Panic in the Loop: Chicago's Banking Crisis of 1932

by Raymond B. Vickers

Relying on a broad array of records used together for the first time, Panic in the Loop reveals widespread fraud and insider abuse by bankers—and the complicity of corrupt politicians—that caused the Chicago banking debacle of 1932. It provides a fresh interpretation of the role played by bankers who turned the nation’s financial crisis of the early 1930s into the decade-long Great Depression. It also calls for the abolition of secrecy that still permeates the bank regulatory system, which would have prevented the Enron fiasco and the financial meltdown of 2008. This book focuses on the recurrent failures of the financial system—the savings and loan crisis of the 1980s, the Enron debacle of the early 2000s, and finally the financial collapse of 2008. Because of regulatory secrecy, knowing what happened in Chicago in 1932 is critical to understanding the glaring problems in the regulation of American finance, in particular the lack of transparency, the abuse of financial institutions by insiders, and the capture of public institutions by insiders going through the revolving door between the private and public sectors. Eight decades later little has changed. The regulatory failures of the 1930s—especially the pervasive system of secrecy that allowed the fraud and insider abuse to flourish—were repeated during the collapse of 2008. Transparency would strike at the alliance between the executives of financial institutions and public officials, who caused the worst economic upheaval since the Great Depression.

348 pages, Hardcover

First published January 1, 2011

Reviews

[Frank Stein · Rating 3 out of 5]

This book is a masterpiece of dedicated research somewhat muddied by excessive detail and a confusing structure.

I will say that I doubt anyone can talk about the causes of the Great Depression, or the bank crises of 1932, without consulting this book. By digging through state and federal bank examiner reports, regulatory correspondence, and legal and bankruptcy filings, Vickers summons a story of almost unparalleled greed and skulduggery, hitherto unknown among historians.

His greatest revelations are that, far from a profitable concern sabotaged by Wall Street investors, Samuel Insull's matryoshka doll electric utility holding companies were tottering on the brink of collapse for years, maintained only by Insull's fraudulent financial trades and the illegal inflation of their assets. The book also explains one reason he created so many different companies, to get around state and national laws limiting bank loans to one customer. His scheme to maintain control of his empire was abetted by a host of Chicago downtown or "Loop," banks who made poorly backed loans to his companies and claimed they were good as gold. The banks' regulators often had loans or stock from these same banks and were thus understandably lenient. Some of the most prominent men of the era, such as Owen Young (GE's president, international diplomat, and presidential hopeful), and Charles Dawes (former Vice President under Coolidge, then head of the federal government-created Reconstruction Finance Corporation (RFC), and head of the Central Republic Trust bank), assisted in this fraud and their bank customers suffered for it. Vickers also shows that Dawes, Young, and Jesse Jones (soon to be head of the RFC for over a decade under FDR) relied on their intimate connections with the RFC, friendly federal bankruptcy judges, and bought-off politicians to salvage their fortunes and acquire cheap government loans, all while investors in their worthless paper and the public suffered. Vickers uses this story to make a case for regulatory transparency.

It's a harrowing and convincing tale, yet there are qualifications. A mass of irrelevant detail and side stories, all with their own series of detailed banking reports and numbers, make much of the book unnecessarily tedious. The author's habit of repeating every other dollar figure in "today's dollars" further confuses and overwhelms the reader. Also, there is perhaps too much of an attempt to re-litigate the old charges against these magnates, hammering home their culpability rather than letting the facts speak for themselves. Finally, despite the title the book has little to do with the actual banking "panic" of June 1932 in the city. The dozens of small banks that were actually closed, as opposed to those big ones that were saved, are discussed only in passing, and even the accusations that the big ones were brought down solely by insider dealing and the Insull and Dawes loans aren't corroborated fully with facts.

