Michael Perino is currently the Dean George W. Matheson Professor of Law at St. John’s University School of Law in New York. He has also taught at Cornell Law School, Columbia Law School, and Stanford Law School. He has testified in both the United States Senate and the House of Representatives and is frequently quoted in the media on securities and corporate matters. Professor Perino received his LL.M. degree from Columbia Law School, where he was valedictorian and his J.D. from Boston College Law School, where he was elected to the Order of the Coif. His latest book is The Hellbound of Wall Street: How Ferdinand Pecora’s Investigation of the Great Crash Forever Changed American Finance.
The Politic: Firstly, who was Ferdinand Pecora? What was his background and why did you choose to write a book on him?
MP: Pecora was an Italian immigrant who came to this country in 1886 at the age of five. He was a poor kid from New York who became a lawyer, and eventually a well-respected prosecutor who was plucked from relative obscurity to take over the faltering national investigation of Wall Street in the years following the Great Crash of 1929. Pecora took over in the investigation’s waning days, and no one expected very much from him, but he really galvanized both the investigation and the country’s appetite for reform. By revealing massive wrongdoing at the most well respected firms on Wall Street, he created the political climate in which Roosevelt was able to push through financial reforms.
The Politic: As a Sicilian born immigrant, Pecora would be considered an outsider in 1930s America. How did this affect the proceedings?
MP: At that time, many people still believed in stereotypes that held that Italian-Americans were lawless, anarchic criminals. The irony of this purportedly lawless Sicilian showing the lawlessness of the Anglo-Saxons who ruled Wall Street at the time was lost on nobody. Pecora became something of a media sensation and was on the cover of both Time and Newsweek in the same week in June 1933. The reports of his investigations were on the front pages of newspapers across the country, and there were puff pieces written about how he liked to play golf and take late night ice cream breaks – the kinds of things you’d normally have for movie stars. I think part of the public fascination with him is due to the fact that he was such a gifted and talented lawyer who didn’t fit into any of the Italian-American stereotypes.
The Politic: What was the most fascinating thing that you discovered in your research?
MP: The most fascinating thing I found was that what we know as the “Pecora Hearings” almost never happened. It was really through serendipitous luck that Pecora was chosen as the counsel for this investigation. His ability to create such sensational headlines was so crucial and that he almost was not chosen is a lesson in the contingencies of history.
The Politic: Why was Pecora so successful at harnessing popular outrage?
MP: Firstly, he was a fantastic lawyer. He had spent twelve years as a prosecutor in New York and knew how to handle courtrooms and how to deal with witnesses. He was a first-rate crossexaminer with a memory that allowed him to remember every aspect of someone’s testimony and every piece of evidence. If someone tried to weasel out of an answer, Pecora was right there to pin him down. It didn’t matter who the witness was – Pecora was not someone who was willing to take it easy on the rich and powerful. When J.P. Morgan appeared before the committee, he complained that Pecora treated him like a common horse thief – and, to a certain degree, he did! Pecora knew how to ask questions and would become incredibly well-prepared by spending countless hours reading memos and briefing documents, in order to know answers to questions before he even asked them. His skill as a lawyer was just phenomenal.
He was also a great teacher. When you look at this investigation, you see that he was dealing with arcane financial concepts, but Pecora was able to present them in a manner that people could understand. He crystallized complex issues into these simple morality tales. By doing that, he was able to win public support for reform. Now, he had a receptive audience since there were not a lot of fans of Wall Street at the time, but it was really his skill and ability to galvanize support that led to many of the New Deal financial reforms.
The Politic: Both the 1929 and 2008 crashes seemed to share a series of flawed incentives, corruption, and an overall lack of regulation. While the 1929 crash brought calls for greater reforms and more government regulation, it seems that the most vocal outrage after the recent crisis largely comes from the Tea Party, which is calling for fewer reforms and regulations. Why do you think the contemporary response to a major crash has been so different?
MP: I think the different responses are a function of both how and when the investigation was conducted. In terms of how, Pecora conducted a very different investigation than the recently completed Financial Crisis Inquiry Commission (FCIC). There was a key moment that illustrates the difference between the investigations that occurred during the FCIC investigation when one of the commissioners stated that he didn’t want to get lost in individual stories, and instead wanted to focus on broad economic forces. That was the exact opposite of what Pecora wanted to do. As I suggested earlier, Pecora’s real goal was to illustrate to people in a simple and easy to understand way why more reform was necessary. Rather than pouring through reams of data and talking about hypothetical conflicts of interest, Pecora would pick apart a single transaction and show how one set of bankers ripped off one set of clients in that transaction. He knew that this would be the easiest way to show why more reform was needed. So part of the difference comes from how the two investigations were conducted.
