Memo to Investigators: Dig Deep

When the Financial Crisis Inquiry Commission opened for business on September 17, it was a nonevent for the media. Leading newspapers brushed aside chairman Phil Angelides, the former California state treasurer, and his declaration of purpose--"uncovering the facts and providing an unbiased historical accounting of what brought our financial system and our economy to its knees." As Angelides put it, "The fuses for that cataclysm were undoubtedly lit years before. It is our job to diligently and doggedly follow those fuses to their origins."

The press has moved on. Financial crisis was last year's story. Didn't the Treasury and Federal Reserve announce they have already turned things around? Hasn't the president proposed a bunch of complicated reforms (boring!) for Congress to enact? Yes, but that is the problem. How can Washington reform the financial system when we still don't know what happened?

We may know the broad outlines, but the landscape remains littered with unanswered questions and informed suspicions about who did what to produce the breakdown. The relevant facts are still buried in the files of Wall Street firms and the regulatory agencies that utterly failed as watchdogs. The Angelides commission has the subpoena power to dig out secrets--from e-mails and private memos, and through testimony under oath--that can disclose political deal-making and ruinous financial strategies. Given the rush of events, the commission may be the public's last, best chance to get at the truth of the matter.

Congress created the ten-member commission (six Democrats, four Republicans) to identify the root causes of the financial crisis. It listed more than twenty areas for inquiry, from the collapse of individual institutions to the complex financial instruments now known as toxic assets. It is a gigantic task fraught with explosive implications for government and finance.

The commission has chosen an executive director with an impressive twenty-five-year history of uncovering corporate fraud and malfeasance. Thomas Greene, chief assistant attorney general from California endorsed as a nonpartisan straight shooter by the Republican and Democratic attorneys general he served, has led complex investigations into anti-trust, price-fixing and deceptive accounting gimmicks on cases involving big names like Enron, Microsoft and El Paso Natural Gas. The financial crisis has all those elements and more.

"If we do this right," Angelides said, "our work can serve as an antidote--much as the Pecora hearings did in the 1930s--to the kinds of financial market practices that none of us would want to see be repeated ever again."

In the New Deal years, the Congressional investigation led by Ferdinand Pecora helped build the case for landmark regulatory reforms--legislation establishing the Securities and Exchange Commission and the Glass-Steagall Act, which separated commercial banks from risk-taking investment banks. Like Pecora, Angelides does not intend to propose policy solutions but simply to discover what really happened.

"I'm very serious on this point," Angelides told me in an informal conversation. "If we stick to the hard facts, we might turn up some perpetrators, but our job is to accomplish something more than that. If we pursue all the facts, we can give the American people a clear understanding of what occurred during the last twenty years or so. What forces lit the fire that led to this explosion? What exactly happened with those financial firms that failed? What happened in regulation or at the Federal Reserve? What happened in the economy to fuel the fire? Where were the firefighters? Who was asleep? Who was awake? Who sounded the alarm and was ignored? It could be a very disturbing story."

Washington cynics have low expectations for Angelides. Too many important people just want the whole thing to go away. The Obama administration had hoped to pass its reform package quickly and then move on. But the White House plan, which rearranges the boxes among regulatory agencies and puts the Fed in charge, is stalled by rising skepticism in Congress and doubts expressed by establishment figures like former Federal Reserve chairman Paul Volcker, who is particularly wary of making the "too big to fail" doctrine into a permanent assumption. In a statement to the House Banking and Financial Services Committee on September 24, Volcker asked, "Will not the pattern of protection for the largest banks and their holding companies tend to encourage greater risk-taking, including active participation in volatile capital markets, especially when compensation practices so greatly reward short-term success?" Volcker wants commercial banks restored to their narrower purpose--taking deposits and lending to borrowers, instead of playing in high-risk financial markets. He does not say so directly, but that would restore some protections enacted seventy years ago by Glass-Steagall and repealed by the Clinton administration.

Even if Congress manages to act this fall, the debate will not end. Obama's plan does not begin to get at the rot in the financial system. Wall Street's most notorious practices continue to flourish, and if unemployment rates keep rising through 2010, the public will not set aside its anger. The Angelides investigators could put the story back on the front page.

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