All the Presidents' Bankers (28 page)

Whitney advocated creating a commission with representation from the exchange, so as to exercise control over its decision-making. Instead, Senator Carter Glass passed an amendment establishing the Securities and Exchange Commission and prohibiting its administrators from having any personal business with the exchange.
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Russell Leffingwell’s Plea for Deposits

At the start of 1934 Morgan partner Russell Leffingwell was enjoying a Caribbean cruise. The prior year had been a tough one, and he was regrouping under the warmth of the equatorial sun. But that didn’t mean he wasn’t considering how to undo the damage to the firm that his old friend FDR and his competitors had inflicted. The matter weighed on his mind. On January 4, he wrote to ask FDR if he would “be so kind as to let me come down and see you after I get back?”

Along with his request Leffingwell sent his concerns about the Banking Act of 1933. He argued that the ban on taking deposits would push legitimate incorporated banks and private bankers out of the business. He implored FDR to permit national banks to underwrite securities under whatever regulations were deemed necessary. That would allow a loophole through which private bankers could engage in the securities business as national banks could.
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While FDR deferred his reply, Leffingwell persisted. On February 20, he took another tack, asking FDR, “What would you think of extending for a
year the time limit on securities dealings by banks and bankers [to] June 1935 instead of June 1934?” He reiterated, “I do think it is a vital necessity of your administration to find some way to keep the banks and private bankers in the underwriting business.”
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FDR stuck to his guns. He held more power over the industry than any other president before him had. Plus he had the people’s support, as well as that of Congress and some key bankers. So he postponed the meeting with Leffingwell, citing the fact that there was “too much press” around, and instead replied on February 24 that “a very large proportion of the bankers themselves do not want the present law changed.” (He was referring, of course, to Aldrich and Perkins, but keeping
all
of his banker friends close at the same time was part of his brilliant divide-and-conquer strategy, while using them against each other as necessary.) “Secondly,” wrote FDR, “Senators and Members of Congress are very loath even to consider amendments which would restore commercial banks to the investment business, even in a remote degree.”
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In truth, the day Leffingwell sent his second letter, FDR met with Aldrich at the White House to discuss the Securities Exchange Act.
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Still, FDR wanted to keep Leffingwell in his corner, so he rescheduled to have a “quiet” talk over dinner on March 5.
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The day before their dinner, Leffingwell made clear that he wouldn’t let the desires of private bankers go. In a letter to FDR, he wrote, “I accept your decision against letting the banks underwrite—partly because I must! and partly because you have been so amazingly right in your political and economic judgments. But—forgive me one question in which I have a special interest—what about the private bankers? The Banking Act of 1933 put them too out of the underwriting business on June 16th. Who is to underwrite new issues then?”
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It was a question Leffingwell would never relinquish, and the dinner between the two men didn’t resolve it.

FDR continued his plans for reforming the financial system with the help of his banker allies. On April 19, when it looked like the proposed legislation was weakening, he called another private meeting with Aldrich and Perkins.
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Fletcher was considering a new bill to postpone the time that bank affiliates, or securities arms, would have before being cut off from their banks—the Morgan partners had gotten to him. Making matters worse, the new measure would allow private bankers to take deposits for one year longer. Aldrich was irate about the extension when the bill was introduced officially. On April 30, he informed Roosevelt’s assistant secretary, M. H. McIntyre, he was coming to Washington the next day to see Fletcher and
talk to FDR about it.
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The extension that the Morgan bankers had sought was denied.

