Financial Inquiries and the Pecora Legacy

6 May 2009
TNI
Kate Phillips
The New York Times
Quotes Howard Wachtel

With the House on Wednesday joining the Senate in seeking an ambitious inquiry into the financial underpinnings that caused the nation’s economic downturn, the name Ferdinand Pecora may well become as familiar as it was during the 1930s.

Maybe not just yet. But various lawmakers and researchers have been invoking his work as the investigative counsel to a Senate committee that examined the actions of major banks in the stock market crash of 1929.

Quotes Howard Wachtel

With the House on Wednesday joining the Senate in seeking an ambitious inquiry into the financial underpinnings that caused the nation’s economic downturn, the name Ferdinand Pecora may well become as familiar as it was during the 1930s.

Maybe not just yet. But various lawmakers and researchers have been invoking his work as the investigative counsel to a Senate committee that examined the actions of major banks in the stock market crash of 1929. And the inquiry led to significant reforms on Wall Street, many of which exist to this day.

Historical accounts of the Pecora hearings provide a reading experience that is as page-turning as a suspense novel. Mr. Pecora, a former New York prosecutor, took a rather moribund inquiry and ran away with it. With Franklin D. Roosevelt’s election to the presidency, Pecora was given a green light in 1933 to make abundant use of a committee’s subpoena power. He summoned the nation’s most respected bankers before the panel and shredded their reputations in public. Replete with his blistering cross-examinations of the titans of Wall Street, the hearings did indeed capture huge headlines in the early 1930s – including those of The New York Times — and perhaps were among the first of congressional inquiries broadcast in newsreels to the nation.

“The Pecora commission created villains essentially,” said Donald Ritchie, associate historian for the Senate. “This riveted the public because it was daily headlines for months and what otherwise would be seen as fairly arcane practices, Pecora was able to dramatize it very much.”

(Mr. Ritchie wrote “The Pecora Wall Street Expose,” in the volumes of “Congress Investigates: 1792-1974: A Documented History (1975),” by Arthur M. Schlesinger, Jr., and Roger Bruns.)

Pecora unmasked hidden bonuses and exorbitant salaries banking leaders had received; uncovered unpaid taxes and wrongdoing. (It was noted in some accounts that Time magazine coined the phrase “bankster” back then.)

Modern-day proponents of an independent commission have been quick to say their intent is not to create an antagonistic, adversarial atmosphere, especially now that banks and other Wall Street firms have begun resisting further government intervention.

But, just as Mr. Ritchie described a national mood that was despairing and frightened during the Depression, some members of Congress these days express worry that Americans remain confused and uncertain about the economic downturn that has rocked across the mortgage industry and securities markets in recent months.

Representative John Larson, the chairman of the House Democratic caucus who is from Connecticut, has been among those advocating an independent commission that would conduct a long look-back and make recommendations across the spectrum of markets and financial institutions. (The House approved an independent panel, included in a broader legislative proposal, by a vote of 367 to 59 on Wednesday afternoon.)

In an interview, Mr. Larson suggested that not only the public, but members of Congress, still need to have the complex factors that caused the financial collapse “demystified.”

“I really believe the most important thing is that we level with the American people, that we have a narrative that’s explained to them,” Mr. Larson said. An independent panel, armed with subpoena power, would, he added in paraphrasing Pecora, “shed a fierce light of public scrutiny on the dark markets, on the schemes, on the negligence and the unintended consequences that have been perpetrated on our financial systems.”

(One historical reference quotes Pecora this way: “Had there been full disclosure of what was being done in furtherance of these schemes, they could not long have survived the fierce light of publicity and criticism. Legal chicanery and pitch darkness were the banker’s stoutest allies.”)

Grilling the Bankers

Mr. Ritchie recalled the origins of the Depression-era panel and the near happenstance way in which Pecora grabbed the reins.

The investigative arm of the Senate committee had been established by Republicans when Herbert Hoover was still president, because he was convinced that Democratic financiers were short-selling securities, Mr. Ritchie said. “About the only thing they proved was that Democrats weren’t responsible for the financial collapse,” he added.

As the Democrats and FDR were coming into power, Mr. Pecora was hired to write a final report. Instead, “he asked if he could have one more month and they gave him a couple of subpoenas,” Mr. Ritchie said.

