Out for Blood

A portrait of the prosecutor charged with investigating the causes of the 1929 crash.

As night follows day, so inquests follow crashes. What followed the 1929 crash were the sensational stock-market hearings of 1933 and 1934. Michael Perino’s “The Hellhound of Wall Street” is the story of the chief inquisitor.

Contrary to the book’s overpromising subtitle, the Senate Banking and Currency Committee investigation did not, in fact, “forever change American finance.” Dramatic it was, and shocking, too. But if Ferdinand Pecora, the committee’s chief counsel, were gazing down on Wall Street today, he might be struck not by how much has changed but how little. Regulations we have in profusion, and regulators, too. Yet fallible human beings persist in buying high and selling low, rather than the other way around.

Mr. Perino roots hard for his protagonist, who had spunk enough for three. Ferdinand Pecora was born in Sicily in 1882 and brought to New York City at age 4. He grew up in a cold-water basement flat that was part residence, part shoe-repair shop. When his father, Luigi, the cobbler, was incapacitated in an industrial accident, 14- year – old Ferdinand became the family’s principal bread winner.

The striving young immigrant had energy left over to attend law school at night. He passed the bar exam and cast his political lot with the city’s Democratic Party machine. In 1918, now 35, he became a deputy assistant district attorney. A decade later he made a run for the DA’s office. Defeated, he left the city payroll for private practice on Dec. 31, 1929. The stock market had already crashed, of course, but the Depression was just beginning.

The inquisition that would make Pecora a household name in Depression-era America was set in motion by President Hoover in 1932. Led by Sen. Peter Norbeck of South Dakota, the Republican chairman of the Senate Banking and Currency Committee, the panel was charged with unmasking the short sellers who, according to urban legend, were undermining share prices. Hoover wasn’t out to regulate American finance, Mr. Perino relates, but rather to finger the scoundrels he suspected of wrecking the market and ruining his presidency.

Norbeck’s investigation went nowhere. The villains he hoped to expose—notably, Richard Whitney, the imperious head of the New York Stock Exchange—walked all over a succession of ineffectual chief counsels. With Franklin Roosevelt’s election, Norbeck would soon lose his committee chairmanship. How to reinvigorate his moribund investigation? The Republican senator hired the eager, obscure, Democratic ex-assistant DA.

What little Pecora knew about banking and finance he had gleaned from prosecuting low-level frauds. He was, however, a master cross-examiner, a quick study and a tireless worker. He wanted blood, too. In a dinner speech to the Elks Club of New York, he assailed the “men of might” on Wall Street who had taken “millions and millions of the hard-earned pennies of the people.” As for what his investigation might achieve, Pecora ventured: “When the nation again comes to days of plenty and prosperity, let us seek to make it impossible for water and hot air to be sold to men and women for gold taken from their life savings.”

For 10 days in March 1933, Pecora’s investigatory target was Charles E. Mitchell, chief executive of National City Bank, later to become Citigroup. “Sunshine Charley,” as Mitchell was mockingly known after his fall from grace, came pre-convicted, but his bank was a pillar of strength. Today, in the wake of the serial bailouts of 2008-09, Mitchell’s managerial achievement seems almost mythical. From the 1929 peak to the 1933 depths, nominal GDP fell by 45.6%—the American economy was virtually sawed in half. By contrast, during our late, Great Recession, nominal GDP dropped by only 3.1%. Yet this comparatively minor perturbation sent Citigroup into the arms of the federal government to the tune of $45 billion in TARP funds and wholesale FDIC guarantees of the bank’s tattered mortgage portfolio.

National City did accept a $50 million federal investment in 1934, after Mitchell resigned. However—and herein lies the difference—the bank’s solvency didn’t hinge on that cash infusion. Many banks did fail in the Depression, of course. But from today’s perspective the wonder is that so many didn’t.

To Pecora, though—and to Mr. Perino, too—the health of the National City balance sheet was not the question. Mitchell was a whipping boy from central casting. If, Pecora reasoned, he could expose Mitchell as a tax evader, ridicule his boom-time predictions and reveal his high-pressure sales tactics, an enraged public would demand that the Roosevelt administration put capitalism in its place. “Pecora gave them proof,” Mr. Perino writes, “proof that the honesty and integrity of the financial establishment were inadequate—proof that laissez-faire didn’t work. If Wall Street could not or would not regulate itself, Washington would have to regulate for them.”

Thanks in good part to Pecora’s work, investors today have prospectuses to read and an SEC to complain to. Bank depositors have federal deposit insurance to protect them. And banks like Citi operate in the certainty that they won’t be allowed to fail, however much they deserve to.

Pecora went on to become an SEC commissioner, a judge on New York state’s Supreme Court and a crusader for progressive political causes. Mitchell, who resigned in disgrace from National City and lost his houses to foreclosure, refused to file for personal bankruptcy. Rather, he honorably worked to pay every last dollar of debt. Later he built Blyth & Co into a thriving investment bank.

Mitchell or Pecora—who’s your hero?

Mr. Grant is the editor of Grant’s Interest Rate Observer and the author, most recently, of “Mr. Market Miscalculates.”

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Full article and photo: http://online.wsj.com/article/SB10001424052748704380504575530392819077162.html