From the May 2009 issue of Research Magazine • Subscribe!

Character Counts

Financial history is filled with scandals -- and virtues.

Sometimes heroes are not all they are cracked up to be. Consider the case of Richard Whitney, whom Time magazine labeled "Hero Whitney" for his actions on October 24, 1929, the Black Thursday that marked the beginning of the Great Crash.

On that day, Whitney, principal of his own brokerage firm and acting president of the New York Stock Exchange, walked onto the exchange floor, went to the post where U.S. Steel was traded and in a loud, confident voice placed a large order at $205, some $15 above its offer price. The square-jawed, striding broker then bought up shares of AT&T, Anaconda Copper, General Electric and other blue chips.

Whitney was acting at the behest of a consortium of banks headed by J.P Morgan & Co. The goal was to allay the panic that had broken out in the market, and for a little while it worked. But a few days later, the Crash resumed in earnest, on Black Monday. Unlike in the Panic of 1907, when J.P. Morgan himself had rallied a recovery, the financiers this time around didn't have enough cash or clout to prevent a collapse.

But that barely begins to explain why Whitney is remembered by history as less than heroic. His reputation retained a shine through most of the 1930s. For that decade's first half, he was formal president of the exchange (no longer just acting, as on Black Thursday, when the president was away) and as such was a leading voice of Wall Street. He was a resolute (arrogant, some said) opponent of the New Dealers' push for a regulated stock market. The exchange, he assured lawmakers, was built on integrity.

The trouble is that he didn't have much of that himself. Whitney was a crook. He was from a patrician background and kept up an expensive lifestyle, but behind the fa?ade he was increasingly mired in debt and had taken to embezzling from organizations where he held positions of trust, including the New York Yacht Club, the Harvard Club and the exchange's own pension fund. In April 1938, shortly after his malfeasance was revealed, Whitney was sent up the river to New York state's Sing Sing prison.

Amid today's headlines, with their torrent of financial scandals, Whitney's story takes on a dreary familiarity. However, what's noteworthy in the history of financial misbehavior is not just that there has been plenty of it. It's also that there has been a great deal of decent, and sometimes excellent, behavior in the financial community that gets overshadowed by the shenanigans of the miscreants who show up in the news wearing handcuffs or electronic ankle-bracelets after they've been caught out in their swindles.

When financial people engage in misconduct, they violate the trust of clients and call forth the wrath (or the opportunism) of regulators. But importantly, they also betray their colleagues in the financial industry, splattering mud on standards that many in the industry have upheld. In the case of Whitney, his misbehavior did serious damage to the image of Wall Street at a pivotal moment in American politics. And it reflected a callous disregard for the emphasis on integrity in finance that had been voiced a couple of decades earlier, with memorable eloquence, by none other than J.P. Morgan.

Flashback to 1912

John Pierpont Morgan Sr. was 75 years old when he testified before a congressional committee in December 1912. As it turned out, J.P. had only a few months to live. The Pujo committee (named after Democratic Congressman Ars?ne Pujo of Louisiana) was investigating the powers that be on Wall Street, and J.P. was a prime target.

During the hearings, committee lawyer Samuel Untermyer asked Morgan how banks decide to whom to lend, suggesting it was all about money. J.P. replied that much lending takes place "because people believe in the man."

Untermyer was skeptical: "And it is regardless of whether he has any financial backing at all, is it?"

Morgan: "It is very often."

Untermyer: "And he might not be worth anything?"

Morgan: "He might not have anything. I have known a man to come into my office, and I have given him a check for a million dollars when I knew that he had not a cent in the world."

When Untermyer probed that credit is based primarily on money and property, the banker replied: "No sir, the first thing is character."

The attorney countered that a man with a lot of government or railroad bonds would get credit because of those holdings, and not because of "his face or his character." But J.P. insisted that "he gets it on his character."

Untermyer interjected some lawyerly sarcasm: "I see. Then he might as well take the bonds home, had he not?"

And Morgan drove home his point: "Because a man I do not trust could not get money from me on all the bonds in Christendom."

Whitney's Morass

In the 1930s, Richard Whitney demonstrated the wisdom of J.P. Morgan's words, perversely, by showing that lending to someone of poor character is indeed a bad idea. Whitney hit up a growing circle of people for loans, especially his younger brother George, who was a partner at the Morgan bank (then chaired by J.P. Morgan Jr.). Richard's debts piled up by the millions as he sank money into a Florida fertilizer company, an applejack distilling operation and other bad investments.

