Pecora in Perspective: Everything Old is New Again — the Pecora Commission Redux
Nancy Pelosi has called for the creation of a new Pecora Commission, and have been quite a few mentions of the Pecora Commission in the news lately. However, I have seen little that actually goes to first sources and explains exactly what the Pecora Commission was and what it did. I will attempt to fill that void.
I have been reading the final report and some of the hearing transcripts. What strikes me, first and foremost, is that they read as if the testimony was taken last week, instead of in the mid-1930’s. You don’t even have to change the names , very much. The same entities, for example Citigroup the known as National City Bank of New York and its stock trading arm National City Company, Inc. were advancing the “too big to fail” argument back then, too.
Executive compensation consisting of a “base pay” that represented a small percentage of total compensation plus various “bonus pools” were the norm for top executives back then as well. There were even off shore subsidiary tax avoidance schemes uncovered. And there were even pyramid scheme scandals.
Reading the “Report of the Committee on Banking and Currency” pursuant to Senate Resolution 84 of the 72nd Congress and Senate Resolutions 56 and 97 of the 73rd Congress is much like reading any newspaper today; the same schemes, the same scandals, the same excuses.
So, what is different? Well, back in the 1930s the concentration of wealth and power into the hands of a few Masters of the Universe was seen as dangerous and undemocratic. After all, the fewer the number of people making momentous decisions that would vastly affect the economy, the more likely that they will begin to act in tandem, so that mistakes in judgment by a few, and a few who mostly talked only to each other, could have disastrous consequences for the many.
Also, a lack of transparency in the markets created a climate where the temptation to fraud and self dealing was almost overwhelming, because the chances of being caught were so slight, so long as Ponzi scheme or fund continued to make payments to “investors”.
The report also decries the practice of making loans on margin to fuel speculation in stocks. Speculation is essentially a “bet” on whether a stock will go up or down, as opposed to investment which is a judgment about whether or not the investor thinks a particular company is being run well and profitably. Would you encourage a system whereby people take out loans to fund a gambling trip to Las Vegas or Atlantic City? I doubt it, yet investors, even small investors are encouraged to buy and sell “on margin” as if this were some kind of prudent practice. Today we call speculators “day traders,” but they are really just placing bets using the stock market as their betting forum.
Congress, in the response to the revelations that came out during testimony held from April 1932 to May 1934, passed a series of laws intended to remedy some of the worst abuses and to provide oversight and create some transparency in the markets. During this period, the Banking Act of 1933 (more commonly referred to as Glass-Steagall) was passed. It required the divorcement of commercial banks from their investment affiliates and created federal bank deposit insurance.
Congress also passed the Securities Act of 1933, which required issuers of securities to disclose material information about those securities to the public before offering those securities for sale. The Securities Exchange Act of 1934 which created the SEC. The Trust Indenture Act of 1940 placed additional registration requirements on a class of securities that included Bonds, debentures and notes offered for sale. The Investment Company Act of 1940 regulates mutual funds and similar entities. You can reach the full text of these laws via hotlinks at the SEC’s website.
This is the first part of a continuing series on the original Pecora Commission and its relevance today.