1929: Inside the Greatest Crash in Wall Street History--and How It Shattered a Nation - 41

At 9 p.m. on March 21, 1933, federal marshal Raymond J. Mulligan, clutching an arrest warrant signed by a federal judge, Alfred C. Coxe, knocked on the door of Charles Mitchell’s mansion on Fifth Avenue.

When Mitchell came to the door, Mulligan arrested him. Mitchell, in an almost catatonic state, put on his coat and hat and was taken to the federal building to be booked and arraigned. The charge was tax evasion.

An affidavit proffered that evening alleged that Mitchell had paid no tax on more than $3 million of income in 1929, claiming a net loss of $48,000. Bail was set at $10,000.

Mitchell had been steeling himself for the possibility of being prosecuted ever since his run-in with Ferdinand Pecora. Mitchell and his wife, Elizabeth, had met with federal investigators the prior week and understood the likelihood he could be charged. But it felt like it all happened so quickly: The U.S. attorney decided at 6 p.m. that night to arrest him and the police were at Mitchell’s home three hours later. President Roosevelt was briefed on the plan and approved it.

Just days before his arrest, The New York Times opined that “the prosecution of an outstanding violation of the banking law would be the most salutary action that could be taken at this time. The feeling is that if the people become convinced that the big violators are to be punished it will be helpful in restoring confidence shaken by the Senate committee revelations.”

Because the statute of limitations for Mitchell’s tax avoidance was set to expire in three weeks, George Z. Medalie, the U.S. attorney for the Southern District of New York, quickly presented the case against Mitchell to a grand jury the day after his arrest; the grand jury immediately indicted him. He was accused of evading taxes of $728,000 in 1929, taking a deduction on a loss of $2.8 million in National City Bank stock by virtue of a “sham” sale to his wife, Elizabeth, as well as failing to report as income a payment of $666,666 from the management fund he received in July 1929. The government later added an additional charge of failing to pay taxes of $156,791 in 1930, centering around an allegedly fraudulent sale of Anaconda Copper stock.

The onetime darling of the press now found himself the object of scorn, and even hatred. The epithets flung at him by editorial writers included “unscrupulous,” “shameless,” “morally obtuse,” and “a consciousness manipulator.”

“ The only difference between a bank burglar and a bank president is that one works at night,” wisecracked a writer for the Chicago Tribune .

Mitchell, who felt he was being singled out for doing something that everyone on Wall Street did, immediately hired Max D. Steuer, the sharp-tongued trial lawyer famed for his ruthless cross-examination, to add to his stable of attorneys. Facing Pecora and the Senate Banking and Currency Committee was one thing; facing the Department of Justice in a federal criminal trial was another. If he lost, he could serve up to ten years in prison and pay up to a $20,000 fine. Mitchell pleaded not guilty.

Mitchell left the courthouse, escorted by a deputy marshal who walked him down two flights of stairs to exit by a side door. He was driven through the dark streets uptown and was home by 11 p.m.

His trial was set for mid-April.

Two days later, on March 23, Thomas Lamont traveled to Washington, DC, to meet first with Treasury Secretary William Woodin at the Treasury Building and then with the president himself at the White House.

Mitchell’s arrest was still the main topic of discussion in the Capitol that morning. To Lamont, his partners, and his peers, it was a clear signal that Wall Street was in the line of fire in a way it had never been before.

Lamont was hoping to serve as a peacemaker—to calm the waters by presenting himself as a constructive, thoughtful, and respectful ally. He knew there was nothing to be gained from going to war with a sitting president, much less one whose popularity was rising as fast as Roosevelt’s. While Lamont had never been a political supporter of Roosevelt, he had a natural talent for befriending people in power—and in this case had already established a relationship with him years earlier: The Lamonts had rented Roosevelt’s family home on Sixty-Fifth Street, just off Park Avenue, in 1914.

Tell us “ what you want us to do, and we’ll come as near as we can to doing it,” Lamont assured the president. “We want to cooperate along sound and helpful lines.”

Roosevelt wasn’t having any of it from his former tenant. Investment affiliates, he said, had to be separated—or “lopped off”—from banking firms within the year. Accepting that the president was committed to this position, Lamont merely asked for more time, warning that forced selling of any kind would be damaging to the economy. “ Not under two years,” Lamont replied, suggesting that the additional time was needed to avoid “breaking the market.”

“Now, what about officers’ bonuses?” asked Roosevelt. “That’s got to go! My gosh, I feel Charlie took my money.” Charlie being Charles Mitchell of National City. “Scandalous!”

“I won’t quarrel on that topic,” Lamont said, hoping to avoid riling the president further.

Roosevelt admitted that he had personally profited from investor pools in the past but now understood that “it was all wrong.”

Lamont listened patiently as the president then turned to insider trading: “Another thing. If corporate officers and directors speculate in their own shares on inside knowledge, they must tell the public when they’re buying and selling.”

Lamont agreed but added, “You can’t prevent a man from selling his investment if he thinks general conditions are worsening.”

Lamont quickly realized that he had to do more than simply raise objections to the president’s plans. He had to offer something Roosevelt needed. As low as Wall Street had sunk in the public’s estimation, Lamont believed that the nation could not fully recover with a prostrate financial industry. Lamont needed to give the president a blueprint for keeping Wall Street afloat.

“Will you let me send you a memorandum on banking reform, bank investment affiliates, handling securities, private bankers?” Lamont asked. “It will then be yours, if there’s any virtue in it, not mine.”

Roosevelt was not particularly swayed, but he had nothing to lose by leaving the door slightly ajar. “Fine,” he said, “but get it to me promptly.”

Lamont ended with one final appeal. He told the president he had recently met with Pecora, who was seeking information about the firm for his hearings. Lamont was convinced Pecora was on a witch hunt. He asked Roosevelt to consider replacing him or adding a more reasonable lieutenant to his staff.

“ You know that men like Jack Morgan, Russell Leffingwell, Parker Gilbert, and George Whitney would cut off their right arm before doing anything wrong. But we’re not infallible; we’ve made mistakes. Don’t put us in City Bank’s class. Don’t make the mistake of breaking Jack’s heart and your own policies at the same time.”

“I get the point, Tom,” Roosevelt said. “I do.”

Lamont mailed a memorandum to the White House four days later.

It was classic Lamont, combining concise arguments for reasonable reforms, such as Glass’s idea of allowing national banks to open local branches, with a heartfelt defense of J.P. Morgan’s unique role, contingent upon its ability to both manage deposits from wealthy clients and devise securities offerings. Bankers of his ilk remained nothing less than unassailable stewards of the national interest. In the three and a half hard years since the crash, the world had a very different view of banks and investment banks. But Lamont hadn’t budged.

A week later, on March 30, Lamont received an unexpected letter from none other than Charles Mitchell about an invoice that J.P. Morgan had sent him seeking interest on the loan it provided him.

“I find myself under extraordinary financial demands at this very moment and my income is sharply reduced,” Mitchell wrote. “May I ask that you accept the enclosed check representing 66⅔ percent payment thereon giving me a reasonable time as to the balance? Your consideration would be greatly appreciated.”