January 6, 2013

The Lion of Wall Street: Ferdinand Pecora and the Crash of 1929

Ferdinand Pecora
By Niccolò Graffio
“Money, and not morality, is the principle of commercial nations.” – Thomas Jefferson: Letter to John Langdon; 1810
Historians tell us the economic system we call modern Capitalism began with the Dutch and the British in the early part of the 18th century.  Some may quibble that it actually began earlier, but the essential elements (capital accumulation, competitive markets, pricing systems, etc) were not really established until then.

In today’s media-driven, political climate of class warfare, it is de rigueur to bash Capitalism as a social evil.  The proponents of this worldview proffer Socialism as an attractive alternative to it.  Being old enough to remember when over 1/3 of the globe’s population lived under various forms of Socialism, I can attest such is not the case.  

The largest (in terms of land area) socialist country in history, the Soviet Union, no longer exists, precisely because of its socialist economy!  The second largest, China, scrapped its socialist economy shortly after the death of Mao Tse Tung in 1976 in favor of a mixed one that has heavy elements of Capitalism in it.

It is also worth noting the greatest scientific and technological advancements recorded in modern history have come largely from Capitalistic societies.  Until the passage of the Patient Protection and Affordable Care Act of 2012 (i.e. “Obamacare”), America was derided in the leftist press here and abroad for the supposedly lower quality of health care it offered its citizens compared, to say, countries like Germany, Sweden and the UK.  Studies have shown, however, cancer patients in the United States live, on average, longer lives and receive higher quality care than their counterparts in Western Europe!

One has to wonder, of course, how long that will last once the last planks of Obamacare become law in this country.

Facts, of course, mean nothing to the ideologically driven, and nothing I or anyone else says will mean a bit of difference to those who steadfastly maintain Socialism is the way to go.  To be sure, an economic system is only as good as the people who are willing to work it.  This includes Capitalism.  

Due to the inhibition or the outright suppression of the profit incentive, corruption tends to run rampant in socialist societies.  Ironically, due to ease of access to large amounts of capital, corruption can be a problem in Capitalist societies as well, though it tends to be more endemic.

Corruption, whether endemic or widespread, is a problem, one which the rulers of a society would do well to be on guard for, provided, of course, they are not corrupt themselves.

America, since its inception, has kept for itself a Capitalist economy, though in recent decades it has taken on a more mixed character as it has added some elements of Socialism.  This has largely been due to the efforts of so-called “progressives” in the Democratic Party.  Those of a more beneficent character have been motivated to promote the public weal.  Those of a more cynical character have no doubt been motivated to do so as a means of buying votes at taxpayer expense.

America has the largest economy of any country on earth, in fact, of any country in history (though China is quickly catching up)!  The linchpin of this economic colossus is its vast network of financiers, affectionately and collectively known as “Wall Street”.

Literally trillions of dollars a year pass through the halls of America’s investment banks and brokerage firms.  These monies power the largest corporations in the country.  In turn, monies spent by these corporations “trickle down” to smaller banks and businesses nationwide.  

Of all the ways corporations raise capital to run their operations, perhaps none is more famous or glamorous than the stock exchanges.  Books have been written and movies produced celebrating or lambasting these financial marketplaces where fortunes have been made (or lost).

Such huge amounts of money have given the impetus to the scientific and technological advances that have made America great.  At the same time, though, they have also given temptation to those of baser morals to enrich themselves at the expense of others.

Though a number of stock exchanges exist here in the United States, by far the largest (in terms of market capitalization) both here and abroad is the New York Stock Exchange (or NYSE), located in downtown Manhattan.  It is also probably the most well known globally.

It began without fanfare back in 1792 as a simple agreement between 24 stockbrokers to deal only with each other.  It also established a uniform system of commissions for services rendered.  In 1817 its directors renamed it the “New York Stock & Exchange Board”.  In 1863 its name was shortened to what it is today.

Over ensuing decades, as America’s fortunes increased so did the size and complexity of operations at the NYSE.  Between the years 1896-1901, for example, the volume of stocks traded increased a staggering sixfold!  It must be remembered that during this time there was little if any government oversight into the day-to-day operations of the NYSE.  There was no Securities & Exchange Commission back then.  As one can imagine, many shady deals were going on in countless back offices.  By the early part of the 20th century “The Street” had already cultivated for itself a reputation as a nest of big money corruption.  

