Reviving Pecora's Ghost

We are hearing a lot about the need for a new "Pecora Commission," to conduct a comprehensive investigation of all the Wall Street abuses that led to the financial collapse and the general recession that has followed. House Speaker Nancy Pelosi has called for such a commission. A House floor vote on a bill sponsored by Rep. John Dingell is expected this week. The bill would establish an investigative panel with full subpoena powers. A companion bill, the Fraud Enforcement and Recovery Act, has bipartisan Senate sponsors, including Senators McCain and Grassley as well as several progressive Democrats. These efforts are an implicit rebuke to the Obama administration's economic team.

The original Pecora committee was not a commission, but the Senate Banking committee operating in investigative mode. Its chief counsel beginning in late 1932 was a former New York City prosecutor named Ferdinand Pecora. The committee began its work in March 1932, and Pecora became chief counsel later that year. It continued throughout 1933 into early 1934. The new Democratic chairman, Sen. Duncan Fletcher, who took office when the Democrats began the majority party after the 1932 election, kept Pecora in the job. Today, Fletcher is a footnote; Pecora is the name people remember. (As a former chief investigator of the Senate Banking Committee, I love to see Senate staffers make good.)

Pecora's work unearthed numerous conflicts of interest--a "preferred list" of investors (including President Coolidge and Supreme Court Justice Owen Roberts) kept by Morgan who had access to lucrative securities offerings not available to ordinary customers; the unsavory practice of bank presidents of borrowing money to short stocks, including sometimes their own; and the first wave "securitization," in which investment banks made sketchy loans and repackaged them as bonds for unsuspecting investors.

Pecora's work led to several resignations of bank executives, but more importantly in created a climate for reform legislation. Pecora's findings helped inform the Glass Steagall Act of 1933 separating investment banking from government-insured commercial banking, the Securities Act of 1933 and the Securities Exchange Act of 1934. Most importantly, it functioned as a public shaming of Wall Street. It thus helped change the political climate so that radical reforms could proceed. President Roosevelt encouraged Pecora's work and he encouraged the public indignation. Pecora was subsequently appointed by Roosevelt as a commissioner of the newly created SEC.

The Obama administration is proceeding very differently, and it has little enthusiasm for a Pecora Commission or for recriminations against financial elites. There has been no dramatic rupture with Wall Street. Rather, Obama's economic team is working hand in glove with the same investment banking firms and commercial banks that invented and underwrote the financial products and subterfuges that creates the collapse.

Two of Obama's top people, Lawrence Summers and Rahm Emanuel, did lucrative stints on Wall Street before returning to government (with an outlook substantially influenced by their time in the financial markets.) A third senior official, Treasury Secretary Tim Geithner, was a senior member of the Bush administrations financial crisis team, in his previous job as president of the Federal Reserve Bank of New York. So when Obama succeeded Bush, there was a seamless handoff from Geithner to.....Geithner.

Several other senior Obama economic officials were part of the Clinton economic team that was responsible for so much of the deregulation. Rather than channeling and affirming public indignation as Roosevelt did, the Obama sees populist backlash as a dangerous force to be damped down.

Although there have been some good individual hearings by particular committees on aspects of the collapse, neither of the key legislative committees in the House or Senate has shown much appetite for a Pecora-style investigation. Rather, investigative efforts have been diffused among the Congressional Oversight Panel chaired by Elizabeth Warren, which was created to oversee see the Treasury's disbursement of $700 billion in bailout money, chaired by Elizabeth Warren; the reports of the Special Inspector General; investigative work by New York Attorney General Andrew Cuomo; and some good hearings by subcommittees. All of the Democratic committee chairmen, however, are under subtle pressure from the White House not to embarrass the administration.

