The Pecora Committee in Context: Going Forward



The investment side of your Bank is sitting on a ton of bad loans to various Latin American nations. The loans used to look good: The rates were, of course, sky high. But with the world in recession, many of these same Latin American nations are just this side of defaulting. If they do default, it could be very bad for the Bank. Sure, the investment side of the Bank would suffer the most, but the defaults would also impact the profit-and-loss sheet of the Bank as a whole. Not good.

The solution? Whip up your stockbrokers —they work on the other side of the Bank—and get them to go sell these “dogs” to the hoi polloi. Gussy the bonds up good, put a fancy name on the package, and, hopefully, the public will love ‘em. You’ll not only get the bad debt off your balance sheets, you’ll get a broker’s fee from the suckers who saved your skin in the first place. Gooooood.

Or consider this:

The Big Bank—the commercial side of your Bank—financed the investment side’s pool operation in copper stocks. Your stockbrokers then went out and sold the public a million and a half shares of copper at $120 a share. It’s now selling for $5 and change.

Annnnh, you say. Stuff happens!

Indeed it did and pretty much exactly as I outlined—but in 1929, not 2009.

For most of the next 70 years, there was no chance of a repetition of these kinds of shenanigans. And why not? Two words: Glass-Steagall.

The Glass-Steagall Act of 1933 forced banks to choose between being investment banks or being commercial banks. No longer could they be both. No longer could this hand slip the money under the table and into that hand. Nor could the commercial bankers blithely send their customers scampering over to the next-door office to do their stockbrokerage business—after having provided them with margin loans. No, thanks to Glass-Steagall, the Big Bank holding companies of the Twenties were no more.

But then along came Phil Gramm, egged on by the Wall Street Journal crowd—abetted, too, by the Clinton Treasury Department (Read: Bob Rubin and Larry Summers, assisted by a young Tim Geithner)—and they changed everything. And not for the better. With the stroke of a pen on November 12, 1999, President William Jefferson Clinton signed into law the Gramm-Leach-Bliley Act, which, in effect, repealed Glass-Steagall.

Americans didn’t realize it at the time, but the world of 1920s finance—ginned-up deals, suckers ripe for the plucking, and nobody to regulate much of anything—had returned with a vengeance. The only real difference, needless to say, was the computer, which simply made the thing go faster. A regular Merry-Go-Round of Mad Money.

And no Glass-Steagall to stop it. (more…)

The Pecora Committee in Context: Mythbusting


Glenn Greenwald got it right this week when he zeroed in on the Banking Culture’s hold on Congress. Tellingly, he quoted Dick Durbin of Illinois, the number two Democrat in the Senate, who on a radio talk show, “blurted out an obvious truth about Congress that, despite being blindingly obvious, is rarely spoken.”

And what was that obvious truth? Quoting Durbin: “And the banks—hard to believe in a time when we’re facing a banking crisis that many of the banks created—are still the most powerful lobby on Capitol Hill. And they frankly own the place.”

The banks didn’t always own the place, though for much of our history they have. As Robert Caro points out in Master of the Senate, the third volume of his magisterial biography of Lyndon Johnson, during the Gilded Age, the Senate became virtually a clubhouse for Republican millionaire-bankers.

The one time the bankers emphatically didn’t own the place came some fifty years later when the Senate Banking Committee began its explorations into the whys and wherefores of the Crash of 1929. Even then, the bankers came very close to making the lights go out and the cameras all just go away.

The reason they didn’t succeed: A fifty-three-year-old, cigar-chewing former Manhattan assistant D.A. named Ferdinand Pecora, who in January 1933 became counsel to the committee.

Ron Chernow has told this story well and in some detail in his excellent study of The House of Morgan. One of Chernow’s most telling points—and one we should ponder carefully—is that, “For six months, the hearings had been stalled. Republicans and Democrats, with fine impartiality, had feared fat cats of both parties might be named and united in a conspiracy of silence.”

Chernow could just as easily have been writing about today, about how House and Senate and now White House alike have dithered over investigations not only into the financial scandals but also into wireless wiretapping and torture. It’s all much of a much.

To an extraordinary degree, in the halls of Congress, the conspiracy of silence continues to protect sinners on both sides of the aisle. That it is patently obvious that there are more sinners on one side of the aisle than the other doesn’t seem somehow important enough to alter the equation.

And so, as it was not quite 80 years ago, and as it was again in 1973, someone—some one man, some one woman—must break the logjam if ever we are to get at the truth. (more…)

The Pecora Committee in Context: The Myth of the Banking Culture

pecora-ferdinand.thumbnail.jpg Bill Moyers posed the exact right question last week: “Is it time for a commission to investigate today’s Wall Street crash?” He also invited his listeners to respond to the question: “What would you ask new Pecora hearings to investigate?”