My favorite anecdote concerning this deals with an apocryphal story about the NYSE.  According to this story, when infamous mob boss Carlo “Lucky” Luciano visited New York City he was invited to take a tour of “The Big Board”.  When the tour was over he was asked by his guide what he thought of the entire operation.  Turning around to look one last time at the floor he muttered “I’m in the wrong racket!”

Corruption, plus a lack of any real Federal oversight of the financial markets (and banking in general), spelled disaster, and disaster came on October 29th, 1929 when U.S. stock market prices suffered the greatest decline in a single day of trading up until that time.  Historians remember that day as “Black Tuesday” and many still believe that day trigged what came to be known as The Great Depression.

Ferdinand Pecora was born on January 6th, 1882 in the town of Nicosia, Sicily.  He was one of seven children.  His parents Louis and Rosa (née Messina) Pecora, left Sicily for the United States four years later, eventually settling in a cold water apartment in the Chelsea district of Manhattan.  His father earned a living as a cobbler. 

Like many children of immigrants, young Ferdinand worked; he sold milk and newspapers to help the family financially.  Though he did work, he did not neglect his studies in public school.  Early on young Ferdinand demonstrated an aptitude for memorizing facts, figures, dates and names.  This helped him immeasurably in his studies and he graduated from high school class valedictorian.

He was able to get a job working as a clerk at a Wall St. law firm.  He divided his time working here during the day while studying law at New York Law School at night.  He passed the bar exam on his first attempt (unlike a lot of other lawyers) and was admitted to the bar in 1911.

For several years Pecora was a member of the Progressive wing of the Republican Party.  In 1916, however, he joined the Democratic Party and became a member of Tammany Hall.  Within two years he was appointed an assistant district attorney.  Over the next 12 years he earned a reputation as a tough but impeccably honest prosecutor.  He especially set his sights on so-called “bucket shops” - illegal establishments set up where people could wager monies on whether stock and commodity prices would rise or fall.  Unlike reputable establishments, those who wagered here did not take possession of the stocks or futures contracts.  Pecora was able to shut down over 100 of these essentially gambling parlors.

By 1922 he was named chief assistant district attorney, second-in-command under the redoubtable Joab H. Banton.  Seven years later Banton, recognizing in Pecora a worthy colleague, tapped him to be his successor.  

It has been said, though, “No good deed ever goes unpunished”.  Pecora’s reputation for honesty and relentlessness earned him no friends in Tammany Hall, little changed from the days of the infamous William Magear “Boss” Tweed.  The members of Tammany Hall feared that if given enough power, Pecora might eventually come for their heads.  As a result, they refused to nominate him for the post.  

Disgusted with Democratic Party politics in New York City, Pecora left his job at the D.A.’s office and went into private practice.  Here he might have remained in obscurity were it not for the events that surrounded the Stock Market Crash of 1929 and The Great Depression that followed. 

Within months of the crash hundreds of thousands of Americans were thrown out of work as capital dried up and the money supplied contracted in a big way!  One of the first casualties of the depression was Herbert Hoover, who as president was given chief blame for the disaster by his political opponent Franklin Delano Roosevelt.  People demanded to know why the depression happened, and they wanted heads on sticks!  

Hoover lost the election of November, 1932 to Roosevelt.  Ironically, Hoover had come to hate being president, considering it a thankless job.  He only agreed to run again out of pride and because he and other top Republican officials believed he was the only Republican candidate who would be able to resist resorting to radical measures to jumpstart the economy.

Peter Norbeck, ninth governor of South Dakota and later a U.S. Senator, was outgoing Republican Chairman of the Senate Banking Committee during the last months of the Hoover Administration.  It was he who brought Ferdinand Pecora out of obscurity, appointing him as Chief Counsel to the U.S. Senate Committee on Banking and Currency.  The Committee was charged with investigating the causes of the Crash of 1929.  The stage was now set for the drama that was to follow.

