Sometimes the very same people that got you into a mess are the very same people you need to get you out.
By Melvin J. Howard
As President Barack Obama deals with financial reforms and stress test for banks it got me thinking. Why not put some foxes back in the hen house it worked for FDR when he appointed Joe P. Kennedy the father of the late great President John F. Kennedy as the first Chairman of the SEC. Everybody thought FDR lost his marbles but FDR countered whom better to know where all the dead bodies are. As bankers discuss isolating toxic assets and the Obama administration pressing banks to resume lending. "The president emphasizing that Wall Street needs Main Street and that Main Street needs Wall Street. So lets go down memory lane and see what FDR did. FDR had a very good reason for wanting to involve Joe Kennedy in his first administration. Kennedy had helped him get elected.
In 1932, FDR was attempting to prevent a deadlocked convention. Kennedy aligned himself with the powerful Bernard Baruch. Kennedy, equally wealthy spoke with the loud voice of money. Kennedy contributed $50,000 of his own to FDR's campaign, and helped raised another $200,000. As told it FDR wanted to ignore them but couldn't. FDR listened to them about their concerns, even if he had his own serious reservations.
Kennedy approached William Randolph Hearst to say that a deadlocked convention may pick Newton Baker, a man detested by Hearst. Hearst then convinced John Nance Garner to give his delegates to FDR. In those days that ensured that Garner would be selected vice presidential job instead.
So FDR defeated Herbert Hoover in a landslide and began to work on his New Deal. Joe Kennedy wanted to be Treasury Secretary. But Roosevelt put the breaks on car. But he did have something else in mind for Kennedy. In FDR's New Deal he created four regulatory bodies: National Labor Relations Board, Civil Aeronautics Authority, Federal Communications Commission, and the Securities and Exchange Commission.
The SEC was created by an act of Congress on June 6, 1934 for the purpose of protecting the public and investors against malpractice in the financial markets. While Wall Street was not exactly jumping up and down of the coming regulation, but Congress was set on changing the Street as it was an easy target for the Crash and the Depression which followed are we connecting the dots yet? Commenting on the creation of the SEC, Texas congressman (and future Speaker) Sam Rayburn admitted he didn't know whether the legislation passed so readily because it was so good or so incomprehensible. In his book "Freedom From Fear," historian David Kennedy summed it up like this on the importance of the SEC: "For all the complexity of its enabling legislation, the power of the SEC resided principally in just two provisions, both of them ingeniously simple. The first mandated detailed information, such as balance sheets, profit and loss statements, and the names and compensation of corporate officers, about firms whose securities were publicly traded. The second required verification of that information by independent auditors using standardized accounting procedures. At a stroke, those measures ended the monopoly of the Morgans and their like on investment information. Wall Street was now saturated with data that were relevant, accessible, and comparable across firms and transactions. The SEC's regulations unarguably imposed new reporting requirements on businesses. They also gave a huge boost to the status of the accounting profession. But they hardly constituted a wholesale assault on the theory or practice of free- market capitalism. All to the contrary, the SEC's regulations dramatically improved the economic efficiency of the financial markets by making buy and sell decisions well-informed decisions, provided that the contracting parties consulted the data now so copiously available. This was less the reform than it was the rationalization of capitalism. "So the SEC prohibited the "pools" and other devices used by the likes of Kennedy to amass their fortunes. While manipulation of the markets was still possible, there were now risks as it is today. Did I ever tell you the one about a penny stock company I invested in but that's another story.
