The sentencing last week of Bernard Madoff is a powerful reminder of why Franklin Roosevelt saw banking and financial reform as one of the keys to economic recovery. As he observed at the signing of the Securities Act of 1933, it had become “abundantly clear that the merchandizing of securities is really traffic in the economic and social welfare of our country.” To protect the public from what he later called “past evils in the banking system, in the sale of security, in the deliberate encouragement of stock gambling, in the sale of unsound mortgages and in may other ways in which the public lost billions of dollars,” FDR passed a series of laws that led to the birth of U.S. financial regulation. These included not only the Securities Act of 1933, but also the Securities and Exchange Act of 1934 (which led to the establishment of the Securities and Exchange Commission), the Trust Indenture Act of 1939, the Investment Company Act of 1940 and the Investment Advisors Act of 1940.
All of these pieces of legislation were designed to protect the public from fraudulent and unscrupulous practices through public disclosure and regulation. Taken together, they formed the structure in which the US financial sector would operate for decades to come. Behind the legislation lay the important assumption that greed was a powerful human failing and that laws and regulations were needed to protect the investor from those who would try to take advantage of their trust.
Perhaps the most spectacular example of this in FDR’s day involved the rise and fall of Richard Whitney, once the president of the New York Stock Exchange, who vehemently argued against the passage of the 1933 and ’34 securities acts. In March 1938, much to shock and dismay of the investment world, Whitney was arrested and charged with embezzlement. After pleading guilty, he was sentenced to five to ten years in prison; he served just over three years in Sing Sing. His arrest and conviction was widely heralded at the time as a major victory for the SEC and the beginning of a new era on Wall Street.
The securities legislation passed during the New Deal has served us well, but given the spate of complicated new investment instruments that have emerged in the past two decades and the re-appearance of fraud on a major scale, it is time to look once again at how best to bring an end to, as FDR said in his first inaugural, “a conduct in banking and in business which too often has given to a sacred trust the likeness of callous and selfish wrongdoing.”
Given the conviction of Mr. Madoff and the news that James Davis, the former chief financial officer of the Stanford Financial Group, will plead guilty to securities fraud, it would appear once again that “the money changers have fled from their high seats in the temple of our civilization.” But if were are to follow FDR’s advice and try “to restore that temple to the ancient truths,” we should also never forget as he so eloquently reminded us that “the measure of that restoration lies in the extent to which we apply social values more noble than mere monetary profit.”
David Woolner is a Senior Fellow and Hyde Park Resident Historian for the Roosevelt Institute.