The Hellhound of Wall Street

The Great Recession has thrown up many villains, from the brazenly criminal (Bernie Madoff) to the simply brazen (Citigroup’s Robert Rubin, AIG’s Joe Cassano, Countrywide’s Angelo Mozilo). It has also occasioned innumerable references to the Great Depression. The main thing that the Great Recession lacks, however, is a hero—someone like Ferdinand Pecora, the “Hellhound of Wall Street,” whose life story is told in Michael Perino’s new book.

Pecora is largely forgotten today (one hopes that Perino’s fascinating biographical history will rectify that). But over the course of ten world-shaping days at the tail end of the Hoover administration in 1933, he changed history and helped to midwife the new financial markets the Depression spawned.

The Wall Street of the 1920s and early 30s was in many ways a far cry from the one we know today. It was a culture in which speculators could bribe the leading financial journalists in New York—to the tune of $300,000 over ten years—to publish inaccurate articles about certain companies so that their share price would go up. When the payoffs were revealed, few eyebrows were raised: “It was all quite unseemly,” writes Perino, “but it is hard to say that anyone was all that surprised.”

In that kind of an atmosphere, any would-be reformer would have to uncover something truly explosive. Wall Street was doing a very good job of blaming the victims of the stock market crash, saying that it was their own fault that they had decided to gamble their savings in the market. In a letter to a widow from San Francisco who had been persuaded by the sales force of the prestigious National City Bank to swap out her government bonds for the bank’s stock, for instance, the bank’s chairman Charles Mitchell simply said that she “shouldn’t have gambled.”

The nemesis of Mitchell and his colleagues proved to be a Sicilian immigrant who had started life in poverty, eventually working his way up to becoming a distinguished judge on the New York State Supreme Court. Ferdinand Pecora spent pretty much his entire life in New York, but the high point of his career took place on Capitol Hill in Washington, where he systematically dismantled a series of the richest and most powerful plutocrats in America.

Pecora’s performance—for, like most trial lawyers, he was in large part a showman—caught the imagination not only of the American public but also of president-elect Franklin Delano Roosevelt. The combination was unstoppable and revolutionary; within months a slew of new regulations had been signed into law, bringing transparency into the financial markets and creating such crucial institutions as the SEC and federal deposit insurance.

Without Pecora, it’s doubtful that many if any of these revolutionary ideas would ever have been pushed by Roosevelt, let alone passed by Congress. It was the last time for 75 years that, in the words of SEC historian Joel Seligman, “money talked and nobody listened.”

Perino plots Pecora’s improbable rise to stardom like a Hollywood screenwriter. Pecora himself overcame enormous obstacles on his way to success, and in no conceivable world was ever going to be offered the job of chief counsel to the Senate Committee on Banking and Currency—a doomed committee, run by a financial illiterate, with only a few weeks of life left in it, which was in any case never going to achieve anything of note.

Yet somehow Pecora was offered the job, and took it, and persuaded the committee’s chairman that in the tiny space of time he had left, he could and should take on the mighty National City Bank and its chairman, Charles Mitchell.

The task was an impossible one, and Pecora triumphed at it. Within a couple of days Mitchell was toast; within months, the entire regulatory structure of Wall Street had been changed forever.

Throughout the proceedings, Pecora was determined to demolish the myth Mitchell and the banks relied on: that the victims were to blame. Rather, he showed how millions of dollars of small investors’ losses had simply been transferred straight into the pockets of fat-cat bank executives like Mitchell.

There are echoes of the present day all through this book. There’s the painfully drawn-out interregnum between the presidential election and the inauguration, for instance, in which nothing useful ever happens, as well as the perverse incentives created by the bonus structure at banks.

Percora’s exposé of excess pay at National City Bank persuaded FDR himself—who had both a highly-developed sense of noblesse oblige and a personal banking relationship at National City—that “Charlie took my money.” Roosevelt also said, in words which echo down the decades, that “these New York bankers haven’t any more notion of public psychology than a chicken.”

At the same time, there are many occasions in this book when the reader is almost wistful for the simpler era of the 1930s, when wrongdoing was so much more obvious and when a single determined lawyer could sit down with a pile of minute books and memorize a very large part of the internal goings-on of the largest bank in the country. Charles Mitchell’s personal tax evasion, for instance, was much more blatant, and on a much larger scale, than anything we’ve seen this time around.

Or consider National City’s adventures in South America: it sold Peruvian bonds despite its own bankers considering the country unlikely to pay them back, and it sold bonds from the Brazilian state of Minas Gerais without informing investors that a large chunk of the proceeds would go straight to National City itself. (And without passing on its own banker’s opinion that the state’s officials were ignorant, careless, negligent, inefficient, and inept.) Once uncovered by Pecora, such disclosure failures were easy to ban, going forwards, with the introduction of America’s first securities laws.

Pecora took down more than just National City’s Charlie Mitchell. Later on in the hearings—which were extended once Pecora started working his magic—he showed that during the 1929 stock market crash, the chairman of Chase National Bank had borrowed money from the bank itself so that he could use the proceeds to short Chase’s stock. And eventually Richard Whitney, the president of the New York Stock Exchange, was sentenced to ten years in Sing Sing for embezzlement. (He ended up serving just over three years.)

There is no Ferdinand Pecora today, and nothing in the Dodd-Frank bill comes close to the revolutionary overhaul of Wall Street that Pecora initiated. And the Financial Crisis Inquiry Commission, led by the smart and competent Phil Angelides, will struggle just to put together a coherent narrative of the crisis.

But to a large degree the way in which this crisis pales in relation to that of the 1930s is a testament to the lasting strength of the laws that were put in place by Roosevelt. In 1933, a spate of bank runs forced the president to close every bank in the country; this time around, the presence of deposit insurance meant that only a manageable handful of commercial banks suffered serious runs.

So it’s right and proper that Perino is giving Pecora his due. But for the legacy of his fierce attention to an earlier economic calamity, the crisis of 2008 might have been much, much worse.