Who rigged Wall Street? The question absorbed people for years after the crash of 1929 and the Great Depression that followed. Now it is before us again. The financial crisis that has swept away great wealth and important banking firms was not an accident of nature. The ingredients for disaster were engineered by human architects seeking greater fortunes and authorized by political actors in both parties. The wiring for this calamity was complex, involving obscure changes in how the financial system functions. It will take months, maybe years, to understand it fully.
But in order to reform the system, the country has to find answers. The economy will not be truly healed until the causes are identified and the financial system is reconstructed on sound public principles. The names of key players in both parties must be identified, not for vengeance but because many of them still exercise enormous influence and hope to supervise the repair work, protecting their interests and papering over their past errors. Economic policy-makers like Phil Gramm, Robert Rubin, Lawrence Summers and their protégés arranged Wall Street for inflated profits and ruinous risk-taking and are now hovering around both presidential candidates. We will not get to the hard truth about what went wrong and how to fix it if these people are in charge of investigating themselves.
In the early 1930s, the country had the Pecora hearings and sensational disclosures that stunned Wall Street and public opinion. Formed by the Senate, the commission of inquiry went through three chief counsels before it found one tough enough to stand up to the titans of banking–an assistant district attorney from New York City named Ferdinand Pecora. His investigators pored over the books of famous Wall Street firms, then Pecora personally grilled the self-righteous bankers. Among many revelations, the commission found that J.P. Morgan Jr. and twenty partners of his firm had paid no income taxes in 1931 or ’32 and only trivial amounts before that. “If the laws are faulty, it is not my problem,” Morgan testified.
The Morgan bankers maintained lists of “preferred clients,” who were invited to participate in their speculative stock-market schemes. The list of insiders included public figures like FDR’s first Treasury secretary. Hoping to discredit the “circus” atmosphere of the hearings, Morgan’s men brought a midget, who sat on his lap. Their PR stunt backfired. The nation was convulsed in derisive laughter. The securities regulations enacted by the New Deal were grounded in what Pecora revealed.
Our crisis might not get a Pecora investigation, not one that digs out the whole truth, for this reason: this time, the dirty details of who rigged what involve many incumbent politicians, Democrats and Republicans alike, and the deals they worked out with their financial patrons on Wall Street. A close accounting would reveal how both parties collaborated for more than two decades in repealing or gutting the prudent safeguards put in place by the New Deal reformers. Congress still has some bulldog investigators, like Representatives Henry Waxman and John Conyers, but their colleagues will have very little appetite for “naming names” or exploring the money connections between Washington and Wall Street.