Published by EH.NET (October 2011)
Michael Perino, The Hellhound of Wall Street: How Ferdinand Pecora?s Investigation of the Great Crash Forever Changed American Finance. New York: Penguin Press, 2010. ix + 341 pp. $28 (hardcover), ISBN: 978-1-59420-272-8.
Reviewed for EH.NET by Carlos D. Ramirez, Department of Economics, George Mason University.
Between 1929 and 1933 the U.S. economy endured the largest contraction in history. Real GNP fell by more than a quarter, the stock market collapsed, unemployment reached a staggering 25 percent, the banking sector was decimated, and panics were the order of the day. People lost a lot of money, faith in the system, and for many, even hope. It was inevitable that such a cataclysmic scenario would result in a large public outcry demanding politicians to do something. Congress?s reaction was to follow the Hollywood-style legislative process: quickly identify the ?villains,? condemn them, and then politically execute them. In the process, congressmen enacted legislation, thereby becoming the ?heroes? who saved the day, and everyone lived happily ever after.
At the time, it was the Wall Street bankers who got to play the role of villains. These ?banksters? ostensibly followed practices that ultimately caused the collapse of the banking system. Such was the political theater within which Ferdinand Pecora operated. Pecora was a Sicilian-born lawyer that Senator Peter Norbeck (R-South Dakota) had selected to become Chief Counsel of the U.S. Senate Committee on Banking and Currency on January 22, 1933.? Pecora?s mission was to investigate the so-called corrupt Wall Street banking practices that were seen as being largely responsible to the economic calamity of the period. His first and probably most important target was Charles Mitchell, then Chief Executive of National City, the bank with the largest network of bond and securities dealings. Michael Perino?s book provides a detailed account of how Pecora uncovered the ?evils? and ?abuses? that that Mitchell had committed. Largely through Pecora?s hearings, the public?s perception of bankers dramatically shifted, making them look like the scum of the earth for their unlimited ?greed,? ?arrogance,? and ?unscrupulous? behavior.
Perino?s book is well written — it is engaging and entertaining. However, he ends up idealizing Pecora and demonizing Mitchell. This is very unfortunate, because by exalting Pecora?s view of the world, Perino panders to the now discredited theory that bankers somehow caused the Depression. (Even if Pecora did not intend to make this causal inference, it was largely interpreted as such.) Back then, the bankers were held responsible for the economic ills of the period because they had not stuck to the sound practices of the ?real bills? doctrine — that bank lending should be limited to short term, self-liquidating loans (Huertas and Silverman, 1986, p. 88). Had they stuck to that model, by implication, the excesses of the 1920s would not have happened, and maybe even the economic calamity of the 1930s could have been avoided.
That Progressive interpretation of the events is now largely defunct. Take, for example, the allegation that ?stock pools? were used to manipulate stocks. Indeed, this allegation was one of the primary motivations for the creation of the Securities Exchange Act of 1934. But the research of Jiang, Mahoney, and Mei (2005) finds no evidence that these pools affected stock prices in the long run, or that they adversely affected small investors.
Perino claims that Pecora wanted to show ?all the reckless, inappropriate, and imprudent actions that Mitchell and others at City Bank had taken, but he always treated Mitchell and his ilk as prime examples of what was wrong in commercial and investment banking. … Mitchell was not an aberration; he was representative of bankers as a class.? (p. 221) The implication is, of course, that bankers allegedly abused their depositors? trust by underwriting securities of poor quality. But Puri (1994) shows the exact opposite occurred: ?The evidence shows that, contrary to conventional wisdom, bank underwritten issues defaulted less than non-bank underwritten issues, over a seven year period from the issue date, and had a significantly lower mortality rate.? Kroszner and Rajan (1994) arrive at a similar conclusion. They find that the failure rate of bonds originated and placed through bank affiliates was no higher than that of bonds placed through investment banking syndicates. This research, unfortunately, is not cited.
What about the claim that bank involvement in the business of underwriting securities was somehow responsible for the decimation of the banking system? Once again, the evidence does not support it. White (1986), for instance, finds that the failure rate for all national banks in the 1930-33 period was 26.3%. However, the failure rate of national banks that were also involved in the securities business was only 7.2%. Hence it is hard to argue that the involvement of banks in the securities business is responsible for the high failure rate of banks during that period.
Indeed, modern research has gone as far as to question the evidence that the hearings supposedly uncovered. Benston (1990) argues that the investigation did not reveal any credible evidence of the alleged abuses. Like Perino, he meticulously examines the congressional hearings? ?evidence? uncovered by Pecora, but arrives at a different conclusion than Perino. Benston finds that the hearings were largely biased in favor of the preconceived ideas of Senator Carter Glass (who introduced the provision for the separation of investment banking from commercial banking). Witnesses were purposely and strategically chosen, and the questioning was entirely one-sided, with no chance for rebuttals. Huertas and Silverman?s (1986) revisionist essay argues that Mitchell was in fact made a scapegoat of the stock market crash of 1929, something that, to be fair, Perino notes.
It seems that the image of Mitchell as an unscrupulous, tax-evading banker was in reality purposely created by Pecora in order to cement enough political support to enact the far-reaching New Deal reforms of the 1930s.
Benston, George J., 1990, The Separation of Commercial and Investment Banking: The Glass-Steagall Act Revisited and Reconsidered, New York: Oxford University Press.
Huertas, Thomas F. and Joan L. Silverman, 1986, ?Charles E. Mitchell: Scapegoat of the Crash?? Business History Review, 60: 81-103.
Jiang, Guolin, Paul G. Mahoney, and Jianping Mei, 2005, ?Market Manipulation: A Comprehensive Study of Stock Pools,? Journal of Financial Economics, 77: 147-70.
Kroszner, Randall S. and Raghuram G. Rajan, 1994, ?Is the Glass-Steagall Act Justified? A Study of the U.S. Experience with Universal Banking before 1933,? American Economic Review, 84: 810-32.
Puri, Manju, 1994, ?The Long-term Default Performance of Bank Underwritten Securities Issues,? Journal of Banking and Finance, 18: 397-418.
White, Eugene, 1986, ?Before the Glass-Steagall Act: An Analysis of the Investment Banking Activities of National Banks,? Explorations in Economic History, 23: 33-55.
Carlos D. Ramirez is Associate Professor of Economics at George Mason University. His major fields of research are banking and financial economic history. He has published banking and financial history articles in the Journal of Finance, Journal of Money, Credit, and Banking, Journal of Economic History, and Public Choice.
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