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2011

Ferdinand Pecora: The Hellhound of

Michael A. Perino St. John's University School of Law

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This Article is brought to you for free and open access by St. John's Law Scholarship Repository. It has been accepted for inclusion in Faculty Publications by an authorized administrator of St. John's Law Scholarship Repository. For more information, please contact [email protected]. Michael Perino Michael Perinois the By Dean George W. Matheson Professor of Law at St. John's University School of Law in New York and aturday, March 4, 1933-Inauguration Day-was one of has taught at Stanford, Columbia, and Cornell those raw March days when it seems that spring will never law schools. He has served as an advisorto the U.S. come. The thick layer of steel gray clouds sheathing the sky Securities and Exchange Hill. Commission and has threatened rain, and a northwest wind whipped across Capitol testified in both the U.S. dull and fleeting Senate and the U.S. House Sunshine broke through on occasion, but it was of Representatives. and did little to relieve the dreariness of that damp, chilly day.

Image: Corbis Images 15 Vol. 21, No. 3, 2011/EXPERIENCE Historians would later pinpoint thousands still milling in the capital. that winter as the nadir of the Great Through clouds of tear gas, the tanks Depression, but Americans hardly need- and soldiers drove the bonus army from ed to be seers to realize that the economy the city and burned their encampment could not get much worse. Thirty-eight along the Anacostia River to the ground. states had closed all their , and Seven months later, Washington still had everywhere else withdrawals were an ominous, wartime feel. Government sharply curtailed. Outright failures buildings were heavily guarded, police numbered in the thousands annually. patrols ringed the White House, and In those days before deposit insurance, machine gun nests were strategically one in four families lost their life sav- placed along the inaugural parade route. ings. The economy was in full retreat, The new president made his way industrial production was half what across the crowded platform, gripping it had been just four years earlier, and his son Jimmy's arm with one hand and unemployment was an appalling 25%. leaning on a cane with the other, giv- Farm incomes were decimated after ing the crowd the illusion that he was a decade of plummeting crop prices. walking. After being sworn in by Chief Shantytowns of the dispossessed, sar- Justice Charles Evans Hughes, Roosevelt castically dubbed Hoovervilles, dotted turned to address the gathered crowd. the landscape, and breadlines stretched Despite the chill March air, he shed his around many blocks. Homes were fore- hat and overcoat. Grim-faced, his usual closed, renters evicted, and signs of mal- broad smile absent on this solemn occa- nutrition among schoolchildren were sion, he told the assembled crowd and increasingly evident. On Friday, March radio listeners that the only thing they 3, the Dow Jones Industrial Average was had to fear was fear itself-"nameless, 86% off its wildly inflated pre-crash unreasoning, unjustified terror which peak in September 1929. At the end of paralyzes needed efforts to convert trading that day, the New York Stock retreat into advance." Roosevelt's Exchange announced that it would be address is rightly remembered for that closed indefinitely. hopeful phrase and for his call for the In the midst of the economic chaos, government to launch a war on the Great a shivering crowd of at least 100,000 Depression. Positioning himself in stark gathered near the east portico of the contrast with , who sat Capitol to hear Franklin Roosevelt's stonily just a few feet away, Roosevelt plan of attack, some perched in the icy, pledged "action, and action now." bare trees, others crammed in bleach- The Inaugural Address, however, did ers or crowded atop adjacent buildings. more than just announce a vision for Pundits from all points of the politi- fixing the economy; Roosevelt used it to cal spectrum were openly calling for assign blame. Along with most everyone Roosevelt to assume dictatorial powers else at the time, Roosevelt pointed his to address the crisis. In some parts of finger at Wall Street, but his goal was not the country the possibility of revolution demagoguery. He wasn't trying to accrete was openly discussed, and Lloyds of power, but to stoke reform. The largely London was doing a booming business silent crowd stirred when Roosevelt told in riot and civil disturbance insurance. them that the "rulers of the exchange of The previous spring, tens of thou- mankind's goods have failed, through sands of unemployed World War I vet- their own stubbornness and their own erans and their families had marched on incompetence, have admitted their Washington, demanding early payment failure, and abdicated. Practices of the of a promised bonus for wartime ser- unscrupulous money changers stand vice, many protesting on the very spot indicted in the court of public opinion, where the inaugural crowd now gath- rejected by the hearts and minds of ered. The bonus never came, and in late men." Applause erupted for the first July, the Army chief of staff, General time when Roosevelt proclaimed that Douglas MacArthur, let loose his cav- the "money changers have fled from alry, sabers and bayonets drawn, on the their high seats in the temple of our

