“Legal chicanery and pitch darkness were the banker’s stoutest allies.”

April 30, 2009 at 12:29 pm | Posted in Economy, Historical, senate | 2 Comments
Tags: banking and securities law, Economy, Ferdinand Pecora, financial markets, Glass-Steagall, government regulation, NYSEC, Pecora Commission, Pujo Commission, SEC, US Senate, Wall Street

Cong. Henry B. Steagall, Chairman House Banking Currency (between 1936 and 1937)

Bloomberg News reported last week that “House Speaker Nancy Pelosi plans to push for a comprehensive inquiry, saying that three-quarters of Americans want to know what led to the bankruptcy of Lehman Brothers Holdings Inc. and the collapse of Bear Stearns Cos. and Merrill Lynch & Co. She favors one patterned after Senate Banking Committee hearings led by Ferdinand Pecora starting in 1933 …”

As John Anderson at Firedoglake correctly points out, “the bankers want to go back to giving themselves whopping pre-Crash bonuses; continue to rip-off credit card consumers with fine print and surprise rate increases; and haven’t the least intention of letting their Congressmen change the laws to allow a bunch of bankruptcy judges to modify the mortgage terms of desperate homeowners.”

Senators Couzens, Fletcher and Special Prosecutor Ferdinand Pecora of Senate Banking Committee probing the collapse of numerous banking institutions in the Detroit area. January 11, 1934

This is nothing new in the world. Americans, through their elected representatives, have tried to change this dynamic before.

(Wiki) The investigation was launched by a majority-Republican Senate, under the Banking Committee’s chairman, Senator Peter Norbeck. Hearings began on April 11, 1932, but were criticized by Democratic Party members and their supporters as being little more than an attempt by the Republicans to appease the growing demands of an angry American public suffering through the Great Depression. Two chief counsels were fired for ineffectiveness, and a third resigned after the committee refused to give him broad subpoena power. In January 1933, Ferdinand Pecora, an assistant district attorney for New York County was hired to write the final report. Discovering that the investigation was incomplete, Pecora requested permission to hold an additional month of hearings. His expose of the National City Bank made banner headlines and caused the bank’s president to resign. Democrats had won the majority in the Senate, and the new President, Franklin D. Roosevelt, urged the new Democratic chairman of the Banking Committee, Senator Duncan U. Fletcher, to let Pecora continue the probe. So actively did Pecora pursue the investigation that his name became publicly identified with it, rather than the committee’s chairman.

Stock exchange leader swears to tell all before Senate probers / Underwood & Underwood, Washington. Richard Whitney, with right hand raised, before the Senate banking committee. c. 1932

As reiterated by SEC Chairman Arthur Levitt during his 1995 testimony before the United States House of Representatives, the Pecora Investigation uncovered a wide range of abusive practices on the part of banks and bank affiliates. These included a variety of 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 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 Glass-Steagall Banking Act of 1933 to separate commercial and investment banking, the Securities Act of 1933 to set penalties for filing false information about stock offerings, and the Securities Exchange Act of 1934, which formed the SEC to regulate the stock exchanges.

[snip]

In 1939 Ferdinand Pecora published a memoir [unfortunately, out of print] that recounted details of the investigations, Wall Street Under Oath. Pecora wrote: “Bitterly hostile was Wall Street to the enactment of the regulatory legislation.” As to disclosure rules, he stated that “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.”

The Banking Committee’s hearings ended on May 4, 1934, after which Pecora was appointed as one of the first commissioners of the SEC.

Morgan partner testifies. Washington, D.C., Dec. 18. Appearing at the Senate Railroad Financing Inquiry today, Arthur M. Anderson, Partner in J.P. Morgan & Co., told the Committee that his firm and other New York banks "lost money" through financing the terminal deal between Missouri Pacific Railroad and Terminal Share Inc. Anderson admitted that Morgan handled a $61,000,000 Missouri Pacific bond issue in 1931. December 18, 1936.

Pecora points to the crux of the problem which is unfortunately still with us today:

That its leaders are eminently fitted to guide our nation, and that they would make a much better job of it than any other body of men, Wall Street does not for a moment doubt. Indeed, if you now hearken to the Oracles of The Street, you will hear now and then that the money-changers have been much maligned. You will be told that a whole group of high-minded men, innocent of social or economic wrongdoing, were expelled from the temple because of the excesses of a few. You will be assured that they had nothing to do with the misfortunes that overtook the country in 1929-1933; that they were simply scapegoats, sacrificed on the altar of unreasoning public opinion to satisfy the wrath of a howling mob blinding seeking victims.

This is Richard Whitney in 1934, four years before he was sent to Sing Sing prison for embezzlement, decrying the National Securities Exchange Act of 1934:

Bill Moyers has links for additional information about the Pecora Commission and the current debate.

Before the Pecora Commission of the 1930s, there was the Pujo Commission, formed in 1912 to investigate the so-called “money trust,” a small group of Wall Street bankers that exercised undue influence over the nation’s finances. The full transcripts of the Pujo Commission are available here.

HOUSE OF REPRESENTATIVES. COMMITTEES. SPECIAL SUBCOMMITTE OF BANKING AND CURRENCY TO INVESTIGATE 'MONEY TRUSTS,' KNOWN AS 'PUJO COMMITTEE.' McMORRAN OFMI; HAYES OF CA; NEELEY OF KS; GUERNSEY OF ME; PUJO OF LA, CHAIRMAN; DAUGHTERY OF MO; BYRNES OF SC; A CLERK; HEALD OF DE; A CLERK; SAMUEL. c. 1912

(American National Biography) The majority report stated that the committee was unable
to say that a deliberate effort had been made by any group to
form a combination to control money and credit. It did conclude,
however, that such a “community of interest” among a small number
of financiers had come about through stock holdings, interlocking
directorates, and other devices for controlling financial institutions,
public utilities, railroads, and industrial corporations. The
minority report agreed that abuses existed but rejected the proposed
remedies. In all, twenty-one recommendations were made in the
majority report, including approval of bank consolidations by
the comptroller of the currency, restrictions on interlocking
bank directorates, the prohibition of voting trusts and deposits
by interstate corporations at unregulated banks, the prohibition
of loans made by banks to their own directors, and the incorporation
and regulation of bank clearing houses. Although the report was
criticized by some and its suggested reforms were not enacted
into law, the Pujo investigation was widely publicized by the
press, and it increased pressure for banking reform.

Frank N. Sheppard of Natl Bankers Ass'n. before Borah Slush Fund Committee, October 22, 1924

(See also Jay Gould)

The power of the banking lobby needs to be broken. But as the Bloomberg article notes:

Members of Congress may be reluctant to tackle the recommendations of such an inquiry because of financial industry donations to political campaigns, said Wall Street historian Charles Geisst.

Financial services has been the biggest contributor in every U.S. election cycle in the last 20 years, according to the Center for Responsive Politics, a Washington research group that tracks campaign money. Its individual and political action committee donations in 2007 and 2008 totaled $463.5 million, compared with $163.8 million from the health-care industry and $75.6 million from energy companies.