The Washington Post has a great article about the Pecora Commission today. In it there is speculation about where this generation’s answer to Ferdinand Pecora will come from.
One possibility is that such a character could come out of the 10-member Financial Crisis Inquiry Commission, which was set up by Congress in July to investigate various aspects of the current crisis. The panel’s chairman, Phil Angelides, a former California state treasurer and longtime Democratic donor, explicitly said in a recent Bloomberg interview that he planned to use Pecora as a model and pursue "non-political hard look" at the causes of the crisis.
I applaud Mr. Angelides decision to rely upon the prior work of the Pecora Commission and use it as model. I have made somewhat of a study of the work of the Commission (housekeeping note: the transcripts basically live on the coffee table in my living room) and believe they provide more than just a model or inspiration, but almost a literal roadmap for questioning on matters like insider trading, excessive executive compensation and conflict of interest in the comingling of commercial bank, investment bank and brokerage functions.
The key for the Financial Crisis Inquiry Commission will be staff hires. Remember, Ferdinand Pecora was not a commissioner, he was staff—specifically, chief counsel. Although the Commissioners obviously play a crucial role, it is staff who spent the hours pouring over documents, parsing the transcripts and doing all the nitty gritty work that makes or breaks the success of such a commission. Hiring staff, like Pecora, with a specific background in fraud and white collar crime will be essential. Hiring staff that are as driven by curiosity to find out what really happened and who do not believe any malarkey about derivatives being “too complex” to understand will determine the success of this endeavor.
A former New York prosecutor, Pecora was the last in a series of investigators hired to examine the causes that led to the stock market crash of 1929 for the Senate Committee on Banking and Currency. In early 1933, the newly-elected Democratic president, Franklin D. Roosevelt, gave the bulldog lawyer his blessing to dig deep into the excesses that had plunged the nation into the Great Depression.
The result was a relentless investigation, 12,000 pages of transcripts that laid bare abuses on Wall Street and failures of Washington to adequately regulate the nation’s financial system. Pecora’s efforts provided a basis for reforms that would alter Wall Street and maintain relative stability in the banking industry until the recent crisis. These included legislation that for the first time regulated the sale of securities and helped establish the Federal Deposit Insurance Corp. and the Securities and Exchange Commission.
For all the differences between then and now, there also are whispers of familiarity: Abuses on Wall Street. The blind eye of Washington. An economy in crisis. A new and eager administration calling for reform, and efforts by those with vested interests to shape those reforms to their will.
On Monday, President Obama tried to wake the national debate over financial reform from its August slumber, urging Wall Street to embrace the changes rather than seek to impede them. But Wall Street has rarely embraced broad change without some prodding.
Pecora and his small team of dogged investigators recognized as much in the 1930s. They issued subpoenas and summoned the titans of finance to Washington, where Pecora savaged them during a series of probing and withering cross-examinations. Charles E. Mitchell of National City Bank, the precursor to Citibank, was forced to resign after Pecora revealed his many transgressions. Likewise, financier J.P. Morgan, namesake of J.P. Morgan Chase and Morgan Stanley, left with a battered reputation.
Day after day, Pecora turned the proceedings into riveting political theater. He made villains of some of Wall Street’s most revered bankers, earning them the nickname "banksters," generating a steady stream of headlines and captivating the nation.
At the same time that Obama was addressing the Masters of the Universe at Federal Hall, Judge Jed Rakoff issued a decision refusing to condone a collusive settlement agreement between SEC and Bank of America over $5.8 Billion in bonuses paid to Merrill Lynch executives after BofA bought Merrill.
The MOTU are not going to suddenly get religion and give up their bonuses, nor beat their breasts crying mea cupla, mea culpa, mea maxima cupla, nor even admit that they must not be geniuses if they ran their companies into the ground and needed to be bailed out by the federal government. Nor have they learned their lesson about derivatives, collateralized consumer debt or gambling masquerading as insurance know as the credit default swap. Did you know you can get get this phony “insurance” on your fantasy football pool? Tell me again that this is insurance, not plain old fashioned gambling? I dare you.
My point is, unless or until the Financial Crisis Inquiry Commission gets some boots on the ground eager to get their hands on all that grunt work, WaPo and others will continue to wonder where the next Pecora will come from. We need people who are willing to do that detail work, so that public hearing can be held which demonstrate to the American people the path to improved financial regulation. We are lucky this time; we don’t have to re-invent the wheel. There are hundreds of pages of transcripts sitting on my coffee table, thumbed through daily, that give a usable blueprint. Mr. Angelides is correct to rely upon that model, it will enable the new Commission to hit the ground running.
(This is the eighth 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, part four, part five, part six, part seven)