As Congress works to convene the new Financial Crisis Inquiry Commission, questions are already being raised about its potential effectiveness. Will the Senate and House appointees be up to the task? Will they direct the commission to use its subpoena power to get the information it needs? Will they call the right witnesses and subject them to the kind of questioning that will ferret out the truth? Perhaps most importantly, will the commission hire a professional staff that will be willing to get tough with some of the most powerful financial figures in the United States? In short, will the commission try to find a modern day Ferdinand Pecora?
If history is any guide, the commission should be pushed now to find the right people for the job. In 1932, the hearings established by the Senate Committee on Banking and Currency to look into the causes of 1929 Wall Street crash got off to an inauspicious start, and the commission worked its way through three separate chief counsels before it hired Pecora—the tough, deputy assistant district attorney for New York who so changed the tenor of the inquiry that the hearings took on his name.
Born the son of a cobbler in Nicosia, Sicily, Pecora came to the United States at the age of five. He attended public schools and eventually worked his way through New York Law School. As assistant district attorney he put more than 100 of the so-called “bucket shops”—shady, short-term brokerage houses that frequently bilked investors—out of business. In the process, he got to know a good deal about the murky side of Wall Street.
Schooled as a prosecuting attorney with special expertise in financial fraud, Pecora relished the opportunity to get to the bottom of what caused the great crash of 1929. After being appointed to the commission he and his team poured through the records of the leading banks and securities firms of his day page by page. Blessed with an uncanny memory, Pecora used this meticulous preparation to great effect when grilling his witnesses, and frequently seemed to know more about their activities that they did.
As a result, he uncovered a whole series of unscrupulous practices: interest-free loans to top executives at National City Bank (now Citibank); National City’s disposal of bad loans to Latin American countries by packing them into securities and selling them to unsuspecting investors; J.P. Morgan’s list of influential “friends” among their clients, including former President Calvin Coolidge, Supreme Court Justice Owen J. Roberts, Senator Kean of New Jersey and many others, all of whom were given the opportunity to purchase stock at sharply discounted prices.
These disclosures, coupled with further revelations about excessive salaries, bonuses and the fact that neither Charles Mitchell (the head of National City Bank) nor J.P. Morgan Jr. had paid any income tax in the past year outraged the public and helped galvanize the Roosevelt Administration—and Congress— into action. The banking and financial reform that followed—highlighted by such landmark provisions as the establishment of the Federal Deposit Insurance Corporation, the creation of the Securities and Exchange Commission, and the separation of commercial and investment banking—restored investor confidence, helped resuscitate the financial sector and laid the foundations upon which our banking and financial system rested from more than half a century.
Thanks to the tough minded and uncompromising work of Pecora, the commission did its job and both Wall Street and Main Street reaped the benefits for years to come. The American people deserve no less today. To be effective, Congress should hire a modern-day Pecora.
David Woolner is a Senior Fellow and Hyde Park Resident Historian for the Roosevelt Institute.