Time for a Grand Inquest on the Financial Crisis

Treasury Secretary Tim Geithner has called for "sweeping regulation" of the financial community, beginning a discussion of how we restructure the banking system -- in and out of the shadows -- as we emerge from what Robert Kuttner calls the Great Collapse. Literally trillions have already been committed in loans, guarantees, swaps, direct equity to stave off a complete financial collapse, even as the real economy declines.

But before we decide on the salvation, we need a public probe of the fall. What caused the Great Collapse? We need a grand inquest -- either a special congressional committee or an independent commission like the 9/11 Commission armed with subpoena power -- to expose misbegotten policies, malpractices, and mistaken ideas that allowed the wizards of Wall Street to transport us over the cliff.

In the 1930s, the dramatic hearings by the Senate Banking and Currency Committee became known as the Pecora Commission, after Ferdinand Pecora, the fierce former assistant prosecutor from New York who served as general counsel. Born in Sicily, the son of an immigrant cobbler, Pecora was a crusader. As counsel, he hauled the barons of Wall Street before the committee, and took them apart with often withering cross examination. By the time Pecora was done, the hearings had captivated the country's attention and, as Ron Chernow reports, Senator Burton Wheeler of Montana was comparing the bankers to Al Capone and the public began calling them "banksters," rhyming with gangsters.

The Senate committee unearthed the assorted frauds, the abuses, the ponzi schemes that led to the 1929 crash. And in doing so it provided both the case for reform and built a public demand in support of it.

The hearings came under fierce criticism. Wall Street bankers charged that they were "undermining confidence." Some Senators scorned them as running a "circus," and in fact, some of the excesses deserved the tag.

Yet, Pecora was deadly serious. By the time the hearings ended in May 1934, they had generated 12,000 printed pages of testimony -- providing the source that historians have mined ever since to fuel their descriptions of the era. And they paved the way for reform: the Securities Act of 1933, the Glass-Steagall Act of 1933, and the Securities Exchange Act of 1934. In recognition, Roosevelt named Pecora to be a commissioner of the new SEC.

We need the same fearless investigation now. As Elizabeth Warren, the brilliant head of the congressional oversight panel on the bank bailout has noted, no one has exposed the record of pervasive fraud and misdealing that was at the base of the housing bubble. Her panel doesn't have subpoena power, and has no little difficulty getting documents from the Treasury. There have been scattered congressional hearings on different aspects of the folly, some quite good. But none have laid out a systematic record of what went wrong, hauling miscreants before the committee, using subpoena power to expose the extent of the malfeasance -- for example, the extraordinary percentage of mortgages that revealed signs of fraud on the face of the loan, and yet were marketed as sound by ratings agencies, banks and hedge funds that never looked at the underlying documents.

A broad, public investigation is also vital to help provide citizens with a clear narrative of what went wrong. It will counter the pernicious efforts on the right to cook up the notion that a powerful poverty lobby created the crisis by forcing hapless banks to make loans to the unqualified because of the Community Reinvestment Act.

There are many reasons for Congress to duck an inquest. An honest inquiry will show that the de-regulatory follies took place under presidencies of both parties -- Reagan, the two Bushes, but Clinton also. The inquest would undoubtedly embarrass some of the former Clinton appointees now at the center of the Obama economic team, like Lawrence Summers. Many of the legislators who voted for deregulation, including dismantling the Glass-Stegall Act, would, no doubt, prefer that the past remain in the mists.

But serious reform of the banks -- and that restructuring that is vital -- will take new laws, new authority, and most likely more money from the government. That will require public support that can only be engendered by a clear view of what went wrong, by a sense that the most extreme wrong-doers are being brought to justice. Exposing the regulatory failures, the legal changes, the ideological blindness, the institutional structures, and the compensation packages that propelled the reckless gambling that eventually brought down the house is vital if we are to understand what must be changed and can mandate change to it.

If the banks are revived without the inquest, then Congress will find it hard to drive the restructuring and re-regulation essential to a new, more balanced economy. This will take courage -- and a modern day Ferdinand Pecora with the necessary fire in his stomach.

Comments

[kemo5]

I'm all for it. Its time the white collar crimes are treated with the severity they deserve. They effect so many more people, that common sense warrants the investigation. I want prosecutions to spread fear to future white collar criminals.

