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Congress Wasn’t Always Afraid to Take on Banks

Mike’s piece today on the failure of Congress to pass a mortgage cramdown bill — which would allow bankruptcy judges to modify loans and is a major element of the Obama administration’s plan to deal with the foreclosure crisis –clearly demonstrates the continued clout of banks and the cowardice of politicians who regularly mouth their support for consumers, but then quickly cave.

But it wasn’t always this way, as Thomas Frank reminds us today in a Wall Street Journal opinion piece. Frank reviews the history of the Pecora Commission, a congressional panel that investigated bank misdeeds during the Great Depression. Its findings were used to create new laws to curb financial industry abuses that kept banks in check for decades, until many of those regulations went out the door, beginning in the 1990s.

In the course of its investigation, the Senate Banking Committee, which brought on as its counsel a former New York assistant district attorney named Ferdinand Pecora, heard testimony from the lords of finance that cemented public suspicion of Wall Street. Along the way, the investigations formed the rationale for the Glass-Steagall Act, the Securities Exchange Act, and other financial regulations of the Roosevelt era.

Frank, author of “What’s the Matter with Kansas?” writes that the idea of a new Pecora Commission is catching on, at least on the left. But it’s not likely it will become a reality. This time around, Congress would have to investigate itself — and its role in paving the way for the deregulatory zeal that is cited as the source of many of the financial system’s problems today.

The crisis today is not solely one of bank misbehavior. This is also about the failure of the regulators — the Wall Street policemen who dozed peacefully as the crime of the century went off beneath the window.

We have all heard the official explanation for this failure, that “the structure of our regulatory system is unnecessarily complex and fragmented,” in the soothing words of Treasury Secretary Tim Geithner. But no proper Pecora would be satisfied with such piffle. The system was not only complex, it was compromised and corrupted and thoroughly rotten even in the spots where its mandate was simple.

After all, we have for decades been on a national crusade to slash red tape and stifle regulators. Over the years, federal agencies have been defunded, their workers have grown dispirited, their managers, drawn in many cases from antiregulatory organizations, have seemed to care far more about industry than the public.

Frank also points out the difficulties of investigating how the free market philosophy of the Bush administration went too far:

Consider in this connection the 2003 photograph, rapidly becoming an icon of the Bush years, in which James Gilleran, then the director of the Office of Thrift Supervision (it regulates savings and loan associations) can be seen in the company of several jolly bank industry lobbyists, holding a chainsaw to a pile of rule books. The picture not only tells us more about our current fix than would a thousand pages about overlapping jurisdictions; it also reminds us why we may never solve the problem of regulatory failure. To do so, we would have to examine the apparent subversion of the regulatory system by the last administration. And that topic is supposedly off limits, since going there would open the door to endless partisan feuding.

But as Frank notes, Republicans alone aren’t to blame. It was former President Bill Clinton and his Treasury Secretary Larry Summers who pushed for the measure that overturned Glass-Steagall’s separation of investment from commercial banking.

Given all this, what are the chances that Republicans and Democrats will join hands to probe what went wrong during the financial crisis, and then work together to craft purposeful regulations to make sure another crisis never occurs? Pretty much nonexistent.

Based on the cramdown experience, banks are rolling over Congress already. It’s as if the Pecora Commission is already just a distant memory. The lack of action by Congress to figure out what really went wrong, and to take steps to fix it, will be the enduring scandal of this financial crisis.

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