The Pecora Commission was named for Ferdinand Pecora, the fourth chief counsel of the investigation into the causes of the Wall Street Crash of 1929. The commission launched in 1932 by a majority Republican Senate and continued under Franklin Delano Roosevelt, turned out to be one of the highlights of FDR’s crusade to rebuild America’s wrecked economy during the Great Depression.
Launched under the aegis of Senate Banking Committee Chairman Peter Norbeck, with hearings beginning on April 11, 1932, it was criticized by Democrats and their supporters as an attempt by Republicans to appease the growing outcry of the angry American public, which was suffering through the ongoing hurt of the Depression.
Two chief counsels were fired for ineffectiveness, and a third resigned after the committee refused to hand him broad subpoena power. Thus, in January 1933, nine months later, Ferdinand Pecora, an assistant district attorney for New York County, was hired to write the final report. Discovering that the investigation was far from over, Pecora requested permission to hold an additional month of hearings.
Consequently, his expose of the National City Bank (now Citibank) made bold headlines and led to the bank president’s resignation. Democrats had won the majority in the Senate, and the new president, Franklin D. Roosevelt, urged the Democratic chairman of the Banking Committee, Senator Duncan U. Fletcher, to let Pecora pursue the investigation. In fact, Pecora led the commission so powerfully that his name became identified with it rather than the name of the committee chairman.
As in our times, following the crash, the U.S. economy had gone into a depression (now called a deep recession) and a large number of banks failed. The Pecora investigation sought to uncover (not cover up) the causes of the financial collapse, a notable difference. Chief Counsel Pecora was assailed as today’s Neil Barofsky, the former Special Inspector General in Charge of Oversight, who was investigating fraud opportunities in the Troubled Assets Relief Program (TARP). Yet, Barofsky fearlessly named Treasury Secretary Timothy Geithner and his staff for obstructing inquiry into TARP. In his time, Pecora, not beholden to crony connections scoured many high-profiled witnesses as well, including some of the country’s most influential bankers and stockbrokers.
In doing so, Pecora uncovered a wide range of abusive practices on the part of banks and bank affiliates. These included, as today, conflicts of interest, such as the underwriting of unsound securities in order to pay off bad bank loans, as well as “pool operations” to support the price of bank stocks. The Pecora hearings galvanized broad public support for new banking and securities laws.
As a result of the Pecora Commission’s findings, the United States Congress passed the historic Glass-Steagall Banking Act of 1933 that separated commercial and investment banking, fortifying the foundation of sound banking with a strong firewall. It lasted until 2000, when President Clinton signed Glass-Steagall out of existence and banking into oncoming chaos.
Also, FDR’s Securities Act of 1933 set penalties for filing false information about stock offerings while the Securities Exchange Act of 1934 provided for the Securities Exchange Commission (SEC) to regulate the stock exchanges. In our time, its power has been weakened by insufficient regulators, and revolving door issues of regulators going from the SEC to banks and back. This applies to rating agencies as well.
Even though the Glass-Steagall Act was the bulwark legislation protecting depositors from having their savings comingled with bank investments, over the years its powers were continually cut then totally removed. And Republicans, from the Reagan era to this day have labeled FDR’s regulation of banks as socialism. The results have been disastrous, as in the current MF Global loss of $1.6 billion in investor funds comingled by CEO Jon Corzine with those of MF Global funds.
Corzine, a former Goldman Sachs CEO, former New Jersey Governor and former US Senator, is now pleading total incompetence of his staff, rather than admitting his own poor decision to make a bad market bet of $6 billion plus, which included investor’s money. Unfortunately, he’ll probably walk away without a jail sentence. That’s how weak our regulatory system is.
After the Glass-Steagall Act, FDR created the Federal Deposit Insurance Corporation to protect savings deposits up to $10,000. Today, that figures is $250,000. In 2010 (2010 -11-18)[update], the FDIC insured deposits at 7,723 institutions. The FDIC also examines and supervises certain financial institutions for safety and soundness, performs certain consumer-protection functions, and manages banks in receiverships (failed banks). The FDIC receives no congressional appropriations—it is funded by premiums that banks and thrift institutions pay for deposit insurance coverage and from earnings on investments in U.S. Treasury securities.
Nevertheless, under GHW Bush, it was subject to vast corruption, the Savings and Loan Scandal, which cost the country at least $150 billion to clean up in the late 1980s. Again, captured oversight was at the heart of it. The Pecora Commission had been long gone and missed.
