Pecora Commission II: Super-Sleuths or Keystone Cops?

Congress will be appointing a special commission to investigate the causes of the economic crisis and to determine who is to blame. This proposal originated among progressives who wanted to see a replay of the depression era Pecora Commission, which exposed the Wall Street corruption that laid the basis for the 1929 stock market crash and the depression that followed.

At the very least, a similar exposure of the greedheads at Goldman Sachs, Citigroup, and the rest could provide an element of justice to this disaster and possibly lay the basis for criminal prosecutions of the worst offenders. Undoubtedly there are many multi-millionaires at these institutions who would make far more appropriate prisoners than some of the 2 million current guests of our criminal justice system.

Unfortunately, there is a real possibility that the commission appointed by Congress may follow a different precedent. Instead of striving to uncover the truth, it may seek to conceal it.

There is precedent for this of cover-up commission. The Iran-Contra Committee that Congress appointed in 1987 strove to conceal fundamental and deliberate violations of the law. Congress had explicitly prohibited the use of government money to support the Contras who were fighting to overthrow the Nicaraguan government.

There was not much ambiguity about the Boland Amendment, the law that prohibited funding. This was deliberate, because President Reagan had in the past skirted Congressional intent on this issue.

Nonetheless, President Reagan supported a special operation in which the U.S. government made a profit selling weapons to the mullahs in Iran (President Amadinejad’s intellectual predecessors) and then used the profits to fund the Contras. The whole operation was concealed from Congress until it was exposed by an independent Lebanese newspaper in the fall of 1986.

Both sides of this operation prompted outrage. On the one-hand, President Reagan was giving weapons to the hardest line elements in Iran. This was not consistent with our efforts to isolate the regime, which included a near complete trade embargo. On the other side, he was secretly giving U.S. taxpayer dollars to the Contras, in direct violation of the law.

This is the sort of activity for which presidents are supposed to be impeached and people are supposed to do long stints of jail time. But that’s not the way the Iran-Contra Committee saw it. They put on lengthy and boring hearings that quickly buried the public in obscure details that had nothing to do with the simple facts: the President sent taxpayer dollars to the Contras in direct violation of the law.

Not only did the committee confuse the public (or at least the media), it also undermined efforts to bring the Iran-Contra criminals to justice. Going against the wishes of Lawrence Walsh, the special prosecutor appointed to deal with the case, the committee gave most of the key figures immunity for their public testimony. While Walsh had sealed the material used for the prosecution case prior to any public testimony, the courts subsequently ruled that because other witnesses’ court testimony may have been affected by the immunized testimony before Congress, the Iran-Contra defendants were effectively immune from prosecution.

In effect, the committee both concealed the real issues from the public and protected the defendants from criminal prosecution. That’s not a victory for justice.

The basic story of the current crisis is very simple. We had an $8 trillion housing bubble as house prices had hugely diverged from fundamentals in a way that had never happened before. The bubble was fueled by loans that were virtually guaranteed to go bad once house prices stopped rising. The banks that issued the loans didn’t care because they sold them in the secondary market. By the time the loans went bad, they had already cashed out their stake.

The investment banks that securitized the loans didn’t care because they sold their (investment grade) junk all over the world. The executives running the operations pocketed tens of millions before the music stopped and the bubble burst.

So, what questions does the commission have to ask? How about putting all the 7 and 8 figure executives under oath and ask them if they were really too dumb to see an $8 trillion housing bubble. For a follow-up, the commission can ask them what exactly they do to earn those multi-million dollar paychecks. Those questions should make for some very informative testimony.

Unfortunately, it is more likely that the commission will get buried in obscure details of collaterized debt obligations and credit default swaps. That would be a serious distraction from the real story and a waste of the taxpayers’ money.