But by refusing a Roosevelt-scale break with Wall Street, the administration embarrasses itself. So we need a new Pecora committee, less to unearth new information than to focus public attention and build support for sweeping reform. Between the work of the Special Inspector General, and the work of other congressional committees, and investigative reports of the financial press, much of the core story has already been unearthed. Commercial and investment banks, their hedge fund counterparties, the mortgage companies and the corrupted credit rating agencies, perpetrated systematic frauds on the public using levels of speculative borrowing that any uncompromised regulator would have shut down. The fraud was central to the business model. William Black has coined the useful phrase, "control fraud," meaning that the fraud was systematic and emanated from the very top of the business.

With Larry Summers, Tim Geithner, and Ben Bernanke working closely with major investment bankers to restart the system of securitization, this time with the Federal Reserve's money and loan guarantees from the Treasury, there will be a titanic struggle over what kind of regulatory system to have going forward. Wall Street is resisting any form of regulation of hedge funds and private equity companies, and hopes that a voluntary system for registering derivatives such as credit default swaps will head off stronger medicine.

For a time, it appeared that the issue of regulation of the shadow banking system would be finessed by making the Federal Reserve the "systemic risk regulator." The Fed (the weakest regulatory agency of the lot) would decide what entities needed additional surveillance.) But that scheme, originally proposed by former Treasury Secretary Hank Paulson in 2006, no longer has much support in Congress. So all of the issues about what to regulate, how, and by whom, are still very much on the table--and a consensus still needs to be created. We need a latter day Pecora Committee to arouse the public and the back-benchers in Congress. Otherwise, the reform moment will pass, and we will revert to something very much like business as usual.

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

Comments

[hosshoss777]

News people are smiling this morning, stock markets have regained their this years losses, it's all sunshine in America again.
Before we thank Obama for saving the economy, let's remember that unemployment is still rising and home foreclosures are holding quite steady even while new homes are making a come back.
Wall Street and the Banks have been saved, yea!!, now as usual, the rest of us have to wait for some crumbs to fall off the table and blow out onto the street, Main Street, to start feeling better about things.

[billw8017]

Kuttner is right. If we merely rescue the loser banks, we will restore the conditions that produced the crash.

[donnyg1941]

Having looked at the comments above, I think it is fair to say that there is a great deal of misinformation, and naivete afloat in the land. As the co-producer of a forthcoming film about the origins of the economic meltdown, I would like to share several things we uncovered in our research. First, there was a concerted effort to dismantle the New Deal begun by free market ideologues, beginning in the 1930s. They were a fringe group until stagflation took place in the 1970s. With the aid of Right Wing millionaires, conservative think tanks were created to promote this ideology(think Heritage, Cato, etc.). When Reagan took office in 1981, the Heritage folks handed him a 3000 page playbook, to begin dismantling the Federal government, and deregulate the economy. Hundreds of their staff soon became Reagan officials. Thus was born the age of Financialization, and the rule of Wall Street over the rest of us, just as they did in the 1920s(think stock market crash). I am sorry to have to tell you that both parties have been on the take from Wall Street for the past 30 years, so there are no innocents. Don't believe me? Just visit us at www.Heist-themovie.com. Kuttner is correct in pointing out that Obama's economic team are part and parcel of the Wall Street takeover of our country. Did I forget to mention that we don't make anything here anymore except toxic bonds and bombs for our Air Force?

[research]

You Got it! See also "The Republican Noise Machine"

[writerroz]

I voted for President Obama too, volunteered and supported him all the way and I still believe he is very qualified and intelligent, but we were promised transparency, and it is some Liberals, certainly not all Republicans who are questioning the way Geithner, Summers and Rahm Emanuel are managing the recovery. I find this a bit worrisome, and I don't particularily like it that Summers, Geithner and Emanuel are focusing on the banking institutions remaining so powerful, since they helped lead us into this crisis. Transparency should allow investigating, what the bankers have done and still plan to do, since they were either making some whopping mistakes or down right tricky to be operating as they were. I think Pres. Obama can handle transparent examinations. Maybe it is the bankers and their pals Emanuel, Geithner & Summers who can't handle it. I say it can not hurt to examine with a fine toothed comb, every facet of their past actions along with their plans. All plans and actions of humans show up and prove out better under sun light or spot lights.

