pecora-ferdinand.thumbnail.jpgTucked into the Fraud Enforcement and Recovery Act of 2009 [FERA], which was signed into law on May 20th, is a provision for a "Financial Markets Commission" (see, S. 386 at section 5). This is essentially a new Pecora Commission.

The Financial Market’s Commission will be composed of ten members to be appointed variously by the majority and minority leaders of both houses as well as by the chairs of both banking committees. (You can read the full text of Section 5 here.)

The functions of the Commission are to

(1) to examine the causes of the current financial and economic crisis in the United States, including the role, if any, of-

(A) fraud and abuse in the financial sector;

(B) Federal and State financial regulators, including the extent to which they enforced, or failed to enforce statutory, regulatory, or supervisory requirements;

(C) the global imbalance of savings, international capital flows, and fiscal imbalances of various governments;

(D) monetary policy and the availability and terms of credit;

(E) accounting practices, including, mark-to-market and fair value rules, and treatment of off-balance sheet vehicles;

(F) tax treatment of financial products and investments;

(G) capital requirements and regulations on leverage and liquidity, including the capital structures of regulated and non-regulated financial entities;

(H) credit rating agencies;

(I) lending practices and securitization, including the originate-to-distribute model for extending credit and transferring risk;

(J) affiliations between insured depository institutions and securities, insurance, and other types of nonbanking companies;

(K) market participant expectations that certain institutions were `too-big-to-fail’;

(L) corporate governance, including the impact of company conversions from partnerships to corporations;

(M) compensation structures;

(N) changes in compensation for employees of financial companies, as compared to compensation for others with similar skill sets in the labor market;

(O) Federal housing policy;

(P) derivatives and unregulated financial products and practices;

(Q) short-selling;

(R) financial institution reliance on numerical models, including risk models and credit ratings;

(S) the legal and regulatory structure governing financial institutions;

(T) the legal and regulatory structure governing investor protection;

(U) financial institutions and government-sponsored enterprises;

(V) the reliance on credit ratings by Federal financial regulators, and the use of credit ratings in financial regulation; and

(W) the quality of due diligence undertaken by financial institutions;

(2) to examine the causes of the collapse of each major financial institution that failed (including institutions that were acquired to prevent their failure) or was likely to have failed if not for the receipt of exceptional Government assistance from the Department of the Treasury during the period beginning in August 2007 through April 2009;

(3) to submit a report under subsection (g);

(4) to refer to the Attorney General of the United States and any appropriate State attorney general any person that the Commission finds may have violated the laws of the United States in relation to such crisis; and

(5) to review and build upon the record of the Committee on Banking, Housing, and Urban Affairs of the Senate, the Committee on Financial Services of the House of Representatives, other Congressional committees, the Government Accountability Office, and other legislative panels with respect to the current financial and economic crisis.

The commission will have the power to subpoena and to have those subpoenas enforced by the local US Attorney. As you can see, the subject matter jurisdiction of the Commission covers most of the suspect areas relating to the current financial meltdown.

Question for the comment thread: Are there any areas of inquiry that you believe are needed and which are not covered by the legislation?

The Commission is funded to the tune of $5 million for its activities and will expire 60 days after issuing its final report. It can start hiring staff once the first four commissioners are in place.

Another question for the comments: The original Pecora Commission owed much of its success to the fact that instead of hiring a Master of the Universe or a lawyer in the pocket of Wall Street, it hired as chief counsel an ex ADA from Manhattan, with an obviously ethnic name and appearance. He was not a member of "the club" and therefore had no reason to pull any of his punches. Ferdinand Pecora was free to "call ‘em as he saw ‘em."

Who would you recommend to House and Senate leaders as possible Commission Members?

The qualifications for Commission Members is as follows (there are no listed qualifications for Commission staff-Pecora himself was staff):

(2) QUALIFICATIONS; LIMITATION-

(A) IN GENERAL- Individuals appointed to the Commission shall be United States citizens having significant experience in such fields as banking, regulation of markets, taxation, finance, economics and housing.

(B) LIMITATION- No person who is a member of Congress or an officer or employee of the Federal Government or any State or local government may serve as a member of the Commission.

Me, personally, I would have preferred to see some mention of white collar investigations experience or white collar prosecution experience, like Mr. Pecora.

This is the fourth part of a continuing series on the original Pecora Commission and its relevance today. Previous posts can be found here: part one, part two, part three.