A mere glance at today’s New York Times offers plenty of reasons for a modern “Pecora Committee” to investigate the causes of the Crash. As I write, the lead story at the Times Website informs us that, “U.S. Economy in 2nd Straight Quarter of Steep Decline,” with GNP shrinking at a 6.1 percent annual rate, “worse than economists predicted.”

The print edition of the Times today carried the no longer startling news that unemployment has grown from 11.1 million in December to 13.2 million in March. Meanwhile, the lead story in the Business section announced that, “Feeling Secure, Some Banks Want to be Left Alone.” What that means, of course, is that the bankers want to go back to giving themselves whopping pre-Crash bonuses; continue to rip-off credit card consumers with fine print and surprise rate increases; and haven’t the least intention of letting their Congressmen change the laws to allow a bunch of bankruptcy judges to modify the mortgage terms of desperate homeowners.

Any why should they?

As the economist Simon Johnson—a guest on Moyers’ Friday night program—keeps reminding us at his blog, The Baseline Scenario, the nation’s Banking Culture has all but overwhelmed its political culture. Like any true Third World country, the United States of America is in the grip of a banking elite. It matters not that the same elite recently led the entire world to the edge of the abyss.

The myth of the Banking Culture—“Too Big to Fail,” too powerful to be joined in battle—lies at the heart of the crisis we face today.

The need to shatter that myth is why the times demand a modern Pecora Committee. (more…)

“US Watchdog Calls for Bank Executives to Be Sacked”

Such was the headline in Sunday’s London Observer.

The Observer’s correspondent went on to note that a call would be made this week by the U.S. watchdog “for the removal of top executives from Citigroup, AIG and other institutions that have received government funds in a damning report that will question the administration’s approach to saving the financial system from collapse.”

You might suppose that the U.S. watchdog in question was Timothy Geithner, Obama’s Secretary of the Treasury. Geithner did, after all, make noises on Face the Nation Sunday about how the administration “would consider” removing top management and boards at troubled banks that are “beyond repair,” in the words of the Wall Street Journal.

But, no, what Geithner was doing was little more than an end-run in advance of yesterday’s report from the real U.S. watchdog.

Meet Elizabeth Warren.

The Harvard Law professor—she’s an expert on consumer lending laws (which is to say she’s the bane of the credit card industry)—is the chair of the five-member Congressional oversight committee monitoring the Troubled Asset Relief Program (TARP).

The committee’s 151-page “April Oversight Report,” issued Tuesday, comes on the heels of the six-month anniversary of the passage of the Emergency Economic Stabilization Act of 2008,” and gives plenty to pause over, beginning with the simple, obvious question: “What is Treasury’s strategy?”

The report lays out—as best it can given Treasury’s deliberate, dogged opacity—what that strategy is. As Paul Krugman has long pointed out, the current bank-subsidization plan is little more than the Japanese “Zombie Bank” strategy, repackaged. But the report also makes the case for alternative plans—like liquidization and conservatorship.

No wonder the two right-wing members of the Oversight Committee—the know-nothing former New Hampshire Senator John Sununu and the egregious East Texas yahoo Congressman Jeb Hensarling—voted against the April report.

But what did anyone ever expect of politicians such as Sununu and, especially, Hensarling? (more…)

Behind the Veil of a Terror War

In my 2007 book Follow the Money, I asked the question: “What if the global war on terror had, at least in part, been the public face used to conceal millions—perhaps even billions—of dollars in corrupt appropriations being siphoned into top-secret contracts?”

When thinking about the “Duke” Cunningham affair and the subsequent dismissal of San Diego U.S. Attorney Carol Lam, the prosecutor in that case and in the related case of former number three official in the CIA, Kyle “Dusty” Foggo, I kept coming back to the same point: “What if a small coterie of Appropriations, Defense, Homeland Security, and Intelligence committee members were, in fact, on the take and engaged in a massive giveaway of federal funds?”

The hapless Randy Cunningham had been well-placed for such an endeavor. At the time of his forced resignation, the “Duke”—captain also of the royal yacht “Duke Stir”—stood sixteenth among Republican members of the House Appropriations Committee. More to the point, however, Cunningham was the third-ranking Republican on the House Permanent Select Committee on Intelligence (“House Intel”) and a member in good standing of the single most powerful subcommittee in the House of Representatives: Defense Appropriations, with the power of the purse over not only the Department of Defense, but also CIA, NSA, and Homeland Security.


