Some Encouraging News on Financial Crisis Probe

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While I harbor considerable doubts about whether the idea of having a modern version of the so-called Pecora Hearings, the 1930 Senate Banking Committee sponsored probe of the financial services industry, will be as serious and as thorough as it needs to be. The fact that the Pecora initiative got as far as it did was by accident. Pecora had been brought in what was thought to be late in the game to draft a final report (the two prosecutors had been fired, the third resigned over his lack of subpoena powers). Pecora asked to reopen the hearing for a month, and they ran more than a full year. His finding laid the groundwork for the securities reforms of 1933 and 1934.

The industry fought the effort tooth and nail; it was only Pecora’s tenacity and his adept use of the media that enabled him to prevail. The odds seem stacked against this exercise. Look at the lengths Team Obama has gone to with the stress tests to “restore confidence”. If that is the prime objective, a thorough probe is the polar opposite of what they’d want to happen.

Nevertheless, some serious names are being mooted: Paul Volcker, former SEC chairman Theodore Levitt, and Sandra Day O’Connor, in my order of enthusiasm. Volcker is sufficiently skeptical of modern financial wizardry to be above reproach; the question is whether he (or any of the candidates) will appoint a sufficiently tough-minded prosecutor.

Leviitt was in fact pro-reform at the SEC, but was frequently stymied by Congress, particularly Joe Lieberman. And he did fall into line with Summers and Rubin on the Commodities Futures Modernization Act, which put credit default swaps outside the reach of the CFTC. Levitt comes out of the equity side of the business, and it is an open question as to how attuned he might be to possible abuses in over the counter credit markets, which is where the action was in this cycle.

O’Connor has plenty of stature, but perilous little knowledge of financial markets. She could be a high profile figurehead. But sometimes it’s the complete outsiders who are most willing to dig.

From Bloomberg.

Retired Supreme Court Justice Sandra Day O’Connor, former Federal Reserve Chairman Paul Volcker and former Securities and Exchange Commission chief Arthur Levitt are among those being considered by congressional leaders to head a probe of the financial crisis, according to people familiar….

“Whoever investigates this is going to have to dig way below the surface and get to the bottom of what caused all these problems,” said Charles Geisst, a finance professor at Manhattan College in New York and author of a history of Wall Street. “If you don’t get someone who has a big name and a good reputation, it sends a signal that you are just going through the motions.”

Congress is modeling the commission on one headed by Senate staffer Ferdinand Pecora in the 1930s. Those efforts led to the creation of the Securities and Exchange Commission and laws for policing Wall Street that have lasted for seven decades.

Another, more recent, example would be the Sept. 11 panel that was comprised of former members of Congress and other public figures. The group investigated missteps in intelligence leading up to the 2001 terrorist attacks….

Yves here. The September 11 panel was a joke, convened well after the fact. If that’s the template, we know this is a sham. Back to the article:

O’Connor, 79, an appointee of former President Ronald Reagan, was the first woman to sit on the high court. She was a swing vote on some of the nation’s most divisive social issues, including decisions that upheld abortion rights and race-based college admissions. She also developed a reputation as being business-friendly by voting to cut punitive damages, curb class- action lawsuits and enforce arbitration agreements.

Volcker, 81, already leads a group that is advising President Barack Obama’s administration on the economy. The former Fed chief has been frustrated at times with his lack of input on policy decisions, people familiar with the matter have said.

Levitt, 78, was appointed SEC chairman by former President Bill Clinton and stepped down in 2001. He has called for stiffer regulation of hedge funds and credit-rating companies that were blamed for underestimating the default risk of subprime-mortgage securities.

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  1. attempter

    Given that such a commission would have to be set up in the first place by those who would not want it to be anything but a whitewash, I have no confidence in the idea. (The 9/11 commission seems like the template desired by those who want the simulation of truth-seeking but not the real thing.)

    If such a commission did actually reveal inconvenient truths and support the call for real action, that would be an accident. The commissioners would have to go rogue.