In another book, “From the Crash to the Blitz,” Cabell Phillips, (no relation) a reporter for The New York Times for decades who is now deceased, described Pecora’s grasp of subpoena authority, saying that he dispatched fellow staff and investigators and “sent them coursing through Wall Street and its outposts like a pack of bloodhounds.”

Their digging spawned hearings that became a spectacle dreaded by Wall Street and consumed voraciously by the public. In a segment last week on the Bill Moyers Journal on PBS, Michael Perino, a law professor at St. John’s University who is writing a new biography of the prosecutor and judge, said: “Pecora was a smart lawyer and he knew that the game plan that he had to follow was to, quite frankly, whip up some popular outrage. If he could get people angry enough, if he could get the clamor for reform strong enough — once that anger was in place, once that clamor for reform was in place — Congress essentially fell in line.”

When Pecora assumed the lead role at hearings resumed in February 1933, the first witness called was Charles E. Mitchell, head of the National City Bank, who, as Mr. Phillips wrote, “survived the crash but not Pecora.”

Various accounts credit Pecora for becoming well-versed in details, which he used to his advantage in those cross-examinations. Mr. Mitchell’s misdeeds included not only not paying income tax, but also selling to his wife and repurchasing shares of stock without any money changing hands so that he could claim losses. (He was indicted but ultimately eluded conviction, according to reports, and paid back taxes.)

The story most retold from that era, and one drawing public ridicule far and wide, was the treatment afforded J.P. Morgan Jr., the son of the mighty Wall Street titan. In an Op-Ed article titled “Where Is Our Ferdinand Pecora?” Ron Chernow, the historian and author of “The House of Morgan,” described a scene that lives on in pictorial infamy to this day:

Such was the furor over the Morgan testimony that Senator Carter Glass of Virginia shook his head and sighed, “We are having a circus, and the only things lacking now are peanuts and colored lemonade.” Seizing on the comment, a press agent for the Ringling Brothers Circus took advantage of a pause in the hearings to pop Lya Graf, a midget in a blue satin dress, on the lap of the portly and surprised J. P. Morgan Jr. The committee chairman, Senator Duncan Fletcher of Florida, pleaded with newspapers not to print the pictures, which only made them rush to do so.

The photo of Morgan with a circus dwarf planted on his lap became the signature shot of the hearings, emblematic of Wall Street’s fallen state. An embittered J. P. Morgan Jr. said Pecora had “the manners of a prosecuting attorney who is trying to convict a horse thief.”

Another account by Howard M. Wachtel in “Street of Dreams — Boulevard of Broken Hearts,” described the event as a public relations stunt designed to “humanize” Morgan. The smallest woman on the lap of the world’s richest man, or so it was described. (She was 27-inches tall, her real name was Lia Schwarz, and after returning to her homeland of Germany, she apparently was sent to Auschwitz and died.)

An article from that period in which The Times profiled Mr. Pecora, an Italian immigrant, was titled: “The Man Who Will Question Morgan.”

Pecora’s Legacy

Mr. Ritchie ranked the Pecora committee as one of the most effective among congressional inquiries, second perhaps to the Watergate hearings “in terms of its impact on the nation.” The Pecora committee led to widespread regulatory and legislative changes as the nation’s leaders worked to rescue the economy and prevent another Depression. Hallmark legislation included major provisions in the Glass-Steagall Act, which imposed a wall between the investment and commercial banking industries, as well as the Securities Exchange Act.

Tax authorities also credit Pecora’s investigation for major reforms.

As for Mr. Pecora, Mr. Richie noted that FDR (who had labeled the Wall Street villains ”unscrupulous money changers” in his inaugural address) decided to name Joseph P. Kennedy as the first S.E.C. chairman, partly to “mute some of Wall Street’s fear and anger” in the wake of the Senate hearings. Mr. Pecora also was named a member of the Securities and Exchange Commission, but left after a brief period to become a state Supreme Court justice in New York.

Back to the Future

The proposals now before Congress would create a 10-member commission, independent of lawmakers but one that would report back its findings and offer recommendations. The prevailing plans would give commission members subpoena powers. (Some House Republicans balked today at a proposed makeup that would leave their party with one fewer member than the Democrats, but the final makeup has yet to be reconciled with the Senate.)

The House vote, with 367 approving passage of an overall measure, included 117 Republicans. (Once again on what could be considered a populist provision, Representative Eric Cantor, the minority whip, voted for approval, splitting from Minority Leader John Boehner, who opposed it.)

