BILL MOYERS: Welcome to the Journal.
Like thunderheads roiling on the horizon, the clamor has been building as more and more Americans want to know exactly what, and who, brought on the worst economic crisis since the Great Depression. What happened and how do we keep it from happening again?
Congress has finally acknowledged the outcry and is supporting some 21st century version of the Pecora hearings.
"Pecora hearings?" That's right, as in Ferdinand Pecora, the savvy immigrant from Sicily who became a Manhattan prosecutor with a memory for facts and figures that proved the undoing of a Wall Street banking world gone berserk with greed and fraud.
In the early 1930s, during the Great Depression, and under threat of subpoena, one tycoon after another, including J.P. Morgan Jr., was hauled before the Senate Banking Committee and grilled by Pecora, the committee's chief counsel.
Here he is on the cover of Time magazine in June 1933. "Wealth on Trial" reads the headline inside, where Pecora is described in ethnic stereotypes of the day as "The kinky-haired, olive-skinned, jut-jawed lawyer from Manhattan." To their shock, pompous financiers, unaccustomed to having their actions or integrity questioned by anyone, much less some pipsqueak legalist making $255 a month, were no match for his cross examination.
The revelations of the Pecora hearings and the public's anger led to sweeping reform, reining in the high-handed, free-wheeling banking industry. Those reforms stabilized our financial world for half a century, until the titans of finance and friendly politicians began to dismantle them.
Ferdinand Pecora, your time has come again. Your biography is being written by this man, Michael Perino. A scholar of law and securities regulation, Michael teaches at St. John's University here in New York, and has been an advisor to the Securities and Exchange Commission, the government agency that was created because of the Pecora investigation.
And, returning to the Journal is Simon Johnson, former chief economist at the International Monetary Fund who now teaches at MIT's Sloan School of Management. Just this week Simon Johnson co-founded The Hearing, a new economics blog at washingtonpost.com.
Simon Johnson, Michael Perino, Welcome to the Journal.
MICHAEL PERINO: Thank you.
BILL MOYERS: It's the spring of 1933, the height of the banking crisis. 38 of the 48 states have closed their banks. Unemployment is 25 percent. Breadlines are long. People are hungry and they're angry, and along comes this son of a shoemaker who takes on the movers and shakers of Wall Street. What did he do that touched such a nerve in the country?
MICHAEL PERINO: What Pecora did was to take complex, corporate maneuverings, complex transactions on Wall Street and really turn them into simple morality plays. That was his genius. He was a smart lawyer. And he knew that the game plan that he had to follow was to quite frankly whip some populist outrage.
So, when he put Charles Mitchell, the head of National City Bank, on the stand, he started off with the same things we're talking about today. He started off with, "What did you get paid? What were your bonuses?" And by the way, at the end of the first day on the stand, "Didn't you engage in this wash sale with your wife where you basically sold her securities as a loss so you could essentially pay no taxes in that year?"
BILL MOYERS: And he had to resign soon after he was grilled by Pecora, right?
MICHAEL PERINO: When Mitchell strode into that hearing room on February 21, 1933, bankers had taken their fair share of lumps over the course of a few years. But, he was still the preeminent banker of his day.
Just a few weeks earlier, he had been quoted in the New York Times telling the shareholders of National City, "The economy is sound." And five days later, he resigned from City Bank, and as a matter of fact, there's this famous scene where Pecora and the chairman of the committee are looking out the Senate window and they see Mitchell who had strode into the hearing room surrounded by his retinue of staffers and lawyers walking alone to Washington Station in D.C. carrying his own suitcase. His career was over.
Pecora was, if nothing else, an excellent courtroom lawyer. He knew how to ask questions. He was a pit bull. He would not let people get away with hemming and hawing and hedging their answers. And he would go after them, politely, of course. But, he would go after them until he got the answer that he wanted.
What Pecora did was he did the grunt work. He did the unglamorous document review. He was able to go in and do the detective work so that when people tried to evade his questions, he knew the answers already. And you're right. In your introduction, you said he had a prodigious memory. His staff was amazed. He would read these complex briefing memos and, without notes, without missing a figure at all during the hearings, he would run through it and not miss a beat.
