Wall Street History
Joseph Kennedy, Part III
Before concluding our story on Joseph Kennedy and his selection
by FDR to be the nation''s first chairman of the Securities and
Exchange Commission, I want to add a story I omitted from
Part II which further burnishes the image of Joe Kennedy as a
Last time we discussed Kennedy''s reliance on inside information
for his spectacular gains in the equity market. In addition,
Kennedy had a partnership with the legendary Ben Smith ("Sell
''em Ben") in which the two would gain access to confidential
loan data. In Martin Fridson''s book "It Was a Very Good Year,"
he describes what would transpire next.
"Upon identifying a heavily margined investor, the two would
stage a bear raid on stocks in his portfolio. Then, when the bank
demanded collateral from the overextended borrower, Kennedy
and Smith would show up, offering to take the stock at a fire-sale
Nonetheless, 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, having made his millions in the market, and
the equally wealthy Baruch spoke with the loud voice of money.
For his part, Kennedy contributed $50,000 of his own to FDR''s
campaign, and helped raised another $200,000.
FDR wanted to ignore them but couldn''t. He told one aide that if
Baruch and Kennedy were statesmen, "my definition of the
public interest was all wrong." But FDR fed them with the
impression that he cared deeply 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 president, a job which Garner described as "not
worth a pitcher of warm ----".(Oh, I''ll leave out the last word).
[Baruch gave FDR the following advice: "Balance budgets. Stop
spending money we haven''t got. Sacrifice for frugality and
revenue. Cut government spending - cut it as rations are cut
in a siege. Tax - tax everybody for everything."]
So FDR defeats Herbert Hoover in a landslide and began work
on his New Deal. Joe Kennedy wanted to be Treasury Secretary.
There was no way Roosevelt was granting that wish. But he did
have something else in mind for the cheating, back-stabbing
father of a future president.
Among its many features, the New Deal 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 enamored of the coming regulation, Congress was armed
for bear as the Street was seen as an easy target for the Crash and
the Depression which followed.
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
damned good or so damned incomprehensible."
In his book "Freedom From Fear," historian David Kennedy has
the best summary 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, now there were risks to the crooks.
Meanwhile, FDR decided he had to do something with Kennedy
so he chose to name him the first commissioner of the SEC.
[Technically, FDR appointed all 5 of the new commissioners and
then told them whom he preferred as their chairman. It probably
wouldn''t have been too wise for any of the other 4 to act too
independently of the Big Kahuna.]
Who wudda thunk it?! Joseph Kennedy, 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. Yes, it was the fox guarding the henhouse.
As one of his first official duties, Kennedy delivered a national
"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
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
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. But there was an
awful lot of bad before we got to the good, eh?
The Joe Kennedy story didn''t end with his chairmanship of the
SEC. FDR appointed him to become ambassador to Great
Britain where he did an absolutely horrible job. He was a
staunch isolationist who agreed with British Prime Minister
Neville Chamberlain''s assessment that Hitler was not to be
feared. Kennedy was also accused of being an anti-Semite.
Then, in the 1950s he used all of his cunning, wealth and
contacts to promote his son, Jack. There was going to be a
president in the family, by gosh. Or, as Joe himself put it,
"We''re going to sell him like soap flakes." A good example of
this was classic Joe Kennedy. He pulled strings to get Jack a
Pulitzer Prize for "Profiles in Courage," even though it was
largely Theodore Sorensen''s work.
Joe Kennedy died in 1969.
"Freedom From Fear," David M. Kennedy
"Monopolies in America," Charles Geisst
"The Great Game," John Steele Gordon
"It Was a Very Good Year," Martin Fridson
"One World Divisible," David Reynolds
"The American Century," Harold Evans