The FCIC Should Swiftly Summon Alan Greenspan

Financial reform might take on new life if the former Fed chairman were to admit his and the system's failings in plain English

January 2010: Blankfein, Dimon, Mack, and Moynihan take the oath Kevin Lamarque/Reuters

By Paul Barrett

Browse Issues

Browse the BusinessWeek Archive

January 1933: Banker Donald Durant is sworn in before a Senate panel Bettmann/Corbis

Story Tools

• post a comment
• e-mail this story
• print this story
• order a reprint
• suggest a story
• digg this
• add to Business Exchange

The public debut of the Financial Crisis Inquiry Commission on January 13 featured Wall Street bosses striking alternately defensive and humble poses while pundits recalled the glory days of New Deal investigator Ferdinand Pecora. The bankers' contrition seemed mostly shallow, especially compared to their obvious impatience over the occasional sharp question. More important, it seems likely that the hopeful historical references to Pecora will ultimately prove disappointing.

One way the commission could salvage something meaningful from the hearing room theater would be to bear down on a former Washington player so far not on the witness list. That would be Alan Greenspan.

In the runup to the commission's opening act, many commentators invoked Pecora, the peppery chief counsel who 77 years ago galvanized a Senate investigation of the 1929 crash. The Pecora Commission, as it came to be called, revealed abuses that showed Depression-era Americans just how much Wall Street was a semi-fixed casino. We will likely get some of the same as the Financial Crisis Inquiry Commission (and let's hope someone devises a catchier name soon) holds hearings in coming months.

The Pecora Commission also laid the groundwork for legislation establishing the Securities & Exchange Commission and insulating the staid depository and lending functions of commercial banking from the riskier trade in securities. That framework kept commercial banking relatively safe, if dull, for a half-century. Its bipartisan demolition, beginning in the 1980s—together with the purposeful demoralization of institutions such as the SEC—helped recreate a free-for-all, 1920s-style environment in the 2000s. You know what happened next.

Do not expect the bipartisan FCIC, chaired by Phil Angelides, a former California state treasurer, to rival the impact of Pecora. We will not see the likes of the Securities Act of 1933, the Glass-Steagall Act of 1933, and the Securities Exchange Act of 1934. This time around, Wall Street lobbyists got the jump on the legislative process. The major battles on Capitol Hill have already been fought, with only the details left to resolve.

episodes of fraud, greed, and hubris

After all of President Barack Obama's fulminating over the largely symbolic issue of investment banker bonuses, Wall Street is writing checks with just as many zeroes and Congress isn't going to do anything about it. Obama and lawmakers bought the financial wizards' insistence that substantial curbs on derivatives speculation would somehow threaten the Republic. What we'll probably get instead is greater transparency for some—but not all—derivatives trading. This half-measure will allow new petri dishes of systemic risk to fester in darkness, as Wall Street returns to the "financial innovation" laboratory. But the idea of revisiting Glass-Steagall's separation of commercial banking from securities speculation never got past the daydreams of Paul Volcker, Obama's marginalized emissary from a distant and more commonsensical era of regulatory caution. The big three credit-rating agencies will continue to enjoy a government-blessed oligopoly while they collect fees from the very institutions whose securities they evaluate.

That's not to say that the Angelides commission will fail to examine some episodes of fraud, greed, and hubris. "We may well find criminal activity as well as egregious practices that were not only permitted, but exalted," Angelides said on Jan. 13. The Wall Street CEOs conceded that things got out of hand, implying that all the really horrific stuff happened in some other guy's shop. "Too many financial institutions and investors simply outsourced their risk management," Lloyd Blankfein, Chairman and CEO of Goldman Sachs, said in his opening statement.

Hearing room talk is one thing—real change, another. Ask the cigarette manufacturers. Representative Henry A. Waxman (D-Calif.) publicly sautéed their CEOs in 1994. A lot of lawsuits followed. But tobacco remains a lucrative and deadly business.

Business Exchange

Track and share business topics across the Web.