BILL MOYERS: He also had to play against these awful stereotypes of the time, right? The ethnic jibes and the depictions.
MICHAEL PERINO: Absolutely. There was — as I've been writing this book, I've begun to think of Pecora [as] sort of the Jackie Robinson of Italian-American lawyers. When he went to law school in the early 1900s, there were 15,000 lawyers in New York. There were 39 who were Italian Americans.
So, when he entered first the local stage, the New York City stage, and then when he entered the national stage, he was a novelty. I mean, an Italian-American lawyer? He grew up in a time — he came to the United States in 1886. It was a time of virulent anti-immigrant sentiment.
And he grew up in that. And part of his motivation was proving the stereotype wrong. And the stereotype was that Italians, particularly southern Italians, were lawless. They were essentially all criminals. And, quite frankly, they weren't very smart. Part of the effectiveness of the hearings, part of why they were such a media sensation, was because they played so much against that stereotype. There was novelty in this theoretically lawless Sicilian showing the lawlessness and chicanery that was going on among the Anglo-Saxons on Wall Street.
BILL MOYERS: He discovered, as I understand it, that some of these banks were making interest-free loans to their own officers, right?
MICHAEL PERINO: One of the things that National City did was that as the stock market was collapsing in 1929, what they did was that they floated interest-free loans to their executives so that they wouldn't overextend themselves in the marketplace. Now, these were on top of the very large bonuses that they had already received. At the same time, some low — they had to entice some lower-level employees to buy National City stock.
And they bought it when it was trading in the $500 range. After the crash it was trading in the $30 range or so. And even though they had floated the loans to the high-level executives, they continued to make those lower-level executives buy their stock at the inflated prices that they had bought it at. So, what he showed was essentially favoritism.
BILL MOYERS: And how did the country react?
MICHAEL PERINO: Angrily. People were outraged at what was going on in Wall Street. And when you look at Roosevelt's famous inaugural address in 1933, he famously tells Americans they have nothing to fear but fear itself, of course. But he also says that the money-changers have fled the temple and it's a direct reference to Mitchell. He got that anger. And once that anger was in place, once that clamor for reform was in place, Congress essentially fell in line.
BILL MOYERS: In those days the new president was inaugurated in March of the follow — of the year following the election. So, Roosevelt was coming into office in March of '33 just as the Pecora hearings were hitting their stride, right?
MICHAEL PERINO: He had just finished his stunning examination — which was front-page news across the country — of Mitchell just before the inauguration.
BILL MOYERS: So, that dynamic played in. A new president who came in a banking crisis wanting reforms, needing public sentiment behind those reforms.
MICHAEL PERINO: And Roosevelt was a big booster for the hearings. He met secretly with Pecora on a number of occasions. He met with the committee chairmen who were running the hearings. And he was pushing the hearings. As a matter of fact, it was from Roosevelt that the suggestion came that the next person on the stand should be J.P. Morgan.
BILL MOYERS: Why?
MICHAEL PERINO: Because J.P. Morgan was the epitome of Wall Street. Now, this is Jack Morgan. This is not the famous —
BILL MOYERS: The son of the —
MICHAEL PERINO: — the son of J.P. Morgan, and he wasn't the banker his father was. But, J.P. Morgan still had the mystique. And —
BILL MOYERS: The House of Morgan, it was —
MICHAEL PERINO: It's the House of Morgan. Exactly right. And so, you know, you can assume that Roosevelt knew that that's the kind of public sentiment, "I need to keep going." And people are going to have that kind of interest in what's going on in Morgan. And that will create the atmosphere where we can pass the first Federal Securities Laws ever. We can create reform of the banking industry. None of that stuff would have happened but for the clamor that Pecora created.
BILL MOYERS: Is there a House of Morgan today?
SIMON JOHNSON: It's the House of Morgan, J.P. Morgan. And Citigroup.
BILL MOYERS: The house still stands, right?
SIMON JOHNSON: Absolutely.
BILL MOYERS: The house built upon —
SIMON JOHNSON: Yeah, well, it's been remade, and refashioned to some degree. But, these big finance houses and securities firms that merged with commercial banks, and vice versa, are incredibly powerful. And they have, you know, questionable practices in New York on and around Wall Street. They're also incredibly powerful in Washington. The strength of their connections possibly is even greater now than it was back in the early 1930s.
