A Real Pecora Commission

In 1932 through 1934 the Senate Banking Committee, led by its Chief Counsel Ferdinand Pecora, ferreted out the deeper fraud and corruption that led to the Crash of 1929 and the Great Depression. The Pecora Committee's findings helped change the political mood, and laid the groundwork for the sweeping financial reforms of Roosevelt's New Deal. Roosevelt himself often conferred with Pecora, encouraged him, and depended on Pecora's work to build the public support for reform. He appointed Pecora to one of the newly created results of his handiwork, the Securities and Exchange Commission, though Pecora was disappointed not to be its chairman.

President Obama has now signed legislation, The Fraud Enforcement and Recovery Act of 2009, which among other things creates an investigative commission inspired by Pecora.

The new Financial Markets Commission has a sweeping mandate, including subpoena powers, to investigate all the causes of the collapse. The list is as comprehensive as one could wish for.

FUNCTIONS OF THE COMMISSION.--The functions of the Commission are--

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

(A) fraud and abuse in the financial sector, including fraud and abuse towards consumers in the mortgage 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 in the financial system, including, reliance on credit ratings by financial institutions and Federal financial regulators, the use of credit ratings in financial regulation, and the use of credit ratings in the securitization markets;

(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) the concept that certain institutions are ''too-big-to-fail'' and its impact on market expectations;

(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) the legal and regulatory structure of the United States housing market;

(P) derivatives and unregulated financial products and practices, including credit default swaps;

(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, including the extent to which the structure creates the opportunity for financial institutions to engage in regulatory arbitrage;

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

(U) financial institutions and government-sponsored enterprises; and

(V) 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 Secretary of the Treasury during the period beginning in August 2007 through April 2009;

It's hard to improve on that. Whether the commission carries out this mandate, Pecora-style, will depend entirely on who its chair and members are, and whether they hire a tough staff. The ten commission members are to be appointed, three by the Speaker of the House, three by the Senate Majority Leader, and two each by their Republican counterparts. The Staff Director is to be hired jointly by the Chair (a Democrat) and the Vice-Chair (a Republican). Interestingly, none are to be appointed by the White House, and President Obama has already issued a signing statement reserving the right to invoke executive privilege in cases where materials or testimony from the executive branch are requested under subpoena.

To get a flavor of what the original Pecora Committee did, consider this observation from Donald A. Ritchie, associate senate historian, in his study, "The Pecora Wall Street Expose""

With the power of the subpoena, his staff would descend upon a banker or broker, and go through is records, file drawer by file drawer, page by page, selecting and photostating documents. Staff lawyers and accountants would assemble this material to reconstruct motivations, discrepancies, delinquencies, and frauds involved. They drew a multitude of charts, tracing every event and statistic. After narrowing down the documentation, they outlined the subject's transactions in chronological narrative on letter-sized sheets with citations in the margins to specific documents which could prove each assertion.

Will the new Financial Markets Commission be this diligent in exposing the facts and kindling public demands for sweeping reform? You can be sure that House Speaker Pelosi and Senate Majority Leader Harry Reid will be getting friendly calls urging them not to make appointments that will embarrass the administration.

Three names have surfaced in the financial press as possible chairs, supposedly based on leaks from the Democratic leadership: Paul Volcker, 81, the former Fed Chairman, Arthur Levitt, Jr., 78, SEC Chairman during the Clinton era, and retired Supreme Court Justice Sandra Day O'Connor, 79. Volcker, an honest conservative, has turned against financial deregulation in recent years, and Levitt was a reasonably tough SEC chair, who bucked (and sometimes buckled) in the face of intense Congressional pressure from both parties not to crack down on abuses. Levitt now advises one of the most powerful private equity companies, the Carlyle Group, not exactly a constituency for tough reform.

Here are two better names:

*Paul Sarbanes, the retired Senate Banking Committee chairman. Sarbanes, a well-liked senator with admirers in both parties was both highly expert, incorruptable, and tough. In the fight to get what became the Sarbanes-Oxley Act, cracking down on accounting fraud, he showed real leadership. Sarbanes, now a vigorous 76, stepped down in 2006.

*Harvey Goldschmid, probably the most expert and public-minded SEC commissioner in recent decades. Goldschmid, 69, is now a law professor at Columbia. He was seriously considered by President Obama to chair the SEC, but was passed over in favor of the somewhat weaker Mary Schapiro.

It is important that this investigation be conducted not by a figurehead, but by one with the knowledge, passion, and predisposition to build the public case for sweeping reform, and without fear or favor.

Some Republicans, such as Richard Shelby, the ranking minority member on the Senate Banking Committee, are as disgusted with the Wall Street corruption as progressive Democrats are, though that does not describe the minority leaders in either house, Sen. Mitch McConnell and Rep. John Boehner, who will make the Republican appointments.

This could be one of those rare, historic commissions that changes the course of history -- or it could be window-dressing. Stay tuned.

