If you search Citigroup Inc’s Web site, a former chairman named Charles E. Mitchell pops up under the heading “Our Legacy.”
What the page doesn’t mention is Mitchell’s reputation for greed, stock manipulation, tax avoidance and abusing customers and shareholders at what was then called National City Bank.
During Mitchell’s heyday in the 1920s, City Bank and its securities-trading arm luxuriated in unsavory dealings, as Michael Perino writes in his page-turning history, The Hellhound of Wall Street. The attack dog was Ferdinand Pecora, a former New York prosecutor who shamed Mitchell in 10 days of Senate hearings in 1933.
In singling out City, the largest bank in the land, Pecora sought to illustrate how widespread such practices were — and why the government, which had assumed a laissez-faire attitude to Wall Street, needed to police it.
The hearings took place against a backdrop of Hoovervilles and unemployment stuck at 25 percent. Banks were closing and other businesses, with their accounts frozen, shut down, too. As cash drained from the economy, bartering became common: One man in Salt Lake City paid his trolley fare with a pair of trousers.
Pecora’s investigation, and the outrage it stoked, spurred Congress and US president Franklin Delano Roosevelt to introduce the first federal securities laws, federal deposit insurance and the Securities and Exchange Commission. It was the moment when “the federal government crossed its regulatory Rubicon,” writes Perino, a professor at St John’s University School of Law and a past Wall Street litigator.
Like a filmmaker, Perino cuts between squatter camps and the hearings, held around a baize-topped mahogany table under a barrel-vaulted ceiling in the Senate Office Building. The book hints at what might have happened, for better or worse, if former US Treasury chief Hank Paulson and US Federal Reserve Chairman Ben Bernanke had let more banks implode.
“Sunshine Charlie” was as prominent then as Jamie Dimon is today. An upbeat banker with an “indomitable jaw,” he ran a vast financial supermarket that prided itself in selling securities, like so much coffee, to the middle class. He owned mansions and advised US presidents including Herbert Hoover.
Pecora, a cigar-smoking Sicilian immigrant, was little known outside New York. He had a reputation for legal rectitude and extramarital affairs. He was hired as chief counsel for the investigation only after the Senate Banking and Currency Committee ran out of candidates in the last weeks of a congressional term. The senators paid him US$255 a month.
With the clock ticking loudly, Pecora had only three days to pore over the minute books of board meetings at City Bank and its affiliate. Although his grasp of markets was often sketchy, he knew a good morality play when he saw one.
The drama began on Day One, when Pecora quizzed Mitchell about the bank’s bonus plan and his own earnings. Mitchell, it turned out, received a shocking amount: more than US$3.5 million from 1927 through 1929. A factory worker, if he had a job in 1933, got about US$17 a week, Perino says.
Yet the day’s real bombshell came when Pecora pinned down why Mitchell sold 18,300 City Bank shares in late 1929, only to buy them back at the same price in early 1930. The trade, with his wife, was done for one reason only.
“I sold this stock, frankly, for tax purposes,” he said.
His reported loss came to US$2.8 million, meaning he didn’t pay a penny of tax on his US$1.1 million income in 1929.
In the following days, Pecora explored how executives had manipulated stock prices, concealed losses on investments in Cuban sugar, and taken interest-free loans, most never repaid.
Worse still was how the bank exploited customers such as Edgar Brown, an almost deaf former theater owner with tuberculosis. He was left destitute after entrusting his portfolio of US$100,000 in cash and mostly US government bonds to the bank’s trading arm.
Pecora, once a media star, was largely forgotten until our own market meltdown. So was the role that City Bank’s behavior played in convincing the government to separate commercial and investment banking under the Glass-Steagall Act of 1933. The merger that created Citigroup in 1998 prompted the repeal of that provision, freeing banks to gamble with the taxpayer’s money.
Cries for a new Glass-Steagall went out after the collapse of Lehman Brothers Holdings Inc. The financial-overhaul bill that US lawmakers patched together falls short of that, and this book indirectly suggests why.
It’s not just that we had no Pecora. It’s also because Bernanke and Paulson, by saving the system from the abyss, sapped the public fury that might have fueled deeper change.
As for Sunshine Charlie, he resigned and then did what disgraced bankers often do. After a jury pronounced him not guilty of tax evasion, he went back to work on Wall Street. By his death in 1955, Perino says, he was again an affluent and esteemed banker.
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