I think you see it everywhere. You see it this week, for example, in these banks that receive massive amount of government assistance and I think a pretty good deal from Treasury pushing back against other Treasury initiatives, for example, to help consumers in changing the rules around mortgages and around credit cards.
And also with regard to Chrysler. So, the government has a broader set of public policy initiatives. One of them is: save the banks. Others are: help consumers and some auto companies. The banks are happy to take the money on pretty generous terms, and won't cooperate on the other aspects of public policy. That tells you how powerful they are and how much hubris they have in these kind of situations.
MICHAEL PERINO: It's not much different in that way. I mean, there was a regular communication between the House of Morgan and Washington back in those days. And if you look back at the history of financial regulation, you see the same pattern over and over again. There are always huge biases toward the status quo. People want to keep the structure the way it is, because it's worked well for them. And it's only when there's the whiff of scandal, only when there's some crisis that's occurring that the forces for reform are strong enough to overcome that status quo.
SIMON JOHNSON: And the laws that came out of the — after the Pecora hearings — were good laws, right? The founding of the Securities and Exchange Commission —
MICHAEL PERINO: Absolutely.
SIMON JOHNSON: The way the securities are regulated. I mean, these are things we've thought for a long time were sort of the bastion of good behavior and what really made financial markets in the United States better than in some other places. Turns out perhaps they were better, but not very good. Or at least it wasn't good in a sustainable way.
So, it's not the case if you have hearings, if you have this kind of dramatic, front-page investigation that you necessarily end up with populism or extreme measures. You may end up with very reasonable legislation. Which is what happened —
MICHAEL PERINO: You may end up with very reasonable measures. But if you whip up that sentiment too strongly, then there's going to be incentive to just go overboard and maybe perhaps regulate too much.
BILL MOYERS: And to scapegoat, right? I mean, it's possible to scapegoat in situations like this.
MICHAEL PERINO: There's a huge aspect of scapegoating in all of this. And if you look at some of the comments that have been made just in the last few days, what you see is very subtly the statements blending from, "We need to find out what happened" to, "We need to see who caused this." And that's —
BILL MOYERS: Well, that's a legitimate question.
MICHAEL PERINO: It is and —
BILL MOYERS: There are moments from the intersection between Wall Street and politics brought about the kind of compromise in regulation that encouraged these tendencies toward greed and fraud, right?
MICHAEL PERINO: There's no question about it. My point is simply that it sometimes becomes very easy to obscure the broader causes of a financial crisis by doing a little finger pointing and saying, "Ah-ha, here's the bad person. We found him. And we can move on."
BILL MOYERS: Do you think we need hearings like this now?
SIMON JOHNSON: Absolutely. What I take from what Michael's saying and my understanding, is the Pecora hearings, they were pretty focused. They were focused on specific individuals, specific potentially illegal or unethical practices.
And I would have thought today you could look much more carefully at predatory practices around the way that consumers were treated, for example. That's a very focused item. You could also look at some of the issues that come out of, at least, the spirit of our antitrust laws. So, the antitrust movement started out as a — really a concern about political oligarchs at the end of the 19th century.
John D. Rockefeller came through — his company was broken up. He came through with a lot of money, became a great philanthropist. That should be a model of how you do this in a proactive, forceful — and you have to talk to individuals. You have to have a strong general counsel, I think, who ask the tough questions and who could — who doesn't let you off the hook. You've got to push it through. So, I think if you can get those procedures, I'm strongly in favor.
MICHAEL PERINO: And I think you can do both. And one of the things that — we forget a lot of what happened during the Pecora hearings. But, at the same time that Pecora was putting the chieftains of Wall Street on the stand and showing the bad things that he was doing, he was also engaging in a broad ranging investigation of actually how Wall Street worked.
He sent out questionnaires to all of Wall Street, essentially, asking a series of questions about the basic nuts and bolts of the operation of the business. And the answers to those questions, which appear in a long report that Congress eventually put out, formed a lot of the basis for what became the Securities and Exchange Act of 1934. The Act that created the SEC.
