Pecora Commission

Last updated

The Pecora Investigation was an inquiry begun on March 4, 1932, by the United States Senate Committee on Banking and Currency to investigate the causes of the Wall Street Crash of 1929. The name refers to the fourth and final chief counsel for the investigation, Ferdinand Pecora. His exposure of abusive practices in the financial industry galvanized broad public support for stricter regulations. As a result, the U.S. Congress passed the Glass–Steagall Banking Act of 1933, the Securities Act of 1933, and the Securities Exchange Act of 1934. [1]

Contents

History

Following the 1929 Wall Street Crash, the U.S. economy had gone into a depression, and a large number of banks failed. The Pecora Investigation sought to uncover the causes of the financial collapse. As chief counsel, Ferdinand Pecora personally examined many high-profile witnesses, who included some of the nation's most influential bankers and stockbrokers. Among these witnesses were Richard Whitney, president of the New York Stock Exchange; investment bankers Otto H. Kahn, Charles E. Mitchell, Thomas W. Lamont, and Albert H. Wiggin; and celebrated commodity market speculators such as Arthur W. Cutten. Given wide media coverage, the testimony of the powerful banker J. P. Morgan Jr. caused a public outcry after he admitted under examination that he and many of his partners had not paid any income taxes in 1931 and 1932. [2]

Investigations (1932-34)

The investigation was launched by a majority-Republican Senate, under the Banking Committee's chairman, Senator Peter Norbeck. Hearings began on April 11, 1932, but were criticized by Democratic Party members and their supporters as being little more than an attempt by the Republicans to appease the growing demands of an angry American public suffering through the Great Depression. Two chief counsels were fired for ineffectiveness, and a third resigned after the committee refused to give him broad subpoena power. In January 1933, Ferdinand Pecora, an assistant district attorney for New York County, was hired to write the final report. Discovering that the investigation was incomplete, Pecora requested permission to hold an additional month of hearings. His exposé of the National City Bank (now Citibank) made banner headlines and caused the bank's president to resign. Democrats had won the majority in the Senate, and the new president, Franklin D. Roosevelt, urged the new Democratic chairman of the Banking Committee, Senator Duncan U. Fletcher, to let Pecora continue the probe. So actively did Pecora pursue the investigation that his name became publicly identified with it, rather than the committee's chairman. [3]

The Pecora Investigation uncovered a wide range of abusive practices on the part of banks and bank affiliates. These included a variety of conflicts of interest, such as the underwriting of unsound securities in order to pay off bad bank loans, as well as "pool operations" to support the price of bank stocks. The hearings galvanized broad public support for new banking and securities laws. As a result of the Pecora Commission's findings, the United States Congress passed the Glass–Steagall Banking Act of 1933 to separate commercial and investment banking, the Securities Act of 1933 to set penalties for filing false information about stock offerings, and the Securities Exchange Act of 1934, which formed the SEC, to regulate the stock exchanges. [4]

The Banking Committee's hearings ended on May 4, 1934, after which Pecora was appointed as one of the first commissioners of the SEC.

Impact

Historian Michael Perino argues that Pecora's investigation "Forever Changed American Finance by its impact on the financial laws of the New Deal. [5]

In 1939, Ferdinand Pecora published a memoir that recounted details of the investigations, Wall Street Under Oath. Pecora wrote: "Bitterly hostile was Wall Street to the enactment of the regulatory legislation." As to disclosure rules, he stated that "Had there been full disclosure of what was being done in furtherance of these schemes, they could not long have survived the fierce light of publicity and criticism. Legal chicanery and pitch darkness were the banker's stoutest allies."

In 2010, a similar investigation was launched by the U.S. Congress into the reasons behind the 2007–2008 crash of Wall Street and the resultant economic crisis and recession. [6]

See also

Related Research Articles

<span class="mw-page-title-main">U.S. Securities and Exchange Commission</span> Government agency overseeing stock exchanges

The U.S. Securities and Exchange Commission (SEC) is an independent agency of the United States federal government, created in the aftermath of the Wall Street Crash of 1929. Its primary purpose is to enforce laws against market manipulation.

