saying, ‘Business as usual.’”

—Albert Wiggin, chairman of Chase National Bank, January 13, 1930

T
HE 1930S BEGAN ON THE FALSE NOTE OF ECONOMIC SECURITY WITH WHICH
the political-financial alliance had capped off the 1920s. After the hysteria around the Crash subsided, President Hoover caught his breath. He could briefly push away doubts about his ability to extend his party’s leadership into his second term. Most of the Big Six were equally relieved that their collaboration to save the markets, buoyed by the staunch support of the White House and Treasury Department and abetted by the Federal Reserve, had turned the tide back to one of unbridled opportunity.

The man who had the most on the line was characteristically enthusiastic about the economic fallout. “The recession will not last long,” proclaimed
National City Bank head Charles Mitchell on January 15, 1930.
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If one simply considered the invigorated behavior of the stock market, that conclusion was almost believable. For it was enjoying a brief resurgence from its Black Tuesday depths. Dipping to a low of 199 on November 13, 1929, the market was on its way up to 294, a 50 percent increase, by April 17, 1930.
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Bankers, politicians, and a Wall Street–infatuated media gushed optimism at every point along the way. After a few threatening comments by some senators right after the Crash, there didn’t seem to be much lingering concern about investigating how the financial system could bounce up and down so quickly—or who was responsible. The rebound was all that mattered.

But those delusional days were short-lived. The economy had suffered a severe blow not just because of the Crash but because of the preceding years of excess and borrowing to support that excess, yet its weakness was masked by the vibrant stock market. Bankers had been fortified by the Fed to “try again,” but the injection of post-Crash speculative money in the market simply couldn’t negate systemic problems for very long. There were too many bonds defaulting, too many businesses closing, and too many people losing their jobs and their hope of a more secure future. The money that was being funneled into the market to fuel financial speculation (rather than productive or social capitalism) provided the illusion of stability and prosperity, but it was not the kind of long-term capital upon which true economic growth could be sustained. Paper profits had shriveled faster than they had once increased. This could, and would, happen again.

Yet President Hoover, either because he wasn’t fully informed about the inner workings of the markets by his banker friends or because he didn’t want to admit that the bottom could still fall out of the economy on his watch, found himself pulling a Mitchell. On May Day 1930, he declared to the nation, “We have now passed the worst and with continued unity of effort we shall rapidly recover.”
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His statement wound up foreshadowing a nearly two-year market dive to a low of 41 on July 8, 1932, and a Great Depression that brought the American economy to its knees.

Were it not for parallel crises unfolding globally, the Depression would have dampened America’s international power. But since the rest of the world would suffer in tandem, America would retain and even extend its dominant position throughout the 1930s. By the decade’s end, the Depression would become the backdrop for another world war, and a war effort that would unite most of the same banks as the first one.

The Fed-Bank Shuffle

The first wave of deepening Depression, in the fall of 1930, coincided with the first of three major episodes of bank closings and mini panics. It began in the Midwest, where banks had been starved for credit since the Crash. The Fed stayed out of the fray. In general, it showed little empathy for the general credit condition of the country, focusing instead on how the big banks were faring. The Fed governors were pleased that the level of indebtedness at the bigger member banks hadn’t changed much since the Crash, a sign they deemed as a positive indicator of a recovery.

But the population wasn’t experiencing a recovery at all, especially not in the poorest areas. As the Fed reported, “The growth of deposits . . . has not been felt by rural communities. . . . At the present time their level is lower than at any time in recent years.”
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It wasn’t surprising that there was no growth in deposits; the public couldn’t manufacture money out of thin air. Yet the Fed board remained blissfully unaware of the broader hardship and focused instead on its elite members. Thus it concluded in October 1930, “The exceptionally strong position of commercial banks and of the reserve banks, the prevailing ease in credit conditions, the low level of money rates, and the attitude of the federal reserve system” meant “the country’s credit resources will be available to facilitate in every possible way the orderly movement of agricultural commodities from the producer through the channels of trade to the ultimate consumer.”
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(The Fed’s obliviousness about broad economic malaise would resurface after the 2008 crisis.)

It didn’t work out that way. By the end of 1930, it was clear that a new group on Wall Street, comprising most of the same banks as in the early 1900s but with new faces at their helms, was selecting which companies would live or die based on the relationships of their leaders to the likes of the Morgan Bank, National City Bank, and Chase. As such, the New York–based Bank of United States collapsed on December 11, 1930, eviscerating $200 million in deposits and wiping out the accounts of about four hundred thousand people (or two hundred thousand families).
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The Bank of United States was the largest bank in New York and the first major financial firm to close, and it had catered mostly to ordinary citizens. The average account there contained about $200, some families’ total savings. The impact of the closing was that much sharper for the mostly Jewish and immigrant customers.

The bank wasn’t innocent in its downfall. It had employed a plethora of shady schemes before its demise, such as selling shares of its stock to depositors at $200 a pop, assuring them they could sell the stock at the same price at any time (which turned out not to be the case). By early December shares were trading at 20 percent of their original value. And that was just the beginning.

The Big Three, a subset of the Big Six that included Thomas Lamont, Albert Wiggin, and Charles Mitchell, convened to consider bailing out the Bank of United States. But as Liaquat Ahamed chronicled, “after an all-night meeting that spilled into the next day, not even pleas from New York superintendent of banks Joseph Broderick could convince these major players to save this bank.”
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Instead, the trio pushed the matter onto the New York State Banking Department, which took over the Bank of United States and concocted a plan with the Clearing House Association of banks whereby the bank’s customers could borrow up to half of their deposit values from a fund created by the Clearing House and the New York State Banking Department. No promises were made about returning the deposits.

Lamont was quick to distance the good banks (such as his) from the “bad” ones. At a meeting of the members of the New York Stock Exchange, he said that the problems leading to the closing of the Bank of United States were “not symptomatic” of the general New York banking community, which he characterized as being “founded on a rock.”
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The Bank of United States became the poster child for a bank that collapsed because of its “ill” practices; it was the Enron of its time. The philosophical cordoning off of such an errant bank shielded the big bankers from certain elements of investigation, as would later be shown during congressional hearings. They may have conducted similar activities, but they would not suffer the same consequences.

The Bank for International Settlements Is Born

President Hoover had reintroduced the term “Depression” in late 1929 to replace the more commonly used “Panic.”
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He thought it was more placating. The term stuck. Now, with domestic conditions faltering and people extracting their deposits, bankers turned to international markets to seek business and increase global influence.

Though the US economy was staggering, conditions were worse in Europe. Neither the Treaty of Versailles nor the Dawes plan had solved the war debt or German reparations problems, so US bankers needed another plan to keep the financial system percolating.

The first entity to be designed for that purpose, with a global name but a decidedly American bent, was the Bank for International Settlements—or, as it was fondly called among international bankers, the “cash register of German reparations.”

The BIS was officially established in Basel, Switzerland, on May 17, 1930. It would continue the ideas of the failed Dawes plan, which had been extended into the Young plan (fashioned by Owen Young). The charter for the BIS was adopted at a conference in The Hague on January 20, 1930; the BIS would deal with ongoing German reparations matters in conjunction with the bankers. It would act as the new central body for the collection and distribution of payments, and as a trustee for the Dawes and Young loans that helped finance those reparations. The Young plan reduced German reparations payments further than the Dawes plan did and likewise allowed for the financing of those payments to come from private banks. It was another game of shuffle, but it allowed the American bankers to once again extend loans.