BILL MOYERS: It also led to the Glass-Steagall Act didn't it? The Glass-Steagall Act separated commercial from investment banking and that persisted up until the 1990s when the Clinton administration — Bob Rubin, Larry Summers, Senator Phil Gramm of Texas — did away with the Glass-Steagall Act.
MICHAEL PERINO: Glass-Steagall, or the idea behind Glass-Steagall, to separate the commercial banks from the investment banks, had been an idea that was floating around since at least 1930. And essentially, the political bias toward keeping everything the way it was, was sufficiently strong that the idea went nowhere until Pecora showed all the things that the securities affiliates were doing that were improper. And within six months, Glass-Steagall was passed.
BILL MOYERS: And it survived until, as I said, the 1990s. To what extent, Simon, do you think the repeal of the Glass-Steagall Act in the 1990s contributed to this present collapse?
SIMON JOHNSON: I think there was a much broader sort of wave of deregulation or removing restrictions on banking that definitely contributed. I'm not sure I would put Glass-Steagall at the top of the list. I think declining to regulate derivatives, which was also a decision made under the Clinton administration, was probably more critical. Because that allowed a very big market to develop, which a lot of people didn't understand. Even the people who were big players in that market.
BILL MOYERS: The Pecora hearings became something of a circus, did they not? I mean, there's a famous photograph of J.P. Morgan, Jr. with a midget on his lap. Play that out for us.
MICHAEL PERINO: What happened was that Morgan was the event that everyone was anticipating. This was the public relations event of the day. They brought in special telegraph lines into the Senate so that people could get out their stories as quickly as they possibly could. Carter Glass was a Democrat from Virginia, probably the foremost expert on banking.
BILL MOYERS: Very powerful. It was the Glass-Steagall Act.
MICHAEL PERINO: It was the Glass-Steagall Act. Exactly right. Glass didn't really think much of Pecora's methods. He wanted to have a much more sober, academic discussion of the issues and not this kind of populist outrage. And he and Pecora had a very public clash during the Morgan hearings at which point, at one point Carter Glass said, "This is a circus. All we need is peanuts and colored lemonade." Well, one of the promoters for Ringling Brother's Circus caught onto that. And the next day, he showed up with Lya Graf who was one of the circus midgets. And he had the idea that the shortest woman in the world should sit on the lap of the richest man. And that's what happened. And that photograph eventually captured what was going on in the hearings.
BILL MOYERS: Do you think these hearings that are approved by the Senate this week can avoid that? Or should they try to have some theatre in it?
SIMON JOHNSON: Obviously, you need theatre. And theatre emerges from anything like this. I think the issue is the focus. Is it something concrete? Is there a conceptualization that people can understand? Because these financial issues are complex, and just like Mr. Pecora did, you need to find some way to crystallize it. I don't know if it's income tax. I suspect that it's not. I think the world is more sophisticated now. But, I think the way that consumers have been treated, predatory practices in and around housing, clearly prevalent.
BILL MOYERS: Such as?
SIMON JOHNSON: The way that mortgages are sold to people, and what they're told about their mortgages and the way they're pressured into certain kinds of borrowings. And that's also true, by the way, for credit cards. And these are things that people can understand. They're very real. They're interactions that many, many people have had. At least potentially somebody's trying to sell you on a dubious loan.
And I think investigating, coming in with a focus, for example, Elizabeth Warren, who is the current head of the Congressional Oversight Panel, is a very distinguished lawyer, she's on the faculty of Harvard Law School, who's focused on these sort of consumer protection issues. Now, she's dealing with a broader financial bailout.
And I think she's doing a very good job of bringing an educated, legal, financial perspective, which hadn't been her focus before. She comes with expertise, but is now drilling into areas where she's not well-connected. She's not a Wall Street player by any means. You need someone like that to really get their teeth into these issues and to find a way to communicate the complexity to a broader audience.
BILL MOYERS: Even as we speak, though, the banking lobby is going after her, saying that she's promoting an anti-business agenda, right?
SIMON JOHNSON: Yes, and I think that's a key point. So, on the Pecora hearings as I understand them — I'll put it this way. I've never read anybody who suggested that the Pecora hearings caused the Great Depression, okay? But what we're hearing now from the banking industry is, "Oh, wait a minute. If you vilify us, if you say that we did these bad things or even if you hold a serious investigation, that will further undermine confidence and cause a much deeper recession and a slower recovery and you'll lose more jobs."