Despite these caveats, this book deserves to be read. The author quotes Senator Harry Byrd, who said that "you cannot measure a snake until its dead," and here, thanks to Vickers, with the archives opened up and the story available for all, almost 80 years after the events, we can finally understand how a group of self-dealing millionaires helped fleece the country.

[Rick · Rating 5 out of 5]

Raymond Vickers “Panic in the Loop” is a vivid account of the banking crisis of 1932 and, in particular, its impact in June of that year on the Chicago banking scene. The focus of the book postulates that the nationwide lack of transparency in banking and financial activities, along with just the right amount of out-and-out fraud, triggered the collapse of a number of state and national financial institutions … embroiled in the mess and guilty of the same oversights were the financial institutions in Chicago. Because of the secrecy involved in bank regulation, most of the primary source documents have been sealed for decades. The ability to finally access some of these records is what launched Vickers in his work … and Vickers makes a convincing case for eliminating the secrecy surrounding banking and financial regulation.

The book centers on three main characters – Samuel Insull (of electric and gas utility fame), Charles Dawes (former vice president under Calvin Coolidge), and Jesse Jones (a player and abettor at Reconstruction Finance Corporation). The interplay among these men (fraud, highly leveraged or unsecured loans, out-and-out falsified reports, interconnected directorships, insider loans, backdoor dealings, conflicts of interest, etc.), helped along by the lack of transparency, would eventually lead to the banking crisis.

The book briefly touches on later banking and financial convulsions … the S&L mess of the 1980s, the Enron watershed at the turn of the millennium, and the near disaster of the 2008 financial collapse. Vickers shows how each of these can trace some of their roots to the lack of transparency in banking and financial regulation.

This book was an entertaining read about a problem we have lived with for 80 years … and will continue to do so in the future until something is changed. If one leaps forward fifty years to the 1980s and on, the same overleveraged games play out; while the people directing the fraudulent activities change from time to time and their vehicle for perpetrating financial legerdemain varies (i.e. bank loans, stock prices, mortgages, derivatives, etc.), the end result is the same – dishonest people allow greed to overcome their sense of decency and they lie, cheat, and steal their way to the top. Whether its Samuel Insull or Kenneth Lay or Bernie Madoff, honest citizens are negatively impacted.

The book reads like an exposé but is on a subject from a time period that is mainly of interest to academics … however the general reader can be pulled into the story by the connections to the present. For example, while Roosevelt fixed a lot of the banking problems with securities legislation in 1933 and 1934 – notably the Glass-Steagall Act of 1933 – the Gramm-Leach-Bliley Act of 1999 negated much of that bill and arguably led to Enron in 2001 and the financial blowout in 2008 … and so we repeat the same mistakes.

Good read - Highly recommended for students of finance and economics.

[M Thomas · Rating 5 out of 5]

The title hints at a study of the madness of crowds. In reality, it is about the methodical looting of the Chicago banking system by insiders lead by the Vice-President of the US and former Nobel Peace Prize winner Charles Dawes and former Thomas Edison sidekick and utility mogul Samuel Insull and abetted by FDR's economic bagman Jesse Jones.

The theft is laid out in excruciating detail and one needs to have an understanding of banking to follow all of Vickers' revelations, which are appalling and unending. The theme of the book is that our financial system was, and in 2009 again still is, at the mercy of politically connected vultures who will steal from the people and the nation to feather their own nest. Perhaps in another 30 years we will get a similar expose of Hank Paulson's actions in the Global Financial Crisis for the benefit of Goldman Sachs and its friends.

The book is a hard read, but worth it.