    (That’s the same reason I have no use for a torture commission, as opposed to having the Justice Department do its job. At least where it comes to torture we do still have laws on the books. Unfortunately, this remedy may not even be available for capital financial crimes, where the law itself has long since been gutted.
    So I’m not sure what the “reform” prescription for justice could be here.)

  2. Richard Kline

    Congress is sufficiently close to the hot breath of the voters to realize that they need something to improve the visuals if not the reality before the next set of elections. Yes, the 9/11 blindman’s buff trick; just so. Yes, appoint someone pushing 80 in the hope that they need to nap in the afternoon and working weekends is out of the question. Yes, “The findings are pending” in Oct 10—and still pending in Jan 11. This sounds all to much like a thespian performance of beating the bushes while the malefactors are hiding in the swamps, or more likely on the Riviera.

    I feel more everyday that I’m living in an alternate surreality. Like the rotting zombies in the credit pool have swashed all the oxygen out of the lower atomostphere with ground-clinging gases of decomposition . . . .

  3. Terry Maynard

    The 9/11 Commission was NOT a joke. It provided the most complete picture of what happened (& what didn't happen) around the terrorist attackes of 9/11 compiled anywhere. Besides its compelling analysis, it provided a valuable set of recommendations, some of which Congress has enacted, and continues to keep track of what the USG has–and has not–done to prevent a recurrence.

    Please stick to finance. Your remarks indicate you know nothing about US national security.

  4. joebhed

    What is the REAL objective here?
    A new financial-money system to support economic stability?
    How deep are we going to go?
    Only what was illegal?
    Only what was immoral?
    Just back to, OMG, don't we really need Glass-Steagall again?

    Yeah, let's waste a lot of time and let the grandkids do this all over again.
    How about structural?

    Boo on Levitt.
    Anyone who has been part of the problem is going to pull punches in order to avoid the fingers pointing back at them.
    O'Connor could be Okay, but I think you would see her knees a-knockin' when the banks came in and said, STFU, or we're gonna bring this mother down around your ears.
    Volcker could be OK for real, because so far he has been the ONLY person out there that has described the financial imbroglio for what it is.
    Said tall Paul: There is not enough money in the (money) system to make our debt-service payments.
    Thus L&G, the financial and money system is essentially insolvent.
    He didn't say we had a sub-prime crisis that exacerbated an unquantified risk in the underlying financial services paperwork.
    He said the debt-MONEY system (of the private fractional-reserve bankers) has failed to make enough money available to the financial and economic system to have the money to make the debt-service payments on the debt-MONEY already out there.

    So, to me, Paul could be OK. But my preference would be Yves Smith.
    Get that book done in your spare time, YS.

    Read "How Debt Money Goes Broke". (You are here*).
    Re-read Milton Friedman's "Financial and Monetary Framework for Economic Stability".

    Quite frankly, Glass-Steagall does NOT do it for me.
    The Chicago Plan for Monetary Reform.
    The only road home.
    Put the banks back to banking, like people think they do now.

    Greenbacks !

  5. Dr. Charles Forbin

    Not O’Connor. She demonstrated on the SC that she is an intellectual lightweight, and I will not comment on her role in Gore vs Bush for fear of provoking a flame war, but let’s just say that she would be a divisive choice.

    I like Volker, but Summers and Geithner would make sure he had his legs cut off from under him.

    The 9/11 Commission was MOST DEFINITELY a whitewash. Lee Hamilton admitted afterwards that they thought Rice should be held responsible for her incompetence in coordinating intelligence (her job at the time!), but in the interests of bipartisanship they buried that recommendation in bromides about “mistakes were made.”

    I’d like to see Dick Durbin. I’d also like to see world peace, an end to poverty and the conquest of climate change.

  6. Minh

    Yves here. The September 11 panel was a joke, convened well after the fact.I disagree.
    I think it may be helpful, despite the quality of what they were allowed to report. Silence about WTC for 7 years also speak volumes.
    The logic of most misdeed is it was done on purpose by a few, but popularized by the masses.

    On another angle, in light of what I’ve watch recently.
    The panel was useful because nnly such panel can ask people like Norman Mineta to testify.

