Echoes Dispatches From Economic History
Members of the Pujo Committee investigated alleged "money trusts" in 1912.
Will Greg Smith Reform Wall Street?: Echoes
Smith's "wake-up call" intended to alert Goldman's board of directors to the increasingly "toxic and destructive" culture of the firm. By hawking "lucrative and complicated products," Goldman generated billions of dollars for itself, but too often violated the interests of the firm's clients: the banks, mutual funds, insurance companies and pension funds that manage the savings of millions of people.
Smith's op-ed probably won't advance his career in finance. But it did insert him into the venerable genre of financial expose, which stretches back at least to stock promoter Thomas Lawson's "Frenzied Finance" in 1906. It includes the writing of corporate-merger lawyer Samuel Untermyer in the 1910s and 1920s, stockbroker Fred Schwed's "Where Are the Customers' Yachts?" (1940), and former bond salesman Michael Lewis's "Liar's Poker" (1989).
Time and again, financial insiders have achieved notoriety by exposing the many methods by which Wall Street profits unfairly from "other people's money." A century ago, however, Smith's predecessors worked actively to advance the cause of financial reform after publishing their tell-alls.
Lawson's "Frenzied Finance," for example, provided a sensational account of how colluding Wall Street banks and brokerages -- which Lawson identified as "the money trust" -- engineered massive industrial mergers that abused customers, workers and investors alike. Lawson also exposed the close ties between the investment banks that underwrote financial securities and the insurance companies and savings banks that purchased them, a conflict of interest that put policy owners and depositors at risk. Lawson's allegations -- substantiated by a New York state investigation in 1906 -- inspired legislation that barred insurance companies from investing in common stock or participating in investment banks' underwriting syndicates.
House Democrats -- buoyed by the election of Woodrow Wilson -- launched an investigation of the "money trust" in 1912. Although Representative Arsene Pujo, a Democrat from Louisiana, was chairman of the investigation, it was Untermyer who directed the inquiry as special counsel. Untermyer had amassed a fortune by lending his assistance to some of the largest, most infamous industrial mergers, including Amalgamated Copper Co., the very merger laid bare in "Frenzied Finance."
The final report of the Pujo Committee, issued in February 1913, affirmed the existence of a "money trust" led by J. P. Morgan & Co. and comprising a small fraternity of financiers who influenced the economy through a system of "interlocking directorates." Purportedly, these banker-directors stymied competition by denying capital to innovators that might compete with corporations on whose boards they sat. New York Stock Exchange members allegedly acted as money-trust lackeys, admitting companies for trading at indefensibly high valuations and orchestrating "pools" to manipulate stock prices to the detriment of outside investors.
The Pujo Committee's findings inspired Congress to pass landmark legislation. In 1913, the Federal Reserve Act created a decentralized national banking system. The Clayton Antitrust Act of 1914 clarified which activities would be prosecuted as anti-competitive (including interlocking directorates). Enforcement fell to the Federal Trade Commission, established the same year. Meanwhile, 24 states passed "blue sky" laws, which required brokers to obtain licenses and created commissions to approve new issues of stocks and bonds.
For the next two decades, Untermyer argued for federal regulation of securities exchanges -- against the public-relations and lobbying efforts of the New York Stock Exchange. His efforts finally bore fruit after the Great Crash of 1929. Led by former New York Assistant District Attorney Ferdinand Pecora, the Senate's 1932 investigation uncovered a wide range of abuses and conflicts of interest in the financial industry. It fueled public outrage and garnered support for the Glass-Steagall Banking Act (1933), the Securities Act (1933) and the Securities Exchange Act (1934). Untermyer himself assisted in the drafting of the last two laws.
So Smith's call for a moral awakening on Wall Street is noble, yes, but also naive. Although Pecora once identified "legal chicanery and pitch darkness" as "the banker's stoutest allies," exposure alone has never inspired Wall Street to constrain itself for the sake of its customers -- not to mention the good of the public. Only credible threats of regulation or prosecution have pushed Wall Street firms to offer even cosmetic efforts at voluntary reform.
Ultimately, only rigorous state-based regulation, coupled with internal incentive structures that prioritize long-term value over short-term profit, can curtail conflicts of interest and force Wall Street companies to act as responsible stewards of their clients' money.
Perhaps Smith could launch a new career helping make that a reality.
(Julia Ott is the assistant professor in the history of capitalism at the New School in New York. Her book, "When Wall Street Met Main Street: The Quest for an Investors’ Democracy," was published by Harvard University Press in 2011. The opinions expressed are her own.)
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