MICHAEL PERINO: Actually, the banks said exactly the same thing in the 1930s.
BILL MOYERS: About the Pecora hearings?
MICHAEL PERINO: About the Pecora hearings. They said, "If you investigate, you're going to find a world of mess, probably. It's going to create sensations and that's going to actually retard recovery." You know, you interestingly said about the Pecora hearings causing the Great Depression. You know, we need to be a little humble about what these kind of hearings are likely to be able to do and not be able to do.
Pecora was a fabulous lawyer. There's no doubt that he did an amazing job at these hearings. If the hearings were intended to find the causes of the crash and the causes of the Great Depression, they failed. Because they never actually did that. They did show bankers behaving badly. And there's no question about that. And showing that created the atmosphere in which reform could pass. But, he never actually showed what caused the Depression. Now, we can't really fault him really too much for that. I don't think people understood it very well then, and I think economists are still debating it today.
SIMON JOHNSON: And will be for another 50 years.
BILL MOYERS: Ben Bernanke spent a lifetime trying to figure that out, right?
SIMON JOHNSON: Right. Exactly.
BILL MOYERS: Is Elizabeth Warren potentially the new Pecora?
SIMON JOHNSON: She might be, and I think she comes with the right combination of qualifications. Relevant experience, and obviously you need a lawyer. You need somebody who knows how to handle themselves in a courtroom-type setting. And then somebody who's not too close to finance. Someone who's not compromised. Someone who hasn't — isn't too deeply enmeshed in the belief system, which I think that we all, you know, one way or another either created or watched develop and didn't stop, okay? Maybe you need somebody who's a prosecutor and that's the other point I take from what Michael's saying, is that a prosecutorial background, somebody who doesn't let you off the hook, doesn't ask questions just for five minutes or 20 minutes, but pursues the questions to the end of the day and presumably into the next day until they get the answer. And that's the framework I think people are looking for.
BILL MOYERS: Simon, you wrote earlier this week that our government seems helpless or unwilling to act against these financiers. Because of all these financial contributions, is the Senate Banking Committee compromised?
SIMON JOHNSON: I think it has some conflicts of interest. And I think the ordinary mechanisms of donations and the way that deals are worked out between that committee, those other committees on Congress with jurisdiction over finance and the financial industry, makes everybody uncomfortable right now. And we need to go back and find out how finance interacts with politics among other things. I think that has to be on the table. By the way, the connections, which I understand Mr. Pecora did get at to some degree, between Washington and Wall Street found that there had been some particular advantage or privileges given to politicians by the big bankers. Those are the kinds of things that need to be on the table, Bill, I think.
MICHAEL PERINO: Let me underscore something you said. There's one way in which I think Pecora is not the model for the kind of lawyer we need to lead the hearings today. Pecora did some work when he was a DA going after what we call bucket shops, essentially fly-by-night securities operations. But, this was low-level fraud kind of stuff.
He really didn't understand very well how Wall Street worked. He was a quick study. He was a very smart man, and he was able to overcome that. But, Wall Street's a lot more complicated place today than it was in the 1930s. And I think a lawyer who really didn't understand the workings of Wall Street very well would be at a severe disadvantage.
SIMON JOHNSON: Here, I might disagree a little bit. I think you need a brilliant person, and you need somebody who's a very quick study. And I have many friends who — I'm not a lawyer myself. But, I have great admiration for my friends and colleagues who are lawyers who can really master the facts. And I think Wall Street is complicated, and maybe it's more complicated than the late 1920s, but I think it can be understood. And I think that, you know, you need a staff. And I think Mr. Pecora had a great staff.
BILL MOYERS: Well, he had only three people, I believe, right? A staff of three people believe it or not.
MICHAEL PERINO: When he started, at least, he had three — it's such a quaint notion, right? You know? He had — it's him, these three people he's just hired, and they go in and they investigate and the world changes, basically, as far as Wall Street is concerned.
BILL MOYERS: But, point taken. If you were asked by this commission what are the questions that you think we should try to answer, what would your first question be? Simon?
