------ EH.NET BOOK REVIEW ------
Title: The Hellhound of Wall Street: How Ferdinand Pecora’s Investigation
of the Great Crash Forever Changed American Finance
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.
References:
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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([log in to unmask]). Published by EH.Net (October 2011). All EH.Net
reviews are archived at http://www.eh.net/BookReview.
Geographic Location: North America
Subject: Financial Markets, Financial Institutions, and Monetary History
Time: 20th Century: Pre WWII
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