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Monday, Oct. 25, 2010

Why We Need Another ‘Hellhound of Wall Street’

Michael Perino examines ‘Pecora’s Investigation of the Great Crash’

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What is it they say? That history repeats itself, or that those who cannot remember the past are condemned to repeat it?

Doesn’t matter. There is plenty of support for both statements in Michael Perino’s admirable study, The Hellhound of Wall Street: How Ferdinand Pecora’s Investigation of the Great Crash Forever Changed American Finance (Penguin Press). In reading it you may ask yourself more than once, “Have we learned nothing?,” for, as Perino says, in today’s financial difficulties there are echoes, so distinct as to be uncanny, of congressional hearings held 77 years ago.

Forgotten now, Pecora was once a media superstar. Perino, a law professor at St. John’s University, says the hearings Pecora led for the Senate Banking and Currency Committee in February 1933, during the last few days of the Hoover administration, “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 headlines his revelations generated, altered all that by galvanizing public opinion for reform.

The hearings into the Wall Street crash had dragged on for nearly a year with no results and were due to expire with the looming end of the congressional session. The committee chairman, South Dakota Republican Peter Norbeck, desperately seeking someone to keep the spark lighted, came across Pecora almost by accident.

He was a most unlikely candidate to become “The Hellhound of Wall Street.” Outside New York he was all but unknown, a Sicilian immigrant shouldering the casual bigotry and stereotypes of his day.

Through efforts barely short of Herculean, he had risen from grinding poverty to become a lawyer—a brilliant cross-examiner, eminently honest and fair. Formerly an assistant district attorney, he lived modestly on his income from an obscure law firm and had savings of a few hundred dollars.

And in just 10 days of questioning the biggest of the big shots of American finance—“Ten Days That Shook the Nation”—Pecora succeeded where others had failed, becoming in the process the darling of the press. He did it, the author says, by changing focus from how securities were being traded at the moment to how they got there, to their issuance and distribution. With that seemingly small but actually dramatic shift, and by keeping his probe simple, not letting his subjects bog him down in obfuscating details, and by humanizing the story, Pecora pulled in the big fish.

The biggest fish of all was Charles “Sunshine Charlie” Mitchell, chairman of National City Bank. Aside from ambition—Mitchell for money, Pecora for acclaim—the banker and the man investigating him could not be more different. Mitchell was enormously wealthy and powerful, socially prominent, and an adviser to the current and two previous Republican presidents.

While outside more and more banks continued to fail and more and more states declared “holidays” for those that remained, inside the hearing room Pecora patiently questioned Mitchell and others about how the bank and its securities-trading affiliate pressured investors to buy without disclosing the risks—Perino likens it to a 1920s version of Glengarry Glen Ross—and manipulated its own stock price and the stock prices of other companies, and then lavishly compensated its top executives.

After the hearings ended, Mitchell was disgraced, forced to resign his position. Richard Whitney, president of the NYSE—an aristocrat appalled by the suggestion that any business activity needed regulation and by his having to sit and be grilled by an immigrant little nobody—eventually went to prison for embezzlement.

An Italian-American, a member of an ethnic group at the time almost universally associated with crime, had exposed the criminality of the Anglo-Saxons ruling Wall Street.

Perino ranks Pecora’s investigation “as the most successful inquiry in the more than two-hundred-year history of congressional probes.” Regulations on securities trading, as well as the agency for enforcing them, the Securities and Exchange Commission, were swiftly created, as were banking regulations in the Glass-Steagall Act. (The latter has since been repealed, largely through the lobbying efforts of, ironically, Citigroup, successor to National City Bank.)

As Perino sees it, now as then we have populist outrage over greedy Wall Street titans. Now as then we have markets awash in short selling, favorable deals for the fortunate few and dodgy loans foisted on unwary investors.

What we don’t have is a Ferdinand Pecora.
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