[Christopher · Rating 4 out of 5]

This book is written by a Florida lawyer with extensive familiarity with proceedings concerning failed banks. This means that he has very direct and concrete understanding in the issues involved with bank regulation (and the failures of such regulation). He has previously written a book about a banking crisis that took place in Florida during the 1920s as a result of the incestuous relationship between incompetent/malfeasant bank management and the government instutitions supposedly set up to prevent such behavior, and here he turns his attention to a little known incident from the early years of the Great Depression. In this event, the failure of Samuel Insull's utilities empire centered in the Chicago area led to a major banking crisis in June 1932 as a result of irresponsible banking practices, and upshot was that Charles G. Dawes (Coolidge's vice president in the '20s and author of a bailout plan for German reparations around that time) managed not only to avoid the bankruptcy that faced him and his family as a result of his mismanagement of his Central Republic Bank, but he actually manipulated the government bailout available from RFC (Reconstruction Finance Corporation, an entity set up early in the Depression as a sort of old-fashioned TARP) to lie his way out of his obligations from the old bank, and to use the process to set up a profitable new bank for himself, lying repeatedly, using connections with the political heads of the agency (of which Dawes himself had until recently been the president) and leaving other share holders ruined.

The author's main idea is that regulatory secrecy (both then and today) simply allows for insider manipulation of the rules through connections with the regulators ("regulatory capture"). The book is basically a thoroughgoing effort to comb through available records (frequently either unavailable to earlier researchers or ignored by them) to demonstrate at length the pervasive conflicts of interest and self-serving behavior of both banking executives and their supposed regulators. Unfortunately, this is basically the entire purpose of the book (carried out excellently, it must be stated), and the overall readability of the book is undermined by the author's dogged determination to examine this aspect of the story. The book cuts little slack to those not already conversant with the story and the banking industry, which has the very unfortuanate result that the book is unlikely to reach as broad an audience as both the story itself (with high relevance to the recent financial meltdown of 2008) and the historical information unearthed by the author deserve.

First, there is basically no explanation of the regulatory or historical background. If you understand what, say, "paid in capital" means for the viability of a bank or the relation between it and the bank's liabilities, fine. If not, you can figure out from the tone of what's going on what must be the significance of the huge numbers of very specific sums that the author throws around, but he assumes that the reader knows as much about the banking industry and its regulation as he does, which is probably a rash assumption for most people. Also, a lot of the institutional framework for the story is left unstated, for instance, the difference between the state and national banking systems or the actual establishment, development and general operation of the RFC.

A second failing of the book is the lack of any substantive narrative. The book is basically origanized into chapters that catalogue the personal malfeasance of the various actors in the story (Insull, Dawes, the board members of the RFC, and then the roles played by Dawes and Owen Young in getting the RFC to bail Dawes out). The title of the book might lead one to imagine that the story of the mini banking meltdown that took place in Illinois in the last week of June 1932 might actually be told, but that's not so. Chapter Four "details the insider abuse at the Dawes bank and how that triggerd the panic and the RFC's bailout of the bank" (p. xx), and it's there that the reader gets closest to any description of what happened, but this narrative is more or less implicit in a chapter that goes through a concatenation of failures. Both here and elsewhere information often is presented out of chronological order, with the immediate malfeasance being described first, followed by some earlier malfeasance that's related simply as "background." The upshot is that not only does the reader not get a very clear idea of what's going on, but what could be a gripping account of tempestuous events loses all dramatic force. The fixation on simply delineating the self-serving duplicity of the bankers and regulators makes the story hard to follow without a great deal of attention on the part of the reader to keep track of the broader significance of the individual acts of malfeasance.

This is really too bad, because the events are inherently interesting, have much broader implications beyond the immediate circumstances, and represent a significant advance in understanding of what went wrong with the banking system in the early '30s. Reading the book with due attention well repays the effort, but I suspect that such effort is beyond the reach of the great number of even those readers who would otherwise be interested in the story. If it were presented in a much more narrative manner with appropriate explanation of the relevant concepts and the historical background, a much broader readership would be benefit from this story.

[Raymond · Rating 5 out of 5]

Hello readers,
If you liked this book and would like to see more, please visit my website at www.raymondvickers.com I have also written Panic in Paradise, about the florida bank crisis.

Thank you for all your support,
Raymond B. Vickers
www.raymondvickers.com