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Wall Street History
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06/14/2002
Charles Mitchell
About four months ago we took a look at one of the true
scumbags of the 1920s, Albert Wiggin. Today, we shine the
spotlight on another figure from the era that will have you
drawing comparisons to the headlines of today, Charles Mitchell.
An Irish-American immigrant raised in the Boston suburb of
Chelsea, Charley Mitchell was a former electrical goods
salesman for Western Electric who, at age 38, received his big
break and became president of National City Company (NCC),
the securities arm of National City Bank (NCB). It was 1916 and
after five years of running the subsidiary, Mitchell was elevated
to CEO of NCB. 1921 the big Bull Market was about to begin
and the man who would come to be known as “Sunshine
Charley” had as much to do with the rise and fall of Wall Street
in the Twenties as any other figure in the country.
During this time, American commercial banks were forbidden to
deal in securities, but all of them had arms like NCC that made
markets in stocks and bonds. Mitchell took his sales skills and
vision and began to market to the burgeoning middle class of
investors. In 1922 there were 600,000 Americans with annual
incomes in excess of $5,000; by 1929 that figure had grown to
1,000,000.
Focusing at first on selling bonds as conservative investments to
the largely na ve investor class, Mitchell was responsible for
building National City Bank and NCC into the first financial
supermarket, with 69 branch offices in over 50 cities by 1929.
Close to 2,000 employees marketed the investments and Charley
rode herd on the sales staff. Market historian Charles Geisst
writes:
“He was known to take them to lunch in a New York skyscraper
and show them the city from the heights, openly wondering how
many citizens below had not yet bought securities from his
bank.”
The message was clear, produce or find another line of work. In
Charley’s own words, securities were “manufactured...like so
many pounds of coffee.” He was the first to formally call his
clients “prospects,” and the “sales staff were urged to lie in wait
and pounce on them outside nightclubs, railway stations, and
bucket shops.” [Chancellor] Mitchell was also the first of the
modern securities chieftains to institute sales quotas and offer
incentives.
Over the course of the 1920s, NCC would underwrite 150 bond
issues, raising $10.7 billion, or 21% of the total issuance in the
U.S. Charley Mitchell became the greatest bond salesman who
ever lived and his network spread far and wide, including South
America, where he became the largest distributor of junk bonds
for this region. He also developed the moniker Sunshine
Charley because his enthusiasm for the bull market of this era
knew no bounds.
All was good, or so it seemed, and in 1927 National City Co.
finally began to offer stocks, which Mitchell peddled as being
“safe as bonds.” But even by the end of 1928, months before the
Crash, chinks in the operation began to show, as did Charley
Mitchell’s true character. Basically, he was peddling a lot of
crap, to put it mildly, and like the dirtballs of today, investors
often didn’t learn the truth until it was too late.
For example, in 1928 he sold a bunch of bonds for a Brazilian
state, Minas Gerais, despite an internal report highlighting “the
inefficiency and ineptitude...(and) complete ignorance,
carelessness and negligence of the former state officials.”
In another instance, NCC cleared its book of some $100 million
in the paper of Brazil, Peru and Chile, even as it received word
by cable that the governments would have a difficult time
meeting the interest payments. Of course Mitchell saw no
problem in withholding this information from the investors, as
long as NCC had rid itself of its own exposure.
And on the equity side there were issues like Ananconda Copper,
where NCC sold its inflated shares in a classic “pump and
dump,” with the dumpee (sorry) being an unsuspecting public,
which then saw the shares plummet from $125 to $4 in the span
of a few months. Not to worry, though, if you were a
shareholder in holding company National City Bank. NCC made
$20 million on the move.
By the end of 1928, however, the Federal Reserve Bank in
Washington, as well as some leading investors like Bernard
Baruch and Benjamin Strong, were having serious doubts as to
the sanity and staying power of the growing speculation on Wall
Street. The Dow Jones Industrial Average, which stood at 155
on the first trading day of 1927, would finish 1928 at exactly
300.