Vol. 21, No. 3, 2011/EXPERIENCE6 16 civilization. We may now restore that economic impact, and long-lasting legis- temple to the ancient truths." lative accomplishments, Pecora's inves- Somewhere in , perhaps tigation must rank as the most successful sitting by the radio in his Upper West inquiry in the more than 200-year history Side apartment, must of congressional probes. have been smiling. It was Pecora, more Those hearings are largely forgotten than anyone else, who deserved credit for now. Those few who have heard of them those lines. Though Roosevelt claimed frequently get the basic facts wrong. And, that the lines had come to him a week of course, even at the time not everyone earlier while he was sitting in a service applauded Pecora's efforts. Raymond at St. James Episcopal Church, it was Moley, a key member of Roosevelt's Pecora-the man reporters called the Brain Trust, said that "Pecora was like Hellhound of Wall Street-and the Senate a police chief who rounds up all the hearings he'd wrapped up just two days suspicious characters in town to solve a earlier that had made those lines true. jewel robbery." Pecora was accused of Few Americans today know who grandstanding, with one writer calling Ferdinand Pecora was, although he was him "three-quarters righteous tribune of once a media superstar, a nearly daily the people [and] one-quarter demagogic fixture in newspapers and radio broad- inquisitor." Critics charged that his reck- casts across the country. With the onset less unveiling of Wall Street's sins only of our current economic woes his name exacerbated the banking crisis gripping has slowly begun to crop up again. In the country. April 2009, House Speaker Nancy Pelosi Pecora was ambitious, and he certainly called for a new "" loved the limelight, but he was no more to investigate "what happened on Wall a demagogue than Roosevelt. He was Street." The next week, the Senate avowedly liberal and reform minded; invoked Pecora's name in voting to create to those who knew him best he was an an independent committee to investigate idealist with "an inveterate passion for the financial crisis, and in January 2010 justice." No Wall Street expert, his con- the Financial Crisis Inquiry Commission clusions about the impropriety of certain held its first hearings. stock market practices were sometimes

It's almost impossible not to hear in today's financial problems the echoes of those hearings held more than 75 years ago.

Pecora, a diminutive Sicilian immi- off base. In the end, though, those mis- grant and a former assistant district steps didn't matter. His success lay not attorney from New York City, was chief in his talent for inciting passions and counsel for the Senate Committee on inflaming prejudices nor in the intellectu- Banking and Currency, charged with al purity of his arguments, but in his abil- investigating the causes of the 1929 ity to crystallize the zeitgeist of the early stock market crash. As he recounted in Depression years-the politicians' vague his own memoir of the hearings, Wall and vitriolic denunciations of Wall Street Street under Oath: "Before [the commit- and the bitter grousing of a broken-down tee] came, in imposing succession, the populace-into hard facts and concrete demigods of Wall Street, men whose evidence. names were household words, but whose Ultimately, the acclaim Pecora gar- personalities and affairs were frequently nered was justified because the hear- shrouded in deep, aristocratic mystery.... ings he led fundamentally changed Never before in the history of the United the relationship between Washington States had so much wealth and power and Wall Street. Before 1933 the fed- been required to render a public account- eral government had taken a hands-off ing." In terms of rapt public attention, approach to the stock market. But the

Vol. 21, No. 3, 2011/EXPERIENcE 17 Vol. 21, No. 3, 2011/EXPERIENCE hearings, and the public clamor they cre- dose of luck and what can only be ated, changed all that. In his inaugural described as impeccable timing. In fact, address, Roosevelt declared, "There must most of the Pecora hearings would never be an end to a conduct in banking and have occurred without a single, decisive in business which too often has given turning point, a key moment that made to a sacred trust the likeness of callous the rest of the hearings and reform legis- and selfish wrongdoing," and he called lation possible. Before Pecora's appoint- for "strict supervision of all banking and ment as chief counsel, the hearings had credits and investments." Many would dragged on for nearly a year. Despite a argue that the former is still all too true, great deal of early effort and promise, but Roosevelt at least delivered on the they had made little discernible head- latter. Over the course of Roosevelt's way and the resolution authorizing the famous first 100 days in office and then investigation was about to expire. Nearly in the year following, Congress passed everyone believed the probe would limp and Roosevelt signed a flurry of banking quietly offstage, accomplishing nothing and securities legislation, most of which and leaving Wall Street untouched. The still governs our financial markets today. turning point-and the primary inspira- The first federal securities laws, federal tion for Roosevelt's line about the money deposit insurance, and the creation of the changers fleeing the temple-came in late Securities and Exchange Commission all February 1933, just a few short weeks trace their roots back to that fertile politi- after Pecora was first appointed coun- cal soil. sel. It was just 10 days, the 10 days in Pecora made it all possible because which Pecora examined the officers from his investigation created the sensational National City Bank (now, a few name headlines necessary to galvanize public changes later, Citigroup), particularly its opinion for reform. As Benjamin Cohen, a chairman, Charles E. Mitchell. Pecora too and one of the primary drafters of recognized the key role this brief period those laws, put it, bankers were "so dis- played, writing that in those few days credited in the public eye that Congress "a whole era of American financial life was ready to pass anything." Securities passed away." and Exchange Commission historian Joel Although he too has faded from mem- Seligman argues that "effective securities ory, Mitchell was one of the best-known legislation might not have been enacted bankers of his day. Edmund Wilson, writ- had Pecora's revelations not galvanized ing for the New Republic in 1933, said broad public support for direct fed- that "Sunshine" Charlie was "the banker eral regulation of stock markets." Even of bankers, the salesman of salesmen, the Roosevelt drew a direct link between the genius of the Nevi Economic Era." The wrongdoing Pecora uncovered and his son of a produce dealer and the one-time ability to push through reform legislation. mayor of gritty Chelsea, Massachusetts, The legislative changes flowed right out Mitchell started off as a $10-a-week clerk of the hearings. "We built completely on for Western Electric, moved to Wall his work," James M. Landis, former com- Street, and made a fortune by funda- mission chairman and another drafter mentally changing how it operated. He of the securities laws, observed. Most almost single-handedly pioneered the famous congressional hearings take the sale of stocks and bonds to middle-class name of the committee chair, but Pecora's investors. At the height of the bubble, he stellar performance was so dominating, proclaimed that the market had nowhere his questioning so riveting, and his inves- to go but up, and he was constantly on tigations so thorough that the Banking top of his salesmen, hectoring, berating, and Currency hearings eventually became bullying, and cajoling them to sell more known simply as the Pecora hearings. and more of the securities City Bank In short, the hearings played a critical "manufactured." role in our financial history. And they At first glance, the confrontation almost didn't happen. between Pecora and Mitchell hardly Almost, that is, but for Pecora's pro- seemed like a fair fight, though the two digious legal skills mixed with a healthy men were not completely dissimilar. Both

