All the Presidents' Bankers (26 page)

Roosevelt was delighted. Not only did he want this split but his foot soldiers, the bankers, were making his job easier. He wrote Perkins and Aldrich letters of effusive appreciation for their preemptive moves.
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Aldrich replied somewhat adoringly: “I find myself lost in admiration of the courage and wisdom you have shown in dealing with the problems created by the immediate banking crisis.”
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It was useful to FDR that Wiggin and Mitchell, with their speculative natures and thirst for power relative to the presidency, were out of his way. He wasn’t really close to them anyway. The bankers who were left knew how to gain power: by supporting his.

Fireside Chat on Banking

On March 12, 1933, eight days after he took office, FDR gave his first “fireside chat” radio address to the nation. The topic was the banking crisis. Millions of nervous Americans—a quarter of whom were unemployed—gathered around their radios to hear his address. These listeners, many of whom had seen their savings go with the closure of their banks, had a faint hope that there was light at the end of the tunnel.
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FDR truly understood banking. He explained to his listeners that when people deposit money, banks invest it “in many different forms of credit—bonds, commercial paper, mortgages, and many other kinds of loans,” and that the “total amount of all the currency in the country is only a small fraction of the total deposits in all of the banks.” In other words, banks don’t keep a lot of peoples’ deposits in storage for stability.

At the end of February and beginning of March, he explained, “there was a general rush . . . to turn bank deposits into currency or gold . . . so great that the soundest banks could not get enough currency to meet the demand.” By the afternoon of March 3, many state and local banks had to close to protect themselves, which is why a “nationwide bank holiday” was required: the banks needed time to breathe.

FDR took care not to blame
all
the bankers for the country’s economic and credit problems. He knew it was important for Americans to regain trust in the bankers. Instead he said, “Some of our bankers had shown themselves either incompetent or dishonest in their handling of the people’s funds. They had used the money entrusted to them in speculations and unwise loans. This was, of course, not true in the vast majority of our banks.”
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A skilled tactician, FDR would strengthen the banking system with the help of his friends, the “good” bankers. For he understood something very important: his power and influence would be greater if he had the bankers on his side
and
solved the banking crisis for the population. The bankers, in turn, realized that collaborating with FDR would help elevate their own financial power later.

On March 16, Bank of America head A. P. Giannini, who had recently visited with FDR in New York, enthused, “The President is certainly doing great work and I don’t think that even Teddy, in his palmiest days, gripped the imagination of the people as has he in the past few days.”
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Teddy Roosevelt had taken on the nonfinancial trusts in his day, but he had supported the “money trusts” during the Panic of 1907. Woodrow Wilson had bashed the money trusts in public (never by name), but established
a Federal Reserve from which they could be assured support during emergencies. Hoover had tried unsuccessfully to work with the money trusts and secure the financial system at the same time. FDR had figured out how to effect real structural change with support from both parties: key commercial bankers and citizens.

The Pecora Hearings, Part II

The Pecora hearings were more probing and public than the Pujo hearings had been, but they became more of a show than a political necessity once FDR got the significant bankers’ endorsement for reforms on the legislative agenda—though they did serve to vanquish, if not jail, the tainted leaders.

A few weeks after Charles Mitchell testified that he sold his stock “frankly, for tax purposes,” FDR was informed that the former head of National City Bank had been indicted for tax evasion.
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Mitchell was arrested at his Fifth Avenue home on March 21, 1933. As the Pecora hearings continued in the background, the New York papers splashed sensational headlines about his tax evasion trial in May and June 1933.

On June 22, after twenty-five hours of jury deliberation, Mitchell was acquitted of all charges. The jury agreed with Mitchell’s defense attorney, who claimed that Mitchell’s “intent” was to “abide by the law” and that, technically, he had done that.
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Mitchell wept when the verdict was read. The press had readied bulletin copy announcing Mitchell’s conviction. The atmosphere was supercharged, as crowds milled in the corridors of the federal building.

(The government entered a civil claim for the taxes and an adjustment of $1.1 million in back taxes and penalties. Mitchell appealed that case up to the Supreme Court and lost, rendering a final settlement on December 27, 1938.
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Roosevelt wrote the lead prosecutor in the case to congratulate him, saying “the amounts involved are not important. The Government’s successful challenge of the practices to which Mr. Mitchell resorted in this case has served largely to end those practices.”
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)

With that bad apple out of the way, FDR and Aldrich began a series of private conversations and meetings at the White House about the pending banking legislation. Washington insiders knew what was going on, and Aldrich’s political position elevated quickly in the eyes of Congress.

As Aldrich wrote FDR on March 23, 1933, “Since writing you on March 20th two Senators, members of the Banking and Currency Committee of the Senate, have approached me indicating that they would like to talk with me about . . . banking reform. . . . I have felt myself that it might be more useful
to you if I talked with you fully with regard to this matter before talking to anyone else.” Four days later, FDR invited Aldrich to the White House to discuss the matter.
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Aldrich didn’t just call for the divorce of commercial and speculative banking, a tactical blow for the Morgan Bank. He also demanded reforms regarding interlocking directorships, which were at the heart of Morgan’s business policies. “No officer or director nor any member of any partnership dealing in securities should be permitted to be an officer or director of any commercial bank or bank taking deposits, and no officer or director of any commercial bank or bank taking deposits should be permitted to be an officer or director of any corporation, or a partner in any partnership, engaged in the business of dealing in securities,” he wrote.
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FDR decided to include Aldrich in his conversation with Senators Carter Glass and Robert Bulkley.
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FDR’s aides concluded that Aldrich should be sent to convince Glass of the necessity for incorporating his view in the Glass legislation.
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The Morgan Testimony and Fed Blaming

Pecora’s roasting of Mitchell was second in terms of public fascination only to that of Jack Morgan. And as the Pecora hearings heated up, Thomas Lamont learned that his relationship with FDR wasn’t going to provide him many privileges.