[DiogenesOfAlaska]

A new regulatory regime and a new approach to measuring and managing systemic risk? Yes. Counteracting favoritism, old-boys networks and nepotism? Yes. Dissolving privileges like tax havens? Yes. Learning the lessons from history? Yes. Enhancing transparency and disclosure? Yes.

But what's the use of endagering the process of making all of this more likely than it ever was for decades?

Reform? Yes. Miracles? No.

[belltor]

Don't you people get it.
Wall St. trumps Washington.

Politicians are bought and sold by the banking industry.
Didn't you hear Senator Durbin say this just days ago after his foreclosure amendment was defeated with the help of twelve democrats that are stooges for big banks.

[CitizenFarmer]

Rahm was an investment banker. Geithner's mentor was Robert Rubin. This is not a problem created by conservatives, it is a problem created by the Federal Reserve and its Igrun Governors.

[Hope Lives]

You know what bothers me so much about all this.... there are really frightened people out there. They need hope and confidence. They do not need this compete run from gloom, to fright, to anger, to meanness. It is not good for the country and it is not good for the people who are most frightened by it. You know the republicans are stuck in the mud of their own making. It is exactly this attitude that is bringing them down. They are so negative, they whine so much, they are so paranoid that they will never see their way out because it's just so pervasive. Is that what you want this blog to become? Look at the comments. There are beginning to be some that are really over the top... so over the top they are taking on a Glenn Beck, Rush Limbaugh, Sean Hannity quality. You don't want to create or bring out the most paranoid fringe left. It seems you want President Obama to go to the Senate floor and say, here is Paul Krugman, he will fix this. I'm beginning to want to see it just so the whining will stop, Krugman will have no idea where to start, as he fails he will get more confused and frantic and then everyone will let the President do his job..

[hosshoss777]

You chastise me for referring to us American Peasants and you finish off this discussion with this trust the authorities plea, get back to your place and believe speech.
Well sir, it's this simple, we see those that worked to cause this, whatever it is, being rewarded exponentially for their work, first by GW Bush, who was dutifully hated for it, right here on this blog site, and now by Barack Obama, who while the jury is still out on results, appears to be following the same path. Which is what this main article here is at least implying.
I tell you what, we will just have to agree to disagree, and I'm trying to be polite to you and not stoop to your subtle but yet clear didactic tactic of diminishing many others points of view. I won't apply troll or any other label to you and your "arguments"

[dianhow]

Hope lives YES Could not agree more We need lots. more like you. So many f crepe hangers - groaners- whiners / negative folks ready to throw our New President to the wolves. its so nasty..
It Reminds me of Cheney. out there undermining Obama and our country. Shame on him.
Beck - Hannity / Limbaugfh are not helping AMercia with all their lies and smears.
We are a nation with so many whiners- who can't even wait and see what Obama can do
over time. I'm logging off now- my B P is going up.

[dianhow]

THank you- Hope lives !

[jcheadsup]

Every time I hear about an investigation I have to laugh. Don’t you get it? There is nothing inherently honest about these people, nothing?

[Hope Lives]

I think they should reinstate Glass Stegall. But I think that the REPUBLICANS who started finding every way they could to steal from the American people would have found a way no matter what. It might not have collapsed the economy but, believe me they were out to enrich themselves and they would have found a way. A criminal is going to carry out his job and that is what happened. What I don't understand is this prolonged rant in the Huffington Post. You will not give President Obama the tiniest break on this. Why? What is the problem with Americans still wanting what belonged to us? We have been the most productive, well fed, well housed country in the world until the last few years. I don't understand why you insist that a bunch of robbers be allowed to rob us of our economic system forever. Do you think President Obama is doing this for himself? Do you think he is trying to profit? I guarantee you that a great majority of Americans are proud of the fact that we have been a great charity for the world and done well for our own citizens. What in the world do you have that is better, tried and true better? What is this hate for our economic system.. it was not Bush's, it was OURS.