SIMON JOHNSON: I think I would want to understand whether the laws were broken in the predatory, potentially predatory practices, around the way the consumers were treated in the housing market and in the credit card market recently. And if it's a case that no laws were broken, then that investigation to answer that question will reveal a lot of unethical behavior or a lot of behavior that we should be uncomfortable with and that will then lead, I think, to sensible changes in the laws. So, really digging into the micro-details of who was taking advantage of, who was misled. How do you get, you know, retired people into some of these esoteric financial products, and of course the selling of savings products also. We know that local governments, for example, were enticed into schemes that they really didn't understand. And, of course, it may turn out in investigation that the banks didn't understand it either. But, going through that level of detail and showing, you know, who made what kind of mistake, who was misled by whom. Who misled themselves? That, I think, is going to give you the factual basis on what you could construct a lot of new, sensible laws.
MICHAEL PERINO: I think that is a very good first question to ask. I think I'd add to it the role that the credit rating agencies played in this entire process. Particularly in the creation of these derivative instruments. It's an industry that I think is not well understood in Wall Street. I think there has been some reluctance to dig into exactly what's going on there. And that's something I think I'd want to take a hard look at.
SIMON JOHNSON: I would add, on a proactive, going forward basis, ask the following question: Do we really need a banking industry that takes these kinds of risks? Professor Joe Stiglitz of Columbia, for example —
BILL MOYERS: Nobel Laureate.
SIMON JOHNSON: Nobel Laureate — is proposing — proposed to the Joint Economic Committee in his testimony on Tuesday to think about splitting financial services into two parts: a public utility model, which is where you put your money and where — that's what handles payments. That doesn't take any risks. It runs like a utility. It's low risk, low return from an investor point of view. It's boring.
In fact Paul Krugman has a great line on this. Make banking boring again. And they're talking about that part of banking. But, at the same time, both Professor Stiglitz and Professor Krugman would emphasize, and I would absolutely want to second, that you need some risk takers. And you need some people to provide money to risk takers. And the good news is we have a very strong entrepreneurial sector in this economy. We have venture capital in this economy. And they've got a great attitude and maybe sometimes things go wrong. We have bubbles there. But, the dot-com bubble and the bursting of that didn't do anything like the kind of damage that this debt finance bubble has done. Venture capital is about equity. Wall Street has been much more about debt.
And we need to be able to — we need those entrepreneurs also to be able to go public. So, we need ability to raise capital, bring in investors, go public and sell your shares to people. That doesn't have to be part of the banking system. Boring banks and risk taking with the risk full disclosed. And maybe we have to work, you know, and that was the core idea as I understand it of the 1930s. A lot more disclosure around what are you selling exactly. And what are the problems, potential problems and what are the conflicts of interest at stake.
More disclosure I would guess on the securities side. That's where you take the risk. We want the risks, this is an economy based and society based on risk taking. But, our banks don't have to be risk takers. In fact, it turns out, they don't understand the first thing about risk.
MICHAEL PERINO: Yeah, this is an important point to keep in mind. If you look back at that period in the 1930s, you see banks taking on these kinds of market risks, and they're doing it with leverage. The same thing we're really seeing today. But, the point you made about markets and entrepreneurial spirit is one that we have to keep in mind in all of this. Back in the beginning of the Roosevelt Administration, there were two sets of advisors.
One set of advisors basically said, we need to have a command and control economy. We need to have a regulator in Washington who decides which portion of the economy is going to get capital. And then within that portion of the economy, which are the right companies to get which amount of capital? The other group said, "No, we can't be in that business." The business we need to be in is we need to let the market work to the extent that it can. And the way we're going to let the market work is we're going to tell people exactly what the material things they need to know are before they buy or sell these securities. And then we let them decide.
And, you know, this is a point that President Obama made recently when he was in Europe. He said, We can't forget the fact that, you know, markets do good things. And they're useful things to have. Which doesn't mean they're completely unregulated. But, it doesn't mean we abandon them either.
SIMON JOHNSON: The one thing, though, I think we've learned since the 1920s just to add onto this very nice distinction Michael's making, is that anything gets too big, if it gets too big relative to the economy it's dangerous. Too big to fail. Thomas Hoenig who's the president of the Kansas City Fed said on Tuesday again —
BILL MOYERS: And a fairly conservative guy, right?
