The Sprit of Ferdinand Pecora

It’s time for the street to be scared-Very scared.

By Micheal M. Thomas Source: Newsweek December 24, 2012 issue

THE ELECTORATE has returned to the White House a man who, for many who voted for him four years ago, turned out to be a sheep in wolfs clothing when it came to dealing with Wall Street. In 2008 it was expected that one of his first priorities would be to deal with the Wall Street miscreants largely responsible for the financial crisis through a combination of punishment and reform. That didn't happen, and it was evident early on that it wasn't in the cards.

Even before the new president-elect had slept a night in the White House, Wall Street knew it was home free and off the hook. On Nov. 21, 2008, a date (which some say will live in infamy) falling barely two weeks after the election of a candidate representing "hope and change," President-elect Obama's transition team announced that the incoming administration's economics team would be headed by Lawrence Summers and Timothy Geithner.

As a character in a novel I'm working on observes of this development, "That's like appointing a couple of Ku Klux Klans-men to run the NAACP." On Wall Street, the Summers-Geithner announcement was cause for cracking open jeroboams of Dom Pérlgnon, lighting up the pre-Castros, and stuffing the garter belts of Scores pole dancers with $100 bills. The city's leading steak houses were once again suffused with that singular suffocating mixture of testosterone and profanity that marks a traders' bull market in full cry. The Dow Jones rocketed 1,000 points in two days. The sun came out from behind the clouds. 

And the auguries turned out to be every bit as blessed as could be wished for: over the following four years, this president would serve Wall Street's interests and purposes more lucratively than any chief magistrate since the palmy days of Calvin Coolidge. Despite this, starting in 2010, the Street reached deep down into its infinite capacity for self-destruction and launched an all-out propaganda campaign against the administration, turning on their new best friend in the White House with a vehemence that made little sense, attacking Obama for being anti-capitalist, for preaching "class warfare," for being a "socialist." Pretty tough language to use on a man whose leadership was protecting fat bonuses that have kept Ferrari dealers and high-end Hamptons realtors grinning like the Cheshire Cat while many in the country are eating cat food and sleeping rough. As the 2012 election approached, the outcry became increasingly strident, and in some cases -if taken at face value-beyond stupid: the hedge-fund magnate Leon Cooperman wrote an open letter to the president that on the face of it may have been as morally tone-deaf a rich man's public utterance as 1 have ever read.

Did Wall Street mean it-or was it just a bluff? A favorite recent addition to my lexicon is "agnotology," defined as "the study of culturally induced ignorance or doubt, particularly the publication of inaccurate or misleading scientific data." If 1 put on my conical-shaped agnotologists' hat (think of Mickey in Fantasia), 1 can't but harbor the faint suspicion that the anti-Obama invective was intended to generate tens of thousands more "anti-Romney" votes for the president than positive votes for his opponent.

There are serious people who believe this, Michael Hudson of the University of Missouri, Kansas City, is one of the most clear-sighted, common-sensical observers of the current state of the nation's political economy. Here's his theory: "The Democrats could not have won so handily without the Citizens United ruling. That is what enabled the Koch Brothers to spend their billions to support right-wing candidates that barked and growled like sheepdogs to give voters little civilized option but to vote for 'the lesser evil.' This will be President Obama's epitaph for future historians. Orchestrating the election like a World Wrestling Federation melodrama, the Tea Party's sponsors threw billions of dollars into the campaign to cast the president's party in the role of "good cop" against stereotyped opponents attacking women's rights, Hispanics, and nearly every other hyphenated-American interest group."

It's an ingenious way of looking at things-but too clever by half, in my view. I'm a great believer in "Hanlon's Razor," an epistemological axiom that advises "Never attribute to malice that which is adequately explained by stupidity." The problem with an intricate game plan carried out by people who think with their wallets is that it can backfire. I think the vituperation directed at the president by Wall Street is going to come back to bite the Street, and 1 think the Street knows it. More than the fiscal cliff or a bump in the base rate, or any other of the thousand man-made shocks that flesh is heir to, the Street fears being awakened on Christmas Eve by a visiting spirit hung all about with law books and handcuffs, who with a baleful, fixed glare pronounces the dread words, "1 am the spirit of Ferdinand Pecora-and this time I'm not fooling!"

Pecora was the federal prosecutor who in 1933 conducted a series of hearings in which various Wall Street titans, notably several partners of JPMorgan and Co. and the Chase and First National City banks, made so clear what an insiders' game Wall Street was that the Glass-Steagall Act (separating banking from speculating) and the Securities and Exchange Commission were created by the New Deal.