By 2006, Cunningham’s boss on the House Appropriations Committee, Jerry Lewis of California, controlled over $900 billion in federal spending. Between 1998 and 2004, spending on “earmarks” had tripled, from $10.6 billion in 1998 to 15,884 in 2004 worth $32.7 billion. (more…)

To Bow or Not to Bow to Wall Street

Comes now James K. Galbraith’s “No Return to Normal,” which might well be the most important primer for understanding how this nation should and should not be responding to the world economic crisis.  Suffice it to say that Professor Galbraith—he holds the Lloyd M. Bentsen, Jr. Chair in Government at the University of Texas at Austin—is largely in agreement with the, by now, well-known views of Nobel economics prize laureate and New York Times columnist Paul Krugman. Both see the crisis as larger and more systemic—and in need of a vastly larger and more systematic response on the part of government (Think: New Deal II)—than is remotely suggested by anything Treasury Secretary Timothy Geithner has said in public so far. Indeed, judged by Galbraith’s really quite shocking reading of affairs, the current situation—not to say the greater, impending crisis—seems to be beyond the capacity of Geithner and his fellow Rubinites’ understanding.

On the one hand the Rubinites—and, apparently, Federal Reserve Chairman Bernanke—believe the trough of the “recession,” as they still deem it, could be forded by the end of 2009. Geithner, in particular, seems to think that if only we can bail out the banks by ridding them of their toxic waste, we can right the system. On the other hand, Galbraith—and Krugman as well—see this as an attempt to bail out the bankers themselves, while stiffing the public with billions—if not trillions—in obligations that will never remotely be worth what we have paid.

Meantime, it is as though, faced with a very long, hard and demanding swim up-current, we merely tread water, praying for some deus ex machina to suddenly appear and save us. This, I fear, is at the heart of the Geithner way.

Galbraith’s vision is frightening in its candor, all the more so since it suggests that the administration is in the gravest possible danger of being seen as the lapdog of Wall Street.

It does not have to be this way.

As I reminded readers in my Saturday post, Franklin D. Roosevelt did not come into office with the New Deal in hand. He was himself considered to be fairly conservative—a Hudson Valley aristocrat—and some of his early-day advisors were surely conservative. But neither was he unbending in his view of how to respond to the Depression. Roosevelt was, for better or worse, one of the most flexible of politicians. And he had the good sense to surround himself with clever White House aides like Harry Hopkins and a handful of very strong cabinet members, among them Harold Ickes, beginning at the Public Works Administration (the celebrated New Deal “alphabet soup” agency known as the WPA) and then at Interior, and Frances Perkins, the first female cabinet secretary, at Labor. (more…)

A Model for Obama Not Named Lincoln

follow-the-money-book.thumbnail.jpg(Please welcome John Anderson, author of Follow The Money: How George W. Bush and the Texas Republicans Hog-Tied America — jh)

Earlier this morning, Paul Krugman delivered what Scott Horton (“No Comment”) afterwards correctly termed “a devastating judgment” on the Obama administration’s emerging economic policies. Wrote Krugman:

This administration, elected on the promise of change, has already managed, in an astonishingly short time, to create the impression that it’s owned by the wheeler-dealers. And that leaves it with no ability to counter crude populism.

Worse, the feeling is fast growing that this is no mere “impression,” but a reality of sorts. That, under the swami-like (or is Wizard of Oz-like?) influence of former Goldman Sachs chair-cum Clinton administration Secretary of the Treasury-cum former Citigroup vice chair Robert Rubin, the administration has effectively abandoned its own principles for the status quo demanded by a Wall Street elite.

On the economic stage, Rubin’s influence seems omnipresent: Not only Treasury Secretary Timothy Geithner, but also senior economic advisor and former Clinton Treasury Secretary Larry Summers are both longtime Rubin protégés. But for Summer’s notoriously arrogant, heavy-handed—failed—presidency of Harvard, he rather than Geithner would almost certainly be Treasury Secretary now. It’s worth pondering that some among his fellow Harvard Fellows—the university’s trustees—still haven’t forgiven Rubin for having stiffed them with Summers in the first place.

Given his tempestuous Harvard adventure, Summers, the current administration seems to have concluded, wasn’t sufficiently presentable to be wheeled out as the front man for their economic policy. And so it fell to Geithner, who, in his own way, appears even less presentable, so seemingly weak is he in public. Never was there a time when Treasury needed—nay, demanded—to be seen as trustworthy. Yet, Geithner has already—and quickly—established a reputation for evasion, not to say prevarication.

