The Hellhound of Wall Street Read online

  While the investigation continued to produce stunning revelations for months—including a dramatic confrontation between Pecora and J. P. Morgan Jr. later that spring—it was those ten days that set the tone for everything that followed. It was then, when banks across the country were shuttering, when City Bank’s executives were in the dock, and when Pecora led America through the bank’s financial machinations, that the federal government crossed its regulatory Rubicon. This was the turning point in which the relationship between Wall Street and Washington was forever altered.

  Even more than that, it seemed to be a visible turning point in American society. In an ornate hearing room in Washington, one of the new Americans, so long dispossessed and marginalized, was firmly in control of the machinery of federal government. An Italian American, a member of a group almost universally regarded as crime-prone and lawless, was exposing the lawlessness of the Anglo-Saxons who ruled Wall Street. Those ten days were a vivid sign that something fundamental had changed in the power structure of the country.

  This is the story of those ten days.

  PART I

  PRELUDE

  Chapter 1

  THE WELL-DRILLER AND WALL STREET

  On New Year’s Eve 1932, Peter Norbeck sat behind his sturdy mahogany desk in the Senate Office Building, cigar in hand, dictating letters to one of his team of secretaries. Even on the last day of the year, the South Dakota Republican couldn’t relax; it just wasn’t in his nature, and, anyway, he was too far behind in answering the mail that constantly poured in from his constituents. Outside he could see the Capitol dome through the light rain that was falling on the city. The view was fitting for a senior senator of the majority party, as was his front-row seat in the Senate chamber, just to the vice president’s left. Around him on the walls were the tokens of what he had accomplished in a quarter of a century in politics. The most prominent was the photograph of the work in progress on Mount Rushmore, George Washington’s head emerging from the Black Hills’ granite.

  The senator had every reason to be content on that warm winter day. Six weeks before, he had somehow managed to emerge untouched from the “Democratic cyclone” that swept the country. He won reelection easily, which was more than most Republicans could claim that year. The 1932 presidential election had, naturally, been a stunning rebuke for Hoover. When Hoover was elected in 1928, the “Great Engineer” was hailed as one of the most competent and ablest men ever to win the office. Now his name was synonymous with poverty and depression. It wasn’t just “Hoovervilles”—newspapers were “Hoover blankets,” empty, turned-out pockets “Hoover flags.” Depending on where you lived, the armadillos, groundhogs, or rabbits the desperately hungry caught and ate were “Hoover hogs.” People who were left penniless in the Depression had been “Hooverized.”1

  Norbeck certainly didn’t like to see Democrats elected president, and he was particularly unsure of this one. In his letters that year, Norbeck called Roosevelt “superficial” and “shifty,” and he said that he had “absolutely no confidence in him or his Party.” Indeed, just so everyone was clear on that score, Norbeck made sure to amend his biography in the Congressional Directory, which used to read “Roosevelt Republican”; it was now “Theodore Roosevelt Republican.” Norbeck’s wariness had more to do with a fear of the unknown than a real difference in political outlook. Norbeck viewed himself as a friend of the common man, particularly if the common man was one of the farmers who regularly voted for him. He was not averse to bucking party lines, and he regularly opposed the Republicans’ conservative bloc. He was, in the words of a journalist of the day, “one of those prairie Republicans—half Democrat, half other ingredients, but less than one-half of one percent Republican.”2

  For all his suspicion of Roosevelt, Norbeck couldn’t generate much sympathy for Hoover. The two had never seen eye to eye. Norbeck even refused to endorse Hoover in the 1932 election, a move that infuriated the president. Norbeck’s decision to run his own campaign and remain uncommitted on the presidential election was driven by both his personal antipathy toward Hoover and his political pragmatism. The Depression had hit South Dakota farmers hard, and commodity prices had fallen to levels not seen in years. Wheat was twenty-five cents a bushel, oats less than a dime. By the time the farmer paid for shipping, he was lucky to make a few pennies. It was no wonder that some farmers simply left the crops in the field to rot. The letters Norbeck read from his constituents were brimming with ominous portents even more troubling than the current low prices—rainless skies, burnt and stunted crops, and swarming grasshoppers.

