From Bill Moyers Journal April 24, 2009.
Like thunderheads roiling on the horizon, the clamor has been building as more and more Americans want to know exactly what, and who, brought on the worst economic crisis since the great depression. What happened and how do we keep it from happening again?
Congress has finally acknowledged the outcry and is supporting some 21st century version of the "Pecora hearings."
"Pecora hearings?" That's right, as in Ferdinand Pecora, the savvy immigrant from Sicily who became a Manhattan prosecutor with a memory for facts and figures that proved the undoing of a Wall Street banking world gone berserk with greed and fraud.
In the early 1930's, during the Great Depression, and under threat of subpoena, one tycoon after another, including J.P. Morgan Jr., was hauled before the Senate Banking Committee and grilled by Pecora, the committee's chief counsel.
Here he is on the cover of TIME Magazine in June 1933. "Wealth on Trial" reads the headline inside, where Pecora is described in ethnic stereotypes of the day as "The kinky-haired, olive-skinned, jut-jawed lawyer from Manhattan." To their shock, pompous financiers, unaccustomed to having their actions or integrity questioned by anyone, much less some pipsqueak legalist making $255 a month, were no match for his cross examination.
The revelations of the Pecora hearings and the public's anger led to sweeping reform, reining in the high-handed, free-wheeling banking industry. Those reforms stabilized our financial world for half a century, until the titans of finance and friendly politicians began to dismantle them.
Ferdinand Pecora, your time has come again. Your biography is being written by this man, Michael Perino. A scholar of Law and Securities Regulation, Michael teaches at St. John's University here in New York, and has been an advisor to the Securities and Exchange Commission, the government agency that was created because of the Pecora investigation.
And, returning to the JOURNAL is Simon Johnson, former Chief Economist at the International Monetary Fund who now teaches at MIT's Sloan School of Management. Just this week Simon Johnson co-founded "The Hearing," a new economics blog at washingtonpost.com.
Transcript below the fold.
BILL MOYERS: Do you think we need hearings like this now?
SIMON JOHNSON: Absolutely, what I take from what Michael's saying and my understanding, is the Pecora hearings, they were pretty focused. They were focused on specific individuals, specific potentially illegal or unethical practices.
And I would have thought today you could look much more carefully at predatory practices around the way that consumers were treated, for example. That's a very focused item. You could also look at some of the issues that come out of, at least, the spirit of our antitrust laws. So, the antitrust movement started out as a really a concern about political oligarchs at the end of the 19th Century.
John D. Rockefeller came through his company was broken up. He came through with a lot of money, became a great philanthropist. That should be a model of how you do this in a proactive, forceful-- and you have to talk to individuals. You have to a strong general counsel, I think, who ask the tough questions and who could-- who doesn't let you off the hook. You've got to push it through. So, I think if you can get those procedures, I'm strongly in favor.
MICHAEL PERINO: And I think you can do both. And one of the things that-- we forget a lot of what happened during the Pecora hearings. But, at the same time that Pecora was putting the chieftains of Wall Street on the stand and showing the bad things that he was doing, he was also engaging in a broad ranging investigation of actually how Wall Street worked.
He sent out questionnaires to all of Wall Street, essentially, asking a series of questions about the basic nuts and bolts of the operation of the business. And the answers to those questions, which appear in a long report that Congress eventually put out, formed a lot of the basis for what became the Securities and Exchange Act of 1934. The Act that created the SEC.
BILL MOYERS: It also led to the Glass-Steagall Act didn't it? The Glass-Steagall Act separated commercial from investment banking and that persisted up until the 1990's when the Clinton administration-- Bob Rubin, Larry Summers, Senator Phil Gramm of Texas-- did away with the Glass-Steagall Act.
MICHAEL PERINO: Glass-Steagall, or the idea behind Glass-Steagall, to separate the commercial banks from the investment banks, had been an idea that was floating around since at least 1930. And essentially, the political bias toward keeping everything the way it was, was sufficiently strong that the idea went nowhere until Pecora showed all the things that the securities affiliates were doing that were improper. And within six months, Glass-Steagall was passed.
BILL MOYERS: And it survived until, as I said, the 1990's. To what extent, Simon, do you think the repeal of the Glass-Steagall Act in the 1990's contributed to this present collapse?
SIMON JOHNSON: I think there was a much broader sort of wave of deregulation or removing restrictions on banking that definitely contributed. I'm not sure I would put Glass-Steagall at the top of the list. I think declining to regulate derivatives, which was also a decision made under the Clinton administration, was probably more critical. Because that allowed a very big market to develop, which a lot of people didn't understand. Even the people who were big players in that market.
