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.
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.
The findings shocked the public. Nearly all major financial firms are publicly traded today, but Wall Street then was dominated by small, private partnerships that behaved much like members-only gentlemen's clubs, says historian Ron Chernow, author of The House of Morgan. No government bank examiner had even stepped foot inside the Morgan bank. "In the 1920s, nobody was under any illusions that the market was fair or open, so there was a sense of Pecora lifting a curtain on all of these secret machinations," Chernow says.
Pecora's power also came from his ability to turn the hearings into exposés of Wall Street's immorality, historians say. Individually, none of the witnesses Pecora questioned were responsible for the crisis. But by highlighting their greed, fraud, and sometimes criminal behavior, Pecora was able to whip up fervor against the whole banking industry. Even more of a sensation, says Michael Perino, an expert in securities law at St. John's University who is writing a book on the hearings, was the image of Pecora, the Italian immigrant, taking on the WASPs of Wall Street. Italian-Americans, not least of all Sicilian-Americans, had been stereotyped as lawless and crime-ridden for the past decade. The bankers, with their potpourri of Ivy League degrees and their venerable bloodlines, were seen as the nation's law-abiding leaders and guardians of its prosperity. Pecora cut through their facades, pinning them down again and again in an unveiling of Wall Street's secrets.
For many observers, one particular moment crystallized just how extraordinary the hearings had become—and how they upended Wall Street's power structure. Amid what one New York Times reporter called "hours of weary examination," a press agent for Ringling Brothers Circus seized on a comment made by a cranky Senator Glass five days earlier that the hearings were a "circus" lacking only "peanuts and colored lemonade." The Ringling flack plopped Lya Graf, a 21-inch, 22-pound woman wearing a blue satin dress, into Morgan's lap. "The smallest lady in the world wants to meet the richest man in the world!" he announced. Spectators roared, and cameras popped. The stunt infuriated Sen. Duncan Fletcher, the Florida Democrat who had replaced Norbeck as chairman when the Democrats took control of Congress, and he ordered the films suppressed and telegraphed the newspapers not to use them. But the "smallest lady" and "richest man" were splattered on front pages across the country the next day, making the message clear. The hearings had not just brought the country's most powerful financiers down to the level of the common people, they had made them a sideshow.
The laws that resulted from the Pecora hearings are considered their greatest legacies, but their most telling moment may have been when a bemused banking tycoon balanced a tiny woman on his knee.
In the run-up to Morgan's appearance, the banker had underestimated Pecora, calling him a "second-rate criminal lawyer" and "dirty little" Italian. Even on his way to the Capitol, Morgan's chauffeur assured the tycoon that he wouldn't stoop to losing his temper "with the likes of them." But his self-assurance couldn't save him from the embarrassing disclosures that ensued. He left Washington with a tarnished name and front-page notoriety. And Pecora returned to the hearings, bent on bringing down more bankers—and reshaping the financial system.