The Pecora Commission: Déjà Vu?

February 14th, 2011

Seventy-Seven Years After the Pecora Commission Released It’s Report on the Stock Market Crash of 1929, the U.S. Government Publishes a Familiar Document

Senator James Couzens, Chairman Duncan Fletcher and Ferdinand Pecora meet during the Pecora hearings.

The National Commission on the Causes of the Financial and Economic Crisis in the United States has recently published its report on the Financial Crisis. The more than 600 pages of this report are a must-read for all people concerned with the last crisis and the ways to avoid a future one.

I will not pretend here that I read the entirety of the document, only the conclusions, – and I did one additional reading…

The good thing with the conclusions of the report is that they contain the essential advocacy messages of civil society organisations around the financial crisis: lack of transparency, uncontrolled greed, conflicts of interest, poor supervision, or deceptive financial accounts.

The bad thing is that those conclusions share some similarities with the conclusions of an older report, the one published in 1934 by the US Senate Committee on Banking and Currency about Stock Exchange Practices. The 1934 report (PDF) drew the conclusions from the hearings organized by the Pecora Commission, which then offered the model for the commission formed in 2009.

The English is not the same, but a certain number of major issues remain. The 1934 commissioners were concerned about the “conduct and management of banking institutions” whereas the 2011 commissioners criticize “dramatic failures of corporate governance and risk management at many systemically important financial institutions”. “Improper banking reserves” have become “great leverage unhindered by capital requirements”. “Ineffective governmental examination of banks” is now called “widespread failure in financial supervision”. The 2011 report quotes the 2003 call by the US senate to identify “deceptive accounting in financial statements or reports”, such deceptive accounting being also called “window-dressing”, a term already used in the 1934 report which described the “window-dressing activities of banking officers”. One expression has not changed, “conflict of interest”, a prominent concept in both reports, as well as “excessive compensation”.

What can we say about that? The 2011 conclusions are using terms which do not belong to the usual financial or corporate glossary: “madness”, “human inaction”, “lack of will”. I am not sure that those terms adequately capture human behaviour in financial firms. Most corporate executives in the years preceding the crisis behaved in a very rational manner. It is perfectly rational to place the bets which will most likely be successful on a bullish market, and it is rational because if you don’t do so, you may lose your job. You cannot expect corporations to take care of the long term interests of the general population, unless you create an adequate regulatory framework which puts effective brakes on the spiralling effects of financial euphoria.

The contrary has been done over the last thirty years, with brakes being broken one after the other by a global wave of deregulation. One of today’s challenges is that regulation, sufficient in the past on a national basis, now has to be global or almost global, in the absence of a global government but with several bodies—the G20, Financial Stability Board, etc…—which have to put in place effective intergovernmental regulation of global financial flows.  They won’t do so without civil society global pressure.

Written by François Valérian

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