<span class="mw-page-title-main">Investment banking</span> Type of financial services company

Investment banking is an advisory-based financial service for institutional investors, corporations, governments, and similar clients. Traditionally associated with corporate finance, such a bank might assist in raising financial capital by underwriting or acting as the client's agent in the issuance of debt or equity securities. An investment bank may also assist companies involved in mergers and acquisitions (M&A) and provide ancillary services such as market making, trading of derivatives and equity securities, FICC services or research. Most investment banks maintain prime brokerage and asset management departments in conjunction with their investment research businesses. As an industry, it is broken up into the Bulge Bracket, Middle Market, and boutique market.

<span class="mw-page-title-main">Gramm–Leach–Bliley Act</span> Act of the 106th United States Congress (1999–2001)

The Gramm–Leach–Bliley Act (GLBA), also known as the Financial Services Modernization Act of 1999, is an act of the 106th United States Congress (1999–2001). It repealed part of the Glass–Steagall Act of 1933, removing barriers in the market among banking companies, securities companies, and insurance companies that prohibited any one institution from acting as any combination of an investment bank, a commercial bank, and an insurance company. With the passage of the Gramm–Leach–Bliley Act, commercial banks, investment banks, securities firms, and insurance companies were allowed to consolidate. Furthermore, it failed to give to the SEC or any other financial regulatory agency the authority to regulate large investment bank holding companies. The legislation was signed into law by President Bill Clinton.

The Glass–Steagall legislation describes four provisions of the United States Banking Act of 1933 separating commercial and investment banking. The article 1933 Banking Act describes the entire law, including the legislative history of the provisions covered.

<span class="mw-page-title-main">1933 Banking Act</span> 1933 U.S. banking reform; established the Federal Deposit Insurance Corporation (FDIC)

The Banking Act of 1933 was a statute enacted by the United States Congress that established the Federal Deposit Insurance Corporation (FDIC) and imposed various other banking reforms. The entire law is often referred to as the Glass–Steagall Act, after its Congressional sponsors, Senator Carter Glass (D) of Virginia, and Representative Henry B. Steagall (D) of Alabama. The term "Glass–Steagall Act", however, is most often used to refer to four provisions of the Banking Act of 1933 that limited commercial bank securities activities and affiliations between commercial banks and securities firms. That limited meaning of the term is described in the article on Glass–Steagall Legislation.

J.P. Morgan & Co. is an American financial institution specialized in investment banking, asset management and private banking founded by financier J. P. Morgan in 1871. Through a series of mergers and acquisitions, the company is now a subsidiary of JPMorgan Chase, one of the largest banking institutions in the world. The company has been historically referred to as the "House of Morgan" or simply Morgan.

<span class="mw-page-title-main">United States securities regulation</span> Law and regulations that relate to Securities

Securities regulation in the United States is the field of U.S. law that covers transactions and other dealings with securities. The term is usually understood to include both federal and state-level regulation by governmental regulatory agencies, but sometimes may also encompass listing requirements of exchanges like the New York Stock Exchange and rules of self-regulatory organizations like the Financial Industry Regulatory Authority (FINRA).

<span class="mw-page-title-main">Albert H. Wiggin</span> American banker

Albert Henry Wiggin was an American banker. General Electric's Owen D. Young once described him as "the most colorful and attractive figure in the commercial banking world" of his time. Wiggin was the Director of privately owned Federal Reserve Bank of New York 1932–33. Wiggin was also the only member of the Federal Reserve Bank to have a law written precisely against his actions, the “Wiggin Provision”, when Albert was forced to “resign in disgrace after it was revealed that he had been short-selling his own bank’s stock”

<span class="mw-page-title-main">Ferdinand Pecora</span> American judge (1882–1971)

Ferdinand Pecora was an American lawyer and New York State Supreme Court judge who became famous in the 1930s as Chief Counsel to the United States Senate Committee on Banking and Currency during its investigation of Wall Street banking and stock brokerage practices.

<span class="mw-page-title-main">Pujo Committee</span> United States congressional subcommittee

The Pujo Committee was a United States congressional subcommittee in 1912–1913 that was formed to investigate the so-called "money trust", a community of Wall Street bankers and financiers that exerted powerful control over the nation's finances. After a resolution introduced by congressman Charles Lindbergh Sr. for a probe on Wall Street power, congressman Arsène Pujo of Louisiana was authorized to form a subcommittee of the House Committee on Banking and Currency. In 1913–1914, the findings inspired public support for ratification of the Sixteenth Amendment that authorized a federal income tax, passage of the Federal Reserve Act, and passage of the Clayton Antitrust Act.