[BlackSwan13]

Yea it is all the republicans. How clueless are you? There is no difference. Obama, Clinton, they all support the big banks. Your silly defense of your hero Obama only helps him stick it to the American people. You ask the most insane question , "Do you think President Obama is doing this for himself?". Do you think he is doing it for us? More power to you if you do.

[dianhow]

Yes Clinton caved to the GOP congress and signed that bill- - He was wrong ! But the DEms did not pass deregulation of banks & WAll st. Reagan / Bush / W / did that. That planted the seeds to this crisis. If not for that policy - this never could have become this massive- world wide meltdown. Even Greenspan said he was wrong about deregulati­ng.and ' unfettered freE markets' Free markets are fine- if they are also FAIR- WITH COMMON SENSE SAFE GUARDS AS THEY HAD BEFORE REAGAN.
It was all EXPLAINED on a CNBC show- called 'HOuse of Cards ' check it out.

[dianhow]

Swan Well - the GOP has along record on which to judge them It is a terrible one since Reagan. Obama has little record to judge him on - YET. SO yes I will give him a fair shake.
Any new President who inherited all this carp deserves that.much. Reasonable ?
by the way- We can not deny that GOP policy planted the seeds to this meltdown.
You can spin it any way you like- but it is the truth.

[ProgressiveVoice]

I voted for Obama but during the primary, not so much. Not that I liked Clinton. But I had to question anyone who so obviously wants to start at the top. It seems as if President Obama only ran for the IL senate in order to run for the US Senate, which he did only to run for the presidency. So, I didn't expect much.

Having said that, he does have a huge debt to the American people. There was such strong grass-roots activism on his behalf - the massive numbers of new voters of all ages that got out there, the volunteers going door-to-door, the record number of small donations to his campaign. It is up to us, the voters from both parties, to make sure we continue to speak out in such great numbers and DEMAND that politicians remember to whom they owe their positions. Congress reported record citizen involvement when Bush/Paulson said Wall Street needed $700B now, this minute. The people were already in activist mode, gearing up for the election. We need to retain that level of involvement. These are not partisan issues! The entire last 8 years need to be investigated - from every election during this period to the smallest regulation written by the least powerful gov't agency's least powerful regulator. Our whole history and entire system of government was perverted and subverted and we need to know how and we need to get it corrected.

[u2cancounterpoint]

Obama says he speak for us the common man and woman, the fight for middle ground. But there is a list.

Truth
Courage
Loyalty
Greed

Greed and party loyalty have been on the top for some time to the ruination of our ideals and way of life. And the courage we once prided ourselves with, turned out to be a pile of intestines because it lacked honor and fairness, it was guts without honor. It appears now with Obama there as been a shift. Real courage and truth have moved up the list, greed has moved down but loyalty and greed could even today end up trumping the best intentions.

[SwampeastMike]

True grit: "the courage we once prided ourselves with, turned out to be a pile of intestines because it lacked honor and fairness"

E X C E P T I O N A L

Thank you.

[u2cancounterpoint]

Your Welcome

[dianhow]

U can Well said. When I think of Bush / Cheney the words that come to mind are :
arrogance - Greed- lies. I hope a few years from now- all said and done that OBama has stopped the bleeding and we are on a better path. WE have to do our part. Be well informed. Read research - check facts- don't believe all you hear. Think clearly & critically .- not emotionally.
Voters put Bush in power for 8 long years. We bought all the lies- we bought into his fear mongering- the medialet us down as well- asked NO tough questions when
BUsh / Cheney lied us into war . Never was a connection between Sadaam & 9 / 11 . NONE.
of the 9 /11 terrorists were from Iraq !
15 of the 19 came from Saudi Arabia...o­ur '' friend '

[dianhow]

Yes Evil - greed- hate could still trump the best intentions. That's why we must look at the facts. Forget party loyality- I have. I am simply an AMercian - that' s where my loyality les-
not with a D or a R . Neither one deserves OUR loyalty unless they prove themselves.
So I will wait and see what develops over the next few years.

