The Pecora Hearings of 1933 and the Bankers Who Testified Under Oath

On May 23, 1933, John Pierpont Morgan Jr., head of the most famous private bank in the world, sat down in a crowded Senate hearing room to answer questions. He was sixty-five, solid and grave, the son of the financier who had personally organized a rescue of the banking system in the Panic of 1907. The man across the table was a different sort of figure entirely: Ferdinand Pecora, a former New York prosecutor born in Sicily, the son of a shoemaker, who had come to America as a small boy. Pecora was paid a modest salary by the Senate Banking and Currency Committee, and he had spent months with a small staff reading the books of the country's largest banks. Over the next days Morgan would confirm that he and his partners had paid no federal income tax for two years running, and that the firm had kept lists of prominent friends who were allowed to buy hot new stocks below the market price. Neither practice was clearly illegal. That, it turned out, was the problem.

In short: From early 1933 Ferdinand Pecora used Senate hearings to put the leaders of Wall Street under oath and show the public how the 1920s boom had worked from the inside. His questions made the case for the Securities Act of 1933, the Banking Act of 1933, which created deposit insurance and separated commercial from investment banking, and the Securities Exchange Act of 1934, which created the SEC. The method, patient and document-driven, is still a model.

An inquiry that was going nowhere

The investigation did not start as a crusade. It began in the spring of 1932, under a Republican Senate, at a time when President Herbert Hoover was convinced that short sellers were deliberately driving stock prices down. The Banking and Currency Committee, chaired by Peter Norbeck of South Dakota, a progressive Republican from farm country with little love for Wall Street, held hearings. They went badly. The committee's lawyers came and went, witnesses gave little away, and the press lost interest.

In January 1933, with the investigation close to expiring, Norbeck hired Pecora as chief counsel. Pecora had a reputation as a tenacious assistant district attorney in Manhattan who had prosecuted fraud cases and had a gift for detail. He asked for time and for the authority to subpoena records. Then he did the unglamorous thing that made everything else possible: he read the books.

When Democrats took control of the Senate in March 1933, the chairmanship passed to Duncan Fletcher of Florida, who kept Pecora on and gave him room. The continuity across party lines is worth noticing. The investigation that built the modern financial regulatory system began under a Republican chair and was finished under a Democratic one.

The banker who sold stock to his wife

The first big witness was Charles Mitchell, chairman of National City Bank, the forerunner of today's Citibank. Mitchell had been one of the celebrities of the boom, a salesman who had turned a staid commercial bank into a machine for selling securities to ordinary Americans.

Under Pecora's questions in February 1933, the machine was laid out piece by piece. National City's securities affiliate had pushed bonds, including Latin American government bonds, onto small investors who had little idea of the risks, while the bank's own people knew more. Employees had been encouraged to hit sales quotas. When the bank's own stock collapsed after the crash, executives had arranged help for themselves that rank-and-file employees did not get.

Then came the detail that made headlines. Mitchell had sold a large block of bank shares to his wife at a loss in 1929, creating a tax loss that wiped out what he would have owed on his income for the year. He had paid no federal income tax for 1929, a year in which the bank had paid him handsomely. Within days he resigned. He was later charged with tax evasion and acquitted, though the government eventually won a civil judgment for unpaid taxes.

The point was not that Mitchell was uniquely wicked. The point was that a man at the top of a bank holding ordinary people's deposits had used the bank to sell risky products to those same people, and had arranged his own affairs so that he paid less tax than a schoolteacher. That story was easy to understand.

Morgan, the preferred lists and a circus stunt

The Morgan hearings in May and June 1933 were the summit. The House of Morgan was the symbol of private financial power in America, and the public had never seen its partners questioned in public.

The most damaging revelation was the preferred lists. When the firm underwrote new stock offerings in the late 1920s, it had offered shares at below-market prices to a select group of friends, among them former President Calvin Coolidge and William Woodin, who by the time of the hearings was President Franklin Roosevelt's secretary of the treasury. Shares were often worth considerably more on the open market than the insiders paid. The firm described it as a courtesy. The public saw a club of the powerful who could not lose.

The tax revelation compounded it. Morgan and his partners, the hearings showed, had paid no federal income tax for 1931 or 1932, largely because of losses in the crash that the law allowed them to deduct. It was legal. It was also, to a country in which a quarter of the workforce was unemployed, outrageous.

On June 1, 1933, in a moment that tells you something about the press of the era, a publicity agent for a circus placed a small performer named Lya Graf on Morgan's lap during a break in the hearings and photographers caught it. Morgan reacted with good humour. The photograph made front pages around the world. Pecora regarded it as a distraction, and he was right, but it also showed how completely the hearings had captured the public's attention.

Other bankers followed. Albert Wiggin, the former head of Chase National Bank, had sold his own bank's stock short during the crash, profiting as its price fell, through companies he and his family controlled. Wiggin's testimony became one of the reasons later laws restricted insiders from short-selling their own companies' stock.

From testimony to law

The hearings ran alongside one of the most productive stretches of lawmaking in American history, and they fed it directly.

