HISTORY: When Washington Took on Wall Street or Why we Need Glass-Steagall
Nearly 80 years ago, on Capitol Hill, Ferdinand Pecora forced J. P. Morgan Jr. and other “banksters” to reveal the corruption that had fueled the Great Depression—bringing shame on the financial industry and resulting in new laws to curb abuses. Today, with Republicans having threatened to block reform and Goldman Sachs fighting fraud charges, the author looks back at the Pecora Commission hearings, which riveted America, and asks why there is no comparable investigation now.
Pecora’s questioning of Morgan was only partly an effort to tease out information about the bank’s internal practices. Pecora knew that the enigmatic quality of the Morgan bank had given rise to myriad conspiracy theories and a broad popular belief that the bank exercised a malign and hidden global power—as Goldman Sachs and other banks are seen by some to exercise today. Pecora also hoped to stoke the public’s wrath toward the financiers, whom most Americans held responsible for the Wall Street crash. And he knew how to deploy both menace and ridicule. But Morgan swallowed his fear and marched into the packed room, “massive and dignified, but less grimly masterful than his father, in a manner which could not fail to be impressive,” the Times noted.
“I state without hesitation,” Morgan said at the conclusion of his carefully written opening statement, “that I consider the private banker a national asset and not a national danger.” Pecora had an impeccable sense of timing. He almost immediately asked Morgan a single question: “What is your business or profession?” When Morgan replied, “Private banker,” the audience burst into laughter. His humiliation was only just beginning.
The Pecora Commission, as the Senate investigation came to be known, was a spectacular event in the darkest days of the Great Depression. It had a lasting impact on the public’s image of the financial world, and it helped make possible new laws and regulations aimed at preventing a Depression-size calamity from befalling the country again. What few anticipated was how fragile those laws and regulations would eventually prove to be—and how, in time, the tide would turn. The abuses highlighted by the Pecora Commission have clear parallels with the abuses that led to the financial meltdown of the past two years. Where the parallel breaks down is in comparison with the Pecora Commission itself. Congress has been remarkably decorous about investigating what went wrong. No Wall Street executives have been questioned for days at a time by a skilled interrogator. The Obama administration’s financial-reform bill—which would establish new procedures for seizing and dismantling failed banks, and also diminish the prospect of taxpayer-funded bailouts—faces strong, perhaps unanimous, Republican opposition. Even if the bill passes, it would represent a relatively modest response to the existing range of problems. In April, the Securities and Exchange Commission agreed (on a split vote) to file civil charges against Goldman Sachs, alleging that the firm defrauded some of its investors by selling them a portfolio of highly risky mortgage-related securities. The S.E.C. further charged that Goldman did not inform clients that the securities they were purchasing had been selected with the help of an investor who was expecting to profit from their decline in value. So far, the charges do not name any figures in Goldman’s senior management.
Among the highlights of Pecroa’s questioning was the admission by Morgan that he had not, in fact, paid personal income tax in 1930, 1931, and 1932. But the results of the hearings were more than headline-making political theater. The outrage and demand for reform of Wall Street and the banking industry that came from the Pecora hearings led to the founding of the Securities and Exchange Commission — the body tasked with regulating the markets and protecting investors ever since. In addition, within a year Congress passed The Glass-Steagall Act, which among other things, separated commercial and investment banking. Many of those trying to deconstruct this financial debacle point directly to the undercutting of Glass-Steagall Act over recent decades as a leading cause.