Saving Capitalism, Part 2: Congress Has Created a New Investigating Body That's Likely to Be Wall Street's Worst Nightmare

By Joe Rothstein
Editor, USPolitics.einnews.com

June 8, 2009

At their peak, the total of U.S. subprime mortgages amounted to $1.5 trillion. The financial markets parlayed that $1.5 trillion into nearly $15 trillion in “credit default swaps,” and other paper of questionable value. That $15 trillion served as the basis for $150 trillion in “leveraged” financial investments that brought down the world's economic system.

To play in these highly speculative financial markets, many banks and heavyweight financial institutions took on 30 to 40 times the debt their assets would justify. The line up of the guilty reads like a Who's Who of world finance: Merrill Lynch, Bear Stearns, Lehman Brothers, Citibank, Goldman Sachs, UBS, Wachovia, AIG and the richest of U.S. hedge funds and equity funds.

Why did these financial institutions take such risks? Because for those on the inside, it was enormously profitable. How profitable? In 2007 alone, 10 individual hedge fund managers took home bonuses worth more than the entire New York City school system spent during the three previous years.

Wall Street became something of a financial Wild West. Anything went. Until everything went.

Incredibly, those who managed many of the institutions that brought about the collapse are still running them. Many of the board members charged with protecting company shareholders are still members of those boards. Tim Geithner, who was president of the New York Federal Reserve during the debacle and in a key position to stop or slow the runaway excess, is Secretary of the Treasury. He's been replaced at the New York Fed by a former managing director of Goldman Sachs.

Drill down into the aftermath of the economic collapse and what you see is that surviving financial institutions are now able to borrow more money than ever from the U.S. government at virtually no cost, and to continue to loan it out at high interest. No surprise, the banks have turned profitable. Who couldn't make money in these circumstances? And if they lose money there's an unlimited open window at the Fed for them to borrow more.

Go from Wall Street to the U.S. Capitol and you will find an army of well-funded lobbyists pressing Congress not to change the system, and a Treasury Department stocked with Wall Street graduates who generally agree with them.

A somewhat similar situation existed after the Wall Street collapse of 1929 and the Great Depression that followed. The financial wizards of the day were unrepentant about their role in economic carnage they had created. The public was angry, but confused about what had happened, who to blame and how to fix it.

Then, Congress created an investigative body known as the “Pecora Commission,” named for its chairman, Frederick Pecora, the chief counsel of the Senate Banking Committee. With reformist zeal, Pecora and his staff delved into the motivations, discrepancies, frauds and deceptions that pre-dated the economic collapse. Out of their work came a whole range of reforms we now associate with President Roosevelt's New Deal.

Pecora's commission ferreted out what went wrong, nailed the blame where it belonged, based recommendations for righting the system on cold hard facts, and helped create the public climate of acceptance that allowed the President and Congress to make fundamental changes to the nation's economic system.

Two reforms directly associated with the Pecora Commission's work included creation of the Securities and Exchange Commission to regulate money markets, and the Glass-Steagall Act, which imposed a wall between the investment and commercial banking industries---the very act Congress repealed in 1998, paving the way for much of the financial wreckage we're now living through.

Well, hang onto your hats, folks. Congress has just created a new “Pecora” Commission. It happened with little fanfare, but on an overwhelming, bi-partisan vote. Senate Majority Leader Harry Reid and House Speaker Nancy Pelosi each get to name three members. Minority Leaders Mitch McConnell and John Boehner will name four. Significantly, the President gets to name no one.

The new commission has been given virtually unlimited power to investigate the collapse of the world's economic system. It's empowered to subpoena anyone, look through all records, public and private, and get to the root causes of what went so terribly wrong.

In the hands of ten informed people serious about their mission, with no personal agendas other than the public's, this commission could provide the foundation for a new form of U.S. capitalism---affecting the future of banking, finance, international trade, credit and a host of areas fundamental to our daily lives. Given the public's mood, I'm betting that congressional leaders appoint members to the commission who will do just that.

Any thoroughgoing investigation is going to turn up a lot of bad stuff in some of the very best board rooms and government filing cabinets. If the commission does its job right a lot of well known names----individuals and companies----are going to be humiliated. Maybe worse.

Who's up to this job? If the commission members are members of Congress, my vote for chairman would go to North Dakota Senator Byron Dorgan, one of eight U.S. senators who, ten years, ago, voted against cutting the financial markets loose from their New Deal restrictions. Dorgan is one of the co-authors of the bill that created the new commission, and has written a new book about the financial crisis, Reckless!: How Debt, Deregulation, and Dark Money Nearly Bankrupted America (And How We Can Fix It!)

If the commission members come from outside Congress, the obvious choice would be Elizabeth Warren, who currently chairs the congressional oversight panel of the TARP program. She's got the smarts to know what to do and the guts to do it.

Testifying the other day, Warren rightly noted, "People are angry because they are paying for programs that haven't been fully explained and that have no apparent benefit for their families or the economy as a whole, but still seem to leave enough cash in the system for lavish bonuses and golf outings. None of this seems fair."

None of it does seem fair. Not the way the banks have been bailed out. Not the way the unregulated financial institutions stay unregulated. Not the way the bond rating agencies which gave triple AAA endorsement to garbage paper are still free wheeling. Not the way mergers have left three large financial institutions owning half the U.S. mortgage market. Not the way the Federal Reserve has become a broken ATM for banks, putting taxpayers on the hook for unlimited future losses. Not the way vital information is still being withheld from public view.

If the new commission does its job right, its public hearings will be truly public----televised live. I suspect they will get Watergate Hearing-type ratings. Real reform to follow.

Joe Rothstein, editor of US Politics Today, is a former daily newspaper editor and long-time national political strategist based in Washington, D.C.

See all previous articles by Joe Rothstein here.