Given the administration’s—and, particularly, Treasury’s—obvious mishandling of the AIG “retention” bonus situation, you have to wonder how much longer Geithner can last. To remove him now would make President Obama himself appear weak. To leave him in office, however, is an equally unappealing choice. As Krugman keeps reminding us, the administration has done little more than muddle along with its economic policies. Again and again, it’s the old story: Too little, too late. And, meanwhile, faced with the firestorm over bonuses, the president’s political capital is sure to take a hit sooner or later. Obama is almost certainly going to need to come back to Congress and ask for more money for more stimulus. Will he get it? Can he get it with Geithner as his Treasury Secretary?


FDL Book Salon Welcomes Thomas Frank: The Wrecking Crew

thomasfrank-the-wrecking-crew.jpg"What he wanted,” his biographer has said, “what he hoped to be . . . was America’s ‘best-loved’ President.” He was by nature, jovial, jolly even, an outgoing kind of a fellow. He liked going to baseball games and throwing out the ceremonial first pitch of the season. He even liked having the Boy Scouts and the Girl Scouts, celebrities and sports figures, children of all ages, shake the Presidential hand. The crowds that came to see him, to “share his presence and shake his hand were a reassurance to him, and he expanded in their presence.” And if eloquence came hard, “The Lord’s Prayer” slipped easily off his tongue. The problem was that he didn’t particularly like all the work that came with being President. Deep thought and concentration required an effort he’d rather forego, preferring instead the golf course. He was by nature a man of instinct; and he trusted his urges, and those who seconded him, supported him, held him up straight. Those were the fellows who did the heavy lifting—and made him look presidential.

He had, however, at least this one advantage over many: He knew he was over his head—way over his head—as President of the United States, and he regretted it. He sincerely regretted it.

And so he surrounded himself with familiar faces, the gang from back home, old pals rather than straight talkers. And, in the end, he presided over the most scandal-ridden administration in a century.

Sound familiar? George W. Bush, perhaps? But, no. Debacle after debacle, Our W seems impervious to regret. After all: What’s to regret when you have an angel on your shoulder? Or Dick Cheney whispering sweet nothings in your ear.

No, this was Harding. Warren G. Harding. Most of us, I suspect, grew up thinking that Harding was the worst president in our history. His Attorney General, the vulpine Daugherty, “brought with him the habits and attitudes of the Ohio political jungle. The vultures and jackals of the Ohio Gang, the politicians of the lower level moving on to Washington . . . flocked to him.” Behind his “impervious mask lurked an uncertain personality.” He was for a time—a long time—unique among Attorneys General of the United States “in that while he headed the Department of Justice he was subject to two congressional investigations.” Following his tenure in office, he was also twice indicted for malfeasance.

The Interior Secretary, the six-gun toting Fall, the villain of Teapot Dome, always considered himself innocent. Sure, he’d taken a loan, a hefty, six-figure loan, from the oilmen who got the contracts to plumb Teapot Dome. But, hell, he was their friend; and what was friendship for, after all? Besides, Fall was a man who believed that the business of government was business.


FDL Book Salon: Fall Of The House Of Bush

unger.jpg[Please welcome Craig Unger in the comments. As with all guest chats, please stay on topic and be polite. Any off topic discussions should be taken to the prior thread. Thanks! — JA]

Yesterday, at Talking Points Memo, Josh Marshall described "the GOP Triangular Trade, in which Southern evangelicals provide the votes for a party financed by and run on behalf of Wall Street and with policies devised by a gang of New York intellectuals and scribblers." In its essence, what this means is that, "Richard Scaife provides the money to help keep his taxes low. Bill Kristol comes up with the ideas. And Mike Huckabee provides the votes."

Later in the day, at Huffington Post, the veteran political reporter Tom Edsall warned that this Triangular Trade might well flounder on the Huckabee candidacy: "Huckabee has demonstrated a willingness to defy party leaders, whom he dismissed as a ‘wholly-owned subsidiary of Wall Street,’ a statement that goes beyond heresy to apostasy."

How the Triangular Trade came to be the bedrock of an ascendant Republican Party—and how it has begun to fracture, not only under assault from the pseudo-populist Huckabee, but more importantly under the weight of the failed George W. Bush presidency—is at the heart of Craig Unger’s splendid new book, The Fall Of The House Of Bush.

Craig is, of course, the author of the national best-seller House of Bush, House of Saud, published to great fanfare by Scribner in 2004. An award-winning investigative journalist, he has had his work published in The New Yorker , Esquire, the New York Times, the Los Angeles Times and many other publications. The former deputy editor of The New York Observer and editor of Boston magazine, he is currently a contributing editor at Vanity Fair.

As it happens, I’ve known Craig for almost fifteen years. (more…)