Christopher Silvester hears echoes of 1932 in the US Congressional investigation into the recent banking crisis and wonders whether things will be different this time
IT WAS HOUSE Speaker Nancy Pelosi, back in April 2009, who first called for a Congressional panel to investigate the causes of the global financial crisis. She wanted it to be modelled on the Pecora Commission. This was the name given to the investigation into the causes of the 1929 stock market crash by the US Senate committee on banking, housing and urban affairs, even though the investigation had been under way for several months before Ferdinand Pecora was appointed as the committee’s fourth and final counsel in February 1932. Nevertheless, he earnt himself the sobriquet of ‘The Hellhound of Wall Street’ for his dogged interrogation of Wall Street’s leading bankers.
The highlight of the Pecora Commission was his cross-examination of Charles Mitchell, the CEO of the City Bank of New York, which yielded revelations that were embarrassing in their sheer arrogance and prompted Mitchell to resign, but the lasting legacy was a raft of New Deal legislation designed to protect bank customers and shareholders.
Before Pelosi could appoint a panel from the House, a Senate investigation had already, in October 2008, hauled former Lehman Brothers CEO Dick Fuld before them as part of its investigation into the ‘regulatory mistakes and financial excesses’ that led to the collapse of Lehman Brothers. ‘We need to understand why Lehmans failed and who should be held accountable,’ said Henry Waxman, the Democrat chairing the House committee on oversight and government. ‘Taxpayers are being asked to pay $700 billion to bail out Wall Street. They are entitled to know who caused the meltdown and what reforms are needed.’
When Pelosi announced the formation of a ten-member Financial Crisis Inquiry Commission (FCIC) in July 2009, she appointed California state treasurer Phil Angelides as its chair. Could Angelides match the swagger and effectiveness of Ferdinand Pecora? How have these Congressional probes fared compared to Pecora’s, and how will they be perceived by future generations?
Fuld was generally held to have got the better of his interrogators on the House committee on oversight and banking, bamboozling them with technical information, although they scored direct hits with comments about his overall compensation. Like Mitchell, in 1932, Fuld didn’t seem to think that there was anything untoward about the massive compensation he had received at Lehman Brothers, even though Waxman charcaterised it as ‘unimaginable’ as far as the American public were concerned.
The basic salaries of Mitchell’s executives before bonuses, at $25,000, were ‘more than twice what Pecora made in his best year and 33 times the average annual income in 1929’, according to Pecora’s biographer Michael Perino.
Yet unlike Mitchell back in 1932, Fuld at least expressed contrition and a sense of shame at what had happened to his 158-year-old institution. ‘Not that anyone on this committee cares about this, but I wake up every single night wondering, “What could I have done differently?”… I have searched myself every single night. This is a pain that will stay with me for the rest of my life.’
But most agree that the Pecora moment of the current crisis came when Senator Carl Levin’s governmental affairs subcommittee on investigations took Goldman Sachs CEO Lloyd Blankfein to task in April 2010 over his company’s selling of mortgage products.
‘We’ve heard in earlier panels today example after example where Goldman was selling securities to people and then not telling them that they were taking and intended to maintain a short position against those same securities. I’m deeply troubled by that, and it’s made worse when your own employees believe that those securities are “junk” or “a piece of crap” or a “shitty deal”, words that emails show your employees believe about a number of those deals… How do you expect to deserve the trust of your clients, and is there not an inherent conflict here?’ Pecora adopted a similar attitude towards Mitchell.
In July 2010 Goldman Sachs was fined $550 million by the SEC — the largest penalty ever levied against a Wall Street firm — for selling collateralised debt obligations without disclosing that hedge-fund manager John Paulson had selected the CDOs and taken out a giant short position against them. Goldman conceded that this had been a ‘mistake’ and that marketing information for the CDOs had been misleading. Yet the final report of Senator Levin’s committee with regard to Goldman’s own allegedly ‘giant’ short position on the housing market has since been shown to have contained some key errors of interpretation.
It is natural for society at large to want to expose villains and bring them down to size, but the true villains will probably never be known. As Bethany McLean and Joe Nocera have written in All the Devils Are Here: ‘Much of what took place during the crisis was immoral, unjust, craven, delusional behavior — but it wasn’t criminal. The most clear-cut cases of corruption — the brokers who tricked people into bad mortgages, the Wall Street bankers who knowingly packaged bad mortgages — are in the shadows, cogs inside the wheels of firms like Ameriquest, New Century, Merrill Lynch and Goldman Sachs. We’ll probably never even learn most of those people’s names.’
Has the grandstanding of Congressional committees this time round led to major reforms? Well, yes and no. The Dodd-Frank Wall Street Reform and Consumer Protection Act was introduced into law in 2009, six months before the FCIC reported its findings. It included measures to enhance systemic financial stability and to ensure the orderly liquidation of ‘too big to fail’ banks. It reshuffled the pack of regulators. It put the ratings agencies under the regulatory purview of the SEC. It introduced regulation of hedge funds for the first time, though there are reporting exemptions for advisers managing less than $150 million in funds and family offices. It also established minimum standards for mortgages and abolished predatory lending.
Illustration by Susan Johnson
Subsequently, when the FCIC reported its findings in January of this year it split along party lines, with Democrats castigating the Federal Reserve under Alan Greenspan for enabling the crisis through 30 years of creeping deregulation. ‘What else could one expect on a highway where there were neither speed limits nor painted lines?’ the report asked. But a dissenting opinion from the Republicans on the panel concluded that ‘the commission’s majority used its extensive statutory investigative authority to seek only the facts that supported its initial assumptions’.
It isn’t that Congressional probes are no longer effective, it’s that government institutions have been quicker to act than they were post-1929 — after all, the necessary institutions barely existed back then — although it has to be said that the SEC and other agencies were found to be asleep at the wheel in the build-up to 2008. It’s also that the modern media, even including publications such as The New York Times and The Wall Street Journal, are infinitely less reverential towards Wall Street institutions than they were in the early Thirties.
Reporters are not only eager to break stories, they are also keen to sign book deals for mega-exposés. Wall Street’s greediest are probably more fearful of William D Cohan and Andrew Ross Sorkin than they are of Henry Waxman and Carl Levin. The gung-ho financial beat reporters are the true inheritors of the Pecora mantle.
Dodd-Frank may have put in place all sorts of new checks and balances on Wall Street’s penchant for excessive risk-taking and reined in the mortgage industry, but what about the quality of the regulators? In her book Chasing Goldman Sachs, Suzanne McGee made the pertinent point that ‘regulators need to be as aggressive and as knowledgeable as the brightest banker on Wall Street’. In the past, the heads of enforcement at the SEC have been lured to Goldman Sachs, JPMorgan Chase, Deutsche Bank, Credit Suisse and Morgan Stanley. Regulators ‘deserve to be rewarded lavishly for containing risk’, just as bankers and traders are ‘for running it in-house or helping their clients pass it on’.