• The Securities Act of 1933, signed on May 27, required companies selling new securities to the public to register them and disclose material facts, with liability for false statements. Its idea was disclosure rather than government approval of investments: tell the truth and let investors decide.
• The Banking Act of 1933, signed on June 16 and usually called Glass-Steagall after its sponsors, Senator Carter Glass of Virginia and Representative Henry Steagall of Alabama, created federal deposit insurance and separated commercial banking, which takes deposits and makes loans, from investment banking, which underwrites and trades securities.
• The Securities Exchange Act of 1934 regulated stock exchanges and brokers, required ongoing reports from public companies and created the Securities and Exchange Commission.

Pecora himself became one of the first SEC commissioners, serving with Joseph Kennedy, the agency's first chairman. He left to become a judge in New York and in 1939 published an account of the hearings called Wall Street Under Oath.

The case against the hearings, and its limits

There were serious critics then and there are serious critics now, and their arguments deserve a fair hearing.

The first argument is about fairness to individuals. Much of what the hearings exposed was legal. Morgan's partners took deductions the tax code allowed. Preferred lists were a common practice of the era. Critics argued that it was unjust to pillory men in public for following the rules of their time, and that the hearings were designed to channel public anger rather than to discover facts.

The second argument is about the economics. Some economists and historians have long argued that the separation of commercial and investment banking was based on a weak reading of what caused the bank failures of the early 1930s, most of which involved small, local banks with no securities business at all. When Congress repealed the separation in 1999, its defenders said the law had become an outdated restriction that left American banks less competitive.

Both points have something to them. But I think they miss what the hearings were for. The question was never whether Mitchell or Morgan had committed crimes. It was whether the rules themselves were fair, and you cannot answer that question without knowing how the rules were actually used. Legal does not mean right. A tax code that lets the richest bankers in the country pay nothing in a depression is a policy choice, and the public has a right to see it in action before deciding whether to keep it.

On the economics, the honest answer is mixed. The 2008 financial crisis struck investment banks such as Lehman Brothers and Bear Stearns that had never been covered by the old separation, and also huge combined institutions that the 1999 repeal had made possible. Economists still argue about how much the repeal mattered. Deposit insurance, by contrast, ended the bank runs that had swept the country in waves, and the disclosure system of the 1933 and 1934 acts became the backbone of American capital markets. Even many critics of Glass-Steagall's separation do not want to go back to a world without the SEC.

The method, which is the real legacy

The Pecora hearings are often remembered for the stunts and the headlines. Their deeper lesson is about method.

Pecora built his case from records. He read bank minutes, account ledgers and tax filings before he asked his first question, so that witnesses could not easily dodge. He framed questions so that the answers told a story ordinary people could follow: who sold what to whom, who knew what, and who paid. He focused on how the system worked rather than on the personal morals of bankers, and he let the facts do the arguing.

When the financial system crashed again in 2008, Congress created the Financial Crisis Inquiry Commission to investigate the causes, and commentators across the spectrum invoked Pecora. The commission produced a long report in 2011, though its members split along party lines in their conclusions. No hearings of that era produced a single image or exchange that lodged in public memory the way the Morgan testimony did. Part of the reason is that the questions were spread across many bodies and many months, and part is that the public's attention, unlike in 1933, had many places to go.

Why the timing mattered

It is worth pausing on the calendar, because the hearings did not happen in a vacuum. In the weeks before Roosevelt's inauguration on March 4, 1933, bank runs spread across the country, and many states declared bank holidays to stop withdrawals. Roosevelt's first major act was to close every bank in the nation for several days while the government sorted sound institutions from failing ones.

The Mitchell testimony landed in the middle of that panic. Americans who could not get their own money out of their banks were reading about a bank chairman who had arranged his affairs to avoid taxes and had sold dubious bonds to customers. The Morgan hearings came during the burst of legislation that followed. Members of Congress voting on the securities and banking bills were doing so while the testimony filled the front pages.

Reform needs both a problem people can feel and a story that explains it. The bank panic supplied the first. Pecora supplied the second.

Who the hearings were really about

The people at the centre of the Pecora story were not the bankers. They were the small investors who had been sold bonds they did not understand, the depositors who had lost their savings when banks failed, and the taxpayers who could not structure their way out of income tax. Pecora's achievement was to make the system visible to them.

Inequality is in part a matter of rules that most people never get to see. Tax provisions, financial products and corporate structures are written in language designed for specialists. Public investigation is one of the few ways to translate that language into terms everyone can judge. The bankers of 1933 had lawyers and accountants. The public had a Senate committee and a prosecutor who did his homework.

What you can do

• See how wealth is distributed now. Our inequality page shows the shares of national wealth held by the top 1% and the bottom 50%, along with real wages and the minimum wage.
• Weigh in on financial rules. Federal regulators, including the SEC, publish proposed rules for public comment. Our open comments page lists rules open now, closing soonest first, grouped by issue, with advice on how to write a comment.
• Tell Congress what to investigate. Use our representative lookup to call or write your representative and senators and see their latest votes. Ask what they will do about tax avoidance at the top and financial risk.
• Follow the fight over corporate power. Our coverage of corporate power and of taxing the rich tracks the bills, hearings and rules that decide who pays and who profits.

Ferdinand Pecora did not invent outrage at Wall Street; there was plenty of it in 1933. What he did was replace a vague sense that the game was rigged with a detailed account of how it was played. Laws followed the facts. They usually do, when someone does the reading.