Bush Admin & Wall Street's Deep Denial

I came upon the below article, published in early September, while researching the Pecora Commission. As a brief introduction to this commission, I shall include, immediately below before the aforementioned article, an excerpt from the Pecora Commission entry in Wikipedia:

The Pecora Commission is the name commonly used to describe the commission established on March 4, 1932 by the United States Senate Committee on Banking, Housing, and Urban Affairs to investigate the causes of the Wall Street Crash of 1929.

[...]

Following the Wall Street Crash, the U.S. economy had gone into a depression, and a large number of banks failed. The Pecora Commission initiated major reform of the American financial system. As Chief Counsel, Ferdinand Pecora personally examined many high-profile witnesses that included some of the nation's most influential bankers and stockbrokers. As the Commission's first witness, Richard Whitney, president of the New York Stock Exchange, declared that "The Exchange's refusal to pay heed to popular demand for reform was simply a manifestation of courage to do those things which are right, regardless of how unpopular they may be for the time being." Other important members of the Wall Street financial community to give testimony before the Commission included investment bankers Otto H. Kahn, Charles E. Mitchell, Thomas W. Lamont, and Albert H. Wiggin, plus 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.

As reiterated by SEC Chairman Arthur Levitt during his 1995 testimony before the United States House of Representatives, the Pecora Commission 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 securities laws. As a result of the Pecora Commission's findings, the United States Congress passed the Securities Act of 1933 and the Securities Exchange Act of 1934, instituting disclosure laws for corporations seeking public financing, and in 1935 formed the SEC as a means to enforce the new Acts.

In 1939 Ferdinand Pecora published his memoirs that recounted details of the investigations. Titled "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."

Need I say that this is all sounding remarkably similar to the present-day scenario whereby Wall Street bankers are bringing home huge year-end bonuses at the very same time that the overall economy is collapsing?

So, is the SEC protecting the interests of the American people? Or is it, like the EPA, standing as a firewall in protection of powerful financial interests?

Here's a little something that the above Wikipedia entry doesn't get into. When the SEC was founded in 1935, to enforce the Securities Act of 1933 and the Securities Exchange Act of 1934, who was found fit to become its inaugural chairman?

None other than Joseph P. Kennedy, appointed by Franklin D. Roosevelt in return for Kennedy's support in Roosevelt's successful 1932 presidential bid. Joseph Kennedy's Wall Street career is summarized within Wikipedia as follows:

In 1919, he joined the prominent stock brokerage firm of Hayden, Stone & Co. where he became an expert in dealing in the unregulated stock market of the day, engaging in tactics that would later be labeled insider trading and market manipulation. In 1923 he set up his own investment company and became a multi-millionaire during the bull market of the 1920s.

David Kennedy, author of Freedom From Fear, describes the Wall Street of the Kennedy era:

(It) was a strikingly information-starved environment. Many firms whose securities were publicly traded published no regular reports or issued reports whose data were so arbitrarily selected and capriciously audited as to be worse than useless. It was this circumstance that had conferred such awesome power on a handful of investment bankers like J.P. Morgan, because they commanded a virtual monopoly of the information necessary for making sound financial decisions. Especially in the secondary markets, where reliable information was all but impossible for the average investor to come by, opportunities abounded for insider manipulation and wildcat speculation.

Kennedy formed alliances with several other Irish-Catholic money men, including Charles E. Mitchell, Michael J. Meehan and Bernard Smith. He helped establish the Libby-Owens-Ford stock pool, an arrangement in which Kennedy and colleagues created an artificial scarcity of Libby-Owens-Ford stock to drive up the value of their own holdings in the stock. Using inside information, and the public's lack of knowledge, a pool operator would bribe journalists to present that information in the most advantageous manner. The stocks would then change in price up or down depending on the position favored by the pool.[citations needed]

Kennedy got out of the market in 1928, the year before the Crash, locking in multi-million dollar profits.

Well, well. So who better, really, to serve as the inaugural firewall between the American people and the business/finance elite? And should we be surprised, today, to find that the Wall Street fraudsters are at it again, making a fortune on the backs of the American people, with apparent impunity granted by the U.S. government?

The aforementioned article follows.

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Bush officials' testimony shows they still haven't come to terms with what's happening in the credit markets, nor has Wall Street.

by Robert Kuttner | September 7, 2007
The American Prospect

Frank Talk. In 1933, the House Banking Committee began a remarkable series of hearings on the causes of the Great Crash. The investigations, which became known as the Pecora hearings after chief committee counsel Ferdinand Pecora, laid bare the conflicts of interest and insider scams that pumped up the stock market bubble of the late 1920s. The Pecora hearings also laid the groundwork for the great financial reforms of the New Deal, which in turn bequeathed two generations of prosperity, thanks to a regulatory system that invited economic dynamism with rules that prevented abuses.

History has now thrust Barney Frank into the role of the next Pecora. Rep. Frank (D-Mass.), a smart progressive, chairs the House Financial Services Committee, the current name for the Banking Committee. But judging by Wednesday’s kickoff hearing in a series of inquiries into the deepening financial mess, Rep. Frank faces a tougher challenge than Pecora did.

This is because the Bush administration and most on Wall Street are still in deep denial of what is occurring in credit markets. The administration testimony suggested that the deniers dearly want to believe that the meltdown in sub-prime mortgages is a one-off, that the economy dodged a bullet, and hence only the most modest government response is required.

This kind of denial has superficial appeal because, unlike in 1933 when Pecora began his work, we haven’t yet had a full-blown crash. But if the government’s only response is to wait for the Fed to bail things out and to do a little tweaking of abuses around the edges, that crash will come.

As Frank put it, “I am not pleased that so many of us were surprised at how the sub-prime crisis spilled over into broader financial markets. I don’t want us to be surprised again.”

“We have had a test case,” he observed, “and in the mortgage market, sensible regulation worked better than its absence.”

“The question before us,” he added speaking more broadly, “is whether there may be a systemic problem here. Has innovation so outstripped financial regulation that we need to catch up, without diminishing the advantages?”

Amen.

Fox, Chickens. Testifying for the administration, Treasury Undersecretary for Domestic Finance Robert K Steele assured the committee that “while certain sectors like housing are undergoing a transition, overall economic fundamentals remain solid.” This column will continue to track Hoover-like statements in coming days. As Frank acidly observed in his opening remarks, “We have tried to talk investors out of being nervous. I don’t think that works very well.”

Steel also told the committee that the President’s Working Group on Financial Markets, chaired by Treasury Secretary Hank Paulson was on the case. This is a real hoot, since connoisseurs of this crisis will recall that the committee was set up precisely to beat the drums for more deregulation. Paulson’s committee is about the last place in Washington to look for sensible policy. One of the few nice bi-products of this crisis is that you don’t hear very many people these days warning that regulation is killing capital markets.

Well, Actually … In fact, while the Financial Services Committee was holding its hearing, over at the House Ways and Means Committee, which is considering legislation to tax the windfall gains of hedge funds executives as ordinary income rather than capital gains, hedge fund lobbyists, such as Bruce Rosenblum of the Carlyle Group, were repeating stale warnings that fair taxation would drive capital investment offshore -- to say London where hedge funds are booming and are more tightly regulated than here. “Complete poppycock,” replied witness Leo Hindery, Jr., a managing partner at a private equity firm InterMedia (and an anomalous Wallstreeter who is raising money for John Edwards.) Hindery added, “Congress, starting with this committee, needs to tax money-management income, what we call carried interest, as what it is, which is plain old ordinary income.”

Amen again.