The Hellhound of Wall Street: How Ferdinand Pecora's Investigation of the Great Crash Forever Changed American Finance Book

A great story of how an unregulated financial industry led to 1929 crash and its reasons revealed by almost single-handedly by a Congressional Committee council - Ferdinand Pecora. His investigation of the financial industry combined with his questioning techniques revealed how much greed of a few led to ruin of many small investors. Makes for compulsive reading.
A brief set of notes follows:
A story of Ferdinand Pecora, who was chief counsel for the Senate Committee on Banking and Currency, charged with investigating the causes of 1929stock market crash. The committee was chaired by Peter Norbeck, a republican senator from South Dakota.
One of the reasons behind the crash was practice of shortselling, which relayed on a bet that shares price would drop. For example, a broker was "borrowing" shares to sell them and while their price was dropping, he would have to pay a lower price and retain the difference, when returning them to the original owner. President Hoover was trying to stop that practice pleading with the exchange's president Richard Whitney with little effect. In response, he set up an investigation into banking practices, which was run by Norbeck.
After months of investigation the investigation did not turn up anything specific. After a few attempts with various highly regarded, but ineffective, investigators, Norbeck was recommended Pecora. He engaged him in January 1933.
Hearings began late February 1933.Pecora started with a chairman of National City Bank (precursor of Citygroup) Charles Mitchell. He revealed that Mitchell was paid over $3.5M from 1927 to 1929. The senators were earning $9k per year. The factory workers were paid $17 per week (with 45% unemployment rate). He also disclosed that after the crash the executives were allowed to keep their profits paid in July 1929.
Pecora also revealed that Mitchell sold some of his City Bank shares at the end of 1929 to his wife, establish an investment loss and make tax deduction, only to bay them back for exactly the same price in early 1930. With his declared loss of $2.8M he didn't have to pay any tax for 1929, the same year he took $1.1M in salary and bonuses.
On the second day Pecora questioned Mitchell about his investments in General Sugar Corporation, whose officer he was. As the prices collapsed in 1921, General Sugar having invested heavily in Cuba was consistently losing money. In February 1927 City Bank sold $50M worth of new shares to its affiliate the National City Company. The next day, National City purchased all of General Sugar 1.5M shares for $25M. General Sugar in turn then paid off the vast bulk of what it owed to City Bank. That way City Bank removed his debt with General Sugar and placed it with his affiliate, with the bank's shareholders picking up the tab. None of that was obviously disclosed to the shareholders.
Later in the afternoon Gordon Rentschler, the president of City Bank took stand. It was his idea to form General Sugar. Pecora started with a City Bank board meeting in November 1929, when share prices tumbling, and the executives were being hit with margin calls. The bank's board decided to lend the top 100 executives up to $2.4M, most without security and interest-free. By the time of hearing only about 5% of the loans had been paid back. In case of its lower-level employees the bank was still requiring to meet their obligations, at the original price of $200 per share, even though they had been traded at $25 per share.
On day three Pecora started with Hugh Baker, the president of the securities affiliate. Baker tried to avoid any answers. Pecora raised an issue of how City Bank shareholders increased from 15k in 1927 to 86k at the time of hearing. As City Bank was prohibited from directly trading in its own securities, it was doing it via its National City affiliate. In order to drive the stock prices up, the bank removed its stock from the New York Stock Exchange and was selling it through the National City Company. This led to doubling City Bank stock to $580 in 1929.
On Friday, Attorney General William Mitchell launched a formal investigation of City Bank.
On day four, Pecora started with Baker and analysed the operations of the National City Company during the 1920s and their conflict of interest when their apparently independent advice was to recommend the City Bank's bonds. This arrangement between National City Company and City Bank was questioned since 1911, but nothing has been done about it.
On weekend Mitchell and Baker resigned from the bank and that James Perkins, the president of City Bank's trust affiliate would be taking over from Mitchell.
The Monday proceedings (day 7) focused around the Peruvian bonds. City Bank participated in about one-third of all foreign bond offerings. In the afternoon, Victor Schoepperle, one of the company's South American experts took the stand. He admitted of poor quality of the bonds.
On the eight day Pecora moved from Peru to Brazil, specifically the state of Minas Gerais bonds. Richard Byrnes, the former head of the foreign bond department at National City took the stand. He admitted that half of the offerings were used to pay off existing short-term obligations held by the National City. Next, Pecora put on the stand George Train, the man who originally urged the National City to underwrite these bonds. Despite his knowledge of the negligence of state officials in respect to external borrowing, he wrote in the prospectus for the bond offerings about prudent and careful management of the State's finances. He explained that it was done to capture as much as possible of bond market and retain the favour of the state authorities.
On the same day Pecora questioned Edgar Brown, one of the bond holders, who has been ruined by the City Bank advice. He also called as the witness National City's treasurer Samuel Baldwin about organising $10k cash for Horace Silvester, the head of the company's municipal bond department, when National City handled a huge $66M bond offering for the Port Authority of New York.
In the senate, senator Costigan's resolution to continue the investigation into the next session of Congress was passed unanimously.
The first witness on day nine was Horace Sylvester, who admitted that the mysterious transaction was to help the friend of friend, who was in strife at the time. None of that was ever repaid.
On that day Pecora called Richard Whitney, the president of the New York Stock Exchange. After feisty questioning Pecora proved that the Stock Exchange did not conduct any probity audits. All was done as a gentleman's agreement. He also demonstrated that by running pool accounts, they manipulated the price of shares. They also distributed among themselves some of the best shares before making them available to public and therefore making huge profits.
On Sunday, 5th of March 1933, the day after his inauguration Roosevelt closed the banks to stop the panic of people trying to withdraw their money. A week later he gave his first fireside chat where he appealed to people to regain faith in the banking system. Money flooded back into the banks and the system quickly righted itself. The day after his chat he nominated the Florida Democrat Duncan Fletcher as the new chair of the Banking and Currency Committee. He also reappointed Pecora as counsel.
On 27th of May 1933 the president signed the Securities Act. Its disclosure philosophy is still the touchstone for regulation of the security markets.
Three weeks later, near the end of the first hundred days, Roosevelt signed the Banking Act of 1933, more commonly known as Glass-Steagall act. It gave the Federal Reserve the power of remove officers of national banks if they were operating the banks in an unsafe or unsound manner. National banks were barred from loaning money to their own executives; private investment banks were prohibited from accepting deposits. Separation of commercial and investment banking remained in place until 1999, when president Clinton signed the law repealing those provisions of Glass-Steagall.
The Securities Exchange Act was signed in June 1934. It required stock exchanges to register with the federal government and submit to the oversight of the Securities and Exchange Commission.
In March 1933 Charles Mitchell was arrested for tax evasion. Jury found him not guilty.
In March 1938, Richard Whitney was indicted for embezzlement. He was sentenced to five to ten years. He was released in 1941.
Pecora resigned from the SEC after only six months and took an appointment as a judge on New York's Supreme Court. He died in 1971 after suffering a heart attack.