Time For Another ‘Pecora Commission’ to Investigate The Pirates of Wall Street

Posted by AzBlueMeanie:

I have made no secret of my disappointment in President Obama's decision to bring Lawrence Summers and Timothy Geithner into his administration. I said it was a mistake at the time, and recent events have only hardened my opposition.

Last week it was reported that After a Pause, Wall Street Pay Bounces Back:

The rest of the nation may be getting back to basics, but on Wall Street, paychecks still come with a golden promise.

Workers at the largest financial institutions are on track to earn as much money this year as they did before the financial crisis began, because of the strong start of the year for bank profits.

Even as the industry’s compensation has been put in the spotlight for being so high at a time when many banks have received taxpayer help, six of the biggest banks set aside over $36 billion in the first quarter to pay their employees, according to a review of financial statements.

If that pace continues all year, the money set aside for compensation suggests that workers at many banks will see their pay — much of it in bonuses — recover from the lows of last year.

As an involuntary taxpayer shareholder of these "corporate welfare" banks, I strenuously object to any bonuses being paid to individuals who are responsible for driving their banks into insolvency through their greed and incompetence.

Nobel Prize winning economist Paul Krugman writes today in the New York Times Money for Nothing

[W]e should be disturbed by an article in Sunday’s Times reporting that pay at investment banks, after dipping last year, is soaring again — right back up to 2007 levels.

Why is this disturbing? Let me count the ways.

First, there’s no longer any reason to believe that the wizards of Wall Street actually contribute anything positive to society, let alone enough to justify those humongous paychecks.

* * *

Still, you might argue that we have a free-market economy, and it’s up to the private sector to decide how much its employees are worth. But this brings me to my second point: Wall Street is no longer, in any real sense, part of the private sector. It’s a ward of the state, every bit as dependent on government aid as recipients of Temporary Assistance for Needy Families, a k a “welfare.”

I’m not just talking about the $600 billion or so already committed under the TARP. There are also the huge credit lines extended by the Federal Reserve; large-scale lending by Federal Home Loan Banks; the taxpayer-financed payoffs of A.I.G. contracts; the vast expansion of F.D.I.C. guarantees; and, more broadly, the implicit backing provided to every financial firm considered too big, or too strategic, to fail.

One can argue that it’s necessary to rescue Wall Street to protect the economy as a whole — and in fact I agree. But given all that taxpayer money on the line, financial firms should be acting like public utilities, not returning to the practices and paychecks of 2007.

Furthermore, paying vast sums to wheeler-dealers isn’t just outrageous; it’s dangerous…

* * *

There’s a palpable sense in the financial press that the storm has passed: stocks are up, the economy’s nose-dive may be leveling off, and the Obama administration will probably let the bankers off with nothing more than a few stern speeches. Rightly or wrongly, the bankers seem to believe that a return to business as usual is just around the corner.

The New York Times also has this lengthy report today on Timothy Geithner and his role as president of the New York Federal Reserve Bank during the financial market melt-down last year. Geithner, as Member and Overseer, Forged Ties to Finance Club – NYTimes.com A brief excerpt:

An examination of Mr. Geithner’s five years as president of the New York Fed, an era of unbridled and ultimately disastrous risk-taking by the financial industry, shows that he forged unusually close relationships with executives of Wall Street’s giant financial institutions.

His actions, as a regulator and later a bailout king, often aligned with the industry’s interests and desires, according to interviews with financiers, regulators and analysts and a review of Federal Reserve records.

This follows on the heels of reporting in the Wall Street Journal last week about the testimony of Ken Lewis, CEO of Bank America, to investigators for New York Attorney General Andrew Cuomo about how Treasury Secretary Henry Paulson and Federal Reserve Chairman Bem Bernanke ordered him to deceive his own shareholders and forced BofA to risk its own solvency to save Merrill Lynch by purchasing it.

"Mr. Lewis executed the Paulson-Bernanke order without informing his shareholders of the material events taking place at Merrill. The merger closed on January 1. But investors and taxpayers had to wait weeks to learn that the government had invested another $20 billion plus loan portfolio insurance in BofA, and that Merrill had lost a staggering $15 billion in the last three months of 2008." Busting Bank of America – WSJ.com "Mr. Lewis noted that an earlier TARP investment in his bank had a "dilutive effect" on existing shareholders and was not requested by BofA. "We had not sought any funds. We were taking 15 [billion dollars] at the request of Hank [Paulson] and others," Mr. Lewis testified."

Finally, Neil Barofsky, the special government inspector general assigned to oversee the $700 billion Troubled Asset Relief Program, told lawmakers last Thursday that Treasury officials have balked at providing specific reporting on "where the money has gone and how it's been used," because it would be onerous and because money is "fungible" and difficult to track. Lawmakers want banks to report on bailout use

Barofsky's investigators have conducted their own survey of 364 banks that received TARP money. Barofsky said he has received a 100 percent response and that the information is revealing and disproves the Treasury's claims that it is difficult to acquire.

