This vivid reconstruction of former New York City prosecutor Ferdinand Pecora’s investigation into the crash of 1929 shows how a financial scandal often must reach a tipping point before it triggers tighter legislation.
In Senate hearings held as banks across the U.S. were shutting down in 1933, Pecora exposed stock-price manipulations, hidden losses and other unsavory dealings. The testimony ignited outrage against “banksters,” hastening laws including the Glass-Steagall Act, which separated commercial and investment banking.
Will JPMorgan’s bombshell give a similar impetus to the Volcker rule, meant to prevent federally insured banks from making bets for their own profit? That depends partly on the size of the scandal, says Perino, a former Wall Street litigator who teaches at St. John’s University School of Law in New York.
“A $2 billion trading loss is nothing to sneeze at, but it pales in comparison to the banking crisis of 1933,” he says.
Perino spoke with me by phone from his study in New Jersey. Outside his window, wild green parrots were nesting around electrical transformers, which keep them warm in winter, he says. We discussed books on the Great Depression and what they tell us about today’s economic slump, austerity fatigue and battles over banking rules.
Pressley: You appear to have immersed yourself in books on the Depression.
Perino: The bulk of the material in the book came from primary documents. There were contemporary newspapers. There were many dusty documents in the National Archives. There were transcripts from the hearing. But to set the scene I needed to review a huge amount of secondary literature on the Great Depression.
Pressley: Among those books, which offered the best “distant mirror” to our own times, to borrow Barbara Tuchman’s title?
Perino: No one book gives you the whole picture; you need to cut it up into slices. One of the best books for people trying to understand the current European debates between austerity and Keynesianism, for example, is Liaquat Ahamed’s “Lords of Finance.” It’s a great reminder about the devastating consequences that monetary and fiscal policy choices can have on fragile economies.
Pressley: Did you gather any clues from this literature on how to pull the West out of today’s economic mire?
Perino: I wasn’t focusing on how to fix a recession or a depression. That’s the work of the economists, although we can debate how good a job they’ve done. My focus was on the legal changes that emerged from a financial crisis -- and on the conditions under which reform legislation has a chance of passing.
Many of the reforms that Franklin Roosevelt was able to swiftly enact when he came into office had been floating around Washington for years. But it was this crucible of the Pecora investigation and the banking crisis of 1933 that created the political conditions under which those reforms had a chance of making it through Congress.
Pressley: So Glass-Steagall didn’t get enacted just because Pecora was a master.
Perino: He was a skilled lawyer, but he also had impeccable timing. If his examination had not occurred while the banking crisis of 1933 was happening, things might have worked out very differently. There were many times when this inquiry could have gone off the rails. And it didn’t.
Bank Runs, 1933
Pressley: Because the whole financial system was collapsing.
Perino: If you want to see the conditions on the ground in that period, I recommend a couple of books. The best is “The Banking Crisis of 1933” by Susan Estabrook Kennedy. It’s a wonderful blow-by-blow account of the spreading contagion from bank to bank across the country. It describes the same fear that drove the effective runs on Lehman Brothers and other financial institutions in 2008.
As for the aftermath of the bank runs, there’s a book Helen Burns wrote in the early 1970s called “The American Banking Community and New Deal Banking Reforms, 1933-1935.” It’s a bit dry and academic. But it looks at how the financial community responded to all of these reform proposals. Anybody who reads that book will be immediately reminded of the rollout of the Dodd-Frank Act.
Pressley: What about JPMorgan and the Volcker rule?
Perino: Timely scandals have often played a critical role in pushing through financial reform legislation. Glass-Steagall was one example. Another was Sarbanes-Oxley. After Enron Corp. collapsed, Sarbanes-Oxley was facing significant opposition in Congress until the WorldCom Inc. scandal was disclosed. The legislation sailed through afterwards.
With the JPMorgan loss, the Volcker rule has already come through Congress. So the relevant consideration is the effect this scandal will have on regulators implementing the rule. I’m sure they will argue harder for a stricter rule.
Pressley: Any other books you recommend?
Perino: One would be John Brooks’s “Once in Golconda.” He was a New Yorker writer and this is one of the best popular accounts of what the stock market looked like in the 1920s.
And for the longer history of America’s love-hate relationship with Wall Street, Steve Fraser wrote a book called “Every Man a Speculator.” It’s a wonderful social history of the place Wall Street occupies in American consciousness.
“The Hellhound of Wall Street: How Ferdinand Pecora’s Investigation of the Great Crash Forever Changed American Finance” is from Penguin Press (341 pages, $27.95 in hardcover, $17 in paperback). To buy the book in North America, click here.
(James Pressley writes for Muse, the arts and leisure section of Bloomberg News. The opinions expressed are his own. This interview was condensed from a longer conversation and an e-mail exchange.)
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