by David Cosgrove
If you are interested in examining the historical parallels between the alleged causes and political responses to the economic crises of 1929 – 1934 and 2008 – 2012 from a unique perspective, pick up Michael Perino’s “The Hellhound of Wall Street: How Ferdinand Pecora’s Investigation of the Great Crash Forever Changed American Finance.” While the focus of the book is the political reaction and wranglings, as well as the financial practices, that ultimately led to the 1932-’33 City Bank Senate investigation and hearings, followed by the creation of the Securities and Exchange Commission, the parallels are astonishing. Here is just one example from the book:
“Few Americans today know who Ferdinand Pecora was, although he was once a media superstar, a nearly daily fixture in the newspapers and radio broadcasts across the country. With the onset of our current economic woes his name has slowly begun to crop up again. In April 2009, House Speaker Nancy Pelosi called for a new “Pecora Commission” to investigate “what happened on Wall Street.” The next week, the Senate invoked Pecora’s name in voting to create an independent committee to investigate the financial crises, and in January 2010 the Financial Crises Inquiry Commission held its first hearings.
Pecora, a diminutive Sicilian immigrant and a former assistant district attorney from New York City, was chief counsel for the Senate Committee on Banking and Currency, charged with investigating the causes of the 1929 stock market crash. As he recounted in his memoir of the hearings, Wall Street under Oath: “Before [the committee] came, in imposing succession, the demigods of Wall Street, men who names were household words, but whose personalities and affairs were frequently shrouded in deep, aristocratic mystery…Never before in the history of the United States had so much wealth and power been required to render a pubic accounting.” In terms of rapt public attention, economic impact, and long-lasting legislative accomplishments, Pecora’s investigation must rank as the most successful inquiry in the more than two-hundred-year history of congressional probes.1”2
“Ultimately, the acclaim Pecora garnered was justified because the hearings he led fundamentally changed the relationship between Washington and Wall Street. Before 1933 the federal government had taken a hands-off approach to the stock market. But the hearings, and the public clamor they created, changed all that. In his Inaugural Address, Roosevelt declared, “There must be an end to a conduct in banking and in business which too often has given to a sacred trust the likeness of callous and selfish wrongdoing,” and he called for “strict supervision of all banking and credits and investments.” Many would argue that the former is still all too true, but Roosevelt at least delivered on the latter. Over the course of Roosevelt’s famous first hundred days in office and then in the year following, Congress passed and Roosevelt signed a flurry of banking and securities legislation, most of which still governs our financial markets today. The first federal securities laws, federal deposit insurance, and the creation of the Securities and Exchange Commission all trace their roots back to that fertile political soil.”3
“The primary compensation for Mitchell and the other officers was the management fund. After deducting an initial 8 percent return for the shareholders, the officers collectively shared 20 percent of all of the remaining profits. In broad strokes, City Bank’s management fund looked similar to compensation in hedge funds today, and for Pecora, it provided the same incentive for excessive risk taking. In fact, it might have created even greater incentives for risk. A hedge fund typically collects 20 percent of all profits, but the executives at City Bank had “nothing to gain and everything to lose, individually, by a conservative policy” because their profit sharing did not kick in until the bank had crossed that initial 8 percent threshold.
There was another factor, as well, that pushed the executives to even riskier securities offerings. Every year it took more and more sales to get the management fund into the black. Mitchell was continuously expanding his far-flung securities-selling network. By 1929 it had offices across the country linked by the latest information technology of the day. The overhead on the system was enormous, and City Bank had to sell larger and larger amounts of securities just to break even.”4
While the title and much of the book’s content center upon the chief counsel for the Senate hearings, “Ferde” Pecora—an Italian immigrant that grew up in a New York City basement without heat or plumbing—the book is also filled with the financial and political history of one of the most extreme decades in the United States. I picked my copy up at a Borders going-out-of-business sale. How ironic is that?!
1Ferdinand Pecora, Wall Street under Oath: The Story of Our Modern Money Changers (New York: Simon & Schuster, 1939), p. 3-4.
2Michael Perino, The Hellhound of Wall Street: How Ferdinand Pecora’s Investigation of the Great Crash Forever Changed American Finance (New York: The Penguin Press, 2010), p. 3-4.
3Michael Perino, The Hellhound of Wall Street: How Ferdinand Pecora’s Investigation of the Great Crash Forever Changed American Finance (New York: The Penguin Press, 2010), p. 4-5.
4Michael Perino, The Hellhound of Wall Street: How Ferdinand Pecora’s Investigation of the Great Crash Forever Changed American Finance (New York: The Penguin Press, 2010), p. 143.