Mr. Larson said that he hoped that the $5 million budget proposed for a new panel, allowing for the hiring of staff and experts, would make it “much better armed than Pecora was, but perhaps with as much zeal.”

Beyond that, Mr. Larson and others say they recognize times are different, with the global ramifications of the downturn evident. The congressional proposals, including one sponsored by Senators Kent Conrad, Democrat of North Dakota, and Johnny Isakson, Republican of Georgia, are also fashioned after the more recent Sept. 11 Commission.

Representative Darrell Issa, Republican of California, noted how roles have been reversed since the 9/11 panel was established. Now, Democrats hold the majorities and some Republicans seem eager for an independent review of the factors leading to the downturn. Mr. Issa has been a leading proponent of a commission for months. In an interview, he said such a panel could act as a “slowdown” against legislative proposals that may be rushed into enactment in the wake of the economic collapse.

Even if, as Mr. Larson suggested, a commission would “augment not supplant,” legislation being pursued by lawmakers like Representative Barney Frank of Massachusetts, chairman of the House Financial Services Committee, Mr. Issa and others hope a commission would entertain alternative viewpoints.

“The commission is the best reason to force a slowdown of those things which are not emergency measures,” Mr. Issa argued.

Independence and Relevance

The Congressional proposals have shifted toward a panel that would exclude lawmakers, in part because so many members have been instrumental in drafting or undoing legislation related to the financial world. (For example, the Glass-Steagall Act was repealed in the late 1990s, leading some to wonder whether its absence contributed to the recent calamities.)

Experts also draw on the experiences of past commissions, describing those that were divorced from partisan pressures as being the most effective.

Paul C. Light, a New York University professor and scholar of government, has been studying the most effective commissions created since World War II as a project with the university and the Governance Institute. “The ones that have emerged from our analysis as having the most significant impact on public opinion, legislative and government operations are the ones with truly a mandate, a very visible leader with impeccable credentials, a very thorough, pragmatic, almost intense perseverance to get to every last angle on the problem,” Mr. Light said.

He cited the Social Security Commission, led by Alan Greenspan in the early 1980s, as being among the most successful in seeing congressional reforms enacted. In terms of a panel to investigate the financial collapse, Mr. Light agreed that any such inquiry should be removed from officialdom. “Everybody is wearing a bullseye on Capitol Hill,” he said. “I think you’ve just got to move it away from Congress and you’ve got to move it away from the president as well.” Otherwise, he laughed, “the commission can become a recurring late-night joke.”

As for a more recent model, Mr. Light said, “What made the 9/11 commission so effective was that it was a very very clear crisis that created it, and it had a very clear and compelling agenda.”

Who Will Lead?

Who would sit on an independent panel? How members are appointed would still have to be worked out between House and Senate negotiators, once the overall legislation on financial fraud and mortgages is sent to conference.

Mr. Issa frequently mentions former Supreme Court Justice Sandra Day O’Connor, or Lee Hamilton, the co-chairman of the 9/11 Commission. Mr. Larson also mentioned Elizabeth Warren, but she’s fairly busy overseeing TARP (the Troubled Assets Relief Program) and the banks.

Bar none, going outside will lend Congress considerable expertise, Mr. Larson emphasized. Citing the vast experiences of those employed from K Street to Wall Street, Mr. Larson said of Congress, “My gut tells me we are dwarfed in terms of capability.”

We’ve asked the White House and the Treasury Department for comment on creation of such a panel, but haven’t heard back. While President Obama and administration officials have tamped down calls for a commission to delve into the interrogation methods of the Bush administration, it’s unclear whether a financial inquiry would evoke the same refrain of a desire to move on rather than look back.

Pecora Footnotes

The legendary Pecora wrote a book called, “Wall Street Under Oath,” ran unsuccessfully for mayor of New York and recorded an oral history of the events that runs 1,570 pages in a transcript now residing at Columbia University. From an interview with a nephew who served on the investigative staff, Mr. Ritchie learned that Mr. Pecora “even on his deathbed in the hospital, he was telling the nurse how he got J.P. Morgan to testify.”

He died in December 1971 at age 89.

Researcher Barclay Walsh contributed to this post.

Published by The Caucus - The Politics and Government Blog of the New York Times