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 historian 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 Securities and Exchange Commission.
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. None have hauled miscreants before the committee and used subpoena power to expose the extent of such malfeasance as the extraordinary percentage of mortgages that revealed signs of fraud on the face of the loan but 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 deregulatory 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 wrongdoers 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.