In April 1933, a politely frustrated Lamont wrote to Roosevelt to complain about the mistreatment he and Morgan counsel John Davis received at the hands of Pecora, who had interviewed the men as part of his preliminary research for the hearings (Davis had been US solicitor general under Wilson and the Democratic presidential nominee in 1924). Lamont was incensed at Pecora’s accusations that his bank had “absolutely refused to answer” any of his inquiries. “In fact,” Lamont wrote, “there is not one single item in our whole business that we are not quite willing to show to anybody who is entitled to see it.”
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This was perhaps not the best tack for Lamont to take. His hands were dirty from his son’s tax plays and the tax-dodging securities deal involving his wife. When later asked by Pecora why that transaction had been performed without an intermediary, Lamont responded that it “didn’t occur to me to do it in any other manner.”
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Morgan was better prepared for Pecora’s relentless questions, and he maintained a composure that gave away nothing. Even the charge of tax
evasion bounced like a rubber ball off his steely demeanor. As he declared in his opening statement on May 23, 1933, “If I may be permitted to speak of the firm, of which I have the honor to be the senior partner, I should state that at all times the idea of doing only first-class business, and that in a first-class way, has been before our minds.”
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On May 27, days after Morgan was grilled by the Pecora Commission
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and before Lamont was sworn in to testify on June 2,
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Lamont wrote Adolph Ochs, publisher of the
New York Times,
to challenge the paper’s uncharacteristically negative editorial comment regarding Morgan’s use of preferred lists to distribute stock. Lamont condemned Pecora’s handling of the investigation, describing his preferred clients as “men who are prepared to take a chance with their money.”
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The Nation
took a different view, charging that Pecora’s commission only scratched the service of deceit and condemning Morgan generally: “Morgan and Company, and their fellow private investment bankers, may declare and believe that even in these transactions they render important services. Actually, their services are not only useless but definitely anti-social and obstructive.”
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During the Pecora hearings,
The Nation
proclaimed Morgan “one of the greatest enemies our society ever had,” characterizing “most of the devious and damaging corporate strategies which have brought us into our present hole” as “developed and perfected and varnished with respectability by him. He was no rescuer. He lived on wrecks. He thrived on depression. He built nothing. He pounced upon what other people built.”
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Pecora’s investigation focused in particular on three of the 1929 issues made available to clients on the preferred stock list—United Corporation, Allegheny Corporation, and Standard Brands—which subsequently dove in value, with citizen investors taking the biggest losses.

The Allegheny Corporation, the Van Sweringen brothers’ web of railroad companies, which had once been the cornerstone of Morgan’s foray into the stock issuance business, incensed the public the most. Allegheny shares were parceled out to 227 clients and close friends at $20 a share at a time when the market price for them was $35–$37. Not only were other financiers in on the deal; some of the men were now holding public office. These included former Treasury Secretary William McAdoo (Leffingwell’s former boss during the Wilson administration, now a California senator on the Senate Banking Committee), Norman Davis (FDR’s ambassador at-large in Europe), and, most tellingly, current Treasury Secretary William Woodin.

Morgan said these men “were selected because of established business and personal relations, and not because of any actual or potential political relations,” adding that “we conduct our business through no means or measures of ‘influence.’”
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In a sense, what he said was true: given the position of power and substantial relationships that the Morgan firm enjoyed, it was not necessary to give away stock to gain influence.

As a sort of denouement to the Morgan hearings, the final man of the Big Three bankers to be called before Pecora was Wiggin. His crimes were the most intricately executed, it turned out. Through a collection of shell companies listed under various family member names, Wiggin had bagged $4 million in profits while his clients lost money during the Crash. He was ultimately fined $2 million in a civil suit but escaped any federal or criminal repercussions.

Compared to Mitchell’s actions, Wiggin’s schemes were more shocking to the Wall Street community. Wiggin was considered a “reserved,” “rather scholarly man” whereas Mitchell was a “genial extrovert with a talent for headlines.”
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Wiggin had not only been Chase chairman, for which he officially made $275,000 per year ($3.8 million in today’s dollars). He also served on the boards of fifty-nine other corporations that paid him a salary, and he used his position to troll for business, which was not against the law but gave him an unfair advantage in financial-corporate dealings. In the hearings he also defended a series of loans his banks made to their own officers (which enabled them to speculate on their own stock) on the grounds that such moves helped them develop “an interest in their institution.” Again, this was not illegal, but it was certainly unsavory.

Federal Deposit Insurance

The Federal Deposit Insurance Corporation, established by the second Glass-Steagall Act (also called the Banking Act of 1933), was supposed to be an emollient for bankers that chose to keep the commercial banking business. It would back depositors by insuring their deposits in case of a bank failure. As such, it provided banks with a safety net, too, as it mitigated the possibility of bank runs by scared citizens trying to extract their money in times of panic.

Though he supported the Banking Act, Aldrich criticized the premise of having a federal guarantee on deposits. “The unlimited guarantee puts a premium on bad banking. . . . [It is] very dangerous from every point of view,” he later asserted.
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Roosevelt, too, was concerned that the FDIC would enable banks to take too many risks, knowing the government would back their
customers’ deposits if necessary. Aldrich warned FDR that “unfortunate circumstances would ensue if the bank deposit insurance provisions contained in the Glass Bill were enacted into law.”