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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Now, 75 years later, the country is mired in another financial crisis, one that includes similar outcries over bankers' bonuses and sales of risky products. With it comes the new congressional commission. Its framework is far different from the investigation that Pecora oversaw. The Pecora hearings were held by a Senate committee, meaning that, technically, they weren't a commission; the Financial Crisis Inquiry Commission is an independent panel appointed by Congress, an approach that began with the Continental Congress and picked up steam in the post-World War II era. Commission members and chairs are typically appointed by Congress, sometimes in conjunction with the president, and the number of members usually ranges between five and 15. Many observers believe the commission could have a sweeping effect similar to that of the Pecora hearings. Much of that will depend on the panel's leadership: chairman Phil Angelides, California's Democratic state treasurer from 1999 to 2007, and executive director Thomas Greene, a lawyer in the California attorney general's office.

Pecora, who gained such prominence that the probe is now referred to as the "Pecora hearings," was the perfect man for the job. He had a nearly photographic memory, allowing him to recall every word of testimony; a sharp intellect (he graduated from the New York public school system at age 13); and a tireless work ethic. And, having emigrated from Sicily to an Irish neighborhood in New York at the age of 5, he had developed the kind of outsider's resolve that made him impervious to intimidation.

In his 12 years as assistant district attorney of New York County, Pecora oversaw more than 1,000 cases and boasted an 80 percent conviction rate. One investigation led to the closing of more than 150 "bucket shop" operators, or fraudulent brokerage houses, in New York City. "What he didn't have was the experience going after the lords of finance and the people that everyone was deferential to," says Donald Ritchie, an associate Senate historian who wrote about the hearings for the book Congress Investigates, 1792-1974: A Documented History. "So he essentially took on the lords of finance the same way he did the petty criminals."

In those days, the nation's top bankers were as unknowable and untouchable as their arcane business practices. But Pecora didn't seem fazed by the financiers he questioned, including banking scion J. P. "Jack" Morgan Jr., making the first public appearance by a Morgan in 20 years. At one point, after several minutes of Morgan ducking queries, Pecora cut him off. "Are you an attorney?" he asked. Morgan said he was not. "I thought you were, because you answer questions the way lawyers are reputed to answer them," Pecora said. "That is a compliment that I supposed I would never be good enough to get," Morgan replied. "That is not a compliment," Pecora said crisply. "It is said that lawyers make the worst witnesses."

It was Pecora's methodical, prosecutorial style that was a particularly effective tool. That persistence wasn't always appreciated, even by the senators. As Pecora hammered Morgan about his income taxes, Sen. Carter Glass, a patrician Virginia Democrat known to be "bored by senatorial exhibitionism," complained that the counsel was "badgering" the banker. But that badgering led to the revelation that Morgan had not paid a dime of income taxes in 1930, 1931, or 1932.

More crucially, Pecora's persistence led to insights into private banking without which the groundbreaking regulations of the 1930s could not have been passed. The public learned how the so-called House of Morgan, the most powerful bank in the country, doled out financial privileges as a way to wield influence, including the fact that more than 60 other prominent bankers had outstanding loans with the bank. And they learned that the Chase Securities Corp. helped finance eight stock pools, which were made up of investors whose purchases together could artificially boost the price of a stock.