WASHINGTON — It's been 77 years since the Pecora Commission combed through cabinets full of banking records, exposed the abuses that led to the stock market crash of 1929 and created a public furor that eased passage of sweeping securities reforms.
On Wednesday, as the nation crawls from the depths of the worst economic collapse since the 1930s, Americans will see whether a similar commission that Congress has created to investigate today's crisis will echo that no-holds-barred inquiry of the Great Depression as its 10 members confront the Wall Street giants of the 21st Century.
Among leadoff witnesses at the Financial Crisis Inquiry Commission's opening hearing: Lloyd Blankfein, the chairman and chief executive of Goldman Sachs, the Wall Street goliath that largely escaped the subprime mortgage debacle — and may have profited from it — by selling off $40 billion in securities backed by risky home loans while secretly betting that the housing market would plummet.
Sitting beside him will be the heads of J.P. Morgan Chase, Morgan Stanley and Bank of America, which together received $80 billion in taxpayer bailout money, all of which they've returned.
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Phil Angelides, the former California state treasurer who's the chairman of the commission, told McClatchy recently that the panel would seek to give Americans a full understanding of what caused the economic implosion, including the roles of investment banks in leveraging risk, Wall Street ratings agencies that bestowed triple A investment grades on shaky loans, seedy mortgage lenders and federal agencies that failed to regulate them all.
"We'll look at everything," Angelides said. " . . . We'll look at the greed, the hubris and the corruption."
Angelides said he also feels that it's his job "to tell the story in a way that's about real institutions, real people. This is people moving subprime (mortgages) to unsuspecting borrowers. These were decisions made in audit rooms. These were decisions made in boardrooms. These were decisions or no decisions made in regulatory agencies. This was about real human beings."
The panel will begin to tell that story this week, also hearing testimony from
U.S. Attorney General Eric Holder, state and federal regulators, economists and community bankers.
Financial institutions have produced documents voluntarily, and the commission has issued no subpoenas, said Warren Tucker, a spokesman for the panel.
Commission officials have been tight-lipped about what questions they'll pose to key witnesses, but that hasn't deterred the flow of unsolicited advice.
Former New York Gov. Eliot Spitzer, former federal savings and loan regulator William Black and University of San Diego law professor Frank Partnoy urged the panel Tuesday to explore the degree to which the big banks laid off their subprime mortgage risks on the American International Group, contributing to the near collapse and the $182 billion rescue of the world's biggest insurer.
The trio also suggested that panel members ask what three significant steps they took after a senior FBI official warned in congressional testimony in 2004 that, unless it were stemmed, a developing "epidemic" of mortgage fraud would produce a crisis.
Congress created the commission last summer, giving its six Democratic and four Republican members until Dec. 15, 2010, to submit a report identifying the myriad intertwined causes of the meltdown that's cost millions of Americans their homes, jobs and, in some cases, both.
While the circumstances are different than in the 1930s, the current inquiry undoubtedly will be measured against the long shadow of the Pecora Commission, considered the most effective such investigation in U.S. history.
Ironically, some of the same "bad actors" identified by the Pecora panel are taking heat today for controversial behavior. Goldman Sachs, for example, was assailed in the 1934 commission report for capitalizing on stock-exchange practices to make outsize gains with the public's money.
"The deplorable consequences to the American investing public, with their misplaced reliance upon and confidence in the competency and integrity of purpose of the investment trustees, is woefully exemplified by the Goldman-Sachs Trading Corporation," the panel wrote.
The panel also went after the business practices of J.P. Morgan & Co., Chase Manhattan and the National City Bank of New York, the forerunner to Citigroup, which, these days, has received more than $200 billion in federal aid since September 2008.
The Depression-era commission was named after its third chief counsel, Ferdinand Pecora, who picked up the mantle on Jan. 24, 1933. Under his leadership, Congress expanded the scope of the inquiry several times. More than 1,000 exhibits were entered into evidence and, in a time before computers, the panel compiled more than 12,000 printed pages.
The commission's high-profile hearings have been credited for creating the environment in which Congress passed the Banking Act of 1933, the Securities Act of 1933 and the Securities Exchange Act of 1934.
Similarly, the current commission is doing its business while the Senate and House finalize legislation to revamp regulations of the financial services industry.
"If we do this right," Angelides told a news conference last summer, "our work can serve as an antidote, much as the Pecora hearings did in the 1930s, to the kinds of financial market practices that none of us would want to see be repeated ever again."
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