  As Norbeck’s reelection campaign crisscrossed the state that summer and fall, farmers gathered in mass rallies and blockaded roads with sharpened telegraph poles. Milo Reno, the leader of the militant Farmers’ Holiday Association, was advocating that midwesterners withhold produce from the market or simply destroy it—all part of a strike to protest low agricultural prices and the wave of foreclosures sweeping the Great Plains. For months, raging mobs of desolate farmers interrupted foreclosure sales, and now self-help was turning violent—the dead body of a lawyer who had handled a foreclosure was dumped in a Kansas field; a sheriff and the representative of a New York mortgage company were beaten up in front of a courthouse; auctioneers were intimidated into selling farms back to their dispossessed owners for just a few dollars. For years Hoover regularly opposed the farm legislation that Norbeck tried to push through, and the senator did not have to look far to see just how unpopular Hoover was back home. If Norbeck held his nose and endorsed the incumbent president he might get dragged down along with him.3

  The problem, of course, was that it was not just the presidential election that had gone so poorly—Democrats now controlled both the House and the Senate. Roosevelt’s long coattails meant that Norbeck was going to lose the chairmanship of the Senate Banking and Currency Committee on March 4, 1933, the day the new Congress was to be sworn in and Roosevelt inaugurated. No, Norbeck was far from content on that last day of 1932, but it wasn’t only because he was about to lose this plum and powerful committee chairmanship, the prestige that came along with it, and his view of the Capitol. Norbeck was unhappy because he had only two more months in the lame duck session of Congress to complete his Wall Street investigation, and it was going nowhere fast.

  That Peter Norbeck was chairman of the Banking and Currency Committee was itself a bit hard to fathom. In fact, it would be hard to conjure up a more unlikely committee chairman. He was born in the Dakota Territories in 1870, the eldest son of Scandinavian immigrants. Raised on the family’s farm with little formal education, he completed only three semesters at the University of Dakota, where he was doing mostly high-school-level work. He had a decent memory for facts, but he was neither an original nor a creative thinker.

  He proved, however, to be a sharp and successful businessman. Norbeck made his fortune as a young man drilling artesian wells for farmers in the arid northern plains. He was the prototypical midwestern farm boy, a burly six-footer who tipped the scales at well over two hundred pounds. He had broad shoulders, a thick neck, and a pronounced Norwegian accent, which he made no attempt to conceal. In his Senate days a Washington journalist said that Norbeck “gave the impression of rugged strength and power. He wore his thick, bristling, iron-grey hair clipped short, and a heavy, full mustache completely covered his upper lip.”4

  When reporter Ray Tucker profiled Congress’s progressive midwesterners (derisively labeled by many as Sons of the Wild Jackass) in 1932, he said that Norbeck’s “greatest charm was his willingness to be himself. He puts on no airs and makes no pretense of being something that he is not.” Despite that assessment, Norbeck was not above using his homespun manners to his political advantage. “Seemingly a naïve and childlike spirit,” Tucker wrote, “‘Pete’ as he is known, is . . . one of the smartest politicians in the Senate; his naiveté is an affectation and armament.”5

  Norbeck entered politics in 1908 when he was elected to the South Dakot
a State Senate as a progressive Republican. In 1912 he supported Theodore Roosevelt’s third-party bid for the presidency. Like Teddy Roosevelt, Norbeck was an ardent conservationist. In fact, it was Norbeck who insisted that Theodore Roosevelt, who remained Norbeck’s political hero throughout his life, be enshrined on Mount Rushmore, the project Norbeck was single-handedly backing in Washington.6

  In 1916, Norbeck was elected governor. Despite his avowed admiration for Roosevelt’s moderate progressivism, Norbeck pursued an aggressive program of state ownership of private business. He, like other midwestern progressives, was hostile to the financial establishment. He thought bankers regularly gouged farmers on crop loans, so his largest venture was a system of rural credits that provided direct governmental loans to farmers at below-market rates. The program was a disaster because South Dakota proved to be an inept banker. In a time of falling farm prices, it made loans with little documentation. Bankers administered the law locally, and their primary mission was often shedding their own bad debts. By the mid-1920s, one-third of the state loans were in default, and taxpayers eventually bore the costs of bailing out the system.