BILL MOYERS: The Pecora Hearings became something of a circus, did they not? I mean, there's a famous photograph of J.P. Morgan, Jr. with a midget on his lap. Play that out for us.
MICHAEL PERINO: What happened was that Morgan was the event that everyone was anticipating. This was the public relations event of the day. They brought in special telegraph lines into the Senate so that people could get out their stories as quickly as they possibly could. Carter Glass was a Democrat from Virginia, probably the foremost expert on banking.
BILL MOYERS: Very powerful. It was the Glass-Steagall Act.
MICHAEL PERINO: It was the Glass-Steagall Act. Exactly right. Glass didn't really think much of Pecora's methods. He wanted to have a much more sober, academic discussion of the issues and not this kind of populist outrage. And he and Pecora had a very public clash during the Morgan hearings at which point, at one point Carter Glass said, "This is a circus. All we need is peanuts and colored lemonade." Well, one of the promoters for Ringling Brother's Circus caught onto that. And the next day, he showed up with Lya Graf who was one of the circus midgets.
And he had the idea that the shortest woman in the world should sit on the lap of the richest man. And that's what happened. And that photograph eventually captured what was going on in the hearings.
BILL MOYERS: Do you think these hearings that are approved by the Senate this week can avoid that? Or should they try to have some theatre in it?
SIMON JOHNSON: Obviously, you need theatre. And theatre emerges from anything like this. I think the issue is the focus. Is it something concrete? Is there a conceptualization that people can understand? Because these financial issues are complex, and just like Mr. Pecora did, you need to find some way to crystallize it.
I don't know if it's income tax. I suspect that it's not. I think the world is more sophisticated now. But, I think the way that consumers have been treated, predatory practices in and around housing, clearly prevalent.
BILL MOYERS: Such as?
SIMON JOHNSON: The way that mortgages are sold to people, and what they're told about their mortgages and the way they're pressured in to certain kinds of borrowings. And that's also true, by the way, for credit cards. And these are things that people can understand. They're very real. They're interactions that many, many people have had. At least potentially somebody's trying to sell you on a dubious loan.
And I think investigating, coming in with a focus, for example, Elizabeth Warren, who is the current head of the Congressional Oversight Panel, is a very distinguished lawyer, she's on the faculty of Harvard Law School, who's focused on these sort of consumer protection issues. Now, she's dealing with a broader financial bailout.
And I think she's doing a very good job of bringing an educated, legal, financial perspective, which hadn't been her focus before. She comes with expertise, but is now drilling into areas where she's not well-connected. She's not a Wall Street player by any means. You need someone like that to really get their teeth into these issues and to find a way to communicate the complexity to a broader audience.
BILL MOYERS: Even as we speak, though, the banking lobby is going after her, saying that she's promoting an anti business agenda, right?
SIMON JOHNSON: Yes, and I think that's a key point. So, on the Pecora hearings as I understand them-- I'll put it this way. I've never read anybody who suggested that the Pecora hearings caused the Great Depression, okay? But what we're hearing now from the banking industry is, "Oh, wait a minute. If you vilify us, if you say that we did these bad things or even if you hold a serious investigation, that will further undermine confidence and cause a much deeper recession and a slower recovery and you'll lose more jobs."
MICHAEL PERINO: Actually, the banks said exactly the same thing in the 1930's.
BILL MOYERS: About the Pecora hearings?
MICHAEL PERINO: About the Pecora hearings. They said, "If you investigate, you're going to find a world of mess, probably. It's going to create sensations and that's going to actually retard recovery." You know, you interestingly said about the Pecora hearings causing the Great Depression. You know, we need to be a little humble about what these kind of hearings are likely to be able to do not be able to do.
Pecora was a fabulous lawyer. There's no doubt that he did an amazing job at these hearings. If the hearings were intended to find the causes of the crash and the causes of the Great Depression, they failed. 'Cause they never actually did that. They did show bankers behaving badly. And there's no question about that. And showing that created the atmosphere in which reform could pass. But, he never actually showed what caused the Depression. Now, we can't really fault him really too much for that. I don't think people understood it very well then, and I think economists are still debating it today.
SIMON JOHNSON: And will be for another 50 years.
BILL MOYERS: Ben Bernanke spent a lifetime trying to figure that out, right?
SIMON JOHNSON: Right. Exactly.
You can watch the entire interview here.
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