With the aid of John T. Flynn, a noted journalist and Max Lowenthal, a prominent (but very discreet) attorney and political figure, Pecora began sending out numerous subpoenas to some of the biggest names in American banking and finance.  The purpose of which was to ‘call them on the carpet’ and learn the truth about their part in events that led up to the Crash.

Among those subpoenaed to appear before the media-dubbed “Pecora Commission” were Richard Whitney, President of the New York Stock Exchange, Charles E. “Sunshine Charlie” Mitchell, President of National City Bank (today Citibank), and none other than John Pierpont “J.P.” Morgan himself!

“The Hellhound of Wall Street” as the press dubbed Ferdinand Pecora, spared no one in his zeal for uncovering the inner workings of Wall Street capital.  In the process he ruined many a reputation.  J.P. Morgan, who suffered massive deflation (in his case, of his ego) during the proceedings, left humiliated, privately referring to the relentless Pecora as a “dirty little wop”.  Men who were once revered in newspapers as America’s bankers were now being reviled in the same press as “banksters”.

Anyone who takes the time to thoroughly read the history of the Pecora Commission can’t help but notice the eerie similarities between the events surrounding The Great Depression and “The Great Recession” of 2008-09.  “Sunshine Charlie” Mitchell, for example, made millions for himself and his cronies by selling securities of questionable value to middle-class investors.  Many of these securities, like the bonds of corrupt and ill-managed South American countries, were sold to ignorant investors even though Mitchell and his buddies knew they were bound to fail.

The press and the American public ate up the proceedings!  Outrage over financial mismanagement of investors’ monies was only further stoked by the revelation members of elite WASP families were privy to lucrative deals not available to the general public (but paid for by their money).  Among these beneficiaries was none other than former President of the United States Calvin Coolidge!  

Franklin D. Roosevelt rode the groundswell of public outrage in demanding Congress immediately pass comprehensive banking reform.  One of the results of this was the passage of the Banking Act of 1933, aka The Glass-Steagall Act.  The bill for the act had been kicking around the halls of Congress for a couple of years prior to this.  Among other things it prohibited commercial and investment banking from being performed by the same financial institution.  It also created the Federal Deposit Insurance Corporation (FDIC).  

The Glass-Steagall Act remained on the books until key parts were overturned by the actions of the Clinton Administration in 1999.  Many charge this set the stage for the colossal recession that occurred just nine years later.

A year after the passage of the Glass-Steagall Act Congress passed the Securities Exchange Act of 1934, which created the Securities and Exchange Commission (SEC) to oversee America’s stock exchanges.  The Pecora Commission’s hearing officially ended on May 4th, 1934.  Pecora himself went on to serve as one of the first commissioners of the SEC.

Five years later he published his memoir that included many details of the activities of his eponymous commission.  In the book, entitled Wall Street Under Oath: The Story of Our Modern Money Changers, he lamented the fact the public’s memory was dimming now that the economy was improving.  He also pointed out the bankers were growing increasingly resistant to any attempts at regulatory reform and marshalling their allies in the media and Congress to stonewall it.

On January 21st, 1935 Ferdinand Pecora resigned his position at the SEC and became a judge on the New York State Supreme Court.  He held that position until he ran (unsuccessfully) for mayor of New York City in 1950.  Afterwards, he returned to practicing law.

On December 7th, 1971, Ferdinand Pecora died at the age of 89.

Pecora’s name may be unknown today to millions of average Americans, but his legacy and name lives on in the hearts and minds of those who continue the fight to reign in the fiscal and political powers of financial institutions.  In the months following the onset of The Great Recession during the last year of the Bush Administration, numerous pundits nationwide invoked the names of Ferdinand Pecora and the Pecora Commission.   They realize, as Thomas Jefferson did before them, that private banks, left unregulated “…are more dangerous to our liberties than standing armies.”  

The media christened Ferdinand Pecora “The Hellhound of Wall Street”.  In truth, he was more of a lion than a hellhound!  In European folklore, a hellhound was a harbinger of death.  Pecora, in his role as the head of the investigative committee that bears his name, stood out as that noble beast guarding its pride from the dangers of the wild.  We would do well for ourselves and our posterity to keep alive his legacy and remember its lessons.

Further reading:
• Ferdinand Pecora: Wall Street Under Oath: The Story of Our Modern Money Changers; A.M. Kelley, 1973