The 1930s Pecora Commission
On March 4, 1932 (one year to the day before FDR took office), a majority-Republican Senate Banking, Housing, and Urban Affairs Committee established it to investigate the causes of the 1929 crash. It was little more than a fig leaf until Democrats took over, appointed Ferdinand Pecora as special counsel, and made a real effort for banking and regulatory reform.
Straightaway, Pecora looked into Wall Street’s seamy underside by placing powerful bankers in the dock, holding them accountable for their actions, and doing through hearings what would have been impossible in open court given their ability to “buy” justice.
He confronted Wall Street’s biggest names: Richard Whitney, president of the New York Stock Exchange; noted investment bankers, including Thomas Lamont, Otto Kahn, Charles E. Mitchell, Albert Wiggin, and JP Morgan, Jr., scion of the man who dominated the Street for decades as its boss and de facto Fed chairman before the central bank was established; and market speculators like Arthur Cutten.
He got Morgan to admit that he and his 20 partners paid no income taxes in 1931 and 1932. Neither did its Philadelphia operation, Drexel and Co., in the same years and way underpaid them in previous ones. It made headlines, was stunning, and galvanized critics to demand reform.
Pecora went further. He questioned Morgan and others on various matters, including sweetheart deals for political figures and insider ones for Wall Street cronies, similar to today’s shenanigans but not on the same scale, and under a president then who cared once Roosevelt took office. He directed “pitiless publicity” on Street corruption, what they easily got away with under Republicans.
Pecora was a former New York district attorney, an Eliot Spitzer-type with a reputation for toughness and fearlessness, but one serving at the behest of the President. He established straightaway that some of Wall Street’s most powerful lied to their shareholders, manipulated stocks to their advantage, and profited hugely through malfeasance.
Roosevelt encouraged him in his March 4, 1933 inaugural address saying: “there must be a strict supervision of all banking and credits and investments; there must be an end to speculation with other people’s money, and there must be provision for an adequate but sound currency.”
Roosevelt also said “the rulers of the exchange of mankind’s goods have failed, through their own stubbornness and their own incompetence, have admitted their failure, and abdicated. Practices of the unscrupulous money changers stand indicted in the court of public opinion, rejected by the hearts and minds of men…. They know only the rules of a generation of self-seekers. They have no vision, and when there is no vision the people perish. The money changers have fled their high seats in the temple of our civilization. We must now restore that temple to the ancient truths. The measure of the restoration lies in the extent to which we apply social values more noble than mere monetary profit.”
Imagine Obama saying this, followed by strong policies for enforcement under Roosevelt-style officials. Men like Pecora who asked tough questions and demanded answers, including on the House of Morgan’s operations, something unimaginable today under any leadership. Morgan’s counsel, John W. Davis, called Pecora’s questions outrageous, but Morgan had to answer in detail enough to shake the “”secret government’s” foundations.
Pecora’s staff examined company records that revealed financial manipulations among the Street’s powerful to reap enormous profits – enough for Morgan to gain control of most US industry, buy politicians and diplomats, and effectively control the most powerful banks in the country.
Years later in his book, Wall Street Under Fire, Pecora wrote:
“Undoubtedly, this small group of highly placed financiers, controlling the very springs of economic activity, holds more real power than any similar group in the United States.”
Morgan called it performing a “service” and exercising no more control than through “argument and persuasion.”
His managing partner, Thomas Lamont, told the committee that the firm only offered advice that clients could accept or reject. Pecora learned otherwise as he peeled away the layers of company power and influence. He discovered “preferred clients” and friends of the bank lists in two tiers – special allies, operatives, and cronies and a “fishing list” from which new ones were recruited. In total, it showed Morgan was more powerful than Washington – that the firm effectively controlled a network of companies that made US financial policy for over three decades plus leading politicians and much of the federal bench.
Pecora discovered what’s as true today – that a select group of giant banks run things. They set policy, rig the game to their advantage, buy politicians the way Morgan did, and pretty much run the country and the world.
Again Pecora from his book: Morgan’s power was “a stark fact. It was a great stream that was fed by many sources; by its deposits, by its loans, by its promotions, by its directorships, by its pre-eminent position as investment bankers, by its control of holding companies which, in turn, controlled scores of subsidiaries, and by its silken bonds of gratitude in which it skillfully enmeshed the chosen ranks of the ‘preferred lists.’ It reached into every corner of the nation and penetrated in public, as well as business affairs. The problems raised by such an institution go far beyond banking regulation in the narrow sense. It might be a formidable rival to the government itself.”
Pecora proceeded from Morgan to others, powerful bankers in their own right like Kuhn, Loeb’s Otto Kahn. Roosevelt championed the hearings and from them came legislative reforms, the kinds so desperately needed now but nowhere in sight by an administration totally subservient to money and power and thoroughly corrupted by them – after a scant three months in office.
Congressional Oversight Panel (COP) Calls for Sweeping Changes
Its head, Elizabeth Warren, called on the Treasury to get tough on TARP recipients, including:
- Questioning the “dangers inherent” in its strategy; the idea of “open-ended subsidies (to giant institutions) without adequately weighing potential pitfalls”;
- Acknowledging that it has no historical precedent and faint hope of succeeding;
- Leveraging the $700 billion in TARP funds well beyond what Congress appropriated – to an amount exceeding $4 trillion and smacking of high-level corruption;
- Firing top executives of failed institutions like Citigroup, Bank of America and AIG: “the very notion that anyone would infuse money into a financially troubled entity without demanding [management] changes is preposterous”;
- Shareholders to be wiped out: “it is crucial [for this] to happen”;
- Choosing among three alternatives for insolvent banks: “liquidation, receivership, or subsidization”. Geithner’s plan is none of the above and essentially unworkable. It fails to acknowledge the decline’s depth and degree to which troubled assets low valuations accurately reflect their worth;
- If the downturn gets greater than forecast, “very different actions” will be needed “to restore financial stability.”