But when the Fed proposed some measures to rein in the markets,
Charley Mitchell, newly elected director of the Federal Reserve
Bank of New York, said that if Fed Chairman Roy Young went
through with his measures, Mitchell’s National City Bank would
lend up to $25 million to traders, thereby thwarting the Fed’s
proposed actions. Said Mitchell as 1928 wound down:
“Business is entering the New Year upon a high level of activity
and with confidence in the continuation of prosperity...No
complaint regarding the level of stock prices (is) justified except
from the standpoint of credit strain.” [Sobel]
As author Robert Sobel would note, “If Charles Mitchell had not
declared his independence of the Federal Reserve or had been
checked by Benjamin Strong or Roy Young, then the great rise
and fall of 1928-29 might have been avoided.”
Unfortunately, it wasn’t, as you all know, and the term
“Mitchellism” came to describe the kinds of securities that
Sunshine Charley’s NCC peddled onto an unsuspecting public.
And just like some of today’s headlines, Mitchell himself
constantly traded on inside information, whether it was the
knowledge that a company which NCC had just brought public
wasn’t nearly as profitable as initially promoted, or the fact that
foreign governments were about to default on their obligations.
Of course in dealing with the public, Mitchell sang a different
tune.
“The time will never come, certainly so long as I am connected
with the National City Company, when, pressed with the need
for securities for our own great selling organization, we will let
down our exacting requirements. We have gained the confidence
of the investor and we are building our institution upon that
confidence.” [Geisst]
And through it all, as Charley personally prospered, he also
remained Wall Street’s #1 cheerleader. On September 3, 1929
the Dow Jones peaked at 381 and by mid-October there were
increasing signs that the bubble was about to burst. Mitchell,
though, while on vacation in Germany issued reassuring
statements such as “I see no reason for the end-of-the-year slump
which some people are predicting” and “Stocks have reached
what look like a permanently high plateau.”
By Black Thursday, October 24, the most volatile session in
Wall Street history to that point, Senator Carter Glass said, “The
present trouble is due largely to Charles E. Mitchell’s activities.”
That day, Wall Street’s leading figures had committed $130
million to stabilize the market, hoping this reassuring move
would encourage individual investors to follow suit. It worked
that day (even as, you’ll recall, Chase Bank’s CEO Albert
Wiggin was using the opportunity to ‘short’ his own firm’s
stock) in helping limit the market’s loss to just 6 points (DJ 299),
but by Monday, October 28, panic selling resumed.
When the Crash hit on the 29th, Mitchell borrowed $millions
from National City Bank in an attempt to support his own
institution’s share price. It didn’t work, as NCB sank from $455
to $300 that day. It was the beginning of the end.
[As an aside: Ever wonder where the term “sucker’s rally”
originated? After bottoming at 198 on November 13, the Dow
Jones rallied back to 294 on April 17, 1930, prompting President
Hoover to declare that the worst was over and a return to
prosperity was around the corner. Of course the Dow would then
proceed to hit its all-time low of 41 on July 8, 1932.]
As the Depression set in, investors and Congress began looking
around for scapegoats, though only one big figure (whose story
we’ll examine next week) served any actual jail time. Historian
Charles Morris sums up the era:
“The Mitchells (and) the Wiggins...of the world, even if they
had done nothing actually criminal, had treated their own
stockholders and the investing public as so many sheep to be
fleeced by whatever means the ingenuity of accountants and
lawyers could devise.”
Morris wrote the book from which I obtained this quote,
“Money, Greed, and Risk”, in early 1999. It certainly also
applies to what we are going through recently.
As for Charley Mitchell, he was forced to resign from National
City Bank in 1933 and was tried for income tax invasion in 1934,
yet acquitted, even though he admitted he hadn’t paid taxes for
years. He later became chairman of Blythe & Co., rebuilt his
fortune, paid off his debts, and died in 1955, his reputation on
Wall Street largely restored.
Lastly, in researching this piece, I couldn’t help but latch on to
another of Charles Geisst’s comments concerning the raft of
charges leveled against the banking community post-1929.
Even though they served no jail time, “Once charged, however,
many of the bankers found that public opinion held them in the
same company as mobsters.” Ditto 2002, Mr. Geisst, ditto.
Sources:
“Monopolies in America,” Charles R. Geisst
“Wall Street: A History,” Charles R. Geisst
“Money, Greed, and Risk,” Charles R. Morris
“Eyewitness to Wall Street,” David Colbert
“Devil Take the Hindmost,” Edward Chancellor
“Rainbow’s End,” Maury Klein
“The Great Bull Market,” Robert Sobel
“Manias, Panics, and Crashes,” Charles Kindleberger
Next week, Richard Whitney.
Brian Trumbore
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