First ’Voice of Wall Street’ a Study in Risk
In recent weeks, the financial pages have intensively covered JPMorgan Chase & Co. (JPM)’s $2 billion losses in derivatives trading. The episode has raised questions about the ability of Jamie Dimon, “the King of Wall Street,” to continue as the financial industry’s leading spokesman for regulatory restraint.
Some commentators have speculated that this incident may stiffen the resolve of legislators and regulators to demand tight limits on proprietary trading by depository institutions. This possibility suggests a look back to a moment during the Great Depression that did trigger more rigorous financial regulation -- the spectacular downfall of Richard Whitney.
Whitney, the head of a highly regarded brokerage firm, became the public face of the U.S. financial community after the 1929 stock-market crash. When Tom Lamont, JPMorgan’s managing partner, tried to shore up the collapsing stock market in October 1929, he sent the urbane Whitney to the exchange floor to purchase tens of thousands of shares.
Whitney served as New York Stock Exchange president from 1930 to 1935. From this perch, he scoffed at reform proposal after reform proposal in congressional testimony, speeches to business organizations and private letters to President Franklin D. Roosevelt. By the early 1930s, reporters had anointed him “the Voice of Wall Street.”
Judgment and Knowledge
Whitney’s views about financial regulation anticipated Dimon’s. Like Dimon, Whitney conceded that financial markets depend on a framework of rules to ensure trustworthiness and systemic stability. Like Dimon, he also argued that the enormity of an economic crisis required some new policy directions. And as with Dimon, financial crisis did not weaken Whitney’s conviction that private governance offered the most effective means of achieving stability, nor his belief that excessive regulatory constraints would stifle economic recovery.
Only the leaders of financial exchanges, Whitney insisted, had the judgment and inside knowledge to make securities regulation work.
These arguments had weight because of Whitney’s position at the industry’s apex, his reputation for market savvy and personal rectitude, and his apparent grasp of technical detail. And he was able to marshal the forces opposed to the reconstruction of securities regulation.
But Whitney’s plea that the New York Stock Exchange was “a perfect institution” fell on deaf ears after the 1932 presidential election. Roosevelt ignored his offers of a face- to-face tutorial about the dangers of excessively bureaucratic securities legislation, and the Securities and Exchange Commission received far greater authority than Whitney would have preferred. When he persisted with a rear-guard action against the new regulatory framework, more moderate voices pushed him out as the exchange’s president in 1935.
Nonetheless, Whitney continued to rally industry opposition to several SEC proposals for the exchange’s reorganization, including segregation of brokers and floor traders, a more democratic governance structure, and the creation of a paid president to manage the exchange.
Despite his assurances that the financial establishment would rein in speculative excesses, manipulative practices and conflicts of interest, the disastrous consequences of his own business dealings eventually cemented a political consensus for dramatic reconfiguration of the exchange.
Whitney’s leveraged speculations in a fertilizer company and a distillery saddled him with such big losses from the 1920s onward that he constantly needed loans to stay afloat. Through 1933, he was able to borrow sufficient sums from friends and his brother George. Thereafter, he turned to creditors who demanded security.
As credit lines dried up, Whitney manufactured lenders of last resort -- his brokerage clients, the estate of his wife’s father, the New York Yacht Club (where he served as treasurer), and the NYSE Gratuity Fund (for which was a trustee). From time to time, Whitney illegally appropriated other people’s assets to use as collateral for additional borrowing.
Such acts of desperation merely delayed the inevitable. With the discovery of Whitney’s insolvency in early 1938 came revelations of his fiduciary breaches and the cozy loans from kith and kin. Then came the humiliation of prosecution for grand larceny, jail time and a public skewering that only confirmed widespread rejection of Wall Street’s old ways. If the venerable Whitney could so readily stick his hand in the till, surely the country’s financial markets required tougher regulatory oversight. Within days of Whitney’s failure and arrest, the exchange’s governing board bowed to public anger and acceded to the SEC’s demands for internal reform.
The political ramifications of Whitney’s fall remind us that under the right conditions, financial scandals can dislodge conventional wisdom, fostering consensus about the need for policy reforms. But this event also signals some cautions about the distinctive circumstances necessary for such political “focusing events.”
Whitney’s actions unambiguously transgressed moral and legal limits. Here was the one-time face of Wall Street’s opposition to public oversight, transformed into a tragic symbol of the financial industry’s incapacity to govern itself.
The Whitney scandal also occurred nearly a decade after the onset of a crisis, by which point Wall Street’s anti-New Deal solidarity had begun to crack. By early 1938, the SEC had hammered out the kinks of the new disclosure regime and coaxed widespread compliance through a combination of informal nudging and selective prosecutions. Years of paralyzed markets had also convinced many in the industry that more robust government action might improve investor confidence.
In this context, Whitney’s actions signified not just a “great optical illusion,” as Time Magazine put it, but the misguided ethos of a bygone era. Considering JPMorgan’s recent troubles through the lens of Whitney’s dramatic fall highlights the daunting barriers to tighter financial regulations now.
It is much easier to dramatize misappropriation of trust funds and customer accounts than ill-fated bets on the direction of a corporate-bond rate index. It is much easier to personalize the head of a brokerage firm’s theft than the abstract oversight duties of a megabank’s executive.
And it is far easier to impose a new regulatory framework on a chastened financial elite than one that remains wealthy, politically powerful and convinced of its own righteousness.
(Edward J. Balleisen teaches history at Duke University and is the co-editor of “Government and Markets: Toward a New Theory of Regulation.” The opinions expressed are his own.)
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