Robert Kuttner is co-editor of The American Prospect and a senior fellow at Demos www.demos.org. His recent book is "Obama's Challenge: America's Economic Crisis and the Power of a Transformative Presidency".

 

 

Comments

[pathwhisperer]

Don't kid yourself, this will be nothing else but window dressing. Obama has been nothing more than a disaster to our American way of life, i.e., the middle class lifestyle being the norm. The coming depression, which will see the collapse of the middle class, will bear his name. The sums shoveled to the financial predators while allowing the auto sector to collapse says it all.

His demeanor, his niceness, the cadences of his speeches are nothing more than window dressing. We have an empty suit at the helm during our country's greatest trial (excepting the trials of the Revolutionary War and the Civil War). We need to take our gloves off. I no longer care if he's merely the bankster's house slave or if he identifies passionately with them. The elite has thrown over the American worker and he is one of the elite (or at least their servant).

Before his election I said that I would fight for his election and then later fight against him if necessary. But I never thought it would be this necessary.

http://pathwhisperer.wordpress.com/2008/10/23/low-hanging-fruit-the-idiots-who-lead-america/

[ClarcKing]

A Pecora Commission is exactly what we need: where is the judge and prosecutor? We must start from the base line perspective: that the U.S. is in the middle of a monetary financial derivative debt based global economic collapse. The design and purpose of the monetary financial debt based engine is contracting the economy and the population. The crisis is the desired outcome: this is the crime and treason against the United States and its' population. The Nuremberg Standard ought to be applied here. This imperial system disguised as globalization demands: speculation, usury, perpetual war, forced trade, out-sourcing industry and jobs, cost cutting in medical services, and medicine, limited education, and unemployment in the millions. The Money Power, scientists, historians, economists, bankers, and Congress all knew where this was going. The present admin has shown it will do anything to re-inflate the bubble. The stock market is up; yet businesses and workers are still being wasted by market pressure. The massive unemployment must be confronted and stopped or recovery will be impossible.

[Blankman]

It seems Mr. Kuttner, like many others, still operate under the assumption that FDR's New Deal dug us out of the depression. It's so historically inaccurate that it's scary. And yet this accomplished man doesn't even examine the history of the Great Depression, and the "sort of" Great Depression that lasted a short time, which preceded the actual Great Depression. Sad.

[research]

BS. my profile has the proof, if you cared.

Stop trying to revise FDR's great success and Hoover and the Bankster's terrible failure.

get over it.

[northstar11]

levitt is a wall street apologist------with a silver tongue----a wallpaperer supreme he would be an awful choice.

this is a job for an economist with experience and a chip on his shoulder,and a smile wide enough to hide it

[zitlight73]

"We have a financial system that is run by shareholders, managed by private instutions, and we'd like to do our best to preserve that system." Tim Geithner. We have an administration whose main focus in its first few months has not been to ease the pain jobless Americans are feeling right now as FDR did but to give billions and billions to Wall Street firms who caused the problems so that the very perpatraters of those problems would still recieve princely bonuses. This president has surrounded himself with advisers that came directly out of that "greed is good" culture and a congress that is controlled by the same strings of these evil puppteers. The American people cannot trust these people to do the will of We the People. Only when black Americans took to the streets and had the courage to take to the streets,many being arrested, beaten and even killed did they finally get their point across that they weren't going to be ignored any longer did they finally win the rights the rest of us took for granted. The same goes for stropping an immoral war in Vietnam. Hopefully we want have to go to those extremes to let those in Washington we've had with this business as usual attitude, and giving lip service to accountability and re-regulation all the while appointing the foxes who raided the chickencoop watchdogs but if we do have to go there We the People will.

[forty8r]

Derivitives need to be outlawed. they have been misused and contribute to the volitity of the capital markets. The simple equation is this for some one to pass on risk then some one has to assume risk. No one calculates how high the risk is and if they have the assets to cover the loss. They use such mumbo jumbo as hedging risk to say that they have no risk.

[dsws]

"The simple equation is this for some one to pass on risk then some one has to assume risk."

Some risk can be diversified away, as with insurance. Regulation needs to make the distinction.

[dsws]

Dead link to the law. This one should work: http://frwebgate.access.gpo.gov/cgi-bin/getdoc.cgi?dbname=111_cong_bills&docid=f:s386enr.txt.pdf

and if not, you can get to it from here: http://thomas.loc.gov/cgi-bin/query/z?c111:S.386:

[mcostello]

Mr. Kuttner,
While I appaud and agreee with this post, I am still reminded every time I see your name the Clinton era, and when the budgets were in the black, you endorsed continued defecits by design, to further expand the economy.
The huge deficits run by government is the cause of our economic woes, and until America lives within her means there will be no real pulling out of this mess.
It is time for mainstream economists to admit that the philosophy of "grow grow grow" is flawed at the core. Especially with 6.7 souls on the planet. Resources are not infinite, especially energy, but the ability for the human population to expand it. The crush is coming, if not here now.