What is not generally recognized is that Pecora's great moment was Congress's second bite at the rotten apple. The previous year (1932, Herbert Hoover still in the White House) a first series of hearings on the 1929 crash had been conducted, and went nowhere, thanks to the soft-ball quality of the interrogatories. Among those put on the stand during the first go-round was the managing partner of Goldman Sachs, which during the roaring '20s had built giant ziggurats of interlocked investment companies that were sold to the public at high prices and subsequently went bust (shares of the Goldman Sachs Trading Company that were flogged to the public at around $50 could be picked up three or four years later for a dime; 1 mention this solely for the comfort of those who, like myself, are under absolutely no illusions about the moral composition of Goldman's DNA).

Now, a year later, came Pecora. But he wasn't the main difference maker. Between the first hearings in 1932 and the second series in 1933, an election had been held. Hoover was out, and FDR was now president, a man who came from the moneyed class and understood them, a man who four years later, running for reelection, would declare, "Wall Street hates me-and I welcome their hatred!" The game had changed. Enter Pecora, who induced one financial megasaur after another to show himself to be an arrogant pig for whom notions like public-mindedness meant zero, and who opened pathways that would lead to jail for one or two prime offenders. Interestingly enough, however, Goldman Sachs wasn't summoned back for the Pecora round. It may be that some form of double jeopardy protected the firm. My own theory is that rising Goldman star Sidney Weinberg had been FDR's principal Wall Street fundraiser, and this made the difference. As much as any politician, FDR understood that toast has two sides that need to be buttered.

This president has had four years to grasp a nettlesome truth that social researchers have known for a long time and in proof of which the nation has paid an extraordinarily high price: namely that the two professions most attractive to sociopaths and psychopaths are politics and finance. Will this impel him to deal more forthrightly with Washington and Wall Street? To substitute the straitjacket for the soft word? Suppose the administration decides to go after the neo-feudal finance oligarchy that seems to run this country? Decides that if Wall Street feels free to declare its hatred of him, he's free to hate back? Decides to unleash a second Pecora?

We'll know soon enough, when the president announces his choices for his economic quarterbacks. As I write. Warren Buffett is pushing JPMorgan Chase's Jamie Dimon for Treasury secretary. I have a measured respect for Buffett, but a worse choice for Treasury I can't imagine, especially after Dimon's bank's adventure in options trading known as "the London whale," the losses from which make even Captain Ahab's worst day look like a walk in Hyde Park. Personally, I'd like to see Treasury put in the hands of someone from "Industry," as we used to call the then-dominant sector of the economy. Someone who knows what real work looks and feels like. 1 always liked Paul O'Neill, former head of Alcoa, whom George W. Bush fired for speaking truth to power.

If the White House hasn't been bought off for a second term, the next four years could initiate the fresh start this country needs. So far, as I write, the signs are favorable: Obama has met with industry, small business, and labor. Dimon and his lot have gone largely uninvited. Of course, it could be a bluff a la Michael Hudson, but it could also be a first step in the right direction: to make the American people understand not only what has been done to them, but by whom, and for how much, in a way that makes them good and properly angry, at which point they can demand that their government do something about it. People may squeal about "class warfare," but what's wrong with that if the class being warred against has acquired its gross comparative advantages through fraud, legislative corruption (take a bow. Sen. Charles Schumer!), inside dealing, unlimited bank credit for speculation and all the other lucrative enriching tools reserved to or appropriated by the uppermost fractions of the 1 percent?

The need for reform is there, but the urge to reform can take hold effectively only if articulated from the bully pulpit. A skein of op-ed and talk-show pontifications rising from here to Mars won't get the job done. The country has reelected a president who, no matter what else he may be, is nothing if not articulate. The question is: in what does he believe? I remain skeptical, but I've often been wrong, and I hope I am now.

Among the more arresting images left in its wake by Hurricane Sandy is a photograph of one of the giant parking lots that serve the public beaches along the westernmost reaches of Long Island's south shore. The surface of the lot is entirely covered in great mounds of debris, the detritus of scores of houses destroyed by the tempest. When I first saw this photo, my first reaction was, naturally, pity and sympathy for the unfortunate people whose homes had been leveled and lives blown upside down. My second, however, was less poignant and humane. What a perfect analogy, 1 thought, for the public-sector balance sheets, and finances in general, of the United States-from the Federal Reserve to government "affiliates" like Fannie and Freddie to banks and other federally guaranteed savings and depositary institutions.

Thanks to a perfect conjunction of private sector greed and recklessness and public sector corruption, just as Sandy represented the coalescence of two violent storm systems, financial spaces created for public utility and convenience have been converted into vast junkyards into which has been dumped the wreckage of the housing-driven financial crisis that came to a head in 2008. Sooner or later, these will have to be cleaned up once and for all and restored to their proper use. In a perfect world, those most proximately responsible for the disaster would be compelled to clean up or render fair compensation for the mess they made. This was the great fear that gripped Wall Street following the 2008 election, and I think it is the great fear that grips Wall Street now.

You know something? If 1 were those people. I'd be scared, too. NW

Michael M. Thomas is a frequent commentator on Wall Street and the author, most recently of Love and Money.