The other part is when it was conducted. Pecora took over these hearings in the winter of 1933, in the waning days of the Hoover administration. It had been over four years since the 1929 crash, and we were in the depths of the Great Depression. There was over 25% unemployment and people had lost their life savings from the thousands of bank failures across the country. Just as Pecora is really getting started, just as he is about to put on the stand the most famous banker of the time – Charles Mitchell, the chairman of National City Bank, which is now Citigroup – is when the 1933 Banking Crisis hits. By the time Mitchell leaves the stand, 38 states had shut down their banks entirely, and in the remaining 10 states, you could only get out 5-10% of your money at any given time. So, the juxtaposition of the wrongdoing that Pecora showed at National City Bank against the unfolding crisis in the banking sector really helped create the environment for reform legislation to pass.
To get the equivalent of what Pecora had in 1933, you would have to take those Goldman Sachs hearings in spring 2010 and move them back to the fall of 2008, when Lehman Brothers had collapsed, we were bailing out AIG, and the whole financial structure seemed to be disintegrating before everyone’s eyes.
The Politic: How responsible was Pecora for some of the major financial reforms of the 1930s?
MP: I think he was extremely responsible. If you look at the people who drafted the New Deal laws, they point directly to Pecora and claim to have built on his work. None of that legislation would have passed if Pecora had not built political climate. For example, the Glass-Steagall Act, which among other things separated commercial and investment banking, and created federal deposit insurance. When Glass-Steagall was originally proposed, Louisiana Senator Huey Long led an effort that defeated it through a filibuster. Glass-Steagall was not going to pass and this was just a few weeks before Pecora took over the investigation. Once Pecora took over and began to show some of the wrongdoing at the elite firms on Wall Street, the political climate completely changed and an even more radical Glass-Steagall Act sailed through Congress with limited trouble. The original bill that was killed in January of 1933 did not have federal deposit insurance, which had already been proposed in hundreds of earlier bills and had always been defeated. In the wake of the Pecora hearings, Congress finally passed federal deposit insurance, which may be the most important banking reform to emerge from the New Deal. Pecora does not deserve all the credit, but he certainly deserves a large share.
The Politic: Is there anyone who could be considered a modern day Pecora?
MP: I haven’t seen him or her yet. No one has really stepped forward to assume that role. I think part of the problem is that even if you had someone today who had Pecora’s skills and abilities as a lawyer, the political window has closed. The sense of crisis that you need in order to overcome the normal political forces against reform legislation has already passed. The window of opportunity is gone for a modern day Pecora.
The Politic: How would you rate the current efforts at financial reform?
MP: I think much of the reform and effects are still unknown as much of the Dodd-Frank legislation delegates authority to the regulators to draft regulations. So, the real issue now concerns what those regulations will look like. We don’t know the answer yet and the jury is still out on what financial reform will look like.
I think the other big issue concerns whether we will give regulators the resources they need to actually enforce the laws. There’s a big debate in Congress right now about the budget. The S.E.C. and the Commodity Futures Trading Commission are unusual among financial regulators because they rely on the annual appropriations process. Some people in Congress, under the guise of “we need to tighten our belts here,” are talking about substantially slashing the budgets of our financial regulators. That’s a recipe for disaster. If we don’t give the regulators the resources that they need in order to enforce those laws, then why bother having those laws in the first place?
The Politic: If you could see one reform instituted what would it be?
MP: There was a proposal in Dodd-Frank that got killed, but would have allowed the S.E.C. to fund itself from its own fees. The S.E.C. is unusual in another way, since it is a net moneymaker for the government. Each year, it contributes more to the treasury than it gets in budget allocations. If you let the S.E.C. fund itself through its own fees, then they would have plenty of resources to perform the functions that we ask them to perform. That self-funding mechanism was an early part of Dodd-Frank, but Congress decided it didn’t want to lose control over the purse strings and eliminated it from the final bill. If I could do anything, I would put that provision in place.
Nicholas Rugoff is a senior in Yale College.