[research]

Solar and waste BioChar energy are infinite.

[ScreenName05]

How about appointing Eliot Spitzer as the chair. Then you might see some actual prosecutions. The problem I see here is that the list of candidates are not regulators, they are not prosecutors. They are make nice politicians. We don't need to make nice. We don't need to take the concerns of the banks into consideration. That is why the Pecora Commission worked, they went in like raiders and took everything they needed to regulate the banks. If we make nice, we will never get to the bottom. That is why we need a real regulator and a real prosecutor.

[emmacop]

I think you'd have better luck trying to appoint Eliot Mintz.

[Economike]

Let's hope he can keep it in his pants this time, this isn't France.

[MarionWatts]

I actually think that would be a wise choice.

[MartynStrong]

Capital markets are unstable. In the past there was no way to make them stable. But today we have computer power that can be used to make them stable.

By using the greater computer power of today we can have a much higher turn over of capital in the capital market. This higher turnover will make the market harder to game or control and the market will no longer have the unstable run ups or declines. Who can change or control the market when say 20% of the capital is trading each day?

So now that we have the compute power to provide for all these transactions that will smooth out the market how do we force people to turn over at a rate of 20% a day? Easy, put a cap gains tax of 0% (zero) on all gains of 7 days or less and put a cap gains tax of 90% of all gains of more than 7 days.

The likes of Yahoo, Micosoft and/or Sun Micro Systems will give us the systems that will provide automated software agents to support turning over one's investments every 7 days (based on the specs you give the agent).

A system like this will make the financial markets work as smoothly as the local fruit market.

[ThePeacemakers]

"...President Obama has already issued a signing statement reserving the right to invoke executive privilege in cases where materials or testimony from the executive branch are requested under subpoena..."

Hahahah...this includes info from Bush Admin final days when first TARP bailout money was "dispersed"?
This includes what Tres Sec Geithner has been up to?

Bend over folks.

[johnie2xs]

Mr Kuttner; first, a request. I suspect you will, but none the less, I beg you to keep us informed, More importantly, if this process shows signs of slipping off the rails, please be even more vocal, and more incensed about its success, than even you yourself thought you could be.
As this financial drama has progressed, I've come a long way in understanding what has been happening, by reading you, Paul Krugman,and Joseph Stiglitz. I can only hope that other of our fellow citizens have done what they could, to educate themselves, so as to understand what must be done.

I have some great misgivings, though. The present political climate seems to be particularly poisoned, I feel, not only because of the intersession of the forces within the financial Industry itself, but also because of the intransigence of the right-wing of the Republican Party, in so far as making the appropriate changes goes, for its own political purposes.

If I had my druthers, there would not only be a greater involvement of academics in the selection of the committee, but they also should be included within the ranks, of said same.

I hope we're not disappointed.

[Tyler-Durden]

i'm not holding my breath anymore for my CHANGE to come. Obama is a good talker, but i have to sit back and give him enough rope to hang himself. so far i am not impressed with his major decisions.

hopefully my doubts will fade over the course of the year, but so far i am disappointed with the handling of the car companies, the banks, and the torture investigations (lack of). and i don't like any of his appointees so far.

if he bombs, i am willing to run for office and fix everything. really. it's getting to the point where i feel like if we the working class want anything done right, we need to do it ourselves, and i'm willing to put up or shut up.

[dzent1]

Let me apply for VP, Tyler.

[muckraker3]

Let's face it. There are millions of Bloggers writing untold stories about the financial crimes of this nation and nothing has been done nor will it be. There is an elite in this country as entrenched as any European aristocracy ever was. Any boards or commisions will be full of these elites and no one else. The only question now is how long it will take the hyperinflation to hit as a result of Bernanke's printing press. We all know the burden of the price increases will be felt by the man in the street. As far as I am concerned our government and it's paymasters on Wall Street are running a full time crminal enterprise. Designed to keep citizens in debt just to meet living expenses and run wars of adventure throughout the world.

[dzent1]

Although the idea of a "commission" is pleasant, nothing can compare with several thousand prosecutions of the greedy bastards, dem or repug, responsible for the whole mess.

I have SERIOUS doubts that will EVER happen, especially when I remember the results of a variety of other "commissions" such as the 911 or Warren charades.

So I must be excused from holding my breath waiting for the rich, powerful and well-connected to face the same draconian penalties that the poor and middle class must deal with daily.

Our American Dream died hard. We worked ourselves half to death at low-paying and often dehumanizing jobs, lost almost all of it, and now own at least a million shares of bitterness.

To my elected officials: If you don't do the right thing and get to the bottom of this by naming names and jailing your Wall Street buddies, you will be voted out first chance we get. Get off their money train and get on board with the people who elected you.

[blueken]

When the rich and entitled would no longer hear the cries of the working class French, they cut off the heads of the nobility..­.......I'm just saying.

[Economike]

Incredibly I was just thinking the same thing as I read the above comment.