  The failure of the rural credits plan would, however, not come until later; Norbeck was still by far the single most popular and powerful politician in South Dakota when he was elected to the United States Senate in 1920. In the Senate he focused primarily, although usually unsuccessfully, on agricultural issues, but was also assigned to the Banking and Currency Committee. It is not entirely clear how he got the post, and in his early years he showed virtually no interest in it. He was, though, at least frank about his ignorance, quipping that “as an authority on banking and currency he was the ablest well-driller in Congress.” In the beginning, he did little more than show up at committee meetings. In 1925 he even offered to step down, but was reappointed.7

  By 1927, however, he was the ranking Republican on the committee and therefore entitled to become its chairman. He continued to have little interest in the field, but was told that turning down the chairmanship might lose him considerable prestige. So he took the post, much to the surprise of his Senate colleagues. After his appointment, Norbeck still had only the most superficial understanding of how banks or Wall Street worked. His most common practice was to turn difficult problems over to Carter Glass, the Democrat from Virginia. The seventy-five-year-old Glass was a former Treasury secretary and generally acknowledged as the father of the Federal Reserve System. He had been Congress’s resident expert on banking for three decades, and he became the real power on the committee.

  As the stock market boomed to unprecedented heights in 1929, Norbeck did little to try to tamp down speculation. About the best he could muster was a rather lame warning that “what goes up must come down.” It did, and as the country sank deeper and deeper into depression, more and more reform proposals came before the committee. At that point, Norbeck’s lack of sophistication actually helped him, if not the rest of country. “I really begin to think I am fortunate,” he wrote a friend, “in the fact that part of the stuff goes over my head—I do not understand it all. If I did, maybe I wouldn’t sleep.”8

  In early 1932, while Norbeck sat bewildered in the Senate, Hoover was fuming in the White House. The embattled president needed to pin the blame for the failed economic recovery somewhere and he chose Wall Street short sellers as his scapegoats. They were, after all, tried-and-true villains; politicians have complained about short sellers in down markets since tulip bulbs were all the rage. The stock exchange in those early Depression years still seemed as lawless as the Wild West, and short sellers did everything they could to make sure that they came out on the right side of their bets that stock prices would fall. They circulated false rumors and formed shadowy conspiracies known as bear pools that would try to force prices down, just as during the boom years stock traders had used pools to drive prices up.

  Hoover believed bear raiders were deliberately impeding economic recovery, both for their own financial benefit and to embarrass the administration. As one sympathetic Republican senator put it, “every time an Administration official gives out an optimistic statement about business conditions, the market immediately drops.” Short sellers, the president insisted, were destroying “public confidence,” and he appealed to their sense of duty. “If these gentlemen have some sense of patriotism which outruns immediate profit,” Hoover lectured, “they will close up these transactions and desist from their manipulations.” Many in Congress thought such attempts at moral suasion were bound to fail. They introduced a welter of proposals to curb short selling or ban it outright, even though those bills had little hope of actually being enacted.9

  The notion that the market swoon and the Depression were solely the product of short selling was, in any event, delusional. Short sales certainly increased after Hoover speeches, but it was not a conspiracy. Bears had simply learned that investors now so thoroughly distrusted Hoover that whenever he predicted recovery the market would drop. Even the largest traders did not have enough capital to drive down and keep down the entire market if the economy were really recovering. Democrats began to openly mock Hoover’s paranoia and his attempts to pin the continued Depression on a Wall Street conspiracy rather than his own failures. One senator elicited peals of laughter from his colleagues when he sarcastically suggested that “possibly after all the man who caused the panic will be located and shown to be some little broker over in Wall Street who has brought about the panic and now, through a spirit of willfulness, will not let us have prosperity back again.”10

