The Pujo, Pecora and Born Investigations and Their Aftermath

In Economy on January 13, 2010 at 3:04 AM

Congressional investigations are common in the wake of financial panics, including those of 1907, 1929 and 2008. Appropriately, The Financial Crisis Inquiry Commission is such an investigation, undertaken starting today, with an initial hearings phase scheduled before Congress. This Iraq Study Group-modeled commission will potentially hold a candle to forerunner inquiry commissions of the past 20th century — read Financial Crisis Inquiry Commission: A User’s Guide.

The Pujo Committee Investigation of December 1912, named after Louisiana Representative Arsene Pujo (D), occurred in response to fallout from The Panic of 1907, a period of rampant speculation in the U.S. securities markets. Representative Pujo, in a series of hearings, effectively prosecuted the so-called “Money Trust” leader John Pierpont Morgan and others, publicly, to dramatic effect and consequence. In the hearings before Congress, Pujo confronted Morgan, the most powerful banker of his time, near the end of an impossible career as chief baron-diplomat-broker of American banking panic interventionism.

Everything changed as a result. The Panic of 1907 set back Wall Street with newfound legislative regulations, ultimately resulting in passage of (1) The 16th Amendment in February 1913, (2) The Federal Reserve Act in December 1913 and (3) The Clayton Antitrust Act in October 1914. In bounded sum, these Acts, born out of The Pujo Investigation, created formative, lasting alterations of the financial-economic regulatory landscape, countours of which still exist today.

Ron Chernow, the American historian, explains in The House of Morgan (1990) —

“The Pujo hearings had one immediate consequence that seemed to threaten Morgan power. In December 1913, President Wilson signed the Federal Reserve Act, providing the government with a central bank and freeing it of reliance on the House of Morgan in emergencies; the new Federal Reserve System was a hybrid institution, with private regional reserve banks and a public Federal Reserve Board in Washington. Yet the House of Morgan moved so artfully to form an alliance with the Federal Reserve Bank of New York that for the next twenty years it would actually gain power from the new financial system. The bankers had not yet been tamed.”

The Pecora Commission, contrastingly, named after American lawyer Ferdinand Pecora, unfolded as a consequence of The Crash of 1929. These memorable hearings, longer lasting than the Pujo undertakings, spanned March 1932 to May 1934. Results, legislatively, included passage of (1) The Banking Act in June 1933, referred to more commonly as “The Glass-Steagall Act,” (2) The Securities Act in May 1934 and (3) The Securities and Exchange Act in June 1934.

John Taylor, Stanford economist and author of “The Taylor Rule” monetary policy instrument, underscored in his recent N.B.E.R. Inaugural Martin Feldstein Lecture that the current recession is helpful to categorize as a “Panic” in the late 2008 phase, centering around the Lehman Brothers failure, occurred in September. That said, The Panic of 2008 has yielded now and given way to a Pujo-like, Pecora-like commission of its own, named formally “The Financial Crisis Inquiry Commission.”

Brooksley Born, American lawyer and former Chair of the Commodities Futures Trading Commission (C.F.T.C.), is arguably the most heralded panel member on the Commission, given her prior regulatory experiences in Washington, D.C.

Phil Angelides, former California State Treasurer, is the Commission Chairman in charge of overall panel investigations and the subsequent report —

“The Commission is called upon to examine the causes of major financial institutions which failed, or were likely to have failed, had they not received exceptional government assistance.

In its work, the Commission is authorized to hold hearings; issue subpoenas either for witness testimony or documents; and refer to the Attorney General or the appropriate state Attorney General any person who may have violated U.S. law in relation to the financial crisis.

A report of the Commission’s findings is due to the Congress, President and, most importantly, the American people on December 15, 2010.”


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