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Nancy Pelosi has called for the creation of a new Pecora Commission, and have been quite a few mentions of the Pecora Commission in the news lately. However, I have seen little that actually goes to first sources and explains exactly what the Pecora Commission was and what it did. I will attempt to fill that void.
I have been reading the final report and some of the hearing transcripts. What strikes me, first and foremost, is that they read as if the testimony was taken last week, instead of in the mid-1930’s. You don’t even have to change the names , very much. The same entities, for example Citigroup the known as National City Bank of New York and its stock trading arm National City Company, Inc. were advancing the “too big to fail” argument back then, too.
Executive compensation consisting of a “base pay” that represented a small percentage of total compensation plus various “bonus pools” were the norm for top executives back then as well. There were even off shore subsidiary tax avoidance schemes uncovered. And there were even pyramid scheme scandals.
Reading the “Report of the Committee on Banking and Currency” pursuant to Senate Resolution 84 of the 72nd Congress and Senate Resolutions 56 and 97 of the 73rd Congress is much like reading any newspaper today; the same schemes, the same scandals, the same excuses.
So, what is different? Well, back in the 1930s the concentration of wealth and power into the hands of a few Masters of the Universe was seen as dangerous and undemocratic. After all, the fewer the number of people making momentous decisions that would vastly affect the economy, the more likely that they will begin to act in tandem, so that mistakes in judgment by a few, and a few who mostly talked only to each other, could have disastrous consequences for the many.
Also, a lack of transparency in the markets created a climate where the temptation to fraud and self dealing was almost overwhelming, because the chances of being caught were so slight, so long as Ponzi scheme or fund continued to make payments to “investors”.
The report also decries the practice of making loans on margin to fuel speculation in stocks. Speculation is essentially a “bet” on whether a stock will go up or down, as opposed to investment which is a judgment about whether or not the investor thinks a particular company is being run well and profitably. Would you encourage a system whereby people take out loans to fund a gambling trip to Las Vegas or Atlantic City? I doubt it, yet investors, even small investors are encouraged to buy and sell “on margin” as if this were some kind of prudent practice. Today we call speculators “day traders,” but they are really just placing bets using the stock market as their betting forum.
Congress, in the response to the revelations that came out during testimony held from April 1932 to May 1934, passed a series of laws intended to remedy some of the worst abuses and to provide oversight and create some transparency in the markets. During this period, the Banking Act of 1933 (more commonly referred to as Glass-Steagall) was passed. It required the divorcement of commercial banks from their investment affiliates and created federal bank deposit insurance.
Congress also passed the Securities Act of 1933, which required issuers of securities to disclose material information about those securities to the public before offering those securities for sale. The Securities Exchange Act of 1934 which created the SEC. The Trust Indenture Act of 1940 placed additional registration requirements on a class of securities that included Bonds, debentures and notes offered for sale. The Investment Company Act of 1940 regulates mutual funds and similar entities. You can reach the full text of these laws via hotlinks at the SEC’s website.
This is the first part of a continuing series on the original Pecora Commission and its relevance today.
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Good rundown.
Having worked on Wall St. for over 25 years, let me assure you it’s worse than you think. Anytime anything makes money for the shortest period of time, the idea spreads like wildfire in the community. Soon everyone is doing it, using more & more leverage. Leverage, which you refer to as speculation or transactions on margin, is a miracle drug in a rising market but works equally well in the opposite direction. I recently reread Galbraith’s Great Crash of 1929, and it’s the leverage that he places the greatest emphasis on.
Of course, MOTU (masters of the universe) think they are getting something for nothing with leverage. Using OPM (other people’s money) to make the play and then the payer gets to keep all the profit.
As long as the gv’t is going to bail you when you fail, it’s a no risk propsition forhte MOTU player addicted to leverage
So Cynthia – will there actually be a commission?
