Pecora Hearings a Model for Financial Crisis Investigation

Congress could learn from Pecora's 1930s investigation of the stock market crash.

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When the Financial Crisis Inquiry Commission held its first public meeting this month, it launched an ambitious, 15-month investigation of the economic meltdown. Created by Congress in May to determine and analyze the origins of the current crisis, the commission is charged with examining no fewer than 20 of its specific causes, including the roles of fraud and abuse, credit rating agencies, and corporate compensation structures. The commission must also examine the collapses of major financial institutions like Lehman Brothers and Bear Stearns.

That's a big goal. And appointing a panel of experts to accomplish such a task is a favorite move of congressional leaders, who have created hundreds over the centuries to examine everything from merchants who defrauded revolutionary forces at Valley Forge to the Iran-contra affair, the 9/11 terrorist attacks, and the use of steroids in baseball. "There's hardly a subject that they haven't tried to tackle with a commission," says Paul Light, a professor at New York University who is studying post-World War II commissions.

Still, hopes are high for the current commission. Criminal charges rarely result from such hearings, but the investigation could lead to legislation to prevent a similar crisis from occurring again. And that's why, when experts and historians point to the type of inquiry this new commission should emulate, they return to the Pecora hearings of the early 1930s.

Ferdinand Pecora, an Italian-American with flashing eyes and a penchant for pinochle, was head counsel of the Senate Committee on Banking and Currency. He took the job after the committee had already spent a year struggling to investigate the main causes of the Depression. The hearings had failed to penetrate Wall Street's shadowy landscape of margin selling, stock rigging, and speculation because witnesses ducked questions and the committee's counsels were weak and changed frequently. By January 1933, with only six weeks of the investigation officially left to go, most committee members had given up on getting answers.

Most, that is, except for Sen. Peter Norbeck, the committee's chairman, a Republican from South Dakota whose lack of knowledge about Wall Street was matched only by his suspicion of it. After the committee's latest counsel quit in frustration over the lack of progress, Norbeck offered the job to four candidates. One by one, they turned him down. A fifth also rejected it but passed along a recommendation: Pecora, the 51-year-old assistant district attorney of New York County. Norbeck pressed Pecora to take the job. All he wanted, he said, was for Pecora to write a report on what the hearings had uncovered so far. But Pecora, hired Jan. 24, 1933, found that there wasn't anything to write, since the committee hadn't uncovered anything of note. Still, Pecora was intrigued. Hoping for one last stab at getting Wall Street to divulge its secrets, Pecora persuaded the senators to grant him another month of hearings and a fistful of subpoenas.

As Pecora prepared for his first hearing, the economy took a new plunge. A run on the banks led to a wave of closures. This crisis put renewed pressure on the committee to deliver. Pecora immediately delved into the country's second-largest bank, National City Bank, which was one of the most notorious for promoting new, risky securities. Though senators were involved in the questioning, it was their new counsel who had done the research, scoured the documents, and knew just how to force the bankers to yield their secrets. Among them was that National City Bank gave cash bonuses to traders who sold the most stocks and bonds, particularly the riskiest ones that it wanted to dispose of the fastest. Just six days after Pecora launched his new round of the investigation, both the bank's chairman and president resigned under pressure from an angry press, the committee, and even the incoming president, Franklin D. Roosevelt.

It was Pecora's first victory, and there were more to come. The most notable was that by the investigation's close in June 1934, the hearings had yielded a trifecta of legislation—the Glass-Steagall Act of 1933, Securities Act of 1933, and Securities Exchange Act of 1934—that dramatically reshaped the American financial system. The Glass-Steagall Act alone created the Federal Deposit Insurance Corp., which guaranteed consumers' deposits in banks, gave the Federal Reserve greater oversight over banks, and separated banks from insurance companies and investment firms. Some economists have even charged that the 1999 repeal of Glass-Steagall helped bring about the current crisis.