Barofsky said his staff is still examining the responses, but he said an initial review shows that many banks, particularly small community institutions, are using the money to increase lending while others are holding on to their TARP assistance in anticipation of future losses.

* * *

The inspector general reiterated other recommendations contained in a 250-page report he released to Congress earlier this week.

Barofsky emphasized his warning that a public private investment partnership that Treasury has devised to rid financial institutions of their troubled assets is vulnerable to fraud. He said that Treasury is considering his recommendations to prevent conflicts of interest on the part of fund managers, collusion among fund managers and financial institutions eager to get the highest price for their assets, and money laundering by organized crime.

Barofsky said he will be issuing six audits of various bailout transactions, including government assistance provided to Bank of America in connection with its acquisition of Merrill Lynch. He said his office is also conducting an investigation involving Bank of America.

Barofsky urged caution when asked about a Wall Street Journal report that Federal Reserve Chairman Ben Bernanke and former Treasury Secretary Henry Paulson pressured Bank of America CEO Kenneth Lewis to not discuss its plans to buy Merrill Lynch. The report was based on testimony Lewis gave last month to the New York attorney general.

Enough! It is time for another "Pecora Commission" to investigate the Pirates of Wall Street. Michael Winship writes in Where Have You Gone, Ferdinand Pecora? (alternatively titled Time to put "wealth on trial" again?)

Last week, House Speaker Nancy Pelosi told a crowd at San Francisco's Commonwealth Club, "I want to initiate… the equivalent of what happened in the '30s. They had something that was called the Pecora Commission," and this week the Senate passed two amendments to anti-fraud legislation, one calling for an independent investigation, similar to the 9/11 Commission; the other for an internal select committee — such as the Senate's Watergate hearings in 1973.

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Under threat of subpoena and under oath, one tycoon after another — including J.P. Morgan, Jr., of the House of Morgan and Charles "Sunshine Charley" Mitchell, chairman of First National City Bank (now Citigroup) — was hauled before the committee and grilled relentlessly by Pecora.

In June 1933, he even made the cover of Time magazine. "Wealth on trial" reads the headline inside, where the investigator was described in ethnic stereotypes of the day as "the kinky-haired, olive-skinned, jut-jawed lawyer from Manhattan." To their shock, the pompous financiers, unaccustomed to having their actions or integrity questioned by anyone, much less some pipsqueak, foreign-born legalist who made 255 dollars a month, were no match for his cross-examination skills.

They found themselves confessing to a litany of financial sins, including discount stock offerings to VIP "preferred" customers (among them, banker cronies, Charles Lindbergh and General "Black Jack" Pershing, as well as Washington insiders, including former President Coolidge and a Supreme Court justice), repackaging bad loans and selling them as bonds to the unsuspecting, and non-payment of income tax.

The Pecora hearings resulted in 12,000 pages of transcripts that are still a primary source for historians of the Great Crash, and important New Deal legislation that, for the first time, regulated the high-handed, free-wheeling banking industry and protected the public from its excesses — including the Securities Act of 1933, the Securities Exchange Act of 1934 (which established the Securities and Exchange Commission — Pecora was one of its first commissioners) and the Glass-Steagall Banking Act of 1933, which erected a firewall between commercial and investment banking — a wall torn down during the Clinton Administration, leading to much of our trouble today.

"[A]n independent commission with subpoena power is the way to go; not yet another congressional investigation led by Senators and Representatives who have received political contributions from the very companies they'll be hauling in for questioning. As the non-partisan Center for Responsive Politics has reported, for the last 20 years, the financial services industry has been the largest campaign contributor in every federal election cycle. In the last two years alone, individual and political action committee donations from Wall Street totaled $463.5 million."

President Obama needs to get involved immediately and publicly back an independent Pecora-style commission's work. According to Michael Perino, "Roosevelt was a big booster for the [Pecora] hearings. He met secretly with Pecora on a number of occasions," as well as the committee chairmen.

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It may already be too late. Simon Johnson says the banking industry is pretty confident they're already won. "They got the bailout, they got the money they needed to stay in business. They got a vast line of credit from the taxpayer," he said. "… Their position is, 'Look, if you want a recovery, if you want to get your economy back, you gotta be nice to us.' I'm afraid that the government has blinked…

"They were too big to fail… Now they're way too big to fail. Next time… they may be too big to rescue."

Ferdinand Pecora, a nation turns its lonely eyes to you.

It is time to stop cowering and kowtowing to these white collar criminals of Wall Street and to hold them accountable for their schemes and artifices to defraud investors and their house of cards Ponzi Schemes. Bank robbers should not be in charge of the banks.