In Original Reformer, a Model
After the Crash of '29, Ferdinand Pecora Took On the 'Banksters' Of His Day and Ushered In Powerful New Regulation of Wall St.

By Brady Dennis
Washington Post Staff Writer
Wednesday, September 16, 2009

The last time Washington enacted sweeping financial reform, more than 75 years ago, the catalyst was a cigar-smoking, Sicilian-born immigrant named Ferdinand Pecora.

A former New York prosecutor, Pecora was the last in a series of investigators hired to examine the causes that led to the stock market crash of 1929 for the Senate Committee on Banking and Currency. In early 1933, the newly-elected Democratic president, Franklin D. Roosevelt, gave the bulldog lawyer his blessing to dig deep into the excesses that had plunged the nation into the Great Depression.

The result was a relentless investigation, 12,000 pages of transcripts that laid bare abuses on Wall Street and failures of Washington to adequately regulate the nation's financial system. Pecora's efforts provided a basis for reforms that would alter Wall Street and maintain relative stability in the banking industry until the recent crisis. These included legislation that for the first time regulated the sale of securities and helped establish the Federal Deposit Insurance Corp. and the Securities and Exchange Commission.

For all the differences between then and now, there also are whispers of familiarity: Abuses on Wall Street. The blind eye of Washington. An economy in crisis. A new and eager administration calling for reform, and efforts by those with vested interests to shape those reforms to their will.

On Monday, President Obama tried to wake the national debate over financial reform from its August slumber, urging Wall Street to embrace the changes rather than seek to impede them. But Wall Street has rarely embraced broad change without some prodding.

Pecora and his small team of dogged investigators recognized as much in the 1930s. They issued subpoenas and summoned the titans of finance to Washington, where Pecora savaged them during a series of probing and withering cross-examinations. Charles E. Mitchell of National City Bank, the precursor to Citibank, was forced to resign after Pecora revealed his many transgressions. Likewise, financier J.P. Morgan, namesake of J.P. Morgan Chase and Morgan Stanley, left with a battered reputation.

Day after day, Pecora turned the proceedings into riveting political theater. He made villains of some of Wall Street's most revered bankers, earning them the nickname "banksters," generating a steady stream of headlines and captivating the nation.

One senator accused Pecora of "having a circus, and the only things lacking now are peanuts and colored lemonade."

There was truth in that, especially after an employee of Ringling Brothers Circus plopped a midget named Lya Graf onto Morgan's lap during a break in the hearings -- the world's smallest woman in the lap of the world's richest man -- a picture that ran in many newspapers.

At the same time, Pecora's relentless grillings drew back the veil on the shrouded world of Wall Street and revealed excessive salaries, failures to pay income taxes and a litany of other abuses.

"His investigation drove these bills and made them stronger than they would otherwise have been," Don Ritchie, an associate historian for the Senate, said. "I don't know any other investigation that produced as much" legislation.

Harnessing the Outrage

Above all, Pecora understood the power of public outrage.

"Pecora's success was his ability to crystallize the anger that a lot of Americans were feeling toward Wall Street," said Michael Perino, a law professor at St. John's University and author of an upcoming book about the hearings. "He was able to create a clamor for reform."

But Pecora also realized that such clamor was fleeting.

In his 1939 book, "Wall Street Under Oath," Pecora wrote, "The public is sometimes forgetful." As memories of the stock market crash faded, he warned, Americans "may lend at least one ear to the persuasive voices of The Street subtly pleading for a return to the 'good old times.' "

Reflecting on his investigation, Pecora recalled how "the captains of Wall Street, still within the shadow of panic and depression," had seemed at first eager to submit to oversight. But it didn't last.

"The more business recovered, however, and the stronger it felt, the more openly and bitterly did Wall Street oppose any sound program of reform," he wrote.

That's what current advocates of regulatory change fear.

"We've passed the moment when there's this palpable anger directed at the financial community," Perino said of the current crisis. "When you leave the immediate vicinity of the crisis, as you get farther and farther away in time, the urgency fades." Key legislators like Rep. Barney Frank (D-Mass.), who leads the House Financial Services Committee, and Sen. Christopher J. Dodd (D-Conn.), who chairs the Senate Banking Committee, have said they plan to push aggressive reforms this fall. Obama insists that issue remains near the top of the agenda.

But both policymakers and lobbyists know that it's usually easier to block reforms than to reach consensus, that enough delay can kill any bold proposal in Washington.

Simon Johnson, professor of entrepreneurship at MIT's Sloan School of Management, says, "We have not yet met our Ferdinand Pecora," a figure who can create the momentum required for strong new regulations. But, Johnson added, "Pecoras can emerge."

One possibility is that such a character could come out of the 10-member Financial Crisis Inquiry Commission, which was set up by Congress in July to investigate various aspects of the current crisis. The panel's chairman, Phil Angelides, a former California state treasurer and longtime Democratic donor, explicitly said in a recent Bloomberg interview that he planned to use Pecora as a model and pursue "non-political hard look" at the causes of the crisis.

Making the Law Work

Yet the landscape confronting today's advocates of reform is far different from that of the 1930s.

"In the earlier period, there essentially was very limited federal regulation -- nothing in securities, nothing in commodities, nothing in insurance," said Joel Seligman, president of the University of Rochester and an expert in securities regulation. "To the extent you had economic regulation, a fair amount was at the state level."

These days, the country has an elaborate regulatory system, albeit one whose failings became obvious during the current crisis. Obama isn't advocating an entirely new system. He's mostly trying to repair the current one. His boldest proposals include a new agency that would oversee consumer financial products such as mortgages and credit cards and expanding the power of the Federal Reserve to monitor systemic risks throughout the economy.

Whatever regulatory changes ultimately emerge from Congress, they alone may not be enough. In his book, Pecora -- who went on to become an SEC commissioner under its inaugural chairman, Joseph P. Kennedy Sr., and later a New York Supreme Court judge -- warned that laws themselves "are no panacea; nor are they self-executing."

On the day that Franklin Roosevelt signed the Securities Exchange Act into law in 1934, Pecora was in attendance. At one point, the president turned to Pecora and asked, "Ferd, now that I have signed this bill and it has become law, what kind of law will it be?"

"It will be a good or bad bill, Mr. President," Pecora said, "depending upon the men who administer it."

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