[dianhow]

Mr Kuttner.st­ated " MUCH of the deregulation problems were in the Clinton years ' NOT TRUE>
The policy of deregulation of bankers & Wall st began with Reagan- and without that policy, nothing that came AFTER would have occurred. Clinton did sign the GLass Steagal bill - which separated the line between investment banks & commercial banks. It was a bad move on his part. The GOP Congress was overwhelming in favor of it and had worked to push it along. Years later - Sen Phil Gramm ( D ) helped pushed through the ' Enron Loophole' and Gramm's wife made 900 K off that deal- as a LOBBYIST ! That deal caused Enron workers to lose all their 401 K savings.
That should have been illegal - but was NOT - because deregulation policy said
' It was perfectly legal ' I just want to keep ALL the facts on the table.

[rsprags]

First of all President Obama nor his team start this down turn in the economy and the cheating of the Banking system. The horse was already out of the barn yard; so, they have worked with the hand they have been dealt. Robert K. has written this same article multiple time here and in other media outlets; with all your knowledge take it to WH, Congress, and WS to those folks in a constructive manner.
All of this is coming together and some of these guys including the pundits, MSM on air and print, and, Pulitzer Prize.

[dianhow]

Exactly Obama's team is working with the hand they were dealt. Thanks

[WritusMaximus]

I agree. Obama's team is working hand-in-glove.

[johnsonc20]

Maybe its time for a new deal?

[OnBorrowedTime]

My gods, don't you have proofreaders? Setting aside the author's intentions and thoughts, which I have no quibble with, the article itself is so riddled with obvious typographical errors that it is truly hard to read.

For example:
para. 4: "...but more importantly in created a climate of..." [obviously "in" is a typo for "it"]p
para. 5: "...the same commercial banks that invented and underwrote the financial products and subterfuges that creates the collapse." [obviously, "creates" is a typo for "created"]
para. 6: "...member of the Bush administrations financial crisis team" ["administrations" an obvious typo for "administration's"]
para. 7: "...as Roosevelt did, the Obama sees populist backlash as..." ["the Obama" a careless half-edit possibly intended to be either just "Obama" or "the Obama administration"]

I could critique the substance of the article, but let's first get the spelling right.

[lordjin]

are you serious? It's a blog. An informal, sort of stream-of-­consciousn­ess style of article writing. I see type-o's in the nytimes too and find type-o's in published literature every now and again. It happens.

[dianhow]

AGreed- Typos ? WHO CARES ?

[rsprags]

Thank you for bringing clarity and being real.

[mtflyer]

GREAT ARTICLE!
I am SO happy to see the Pecora Committee concept getting some publicity. My mentor Lyndon Larouche has been pushing for this as well as other necessary measures to avoid complete meltdown of the system for quite a while. Fortunately there are more and more people listening,EXCEPT unfortunately the President! Summers and Geithner, et al, whether dupes or accomplices to the banksters on Wall Street, MUST GO-AND SOON! And Madoff needs to have a cell block full of these criminals to keep him company
Throughout the campaign, the mantra was to desert the failed policies of the previous misadminis­tration-wh­at has happened to that? Looks like we are still treading that same road to oblivion!

[dianhow]

Madoff and other WAll st greedy fat cats did all their dirty work way before Obama.
Bush / Cheney made it so so easy for them to screw us.

[lordjin]

But don't you see? Doing nothing to the dirty workers (except handing them boat-loads of tax dollars) and keeping them in key administration posts amounts to a continuation of that dirty work!

[lordjin]

"Throughout the campaign, the mantra was to desert the failed policies of the previous misadminis­tration-wh­at has happened to that?"

Good question. Strike that. Great question.

It strikes me as completely incongruous with many of the other big areas of his right-minded policies. I wonder how the die-hard Obamatons rationalize his financial team?

What's troubling about our dashing young president is his obvious connection with wall street... or should I say subservience to it.

[dianhow]

Obamtons are waiting to see what he does - over time. We will not RUSH to judgement.
Simply not fair. ANy one who got his mess dumped on him would need more time.
Are you kidding me. what did you expect in only 3 1/2 months ? Get real .