Book Review: Wall Street Wars

by: CFA Institute Contributors

By Martin Fridson, CFA

Wall Street Wars

Wall Street Wars: The Epic Battles with Washington That Created the Modern Financial System. 2015. Richard E. Farley.

In 1928, the aircraft manufacturer Boeing (NYSE:BA) was planning an initial public offering of its stock, to be led by the securities affiliate of National City Bank, the predecessor of Citigroup (NYSE:C). Overriding the recommendation of one of his investment bankers, National City chairman Charles Mitchell declared that the deal was too risky for a public offering. Instead, National City Company organized a private offering, bought the entire issue, and placed the shares with its officers and directors, J.P. Morgan & Company bankers, Shearman & Sterling lawyers, and various other friends.

Nine days after the private offering closed, National City Company applied to the forerunner of the American Stock Exchange to list Boeing as a public stock. When exchange trading began, the shares soared to a 50% premium over the private placement price. The insiders pocketed a profit equivalent to $21.5 million in today's dollars.

This example of financial manipulation and others equally egregious came to light in hearings on stock market practices conducted in 1933 by Ferdinand Pecora, chief counsel of a subcommittee of the Senate Banking and Currency Committee. The public outrage over the revelations gave impetus to the passage of the Glass-Steagall Banking Act of 1933, the Securities Act of 1933, and the Securities Exchange Act of 1934, which, together, laid the foundations of modern US securities regulation. Attorney Richard E. Farley of Paul Hastings, LLP, ably chronicles the passage of those laws, as well as the Emergency Banking Act of 1933, in Wall Street Wars: The Epic Battles with Washington That Created the Modern Financial System.

Farley notes the parallels between recent events and the debates in the early 1930s over securities regulation. He is most interested in scandals surrounding the 2000 dot-com bust and the Global Financial Crisis of 2008-2009. Equally striking, however, is the early version of quantitative easing that President Franklin Roosevelt won authorization for through an amendment to the Agricultural Adjustment Act of 1933. Joseph Kennedy, the first chairman of the Securities and Exchange Commission (SEC), criticized short-term trading, a reproach recently echoed in presidential candidate Hillary Clinton's proposal to curb the activity by taxing it.

Even readers who are generally familiar with the history of the New Deal will acquire significant new information from Farley's rendition. For example, the Securities Act of 1933 assigned enforcement of its provisions to the Federal Trade Commission (FTC). The SEC came into being only in 1934 as a political victory for the New York Stock Exchange, which considered the FTC staff anti-business. Also interesting is the way Roosevelt held off deciding which of the competing versions of the 1934 securities exchange bill to endorse while he tested the political winds. Another choice tidbit involves Kennedy, who, while walking to the White House to tender his resignation as SEC chairman, spied a newspaper headline reporting that the Supreme Court had struck down as unconstitutional the National Industrial Recovery Act, a cornerstone of the New Deal. Worrying that the high court might next take aim at the recent securities legislation, Kennedy concluded that his timing was wrong and tore up the resignation letter.

Showing the importance that he attaches to Joseph Kennedy, Farley ends the final chapter with Kennedy's later, consummated resignation from the SEC chairmanship and concludes the epilogue with his death in 1969. Indeed, a material portion of Wall Street Wars reads like an attempt to resurrect the reputation of Kennedy, who is perhaps most remembered for supposedly attempting to buy the presidency for his son, John Fitzgerald Kennedy, and for accusations (unfounded, according to the best evidence) that he was involved in bootlegging during Prohibition.

Farley makes a strong case for Kennedy as a hard-working, highly capable administrator who allayed Wall Streeters' fears that they would be saddled with unduly onerous regulations. Farley's account of Kennedy's later stint as US ambassador to the United Kingdom, however, cannot be described as balanced. He suggests that Kennedy's relationship with Roosevelt cooled because the president allowed the State Department to sabotage Kennedy's grand plan, hatched after anti-Semitic violence escalated with Kristallnacht, to rescue European Jews from Nazi persecution. He ignores the statements that led the British to regard him as a defeatist (e.g., "Democracy is finished in England"), even as Londoners braved the blitzkrieg while Kennedy retreated to a safe country estate. In a letter to Charles Lindbergh, Kennedy lamented that the worst thing about Kristallnacht was the unfavorable publicity it generated for the Nazi regime.

Wall Street Wars offers countless pleasures in its intimate look at the legislative process as conducted by Roosevelt's brain trust, populist firebrand Huey Long, Sam Rayburn (later a longtime Speaker of the House of Representatives), and numerous other intriguing characters. The book is not flawless, though. At one point, Farley misidentifies the prominent brokerage house Hornblower & Weeks as a "Boston law firm." His reference to a "zero-to-two" count in a sidelight about baseball great Babe Ruth is not idiomatic (the customary phrasing is "oh-and-two").

Wall Street Wars is a fine work of popular financial history. To this reviewer, its extensive recounting of financial misdeeds prior to the 1929 stock market crash teaches a pertinent lesson amid talk of the need to restore trust in the financial industry: Restoration should apply only to firms that are worthy of trust and must come about through commitment to ethical practices, rather than public relations campaigns.