On May 10, Aldrich announced that the official separation of Chase’s securities unit, Chase Harris Forbes Corporation, would be completed by June 14, in accordance with the Banking Act. The unit would merge with the similar offspring of the First National Bank of Boston, the First of Boston Corporation, and would drop the Chase name for clarity.
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Perkins followed suit less than a month later and announced to shareholders that National City Bank’s securities affiliate, the City Company of New York, would go into liquidation.
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The
fait accompli
that began when the two men announced that their securities arms would split from their commercial banking business was official. The separated units were now completely different companies. Solidifying the New Deal banking regulation initiative, the Securities Exchange Act was finally passed on June 6, creating a federal regulator to police the securities industry.
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For his part, Jack Morgan had chosen to stay above the fray of legislation, letting his more able legal mind, Leffingwell, deal with the lobbying effort. Yet Morgan would maintain the social relationship with FDR he had enjoyed for decades. On June 8, upon discovering that FDR was attending the sailing races in New London, Connecticut, and that his son was rowing on the freshman crew, Morgan said he looked forward to the “privilege of entertaining [FDR’s son] along with the rest of the squad” on his yacht, the
Corsair
.
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He invited FDR to join them for lunch, but the president declined. “Unfortunately, I must go back on board the little “Sequoia” after the morning races,” he said. “Perhaps I shall see you on the Referee’s boat—I hope so.”
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Both men wanted to resurrect their friendship.

The Kennedy Connection

Three weeks later, to the dismay of New Dealers and big business alike, FDR selected the first man who would run the Securities and Exchange Commission. He did not choose just any old banker but a notorious one, Joseph Patrick Kennedy, to lead the new unit.
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It was a good time to be a Harvard graduate; they now ran the six spots with the most control over the financial industry: the presidency, the New York Stock Exchange, the three largest banks, and the body that watched over them.

Ironically, while the battle over the Fletcher-Rayburn bill was raging, Ferdinand Pecora was grilling banker Henry Mason Day over his role in creating a pool to speculate in the stock of the Libbey-Owens Ford Glass Company,
in which Kennedy was included and from which he profited $68,800.
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Thus, Pecora had implicated Kennedy in the same shady practices he would be tasked with policing.

But Roosevelt had a more personal reason for installing Kennedy into the prime national regulator’s slot: he owed him one. They were old friends who had first encountered each other when Roosevelt was assistant secretary of the Navy and Kennedy was running the Bethlehem Shipbuilding Company.
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Kennedy had been instrumental behind the scenes during Roosevelt’s 1932 presidential campaign. Not unlike Sidney Weinberg, he had donated $25,000 directly and raised another $100,000 from others. At the time, Kennedy was in California—beginning a highly lucrative foray into the film industry and serving as one of Roosevelt’s “silent six,” traveling ahead of the candidate during his West Coast tour and acting as a financial adviser.
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Kennedy convinced William Randolph Hearst to support Roosevelt in California, and as a result Roosevelt captured the nomination after the state swung his way.
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Once in office, as part of his expression of gratitude, FDR invited Kennedy to come over to his place for a weekend and sail on the
Sequoia
.
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Kennedy took measures early on to reassure the banking community that he’d be working for them. At the National Press Club in early August 1934, he proclaimed that his job was to give bankers the opportunity “to live, make profits, and grow.” He added, “We of the SEC do not regard ourselves as coroners sitting on the corpse of financial enterprise. . . . [We] are not working on the theory that all men and all women connected with finance . . . are to be regarded as guilty of some undefined crime.”
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Bankers, initially skeptical, were elated. In response to his speech, the
New York Times
reported, “Nowhere on Wall Street was any disapproval or unfriendly criticism of the speech heard.” Even Richard Whitney commented approvingly, “I think Mr. Kennedy has shown that he is approaching his job carefully and from a sane and sound point of view.”
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On September 2, not wishing to be outgunned by the big New York commercial bankers, Bank of America head Giannini informed the White House, “I am one hundred percent with the President and his New Deal and I hope he will not let any one block him in his efforts to put it over.”
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On October 1, Thomas Lamont decided it was time to resurrect the most congenial aspects of his relationship with FDR. So he sent FDR his notes from an intimate mid-September business dinner he had attended given by Perkins, who had initiated the gathering to ensure ongoing support for FDR.