President Obama signed the law creating it on May 20th. There will be another post in this series all about the commssion
And there is no evidence in the macroeconomic results that suggests the economy benefited (except for Wall St. compensation, of course). But Wall St., like W, is into reality creation, so they argue that without financial innovation (sic) the economy couldn’t move forward.
Seems to me we should dig out the old Banking Laws from the Thirties and just re-enact all of them and start over! Big Money has been working to (greasing Congress/Senate palms)change those Laws ever since they were enacted to fix the economy back then!! I will give them this.. they are fucking persistent!
Thee are some parts of the securites act of 1933 that really don’t make sense any more; think red herring prospectus and tombstone ads. They are printing press rules in a computer and twitter driven world.
They need updating to reflect modern logistics.
That being said, the substance of those regualtions–especailly Glass Seagel–have to be re-enacted
But of course they need to be updated to cover all these “New Financial Markets” that Must be regulated and transparent in their workings.
It’s Glass-Steagall, not Seagel.
That is my fault. Sorry, Cynthia.
Repaired in the post.
Jane posted on it on May 21. Her opening paragraph was not terribly heartening:
Links and more at Jane’s post.
I shouldm’t just type and hit “send” w/o spell checking, I had it right in the post itself
No problem. I got it wrong once myself. :-)
once??
I think I got Glass-Steagall (went with Stiegel, which came up on google so I’m not the only one) once that I remember. Other mistakes, who knows how many times!
Who really cares?? you know what the intended word was… just saying.. last I checked we all put our pants on the same way /s
Edit I love you..
Lack of transparency inevitably destroys a market.
If it can be gamed, it’s not a market, it’s something else.
A little more info on the Pecora hearings.
Where is our Ferdinand Pecora? NYT 5 Jan 09
Pecora Part II? Moyers 24 Apr 09
Wouldn’t it be loverly? tra la la
One of the problems with both mortgage backed securities –artificially amped up with credit deafult swaps–and with derivatives is that the “valuation” of these so called securities is not transparent.
When a security becomes so complex that the MOTU cannot explain how they work, they cease to be suitable for the general market, or perhaps any market?
The rating agencies also have a lot to answer for.
Thanks Cynthia, good post.
Great post Cynthia, thank you.
I keep wishing the big remaining dailies left in the rust belt would pick up this kind of great content.
Cynthia — dig in a little to both the members of the Pecora Commission and some of the staff who served it. One important aspect of this commission is the young lawyers from places like Harvard, Michigan, Wisconsin who came to DC as “reformers” and served the commission well, and then had long careers in the professional Civil Service in the Regulatory agencies that were created, and were still around in the 50’s and 60’s, overseeing the regulatory regimes. The network for many of these was called “Frankfurter’s Hot Dogs” — Frankfurter at Harvard had been the great exponent of a well crafted regulatory regime, and he had seeded in the 1920’s many of his best students in the faculty of law schools of Michigan, Wisconsin, and other non-elite law schools, and they produced the bright students who could carry these reforms. I am not certain we have a Frankfurter these days — but perhaps we do, and just don’t know it. To understand it, you have to look at some of Frankfurter’s writings about regulation that date before the crash, when he was Dean at Harvard Law.
One reason the recommendations of the Pecora Commission took hold was because that generation of young lawyers, economists, etc., became the institutional memory in the Regulatory Agencies, and were quitely respected for that over the years. No one wanted another crash. Many reached retirement age in the Nixon Years, and were simply not replaced. The “hot dogs” tended toward becoming legal counsel for a regulatory body, and then rather than selling out to K-Street or Industry, just stayed put for 35 years or so enforcing the laws. There are several biographies of Frankfurter, any one of which will give you the flavor of the network he created and the profound influence it had over perhaps 30-35 years.
If it can be gamed it’s just a fancier Three Card Monte or Carnival ‘game’.
This is the first in a weekly series that is planned for this time each Wed.
Thank you Sara, That’s a great insight