    If you have time to watch this film it would be well spent. The approach of the author is he relies only on mainstream media sources to avoid the “conspiracy” label. That’s why he was “attacked” by the NYT.

    In Poland the film was shown in Gdansk film festival, because the producer was born in Poland.

    His comment on 9/11 commission was: the most important thing about it is the testimony of Norman Mineta about what was happening on the morning of 9/11 when he came to work with Cheney.

  7. Percy

    Want someone who could do what Pecora did? Get Judge Stanley Sporkin, famed and feared by Wall Street and those misusing the executve suite while he
    was Director of the SEC’s Division of Enforcement in the ’70s until he left to become GC for the CIA under Bill Casey and later appointed to the federal bench. He is an effective truth teller and will not tolerate and can cut through financial nonsense, which he has done so all his professional life and to great effect.

  8. Mo

    I have no opinion on O’connor. Leavitt, however, is another story. He comments frequently on Bloomberg radio and I recall him singing Chris Cox’s praises when he was appointed to replace Donaldson. Let us not forget he was chairman of the SEC while Bernie Madoff was doing business. (This in particular pisses me off. When I see how some of my fellow Registered Inv. Advisors freak out about compliance issues – and Madoff got away with billions.)

    Finally, Leavitt has some affiliation with the Carlyle group. ’nuff said.

  9. Hugh

    These were Bill Black’s suggestions he gave at firedoglake:

    “Jack Blum and Saul Wisenberg (Dem., Rep) as counsel. Hire Dick Newsom and Chris Seefer as your key investigators

    A real commission would need real investigators, subpoena power, and questioning by counsel. Anyone who has listened to a Congressional hearing and suffered through the grandstanding and all the sloppy, ill informed questions knows that members of Congress are just awful.

    I really don’t like any of the 3 choices. They are all past it, Volcker included. I don’t like Levitt because of his involvement in events which set the stage for bubblenomics. O’Connor, I don’t like for lots of reasons. Anyone remember she was on the Iraq Study Group or read its mishmash of proposals? Volcker comes across to me as just plain crotchety.

    On the other hand, I would think that both Bill Black and Simon Johnson would be good choices to run a Pecora inquiry.

  10. Hugh

    Actually I misspoke I was thinking of Robert Johnson. I tend to confuse the names.

  11. chaingangcharlie

    “Actually I misspoke I was thinking of Robert Johnson. I tend to confuse the names.”

    ?? That’s the long dead blues singer, right ?

    Well, he could be the best of a bad bunch..

  12. tom a taxpayer

    Probe my foot. We need a bulldog prosecuton!
    Pecora is too tame. We need Maxiprocesso (Maxi Trial) like Mafia criminal trial that took place in Sicily during the mid-1980s that saw hundreds of defendants on trial convicted for a multitude of crimes relating to Mafia activities.

    The investigation and prosecution can begin anywhere, with Countrywide and the mortgage industry or the appraisers or Freddie and Fannie or Citi and the big banksters or with Goldman Sachs and other Wall Street investment banks and brokerages or rating agencies or AIG or with federal co-conspirators at U.S. Treasury, SEC, OTS, and the Federal Reserve and with Hank “the mole” Paulson, Ben “the bag man” Bernanke, Tim “the patsy” Geithner, or the members of Congress who took money to facilitate the criminal enterprise.

    Follow the money, and the crimes, and bring down the entire criminal enterprise using a Racketeer Influenced and Corrupt Organizations Act (RICO) prosecution. This is a target rich environment, and the criminal activities (fraud, Ponzi schemes, blackmail, looting of treasury, cover-ups, etc.) are continuing today.

    Bring down the entire mob that raped and pillaged the mortgage industry, ruined the housing market, destroyed the credit system, endangered municipal financing, pension funds, and the banking system, sent the economy into a downward spiral, endangered the world financial system, and now extort the U.S. and the world to pay them billions in ransom or face the destruction of the world financial system and economy.

    Prosecute the hundreds of criminals responsible for committing the greatest financial crimes in U.S. history.

    Let a bulldog prosecutor take off the kid gloves, hit these criminals with the iron fist of justice, and become a national hero…a legend in our time.

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