Meanwhile, FDR decided he had to do something with Kennedy so he chose to name him the first commissioner of the SEC. Joseph Kennedy was appointed to oversee the very activities he had participated in. FDR was initially accused of selling out to Wall Street. But FDR argued that Kennedy was the right choice since he was the only one with intimate knowledge of the very acts that the SEC was set up to prevent. It was a classic case of the fox guarding the henhouse. When Joe first started he was given a job with the venerable Boston stock brokerage firm Hayden, Stone and Company, after Mayor Fitzgerald Joe's father promised to swing business to the firm if they hired his son-in-law. Galen Stone, a friend of Joe's father-in-law, taught his protégé how to make huge sums of money off investors by trading on inside information. I am not making any judgement calls here because back then the practice of using inside information was not illegal. Joe was a business man he was out to make money his distrust for institutions and the prejudices he faced for being catholic I am sure drove him to become a success. People and their prejudices are so ridicules and stupid it makes no sense I have gone through it myself in the early part of my career so I understand. What Joe did was it ethical maybe maybe not there was no law at the time. Did Joe use his contacts and influence to gain an advantage? Why sure he did just like all the robber barrons before him. It still happens today because of privileged positions how many times have you had advice to take advantage of a loophole now before it closes can I get a show of hands.
Besides using inside information, Joe made a ton through what were known as stock pools. This was a way of manipulating the market by forming a syndicate and arranging for the members to trade stock back and forth. By bidding the price of the stock higher, the pool members created the appearance that the public was bidding up the price. In fact, the syndicate members retained the profits, and when the trading public bit by joining the action, the syndicate members sold out, leaving the public with losses. Joe called the practice "advertising" the stock.
By 1930 Joe had seen the Depression coming, and as Black Tuesday approached, Joe liquidated his longer-term investments while continuing to make money on the declining market by selling short.
Selling Short - Usually an investor purchases stock and later sells it, earning a profit if the stock has gone up. Selling short reverses the process. The investor who believes the price of a stock will go down borrows stock - say at $10 a share - from a broker for a fee. If the price falls to $8, he buys new shares at the lower price of $8 and gives them back to the broker to replace the shares he borrowed at $10. He then gets to keep the $2 difference as his profit. By selling short, Joe made sums estimated at more than $1 million dollars by forcing prices down. The fact that the market was unregulated was largely responsible for the crash. Salesmen had made wild claims to a gullible public. Stock pools were defrauded legitimate investors. Reporters and columnists had acted as accomplices for companies peddling stocks in return for payoffs.
Considerably richer because of his short selling, Joe Kennedy had sold off his Wall Street holdings before the bottom dropped out of the stock market. He then waited to pick up the pieces. Joe Kennedy's wealth was now estimated at over $100 million. Some of you might say that's not how he made all of his money. Maybe but I am only focusing on his appointment as Chairman of the SEC.
The crash set off a worldwide financial panic and depression that would last for years. By 1932, 12 million Americans were jobless. Governments responded with strict tariff restrictions that dried up world trade. In Germany, where 5.6 million people were out of work, the depression contributed to the rise of Adolph Hitler.
As one of his first official duties, Kennedy delivered a national radio address: "We of the SEC do not regard ourselves as coroners sitting on the corpse of financial enterprise...We do not start with the belief that every enterprise is crooked and that those behind it are crooks. "Wall Street breathed a little easier. After all, regulation did not always mean prosecution. Joe Kennedy proved to be a highly effective leader of the SEC. And, while he stayed in the position only one year (leaving to pursue other interests), it was a crucial one as far as establishing the credibility of the organization.
Historian John Steele Gordon described his reign: "Kennedy knew where the bodies were buried. But he regarded his job to be not only to restore the confidence of the country in Wall Street, but, equally important, to restore the confidence of Wall Street in the American economy and government. Kennedy's first priority was to end the 'strike of capital,' in which the great Wall Street banks, and innumerable small ones, shell-shocked alike, were refusing to underwrite new issues of securities and to lend money, no matter how good the collateral or how solid the project." Eventually, Wall Street and the country recovered. Kennedy quickly established himself as a fair-minded, yet tough, leader. He set up the procedures for investigating and prosecuting misdeeds by investment bankers and brokers and for all this, his place in financial history is secure. Joe also took steps to protect his fortune and the future of his children and their mother. That information will costs extra that is what I get paid for.