Vol. 21, No. 3, 2011/EXPERIENCE 18 were smart, hardworking, and shared a than 75 years ago. Most Americans then burning ambition-Mitchell for wealth blamed Wall Street and the banking sec- and Pecora for acclaim. But that's where tor for the ills facing the country. There the similarities ended. Mitchell had testi- was populist outrage over excessive exec- fied in congressional hearings before and utive compensation. The markets seemed had emerged unscathed. Pecora had been to be awash in manipulative short selling, committee counsel for just a few weeks in favorable deals for the fortunate few, and had almost no time to investigate the and in dodgy loans that were foisted on bank's complex and far-flung operations. unwary investors. Against the backdrop

The relationship between Wall Street and Washington was forever altered.

Mitchell was a world-renowned banker of the then-exploding banking crisis, the and an adviser to Presidents Harding, disclosures were riveting and, ultimately, Coolidge, and Hoover on economic mat- revolutionary. ters. Outside New York, almost no one While the investigation continued had ever heard of Ferdinand Pecora. to produce stunning revelations for Mitchell was a member of New York's months-including a dramatic confronta- social elite, with all the trappings of tion between Pecora and J.P. Morgan Jr. Wall Street success-a Fifth Avenue later that spring-it was those 10 days mansion, houses in Tuxedo Park and the that set the tone for everything that fol- Hamptons, country club memberships, lowed. It was then, when banks across and a garage full of big, fast cars. Pecora the country were shuttering, when City was an Italian immigrant who was still Bank's executives were in the dock, and struggling to overcome the bigotry and when Pecora led America through the stereotypes of the day. After years of gov- bank's financial machinations, that the ernment service, he had managed to save federal government crossed its regula- just a few hundred dollars. Mitchell had tory Rubicon. This was the turning the wealth and resources of City Bank at point in which the relationship between his disposal, and he strode into the hear- Wall Street and Washington was forever ing room surrounded by the most expen- altered. sive legal talent in the country. Pecora Even more than that, it seemed to had just cobbled together a tiny staff of be a visible turning point in American first-generation immigrants, all earning society. In an ornate hearing room in the same meager salary he did. Nobody Washington, one of the new Americans, was expecting very much from Pecora. so long dispossessed and marginalized, Just 10 days after the City Bank hear- was firmly in control of the machinery of ings began, Mitchell would walk out federal government. An Italian American, alone, discredited and disgraced. The a member of a group almost universally bank quickly accepted his resignation. regarded as crime-prone and lawless, was Pecora had shown that the bank and its exposing the lawlessness of the Anglo- securities-trading arm had engaged in all Saxons who ruled Wall Street. Those 10 sorts of unsavory behavior. It sold worth- days were a vivid sign that something less bonds to investors without fully dis- fundamental had changed in the power closing their risks, manipulated its own structure of the country. m stock price and the stock prices of other companies, and lavishly compensated Published by arrangement with the its executives as the country plunged Penguin Press, a member of Penguin into depression. It's almost impossible Group (USA), Inc., from The Hellhound not to hear in today's financial problems of Wall Street by Michael Perino. the echoes of those hearings held more Copyright @ Michael A. Perino, 2010.

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