Pecora: A Look Back That Moved Us Forward
By Mike Elk
April 22, 2009 - 11:49am ET
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Nowadays only a handful of financial wonks know who Ferdinand Pecora was. Yet in the depths of the Great Depression this son of a Sicilian shoemaker made his mark on history by uncovering the wrongdoing that led to the 1929 market collapse. The findings from the congressional commission he led fostered the regulatory structures that rebuilt the market and lasted until conservatives all but dismantled it during the past decade. We need another Pecora Commission in order to right the wrongs of the markets and get the economy moving again.
Ferdinand Pecora was a tough-nosed, street smart prosecutor who had learned about corporate abuse taking down stock fraudsters and predatory lenders as a New York City Assistant District Attorney in the 1920s. He was hired as chief counsel for the Senate Banking Committee in 1933.
Pecora's work taking down white-collar criminals in the 1920's led him to a fundamental belief:
"Had there been full disclosure of what was being done in the furtherance of these schemes, they could have not long have survived the fierce light of publicity and criticism. Legal chicanery and pitch darkness were the banker's stoutest allies."
For these reasons, many on Wall Street opposed his work, claiming that it would expose financial markets to undue risks. Critics argued, as they do today, that opening up all of Wall Street's books would erode market confidence. Three previous chief counsels to the committee had been stymied in their ability to expose fraud in the market because they had been denied subpoena power. However, the economy was in such dire shape that Franklin Roosevelt declared that the nation had to know what was wrong in order to fix it and insisted that Pecora be granted subpoena power.
Pecora's subpoena power allowed his team to uncover Wall Street frauds. The commission exposed corporate Ponzi schemes in which banks wrapped junk loans in convoluted plans to make them appear to be good investments. The similarity to today's schemes bring to the mind the old Yogi Berra phrase "It's like déjà vu all over again".
As Jackie Corr of Counterpunch explains in a must-read piece written on the Pecora Commission back in 2003:
Conspiring with Cuban President Gerado ("The Butcher") Machado as the National City Bank, [Charles Mitchell, chairman of National City Bank, now known as Citicorp] unloaded $31 million worth of useless Cuban sugar loans by transferring the insolvency to the stockholders of the National City affiliate without their knowledge. To do this the National City Company created a dummy Cuban company, the General Sugar Corporation.
... [I]n 1927 and 1928 the National City Bank dumped $90 million of worthless Peruvian government bonds on unsuspecting customers of the National City Company. Under the grilling of Pecora, Mitchell also conceded that the bonds were not "a good moral risk." Mitchell and Baker both testified to a memory loss when asked if there was any reason to consider the bonds sound.
Pecora uncovered how National City bank made huge profits through predatory lending practices and artificially inflating prices (deja vu again):
National City Bank and the Anaconda Copper Company conspired to defraud the public through call loans. Call money was first lent at 15%. This was followed by manipulation of Anaconda Copper fueling the speculative mania which was pushing stocks to record highs. In addition, Mitchell confessed to a series of National City Bank/Anaconda Copper operations that as of 1933 were the greatest frauds in American banking history. Among the details grudgingly given by Mitchell was the single most sensational Wall Street "sting" of the "Roaring Twenties." First, Mitchell, Rockerfeller and Ryan set up a "joint account" of nearly a million and a half shares of Anaconda Copper Company stock.
The stock was then repackaged and aggressively advertised and sold through the National City affiliate and its salesmen. At all times the "joint account" was being manipulated by Mitchell and Ryan who ran the stock up, from $40 in December, 1928 to $128 in March of 1929. The trio then dumped the stock, the results being one of the great fleecings of Wall Street. The hearings concluded that this single National City/Anaconda operation cost the public at least $150 million. At the time of the hearings Anaconda stock was listed at $4 a share. In addition to the millions made from these "transactions and others, " as Mitchell called them, none of the National City-Anaconda "joint accounts" required the insiders to put up any money.
Mitchell's admission that he had defrauded investors forced him to resign as the CEO of National City Bank. Additionally, a number of corporate wrongdoers were forced to resign and accept accountability due to the intense media pressure of the hearings. Most famously, under tough questioning J.P. Morgan even admitted under oath that he had not paid income taxes for three years.
Arthur Levitt, the former chairman of the Securities and Exchange Commission, gave the Pecora Commission credit for uncovering many abusive practices and bringing about new regulatory changes. By May 1934, the commission had generated 12,000 printed pages in several volumes. This work lead to the passage of the Glass-Seagall Act in 1933 to separate commercial and investment banking, the Securities Act of 1933 to prevent against false information, and the Securities Exchange Information Act of 1934 to regulate the stock exchange. The modern regulatory state was built as a direct result of Ferdinand Pecora's exposure of Wall Street. It worked well until it was dismantled in the late 1990's by conservative deregulatory ideologues such as former Sen. Phil Gramm, who led the Senate Banking Committee in the late 1990s.
With our economy in shambles, it is essential that learn what went wrong and why in order to rebuild. Bob Borosage, Co-Director of the Campaign for America's Future, has been a leading voice calling for a Pecora-like Commission here and Nancy Pelosi recently announced that Congress will start such a commission. It's important, though, that this Commission not be a whitewashing commission; it needs broad subpoena power to get to the bottom of this matter. Most importantly, we need a tough-nosed prosecutor like Ferdinand Pecora who is not afraid of ruining the careers of Wall Street criminals and their political patrons.
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