St. Petersburg Times: Local history and the banking crisis

Moral hazard back in the day

By John Kennedy, Special to the St. Petersburg Times

Published Wednesday, March 18, 2009
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Some of the best known names on Wall Street are hauled before a congressional committee and their testimony yields stunning accounts of a financial system out of control.

One of the wealthiest men in America paid no income tax for three straight years. Others manipulated stock sales with family members to avoid paying taxes.

Outraged committee members hear testimony about banks engaging in rampant stock speculation. Even credit markets were looted in pursuit of profit.

Sound familiar?

Such testimony didn't come from executives of Bank of America, Citigroup, Goldman Sachs and Morgan Stanley when they were recently hauled before a House committee plumbing the depths of the nation's financial crisis. Neither was it part of AIG's defense last week for paying millions of dollars in executive bonuses despite needing a $170 billion government bailout.

Instead, the Wall Street revelations date to the 1930s, when lawmakers similarly sought answers to an economic disaster — the 1929 stock market crash.

Chairing the investigation was a Floridian, Jacksonville Sen. Duncan Fletcher, whose name today is largely lost in history. But his probe of the freewheeling financial era that crashed with the Great Depression spanned two years, filled 11,000 pages of testimony and spawned many of the nation's banking regulations still in place.

The Glass-Steagall Act of 1933 grew out of Fletcher's hearings, separating commercial banks from investment houses. Bank deposits became federally insured, protecting Americans' nest eggs, while the Securities Exchange Act of 1934 also tightened Wall Street regulation.

Glass-Steagall endured until Congress in 1999 bowed to pressure from the banking industry and repealed the measure. Many critics now blame the repeal for sparking the current global crisis, since risky investments and subprime lending flourished in the newly deregulated climate.

"Fletcher is one of most important figures to come out of Florida in the 20th century, but he's been mostly forgotten," said J. Wayne Flynt, a retired Auburn University historian and author of Duncan Upshaw Fletcher: Dixie's Reluctant Progressive, a 1971 book that chronicled Fletcher's almost three decades in the Senate before his death in 1936.

"If you look back, his work on the Senate's Banking and Currency Committee sounds like it could've drawn the same headlines you're seeing today," Flynt said.

Those called to testify before Fletcher's committee were a who's who of American finance.

J.P. Morgan, along with most of his partners, arrived in spectacular fashion. Like modern auto executives on their private jets, Morgan and four partners left New York for Washington in separate vehicles accompanied by 15 private bodyguards.

Once before the panel, testimony revealed that Morgan paid no incomes taxes in 1930, 1931 and 1932, while members of his firm paid less than $50,000 in 1930.

Just as near-daily revelations about bonuses and bailouts are bugging Americans today, Fletcher's committee touched a nerve almost 80 years ago in a nation staggered by the Depression.

Flynt, the biographer, recalled that the hearings led one businessman to write to Fletcher and deride the stock market as, "the greatest single source of misfortune and disaster in the history of the American people."

An Arizona man wrote the senator, saying he was mad enough to demand some cowboy justice had Fletcher not been "uncovering the truth" about bankers. His confidence in the Floridian "saved us from greasing up our Winchesters and coming down here to clean out this whole gang," the man wrote.

By the time Fletcher began his probe of the nation's troubled finances in 1933, the Depression-weary public had begun referring to bankers as "banksters," likening them to gangsters like Al Capone and Bugsy Siegel.

"The testimony he heard painted a picture of what was basically a free-for-all in the financial world, and it really steamed Fletcher," Flynt said. "He became deeply disillusioned. He had been an ally of the conservative banking industry back home in Jacksonville, and he felt deeply betrayed."

Fletcher, a conservative Democrat, had served as a Jacksonville city councilman, mayor and state representative before defeating Florida Gov. Napoleon Bonaparte Broward in the 1908 party primary for an open U.S. Senate seat.

Fletcher now may be remembered mostly by modest memorials.

In Tallahassee, the state's Fletcher Building houses the state's Office of Financial Regulation and Department of Financial Services. There's also a Neptune Beach high school and Jacksonville Beach middle school named after him.

But in his time Fletcher was a political giant killer. He not only knocked off the influential Broward, Fletcher also defeated another Florida governor, Sidney Catts, to retain his Senate seat in 1920.

Still, with his career built mostly on national issues in Washington, Fletcher's name has dimmed in his home state.

"He's mostly lost in history now," said Canter Brown, a historian at Georgia's Fort Valley State University, who has written extensively on Florida. "But in his time, Fletcher became the symbol of a new Florida, one of dynamic, growing cities like Jacksonville."

In Washington, Fletcher thrived as a progressive — supporting an eight-hour day for government workers, an income tax, and advocating social, political and economic reform. He also served on a Senate subcommittee investigating the sinking of the Titanic.

But when New Deal Democrat Franklin Delano Roosevelt became president in 1933, Fletcher's career found its zenith, with the pair joining in crafting legislation that reshaped the U.S. financial system.

"He really took on some big issues at a terrible time," said Alex Sanchez, president of the Florida Bankers Association.

Fletcher was low-key, historians recall. But he had bite when it came to dealing with a Wall Street run amok.

America's financial system "enabled corporation executives to run pools and to make enormous personal profits at the expense of their own stockholders," Fletcher told the New York Times in 1934. Such behavior, he added, subjected "the interests of the nation to the purposes and profits of stockbrokers."

Fletcher left most of the theatrics to his cigar-chomping committee counsel, Ferdinand Pecora, a former New York assistant district attorney and son of Italian immigrants, who led the probe that riveted the nation's press.

Fletcher's role, though, played well back home in a Florida hit hard by the Depression.

Just as the sputtering of Florida's housing market two years ago foreshadowed deeper problems worldwide, before Wall Street's 1929 collapse the state had been buffeted by bank failures, hurricanes and a citrus freeze that damaged the local economy.

"The Depression really came to Florida at least three years early," said Brown, the historian. "This state was hurting, and Fletcher was seen as a hero."

Fletcher's hometown Florida Times-Union hailed him in February 1934 for "having the time of his life calling all the big bugs up on the 'carpet' before his investigating committee."

In the Senate, Fletcher went on to push what was envisioned as one of the nation's biggest public works projects of its time: the Cross Florida Barge Canal. But the two-year Wall Street investigation had badly sapped Fletcher's health and he died of a heart attack on June 17, 1936.

Roosevelt in private correspondence remembered him as a "loyal and steadfast friend."

Fletcher's funeral in Jacksonville was carried on radio stations statewide and 5,000 people filed past his coffin at City Hall.

"There is almost no consciousness of Fletcher in Florida today," Flynt said. "But what he was dealing with was a financial meltdown that surpassed anything we have seen so far in this recession.

"He didn't like to be the center of attention. But he helped dig this country out of the middle of a real crisis."

John Kennedy is a former Tallahassee bureau chief for the Orlando Sentinel.