Not to be shafted by Perkins, who had boasted about all of his “talks” with FDR at the dinner, Lamont wanted to regain the ear—and the confidence—of
the president. He conveyed his approval for the New Deal stimulus objectives and reminded FDR of his international experience and progressive leanings: “When people complain to me of the amount of money that the Government has been borrowing, I always answer it by saying: ‘Well, if that country was willing to spend thirty billion dollars in a year’s time to try to lick the Germans, I don’t see why people should complain about its spending five or six billion dollars to keep people from starving.’”

As to the “general attitude of the banking community,” wrote Lamont, retaking ownership for their combined thinking, “the attitude is generally the same as it is in this [the Morgan Bank] office, namely one of backing up the Administration to the limit.” This support, he believed, was exemplified by the vast amount of US government bonds the New York banks were holding. In closing, he informed Roosevelt, “I may be a Republican but you can bear witness from my association with President Wilson that I do want to be loyal to any Democratic President with whom I happen to be working, especially one who is a friend and of many years’ standing as F.D.R. is.”
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Somewhat upended by Glass-Steagall and related issues, Lamont was ready to join the president’s side. In return, he hoped to maintain his position as the dominant domestic and global banker.

Under Kennedy’s leadership, the SEC implemented some major reforms but took no further actions against the big banks.
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What most concerned Kennedy, as it did the bankers, was the restoration of the capital markets to supply the nation’s corporations with credit. Before February 1935, issues of new debt securities had nearly stopped. New Dealers called this “a strike of capital,” with big business holding the economy hostage while demanding less stringent oversight.

The Morgan bankers attributed the credit crisis to the Glass-Steagall Act’s separation of securities issuance from deposit-taking businesses. At any rate, all that changed when Swift and Company negotiated a $43 million bond issue with the SEC; soon afterward, the capital markets came roaring back.
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This loosening of credit played a role in resurrecting the business economy.

Kennedy was appointed chairman of the SEC for one year, but he stayed nearly sixteen months. He remained a strong supporter of Roosevelt, though, lending his name to the book
I’m for Roosevelt!
, published during the election year of 1936. Roosevelt enthusiastically responded in a personal note, “I’M FOR KENNEDY!”
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As a campaign surrogate, Kennedy strongly defended Roosevelt’s record in front of hostile audiences.
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After 1938, Kennedy and his family traveled to London, where he took up his FDR-appointed post as US ambassador to the Court of St. James’s.

1935: The Morgan House Divided

Though the Banking Act of 1933 would garner the most attention for regulating the industry in later years, what has been nearly forgotten is how it was almost completely gutted by Washington and Wall Street during the debate over the Banking Act of 1935. Sharp clashes over the successor bill further accentuated the battle lines between the Morgan interests and those who advocated more restrictions on private banks.

Lending muscle to the Aldrich side was Bank of America chief A. P. Giannini. He was also a director of the National City Bank and its largest single stockholder, and he harbored a huge dislike for the “New York Banking fraternity.”
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Hence, he was for anything that could tamper with its power. He would be helped in this effort by the Federal Reserve. Marriner S. Eccles, whom FDR appointed governor of the Federal Reserve Board, was a western banker like Giannini. The proposed banking bill challenged the powerful New York Fed’s control of the Federal Reserve. Giannini, like Eccles, wanted this influence curtailed.
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On February 5, 1935, Steagall introduced the three-part bill in the House.
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For the remainder of the spring and into the summer the fight in Washington and on Wall Street was over the particular part of the bill known as Title II, which centralized control of the Federal Reserve system in Washington. It was something Wilson had not been able to do when the Federal Reserve was first established. FDR would accomplish it—for a while, anyway. Morgan Guaranty’s William Potter publicly decried the act, stating it would make inflation “more inviting, more dangerous and more imminent.”
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Testifying in the Senate, even Aldrich said it would turn the Fed into “an instrument of despotic authority.”
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