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Congress Looks to Investigate Wall Street

May 5, 2009 - by Donny Shaw

Are we ready to start looking back at the origins of our crisis and ask questions about what went wrong? Congress thinks so. The House on Wednesday is expected to follow the Senate’s lead in approving legislation to establish a bipartisan Financial Markets Commission, made up of lawyers, economists and regulators, to examine the causes, both global and domestic, of the economic crisis.

The commission is being already being referred to as a modern-day Pecora. The Pecora Commission, named after the mettlesome Chief Counsel Ferdinand Pecora, ran an investigation of Wall Street in front the Senate Committee on Banking and Currency during the Great Depression. The investigation lasted several years and became quite a media spectacle as powerful bankers, including J.P. Morgan Jr., were dragged one by one before the committee to be tirelessly grilled by Mr. Pecora. The hearing lead directly to the ousting of several powerful bankers.

The photo on the right is of J.P. Morgan Jr. at the hearings with the world’s smallest woman, Lya Graf, sitting on his lap. The story goes that during one particularly rambunctious day of the hearings, Sen. Carter Glass, of Glass-Steagall Act fame, exclaimed, “This is a circus. All we need is peanuts and colored lemonade.” P.T. Barnum of Ringling Brother’s Circus picked up on this and showed up the next day with Ms. Graf, the idea being that the world’s shortest woman should sit on the lap of the world’s richest man. See Bill Moyers with Simon Johnson and Michael Perino for more background on Pecora.

Back to the present day — the Senate approved their mandate for a modern-day investigatory commission last week as part of the Fraud Enforcement and Recovery Act of 2009. It would give the commission full subpoena powers and require them to report back to Congress on December 15, 2010. The House’s legislation to establish the commission hasn’t bee made public yet, but it is expected to look similar to the Senate version.

Here, from the Senate bill text, is what on Congress is specifically asking the commission to investigate:

( c) Functions of the Commission- The functions of the Commission are—

(1) to examine the causes of the current financial and economic crisis in the United States, including the role, if any, of—

(A) fraud and abuse in the financial sector;

(B) Federal and State financial regulators, including the extent to which they enforced, or failed to enforce statutory, regulatory, or supervisory requirements;

( C) the global imbalance of savings, international capital flows, and fiscal imbalances of various governments;

(D) monetary policy and the availability and terms of credit;

(E) accounting practices, including, mark-to-market and fair value rules, and treatment of off-balance sheet vehicles;

(F) tax treatment of financial products and investments;

(G) capital requirements and regulations on leverage and liquidity, including the capital structures of regulated and non-regulated financial entities;

(H) credit rating agencies;

(I) lending practices and securitization, including the originate-to-distribute model for extending credit and transferring risk;

(J) affiliations between insured depository institutions and securities, insurance, and other types of nonbanking companies;

(K) market participant expectations that certain institutions were ‘too-big-to-fail’;

(L) corporate governance, including the impact of company conversions from partnerships to corporations;

(M) compensation structures;

(N) changes in compensation for employees of financial companies, as compared to compensation for others with similar skill sets in the labor market;

(O) Federal housing policy;

(P) derivatives and unregulated financial products and practices;

(Q) short-selling;

( R) financial institution reliance on numerical models, including risk models and credit ratings;

(S) the legal and regulatory structure governing financial institutions;

(T) the legal and regulatory structure governing investor protection;

(U) financial institutions and government-sponsored enterprises;

(V) the reliance on credit ratings by Federal financial regulators, and the use of credit ratings in financial regulation; and

(W) the quality of due diligence undertaken by financial institutions;

(2) to examine the causes of the collapse of each major financial institution that failed (including institutions that were acquired to prevent their failure) or was likely to have failed if not for the receipt of exceptional Government assistance from the Department of the Treasury during the period beginning in August 2007 through April 2009;

(3) to submit a report under subsection (g);

(4) to refer to the Attorney General of the United States and any appropriate State attorney general any person that the Commission finds may have violated the laws of the United States in relation to such crisis; and

(5) to review and build upon the record of the Committee on Banking, Housing, and Urban Affairs of the Senate, the Committee on Financial Services of the House of Representatives, other Congressional committees, the Government Accountability Office, and other legislative panels with respect to the current financial and economic crisis.

What would you have the commission investigate? Leave your ideas in the comments.

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