WASHINGTON — President Barack Obama reminded Wall Street last week that he intends to impose "common sense" regulations. The last time Washington enacted a sweeping set of financial reforms, more than 75 years ago, the catalyst was a cigar-smoking, Sicilian-born immigrantnamed Ferdinand Pecora.
A former New York prosecutor, Pecora was the last in a series of investigators hired to examine the causes that led to the stock market crash of 1929 for the Senate's Committee on Banking and Currency. In early 1933, the newly elected Democratic president, Franklin D. Roosevelt, gave the lawyer his blessing to dig deepinto the excesses that had plunged the nation into the Great Depression.
The result was a relentless investigation, 12,000 pages of transcripts that laid bare abuses on Wall Street and failures of Washington to adequately regulate the nation's financial system. Pecora's efforts provided a basis for changes that would alter Wall Street andmaintain relative stability in the banking industry until the recent crisis. These included legislation that for the first time regulated the sale of securities and helped establish the Federal Deposit Insurance Corp. and the Securities and Exchange Commission.
For all the differences between then and now, there also are whispers of familiarity: abuses on Wall Street; the blind eye of Washington; an economy in crisis; a new and eager administration calling for change; and efforts by those with vested interests to shape those new policies to their will.
Obama, in his speech last week at New York's Federal Hall, tried to wake the national debate over afinancial overhaul from its August slumber and to urge Wall Street to embrace the changes rather than seek to impede them. But Wall Street has rarely embraced broad change without some prodding.
Pecora and his small team of dogged investigators recognized as much in the 1930s.They issued subpoenas and summoned the titans of finance to Washington, where Pecora savaged them during a series of withering cross-examinations. Charles Mitchell of National City Bank, the precursor to Citibank, was forced to resign after Pecora revealed his many transgressions. Likewise, financier J.P. Morgan, namesake of J.P. Morgan Chase and Morgan Stanley, left with a battered reputation.
Day after day, Pecora turned the proceedings into riveting political theater. He made villains of some of Wall Street's most revered bankers, earning them the nickname "banksters," generated a steady stream of headlines and captivated the nation.
One senator accused Pecora of "having a circus, and the only things lacking now are peanuts and colored lemonade." There was truth in that, especially after an employee of Ringling Brothers Circus plopped Lya Graf, the world's smallest woman, onto Morgan's lap during a break in the hearings - a picture that ran in many newspapers. At the same time, Pecora's relentless grillings drew back the veil on the shrouded world of Wall Street and revealed excessive salaries, failures to pay income taxes and a litany of other abuses.
"His investigation drove these bills and made them stronger than they would otherwise have been," said associate Senate historian Don Ritchie. "I don't know anyother investigation that produced as much" legislation.
Above all, Pecora understood the power of public anger.
"Pecora's success was his ability to crystallize the anger that a lot of Americans were feeling toward Wall Street," said Michael Perino, a law professor at St. John's University and author of a forthcoming book about the hearings. "He was able to create a clamor for reform." But Pecora also realized that such clamor was fleeting.
In his own 1939 book, Wall Street Under Oath, Pecora wrote, "The public is sometimes forgetful." As memories of the stock market crash faded, he warned, Americans "may lend at least one ear to the persuasive voices of The Street subtly pleading for a return to the 'good oldtimes.'"
Reflecting on his investigation, Pecora recalled how "the captains of Wall Street, still within the shadow of panic and depression," had seemed at first eager to submit to new rules and oversight. But it didn't last.
"The more business recovered, however, and the stronger it felt, the more openly and bitterly did Wall Street oppose any sound program of reform," he wrote.
That's what current advocates of regulatory change fear.
"We've passed the moment when there's this palpable anger directed at the financial community," Perino said of the current crisis. "When you leave the immediate vicinity of the crisis, as you get fartherand farther away in time, the urgency fades."
Key legislators such as Rep. Barney Frank, D-Mass., who chairs the House Financial Services Committee, and Sen. Chris Dodd, D-Conn., who chairs the Senate Banking Committee, have said they plan to push aggressive changes this fall. Obama insists that the issue remains near the top of the administration's agenda.
But both policymakers and lobbyists know that it's usually easier to block change than to reach consensus, that enough delay can kill any bold proposal in Washington.
Simon Johnson, professor of entrepreneurship at the Massachusetts Institute of Technology's Sloan School of Management, says that "we have not yet met our Ferdinand Pecora," a figure who can create the momentum required for strong new regulations. But, Johnson added, "Pecoras can emerge."
One possibility is thatsuch a character could come out of the 10-member Financial Crisis Inquiry Commission, which was set up by Congress in July to investigate various aspects of the current crisis. The panel's chairman, Phil Angelides, a former California state treasurer and longtime Democratic donor, told Bloomberg News recently that he planned to use Pecora as a model and pursue a "nonpolitical hard look" at the causes of the crisis.
Business, Pages 75, 76 on 09/20/2009