When Washington Regulated Wall Street

by Caitlin Huey-Burns

How the Pecora Commission changed American finance

In the winter of 1933, as the Great Depression wore on, a Republican-chaired Senate panel was exploring the events that had led to the stock market crash. But with little time left before a new president and party would assume control, little reform was expected.

The panel hired Ferdinand Pecora, a Sicilian-born New York attorney with little Wall Street litigation experience -- the committee's sixth choice -- to head the investigation.

In his book The Hellhound of Wall Street: How Ferdinand Pecora's Investigation of the Great Crash Forever Changed American Finance, St. John's University law professor and former Wall Street litigator Michael Perino describes how Pecora's probe prompted the government's first set of financial regulations. He spoke with Caitlin Huey-Burns recently about what the new Congress can learn from Pecora. Excerpts:

Why is Pecora important?

Pecora shows that even these elite bankers from the most prestigious institutions were engaging in the same sort of chicanery as low-level bucket shops. And with the anger that he creates in the populace, there's this huge clamor for reform. As a result, we have the first federal securities laws; the first time that Washington ever regulated Wall Street; the creation of the Securities and Exchange Commission; federal deposit insurance and [its regulator]; and the Glass-Steagall Act, which separated commercial and investment banking.

Explain the public's feelings toward Wall Street at the time.

What people hadn't focused on were these elite prestigious firms -- the J. P. Morgans, the [National] City Banks. And there was a perception that the men who ran these firms were of unimpeachable integrity. Pecora was able to show that simply wasn't the case. All of these supposedly upright and upstanding men were actually engaged in the same sort of wrongdoing that everybody else on Wall Street was engaged in.

How did he do that; what was his technique?

He had spent 12 years as a prosecutor in New York and had tried something like a thousand cases. He had this prodigious, almost photographic memory. He didn't care who he was cross-examining -- whether it was the lowest-level clerk or the chairman of the board. He treated them all the same way, and he was not one to back down. J. P. Morgan famously complained that Pecora treated him like a horse thief.

What challenges were facing Congress?

It was pure laissez faire at that point. There were many people who believed that regulating the New York Stock Exchange was unconstitutional. Part of the Democratic campaign that year was to create regulation for the sale of securities. And we've seen this recently: that you have to overcome a lot of entrenched interests in order to pass substantial reform legislation. The way you do that, I think, is that you get the country so behind the reform that you are trying to put through, that politicians don't have any choice but to vote for it. That was Pecora's genius.

How were the recent financial crisis and the one Pecora was investigating similar?

I started this book a month before Lehman Brothers collapsed. I would be reading these transcripts from 1933, I would go home, read the newspaper, and it was like I was reading the same thing all over again.

Were there important lessons missed?

What was clear to Pecora is that it's not enough to have a law on the books; you have to have enough resources to enforce that law. And you also have to resist the constant pressure to deregulate. If you look at the last 30 years or so, we've been in this phase of completely dismantling many of the regulations that had governed the securities markets.

What can lawmakers learn today from the Pecora investigation?

The lesson was not so much in the implementation of the laws, but it was more in the passage of the laws and the kind of political moments you need in order to get legislation passed. Those moments are not only rare but fleeting. What Pecora showed was that when you have the opportunity to pass sweeping reform legislation in the financial markets, you have to seize it.

Did the recently passed financial reform bill reflect a good political moment?

Congress left many of the hardest questions unanswered. The issue going forward is: We don't really know what [the law] means yet until we have those regulations drafted. The final shape of financial reform remains to be determined.

What can President Obama learn from your book?

Sometimes in order to get reform legislation passed, it's not enough to try to build a consensus. You have to create an overwhelming desire in citizens of this country for that reform legislation. Sometimes that requires you to get Americans angry. Not just the sort of unfocused Tea Party kind of anger, but angry at a particular situation to get those people to demand that new laws get passed to adjust that situation.

What did you learn from writing this book?

The power that one person can have to change a system.

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