  Hoover remained convinced that Wall Street was at fault, but there was little he was willing to do to rectify the matter. He wouldn’t support the bills to limit short selling because he adamantly believed that the federal government had no business regulating the New York Stock Exchange. In fact, the president thought that such legislation was likely unconstitutional. So for two years Hoover did little but plead with the exchange’s president, Richard Whitney, to take steps to rein in the short sellers. The patrician Whitney assured the president the exchange would act, but made only piddling changes to stock market rules.

  Whitney even seemed to thumb his nose at the president. He continued to make speeches around the country proclaiming that “normal short selling is an essential part of the free market in securities” and ridiculing the notion of rampant bear raiders. In a national radio broadcast in October 1931, Whitney lashed out at the exchange’s critics. “I would like to ask what proof there is—not blind prejudice, not vague assertions, but actual proof and evidence—that bear raiding has taken place in the stock market.” Any attempt to ban short selling, he warned, would lead to Armageddon, the very “destruction of the market.” Whitney was right that an outright ban on short selling was nonsensical, but his constant and very public intransigence infuriated the president.11

  By the winter of 1931-32, Hoover had had enough. With the upcoming election, he was convinced that Democrats on Wall Street, prominent financiers and traders like Bernard Baruch and the Democratic National Committee chairman John J. Raskob, were planning huge bear raids that would crater the stock market and further dim his chances for reelection. In an angry meeting with exchange leaders, Hoover demanded immediate action. “Mr. Whitney made profuse promises, but did nothing,” the president wrote. On February 16, 1932, Hoover issued a final ultimatum to Whitney—take substantial steps to stop bear raids or he would ask Congress to investigate “with a view to Federal control legislation.” This was the first time Hoover had threatened an investigation, but given the president’s views on the propriety of federal securities legislation, Whitney likely thought it was an idle threat. But Hoover did not back down. He told reporters that short sellers were bringing “discouragement to the country as a whole” and explained that he had asked the exchange to “take adequate measures to protect investors from artificial depression of the price of securities for speculative profit.”12

  A few days later, after yet another meaningless tweak to t
he exchange’s short-selling rules, Hoover reached out to the Senate Banking and Currency Committee, although not to its chairman. Instead of contacting Norbeck, Hoover turned to Republican senator Frederic Walcott, the president’s go-to man in the Senate. It was a natural choice. According to Washington columnists Drew Pearson and Robert Allen, Walcott was not only one of the president’s fishing buddies, he was also his “most devoted henchman,” a man who “gratefully does all the little chores which the President cannot get the Republican leaders to do, and [who] unquestioningly carries out under-cover legislative schemes for the President.” It was Walcott that Hoover wanted to run an investigation of Wall Street, and the selection spoke volumes about the president’s intentions.

  Walcott was a conservative former investment banker from Connecticut who was in constant contact with Wall Street’s leaders, frequently reporting their views back to the president. He was a staunch defender of wealth, privilege, and the economic status quo, hardly the man to conduct the kind of rigorous investigation of Wall Street misdeeds that would lay the groundwork for federal legislation. But federal legislation was not what Hoover was after, a point Walcott made explicitly just a few days later. The president really only wanted to scare and embarrass the short sellers so they would stop, in his view, driving down stock prices. When Walcott emerged from his meeting with Hoover, he made that intention clear to the assembled reporters, telling them that the committee would look at every angle of short selling and that “some of the outstanding bear raiders” would be called to testify. “We have the names,” he gruffly told the press. The committee would disclose the identities of “these big professional raiders who have been deliberately taking the bloom off of every constructive enterprise for the last year.”13