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Notes From the Fieldby Martin Weil

September 15, 2013

Where, Oh Where, is Ferdinand Pecora?

It is the 5th anniversary of the onset of the greatest banking and financial crisis of our lifetimes. During September 2008, vast chasms opened in the global financial system, exposing imbalances so large they threatened to bring down the world’s economies. For a few months during which time seemed to stand still, we came perilously close to just such a collapse as markets seized up and cash was hoarded by banks and households worldwide.

Five years later, one would like to think that the fundamental conditions that led us to the precipice in 2008 had been corrected. One might presume that the many individuals and companies who knowingly or carelessly gamed a largely unsupervised bazaar of counter-party debt and derivatives for their own benefit had been charged and convicted. One would be wrong on both counts.

As I wrote here one year ago, the world was rescued from the brink. And in the intervening years, some progress has been made towards reducing the dangerously excessive leverage in our financial systems, at a cost to tax-payers and savers worldwide (see financial repression).

But as I wrote in 2012, the financial crisis did much to damage the credibility of the once-vaunted American financial marketplace. Were I the “brand manager” for Team Financial Markets USA, I would have made restoring that trust my number one priority, once the immediate crisis had passed. Congressional inquiry, criminal and civil prosecutions would have played a prominent role, if only (as the tough-on-crime advocates are fond of saying) as an example to others and as a means of discouraging similar behavior in the future.

Yet none of these responses have occurred. Even modest attempts to re-regulate a recklessly deregulated banking and finance industry have been met with ferocious, and abundantly funded, opposition by lobbyists and other industry flacks.

Ferdinand_Pecora,_circa_1933The Great Depression had its Pecora Commission, deemed at the time a “witch hunt” in the same tones used to decry today’s Volcker Rule. Yet Pecora’s theatrical trial lawyer tactics succeeded in unleashing a groundswell of public support for substantive Congressional action. And this led to historic consumer and investor protection laws such as Glass Steagall, which mandated the separation of commercial and investment banking; and the Securities and Exchange Act of 1934, which created the Securities and Exchange Commission.

In 1999 Glass Steagall was overturned, and today’s SEC is an understaffed, understaffed remnant of its former self, both due to the deregulatory zeal that reigned throughout the 1990s and 2000s. Market efficiency was, and remains, the rallying cry, all else be damned. I am still waiting for some definitive indication that the finance industry, and Washington alike, are committed to restoring the qualities of fairness, transparency and rule of law that made our capital marketplace the greatest in the world.

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