Pelosi Wall Street Probe Follows Pecora After Crash

Wall Street may be heading for the deepest investigation of its practices since a congressional panel’s probe of abuses following the 1929 stock market crash.

House Speaker Nancy Pelosi plans to push for a comprehensive inquiry, saying that three-quarters of Americans want to know what led to the bankruptcy of Lehman Brothers Holdings Inc. and the collapse of Bear Stearns Cos. and Merrill Lynch & Co. She favors one patterned after Senate Banking Committee hearings led by Ferdinand Pecora starting in 1933, according to her spokesman, Nadeam Elshami.

The Pecora review “was probably the single most important congressional investigation in the history of our country, except perhaps the Watergate hearings,” Donald Ritchie, associate historian for the U.S. Senate, said in an interview.

Congress is reacting to an economic collapse that has generated $1.3 trillion in financial industry losses, $700 billion in U.S. taxpayer cash infusions and loans, and $37 trillion in destroyed world stock market value since 2007. The Pecora Commission generated public support for creating the Securities and Exchange Commission and laws that governed financial services for seven decades.

Pelosi, a California Democrat, will speak about hearings this week to lawmakers, including Representative Barney Frank, chairman of the panel that writes banking law, Elshami said.

“I think it’s useful to have it, but that should not be a reason to hold off on legislating,” Frank, a Massachusetts Democrat, said of Pelosi’s proposal after a speech in Washington yesterday.

Rewriting Rules

President Barack Obama, Frank and other congressional leaders have made rewriting the rules governing Wall Street a top priority.

Several lawmakers have proposed a commission or select committee to investigate the causes of the meltdown. Pelosi’s backing, expressed during an appearance in San Francisco last week, was the first show of support from the congressional leadership.

“We truly want to find out what happened to this country and level with the American people,” said Representative John Larson of Connecticut, the No. 4 House Democratic leader, who has proposed a nonpartisan independent commission. “We need to provide a narrative.”

Job Losses

Wall Street firms have cut more than 180,000 jobs during the worst credit crisis since the Great Depression. The retrenchment helped boost New York City’s unemployment rate to
8.1 percent in February from 6.9 percent in January, a record month-to-month increase, according to the state Labor Department.

City Comptroller William Thompson predicted in March that 250,000 jobs would be lost in New York before the recession ends.

People need “to have a clearer understanding of as to how we got here and what the exposure is to the taxpayer to all of this,” Pelosi said April 15, according to a tape of an appearance at the Commonwealth Club of California. She said she told Treasury Timothy Geithner about her plan.

Senate Majority Leader Harry Reid, a Nevada Democrat, hasn’t indicated a preference for a new inquiry.

"There are a variety of proposals in the Senate,” said Regan Lachapelle, Reid’s deputy communications director, in an e-mail. “Senator Reid is exploring these different approaches and plans to discuss them with the speaker at the appropriate time.”

Premature Reforms

Some lawmakers say passing reforms without a complete study of the credit crisis would be premature. Senator Richard Shelby of Alabama, the senior Republican on the Senate Banking Committee, made that point at a hearing on modernizing financial rules in February. He cited the Pecora hearings as the “best precedent.”

Senator Christopher Dodd, the Connecticut Democrat and committee chairman, responded: “Certainly we want to examine what happened, but also we need to move forward.”

Members of Congress may be reluctant to tackle the recommendations of such an inquiry because of financial industry donations to political campaigns, said Wall Street historian Charles Geisst.

Financial services has been the biggest contributor in every U.S. election cycle in the last 20 years, according to the Center for Responsive Politics, a Washington research group that tracks campaign money. Its individual and political action committee donations in 2007 and 2008 totaled $463.5 million, compared with $163.8 million from the health-care industry and
$75.6 million from energy companies.

Goldman and Citigroup

Individual and PAC donations from Goldman Sachs Group Inc.which totaled $30.9 million, and Citigroup Inc., at $25.8 million, were higher than those from any other company except AT&T Inc.’s $40.9 million over the last 20 years, the center’s compilation of Federal Election Commission data shows.

“How can you seriously propose a law when you’ve been taking money from ‘The American Poodles for Wall Street’ or whatever fund for the past 10 years,” said Geisst, a professor of finance and economics at Manhattan College in New York and author of “Wall Street: A History” (Oxford University Press,
488 pages, $24.99).

Senators John McCain, an Arizona Republican, and Byron Dorgan, a North Dakota Democrat, say they’re concerned congressional turf disputes might hamper the effort.

"The magnitude of a serious investigation and the conflicts likely to arise from fragmented committee jurisdictions suggest that a bipartisan select committee is necessary,” they wrote March 8 in the Washington Post.

‘Different Take’

Larson said he has sought Dodd’s support for his bill.

“He has a different take on it,” Larson said. “Given his position, he’d like to have more of his input on this, but he definitely embraces the concept.” Dodd’s office didn’t respond to requests for comment.

Pelosi, who wasn’t available yesterday, would prefer the hearings be handled by a newly created subcommittee of an existing congressional panel, which is more tailored to the Pecora Commission’s approach, according to spokesman Elshami.

“I would hope that the individuals who take part in this will have at least a modicum of past experience of the players and the instruments that are involved,” said Representative Scott Garrett, a New Jersey Republican and member of Frank’s Financial Services Committee.

“That’s so you don’t have a huge learning curve going in, which would be a waste of time,” he said.

Insider Prices

In citing the Pecora model, advocates of a full-scale probe are harkening back to an investigation that captivated the nation in the 1930s. It centered on an intense examination of bankers and brokers and how their actions helped contribute to the stock market’s implosion.

Pecora exposed practices that benefited the wealthy at the expense of ordinary investors, such as giving favored clients insider prices on stock offerings, Ritchie said.

“Stock exchanges were operated as private clubs up to that point,” he said, adding that the investigation “brought back to Earth once-Olympian bankers.”

The Pecora hearings were steeped in drama -- and comedy. In one incident, the publicity-shy financier J.P. Morgan sat alone at the witness table during a break and was surprised when a circus promoter, seeking a chance to use the hearings to get publicity for his show, placed a dwarf in Morgan’s lap, Ritchie said. Photos of the son of the banker who staved off the Panic of 1907 in an awkward moment appeared on front pages across the nation and became a symbol of the humbling of the nation’s top financiers.