<span class="mw-page-title-main">Charles E. Mitchell</span> American banker (1877–1955)

Charles Edwin Mitchell was an American banker whose incautious securities policies facilitated the speculation which led to the Crash of 1929. First National City Bank's controversial activities under his leadership were a major contributing factor in the passage of the Glass-Steagall Act.

The first "Glass–Steagall Act" was a law passed by the United States Congress on February 27, 1932, prior to the inclusion of more comprehensive measures in the Banking Act of 1933, which is now more commonly known as the Glass-Steagall Act. It was the first time that currency was permitted to be allocated for the Federal Reserve System. It was passed in an effort to stop deflation and expanded the Federal Reserve's ability to offer loans to member banks (rediscounts) on more types of assets such as government bonds as well as commercial paper.

<span class="mw-page-title-main">John C. Hull (politician)</span> American politician (1870–1947)

John Carpenter Hull served the state of Massachusetts for twenty years between 1916 and 1936 at the Statehouse in Boston chairing the committees of Education, Judiciary, Elections and Public Institutions. He was also the Speaker of the House of Massachusetts from 1925 to 1928, educator, lawyer, and the first Securities Director of Massachusetts.

Wall Street reforms are reforms or regulations of the financial industry in the United States.

Philadelphia financier Jay Cooke established the first modern American investment bank during the Civil War era. However, private banks had been providing investment banking functions since the beginning of the 19th century and many of these evolved into investment banks in the post-bellum era. However, the evolution of firms into investment banks did not follow a single trajectory. For example, some currency brokers such as Prime, Ward & King and John E. Thayer and Brother moved from foreign exchange operations to become private banks, taking on some investment bank functions. Other investment banks evolved from mercantile firms such as Thomas Biddle and Co. and Alexander Brothers.

This article details the history of banking in the United States. Banking in the United States is regulated by both the federal and state governments.

The Glass–Steagall Act was a part of the 1933 Banking Act. It placed restrictions on activities that commercial banks and investment banks could do. It effectively separated those activities, so the two types of business could not mix, in order to protect consumer's money from speculative use. The Banking Act of 1935 clarified and otherwise amended Glass–Steagall.

The Glass–Steagall legislation was enacted by the United States Congress in 1933 as part of the 1933 Banking Act, amended as part of the 1935 Banking Act, and most of it was repealed in 1999 by the Gramm–Leach–Bliley Act (GLBA). Its protections and restrictions had also been chipped away during most of its existence by lenient regulatory interpretations and use of loopholes. After Glass–Steagall's 1999 repeal, there was a great deal of discussion in the banking and securities industries, and among policymakers and economists, about the practical positive and negative changes to the business and consumer environment. Later, as financial crises and other issues played out in the United States and even worldwide, arguments have broken out about whether Glass–Steagall, as originally intended, would have prevented these issues.

There have been several efforts or appeals in the United States to reinstate repealed sections of the Glass–Steagall Act following the 2007–2008 financial crisis, as well as elsewhere to adopt similar financial reforms.

The separation of investment and retail banking aims to protect the "utility" aspects of day-to-day banking from being endangered by losses sustained by higher-risk investment activities. This can take the form of a two-tier structure in which a company is banned from doing both activities, or enforcing a legal ring-fence between two divisions of a company. Banks have resisted this separation saying that it increases costs for consumers.

References

  1. ↑ Ruggeri, Amanda (29 September 2009). "Pecora Hearings a Model for Financial Crisis Investigation". U.S. News & World Report. Retrieved 1 December 2016.
  2. ↑ "Congressional Digital Collection - Financial Crises of the Past - The Pecora Investigations" (PDF). www.amdev.net. Lexis Nexis. Retrieved 1 December 2016.
  3. ↑ Michael Perino, The Hellhound of Wall Street: How Ferdinand Pecora's Investigation of the Great Crash Forever Changed American Finance (2010) pp 3-6.
  4. ↑ Perino, The Hellhound of Wall Street (2010) pp 280-304.
  5. ↑ Michael Perino, The Hellhound of Wall Street: How Ferdinand Pecora's Investigation of the Great Crash Forever Changed American Finance (2010) pp 3-6, 280-304.
  6. ↑ "The men who crashed the world - a four part investigation". Al Jazeera. 25 September 2011.

Further reading

This page is based on this Wikipedia article
Text is available under the CC BY-SA 4.0 license; additional terms may apply.
Images, videos and audio are available under their respective licenses.