Month: May 2017

from the Citizens Electoral Commission
Greens leader Richard di Natale has responded to the Citizens Electoral Council’s change.org petition, Break up the big banks now—pass Glass-Steagall, by reiterating his party’s intention to establish a “Parliamentary Commission of Inquiry into Banking and Financial Services”. To be effective, such an inquiry must be modelled on the US Senate Committee on Banking and Currency’s ten days of momentous hearings in 1933, known as the Pecora Commission.
The story of the Pecora Commission is one that everyone involved in banking oversight needs to know. It is of enormous relevance to Australia, because it shows how criminality can flourish right under the noses of authorities, until a person of unique courage and morality rips off the blindfold. Australia is getting used to the blatant criminality of banks, having experienced case after case of the big banks victimising thousands of customers, for which either nobody gets held accountable, or the blame is pinned on some “rogue” operator in middle or lower management. What we need is a crusader like Ferdinand Pecora.
In 1931, US President Herbert Hoover instigated an inquiry into short selling. The Senate Committee on Banking and Currency conducted the inquiry, which after ten months, under chairman Senator Peter Norbeck expanded into a general inquiry into the causes of the Great Depression. Until February 1933, however, the inquiry got nowhere. In January 1933, in the middle of the lame duck session of Congress between Franklin Roosevelt’s election in November 1932 and his inauguration in March 1933, Senator Norbeck was set to wind up his ineffectual inquiry, when he decided to make one final attempt and appointed fearless New York prosecutor Ferdinand Pecora as the new general counsel to run the investigation. This proved to be a fateful choice—for the banks.
Unlike all previous counsels for the Committee, Pecora was not a financial expert. He was a criminal prosecutor, with instincts honed in the courts of New York City. He looked at the same evidence as the previous counsels, but instead of seeing standard financial practices, as his predecessors had, he sniffed crimes. Pecora exposed those crimes in ten days of public hearings in February 1933, immediately before Roosevelt’s inauguration.
Up to the point that Pecora conducted public hearings, bankers were still among the most respected members of society, having largely escaped blame for the 1929 stock market crash three years earlier, and the subsequent misery and poverty of the Great Depression. That changed, dramatically, over the ten days of hearings, which were broadcast live on radio. With his chairman’s firm support, Pecora subpoenaed the titans of high finance, including the chairman of National City Bank, Charles “Sunshine Charlie” Mitchell, New York Stock Exchange President Richard Whitney, and J.P. Morgan Jr. Pecora laid bare, through fearless cross-examinations, the predatory practices of these powerful financiers and their institutions.
On the stand, Morgan admitted to effectively bribing hundreds of politicians with heavily discounted share offers. Pecora forced Mitchell to own up to dodging millions of dollars in tax, and overseeing a banking operation that sucked in depositors with $1 bank accounts and $50 loans, for the sole purpose of pushing those depositors into the clutches of Mitchell’s army of aggressive bond salesmen, to be hard-sold dangerous and often fraudulent investments; National City specialised in covering potentially bad loans it had made to failing companies and governments by selling the worthless bonds of those companies and governments to its own depositors, ruining thousands. (The way National City lured its depositors into buying its dangerous investment products that ruined them financially is strikingly similar to the numerous financial advice scandals in Australia over the past decade or more, in which Australia’s big banks pressured their retail customers into bad investments that cost many their life savings.)
The Pecora hearings electrified the whole country. Many top bankers, dubbed “banksters” by the public, lost their jobs, were indicted and jailed or fined. Incoming President Franklin Roosevelt made a last-minute adjustment to his famous “the only thing we have to fear is fear itself” inauguration speech, inserting a powerful commentary on Pecora’s hearings: “Practices of the unscrupulous money changers stand indicted in the court of public opinion, rejected by the hearts and minds of men”, FDR declared. This set the agenda for Roosevelt’s first 100 days, in which he was able to push through far-reaching financial reforms, including the 1933 Glass-Steagall Act that imposed a strict separation of commercial and investment banking, to stop banks such as National City from selling risky securities to their unsuspecting depositors.
Glass-Steagall would become the most effective banking regulation in history. In the three years or so between the 1929 crash and its enactment, more than 4,000 American banks had failed; for the next 66 years, from 1933 until Glass-Steagall’s repeal in 1999, there were no systemic banking crises in the USA. Ironically, it was repealed to allow National City’s successor, Citibank, to merge with Travellers Insurance and its investment bank Salomon Smith Barney, creating Citigroup, which nine years later, in the 2008 crash, required the biggest bailout of any of the Wall Street megabanks. Following the crash, the two men who negotiated the Citigroup merger, Travellers’ Sandy Weill and Citibank’s John Reed, became some of the most vocal advocates on Wall Street for restoring Glass-Steagall.
Australia doesn’t need a banking inquiry to know that the banks are crooked, and that the retail banks should be split off from all other financial services, à la Glass-Steagall. Such inquiries are often bureaucratic cover-ups, especially royal commissions, which can be manipulated by their choice of commissioners and terms of reference. The test of whether the Greens and other advocates of a banking inquiry are genuine, is whether they are prepared to adopt Ferdinand Pecora’s fearless approach and conduct an inquiry without limits, one which has the potential to completely overhaul the Australian banking system.