The latter’s Banking Committee’s hearings ended on May 4, 1934, after which Pecora had been appointed as one of the first commissioners of the SEC. Pecora published a memoir which should be a handbook for today’s regulatory agencies, including the SEC, CTC, ratings agencies, etc. Pecora wrote: “Bitterly hostile was Wall Street to the enactment of the regulatory legislation.” As to disclosure rules, Pecora wrote, “Had there been full disclosure of what was being done in furtherance of these schemes, they could not have survived the fierce light of publicity and criticism. Legal chicanery and pitch darkness were the bankers’ stoutest allies.”
Those words of wisdom are truer today than ever. And every time we let banks get off with just a fine for a crime, we encourage more of the same. It becomes the cost of doing business. Every time, a whistleblower or ratings agent is made or paid to look the other way, to exaggerate findings one way or the other, the system regresses back to the chaotic corruption of the Great Depression, helping to create still another one. Every time, regulators go through the revolving door of government to banking to government, justice suffers. Every time, some deadly new derivative is introduced without proper transparency, millions, billions can be lost on its shadowy nature. And the economy takes still another step backwards.
Every time promises are made to abolish these abuses and punish their purveyors and little or nothing is done, as with Corzine, we approach a financial Armageddon. Pecora must be rolling over in his grave. Because the issue of our present day is that “oversight has been captured;” in one way or another “the capture of oversight” corrupts further attempts to correct corruption. In the short run it makes some rich. In the long run, it will bankrupt the system. And therefore, there needs to be a constant weeding out of the bad apples before rotten ideas infect others. And I repeat, the perpetrators of corruption need to go to jail for their actions.
In calling for a Real Pecora Commission for today, Robert Kutner at Huffington Post lists practically an entire alphabet of problems and proposed changes you can scan. He also suggests the commission be imbued “with the power of the subpoena . . . his staff would descend upon a banker or broker, and go through its records, file drawer by file drawer, page by page, selecting and Photostatting documents. Staff lawyers and accountants would assemble this material to reconstruct motivations, discrepancies, delinquencies, and frauds involved. They should draw 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.” It worked for Pecora. It can work for us with the right people.
He also suggests names of senior people (both in experience and age), including Paul Sarbanes, Harvey Goldschmidt, Arthur Levitt, Jr., and former Supreme Court Justice Sandra Day O’Conner.
I would prefer some younger names mixed in as well, like Barofsky, Simon Johnson, even Max Keiser. Then, turn them loose and have them make sure not to settle for financial settlements. Again, people should go to jail for their financial crimes, like Bernie Madoff. Then perhaps we could hope to see some improvement. A president certainly should not, as Obama did, appoint a treasury secretary like Tim Geithner, the former New York Fed Bank capo; or have as a senior adviser like Larry Summers, also an ex-Goldman chief, or even Paul Volcker, former head of the Fed, which is an illegal organization itself. These appointments beg for conflicts of interest.
In Volcker’s case, remember The Fed is not part of the U.S. government, but controls and prints the money supply and interest rates, thanks to the illegal Federal Reserve Act, written in secret in 1913 by Paul Warburg, a Rothschild representative, with the Rockefellers, Morgans and other major bankers. Thus, the Fed is a private investment bank by design and its board members are all private stockholders, mostly bankers. Their first allegiance is not to a sound economy, as the former head Allan Greenspan proved, but to a “free market,” non-regulated casino banking. Using one of these characters is literally putting the “fox in the henhouse.” Trust experience; they have eaten us out of house and home.
Whoever our gatekeepers are and will be, they need to have fire in them, self-assurance, the knowledge and will to be champions for justice. As importantly, they need to be backed by a president with the same qualities. We have seen enough of the compromisers from top to bottom. And that should last us for a lifetime. In short, they should be like Ferdinand Pecora and his boss, FDR, who coincidentally was accused of being “a socialist,” and preaching “socialism,” when what he was doing was spending to create jobs, like the CCC; building infrastructure like the Rural Electrification Administration that provided electricity to rural areas; and most of all, making sure the banks stayed on the level.
Jerry Mazza is a freelance writer and life-long resident of New York City. An EBook version of his book of poems “State Of Shock,” on 9/11 and its after effects is now available at Amazon.com and Barnesandnoble.com. He has also written hundreds of articles on politics and government as Associate Editor of Intrepid Report (formerly Online Journal). Reach him at email@example.com.