As recounted in Ron Chernow's excellent history The House of Morgan, Richard even had the nerve to associate himself with J.P. Sr.'s 1912 testimony, which had become part of Wall Street lore. In 1938, shortly before his fall, Whitney got a $100,000 loan from one Walter T. Rosen, who told him: "I have always been much impressed by the attitude of the elder Mr. Morgan, who held the view that the personal integrity of the borrower was of far greater value than his collateral."

The embezzler replied: "Mr. Morgan was entirely right."

Whitney's schemes began unraveling in late 1937 when a clerk noticed some missing securities in a Yacht Club account. Soon, Richard was racing around looking for fresh funds to replace what he had stolen. He went to George for an immediate million-buck loan, confessing that he had misappropriated securities. George, not having the cash on hand, went to senior partner Thomas Lamont and explained the situation. Lamont wrote out a $1 million check to George, which George signed over to Richard.

Over the next couple of weeks, George paid Lamont back and withdrew the needed money from his own partnership capital. He gave J.P. Morgan Jr. a vague explanation that Richard was in "a jam." J.P. Jr. did not inquire what kind of jam.

In March 1938, though, Richard was in need of more cash to cover more missing securities. This time, while his brother was out of town recuperating from illness, Richard made a desperate appeal to Morgan partner Frank Bartow for a loan to cover embezzled shares. Bartow refused and set up a meeting with J.P. Jr. and the bank's lawyer (and past U.S. presidential candidate) John W. Davis, who put the kibosh on any cover-up loan.

Richard's downfall followed swiftly thereafter. The already battered 1938 stock market took a turn for the worse as exchange officials announced Whitney's misconduct and insolvency. New York District Attorney (and future presidential candidate) Thomas E. Dewey then hit Whitney with charges of grand larceny, to which the embattled broker pled guilty. Barely a month after his crimes went public, a large crowd gathered at Grand Central Station to watch a handcuffed Richard get bundled off to prison.

George and Lamont got a harsh rebuke from the Securities and Exchange Commission for following an "unwritten code of silence" in not reporting Richard's malfeasance. But the two retorted that they were trying to help Richard make restitution for what they thought was an isolated example of wrongdoing. There was some public sympathy for this view, especially in that George was Richard's brother. Dewey as well as the Justice Department declined to charge the partners, much to the disappointment of William O. Douglas, hard-line SEC chairman (and future Supreme Court justice).

Nonetheless, the way was now clear for expanded federal regulation of the stock market. Richard Whitney had made some reasonable arguments against an onset of new rules, as when he defended the basic validity of short trading against lawmakers who wanted to ban it. Whitney also had sometimes overstated his case, as when he told federal investigators that the stock exchange was "a perfect institution." But all that was water under the bridge now. Whitney was a crook, and he would be remembered for that far more than for anything else he ever did or said. Character counts.

Prison and Beyond

Disgraced financier Richard Whitney was treated with some deference at Sing Sing. Known as "Mr. Whitney," he sometimes signed autographs for guards or fellow cons. He entered the prison still wearing on his watch chain a golden pig, emblem of Harvard's exclusive Porcellian Club. After a stint of janitorial duty, he was assigned to teach in the prison school and soon became a player on the inmate baseball team.

Whitney was paroled in 1941, three years and four months into his five-to-10-year sentence. Upon release, he moved with his wife to a dairy farm in Massachusetts, where his new job was to manage a few farmhands and cows. He later became president of a textile company. Unsurprisingly, he was banned for life from the securities industry.

Whitney died at age 86 in 1974, and the Harvard Crimson ran an overheated obituary exuding 1970s-style student radicalism. "It's silly to condemn Whitney's stealing, compared to the huge size of the kind of 'legal' stealing that goes on all the time," opined the anonymous writer, who added that "Whitney demonstrates the last stages of personal disintegration for the capitalist, and may warn us, on a larger scale, of the no-holds-barred rapaciousness combined with childlike faith in the impossible that may surface in American capitalism's coming death-rattle."

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Kenneth Silber is a senior editor at Research. His work on science, economics and history has appeared in a variety of publications, including "The Wall Street Journal."

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