[phasechange]

That's all well and good, but don't dignify the 9/11 commission as an example, it's probably the worst investigation ever foisted upon the American people. Various people asked for Spitzer to handle a reinvestigation there as well, but there's no way an investigation will get behind such a complex operation in either matter.

[Oldchef]

It's been suggested here that Elliot Spitzer be appointed as a Special Prosecutor to investigate this scandal, and I can't think of a better candidate. His bedroom exploits have nothing to do with his brilliance as a prosecutor. He has the skills and the determination needed.

[thoughtmuse]

There are many of us who feel an inquest is needed to uncover how this whole situation came about and it's an idea that's been brought up here and there by people in a position to be heard. New legislation will be effective only if we're clear on what is being fixed. But I'm not clear about how much push is necessary to get our lawmakers focused on this and I'm skeptical about their being open to the idea.... but I will dutifully write to our lawmakers to ask them to consider the proposal.

[FloresdelaHoz]

Where is Spitzer when we need him? Geithner must go. Krugman has the confidence of Left Center and moderate right. Obama must be decisive. Geithner and Summers are Wall Street good ole boys. No more taxpayer cash for trash to save shareholders and bond holders of the big five banks. No more bailout of the top 1%.

Cuomo should have had 6 indictments of Wall Street bigwigs by now.

[dotsthefunist]

If we the people are the parents of the government and capitalism we will have to make it clean it's room from time to time.From history we should learn what works or not and our " children " government & capitalism have acted like spoiled foolish babies for a while.

[hark]

Like the march to war in Iraq, this massive Wall Street and banking fraud is simply too big, too wide, and too deep to expose. Those involved, virtually everyone with money and/or power, will never let this come to pass. It is a failure of our entire system, public and private alike. Our nation has been replaced by a gigantic seedpod replica, and there is nothing left to salvage. We'll just trundle on as this new, transformed beast into some alternative future, and never look back. We just aren't us anymore.

[ArchAngel]

Spring 2003 Fear Mongering - WMDS

Spring 2009 Fear Mongering - Toxic Assets

[dadw5boys]

The Community Reinvestment Act came about when cities were begging the Congress for help.

People were leaving the cities because of high taxes and high property cost and crime.

The Community Reinvestment Act was ONLY meant to save neighborhoods from abandoned homes and get some remodeled.

[dadw5boys]

INCASE YOU MISSED IT THE FBI IS COVERED UP IN PROSECUTIONS AND INVESTIGATIONS.

THE FBI UNDER BUSH LIMITED THEIR INVESTIGATION TO FRAUD OVER $280,000.00 BECAUSE THERE WERE SO MANY !!!!!

[progressiveevangelic]

great comments. You need to write a column for this blog. They could use you. don't they have an option for this tyep of Journalism?

[Sundialsvc4]

I think that it is quite reasonable, even under existing regulation, to move forward with the declaration that Citibank, Bank of America, Wells Fargo, and SunTrust are all ... insolvent.

I know that this is -precisely- what these "mega banks" do not want to hear, but it's actually not the end of the world for them. What this will force is a complete forensic assessment of what assets and liabilities they actually DO have. There are many billions of "dollars," on both sides of the balance sheet, that have utterly no basis in fact. We cannot continue, if we continue "pretending."

These bankers beg us to call their worthless paper "toxic assets" or any other sort of euphemism. And, of course, to buy them. Well, we'll guarantee the demand-depositors. The bank will continue to operate while in receivership, and in time it will move back out of receivership. But, no more pretenses that "this is just a temporary setback," or that "this is the way things must be."

[cadawa]

Amen.
"Reform" and regulation without investigation is putting lipstick on a pig.
Making more laws that you have no intention of enforcing will fix nothing.

[humboltddude]

It's time to open up and disclose all those secret swiss bank accounts.That's where all the bodies are buried.

[bblinky]

Will Obama treat this like Bush treated the idea of a 9/11 commission?

[rabrophy]

A good idea, but any real inquest would show that Congress is for sale , and most of Obama's finical team were up to their necks in the Wall Street flim-flam that got us here.

The only way we will get to the bottom of this AND make sure it doesn't happen again is public financing of elections, but that is never going to happen. So if we do have some sort of inquest it will just be smoke - sorry.

[Pablo175]

The ball is in Obama's, Frank's and Dodd's courts.

What are they waiting for?