SIMON JOHNSON: I think so —
BILL MOYERS: I mean, he —
SIMON JOHNSON: That's my understanding of where he's coming from. He said to the Joint Economic Committee something. My recollection of what he said, which I think is absolutely brilliant and really hits the nail on the head, is any time you have financial institutions, banks that are — or also could be securities firms — that are too big fail, you're going to get oligarchs. He actually used the word oligarch which — senior fed officials do not usually use that word. I think his point is a very good one, which is: sensible regulation of behavior is what we got from the 1930s, and it was good.
BILL MOYERS: Sensible?
MICHAEL PERINO: Regulation of behavior. So, you're saying you have to disclose. You have to — you musn't have the following conflicts of interest. If you had these other conflicts, you've got to tell people about them. So, your behavior is regulated. That's a fundamental approach to this. But, the problem with any kind of regulation, Bill, is the regulators get captured, right? And that's a very — that, by the way, is a very odd idea which comes in from the Chicago School of Economics, which is, you know, the right and the left and the center are agreeing a lot on this issue here, which is very, very interesting.
BILL MOYERS: How so?
SIMON JOHNSON: Well, I think that everyone's worried about power. And everyone's worried about, you know, disproportion of power in the hands of a relatively few financial big players, or maybe let's call them oligarchs. Which was the issue and that's what I think Mr. Pecora was really highlighting in the early 1930s, and I think that's what we've come back to today. And if you focus on that and worry about it, you can worry about it from a left point of view. You say, "Well, this is just unfair and it obviously affects distribution of power and income." You can worry about it from a right point of view because it leads to corporate welfare. Actually, I think everyone's opposed to corporate welfare when it's these big players.
Remember, Bill, the big banks have got massive amounts of money. Your money. My money. And our children's money, okay? There's future taxes. We're loading up on debt to bail them out to keep them with the same kind of compensation schemes, the same kind of approach to bonuses and the same wrongheaded approach to risk taking. And that issue, that central issue is something that both, that the right, and the left and the center are not comfortable with. Particularly if they're not comfortable with big finance. Obviously, they do have some supporters.
BILL MOYERS: Even as we speak, some Wall Street sources and some conservative commentators are saying that Obama's got state control of the banks now and that he's dictator or he's a king. One column in the Wall Street Journal kept referring to him over and over again as a king because he is doing whatever it is he's doing in regard to debt.
SIMON JOHNSON: I think the banks have control of the state, Bill. Not the state control of the bank. If the state had control of the banks, the banks wouldn't be able to turn around and say no on your Chrysler deal and no way on modifying the rules about mortgages and allowing bankruptcy judges to modify mortgages in bankruptcy. These are two hot issues this week. The banks are saying no to the government.
BILL MOYERS: Here are these people receiving billions of dollars in taxpayer money who are now raising fees on credit cards, who are resisting any more regulation of credit card interest rates, who are, you know, saying, "We're going to get out of the game if you insist that we do something about executive compensation." What is going on there as you see it? Both of you.
SIMON JOHNSON: I think there's an arrogance of power. They think they won, Bill.
BILL MOYERS: Even now —
SIMON JOHNSON: And actually they're pretty confident they won. And I think probably at this point, they have won. They got the bailout. They got the money they needed to stay in business. They got a vast line of credit from the taxpayer, both the top money, which gets a lot of attention, but also the guarantees they have on their debts from the FDIC, which really helps them borrow more cheaply. And the money that they get that they can borrow from the Federal Reserve when they need it, all right?
So, they got everything they wanted. They came — a couple of players got knocked out. The guys who remain are more powerful, okay? And their position is, "Look, if you want a recovery, if you want to get your economy back, you've got to be nice to us." And I'm afraid that the government has blinked and then —
BILL MOYERS: So, they're not hearing any of this clamor? This rage? They're not hearing this —
MICHAEL PERINO: I think they are hearing it. I don't think it's reached the level that it reached, anywhere the level it reached in that period that we've been talking about in the 1930s. So, maybe it isn't quite strong enough yet.
SIMON JOHNSON: To be honest, Bill, you know I think that these hearings as I understand it were 1932, 1933, right? So, you're three years, two or three years into a big decline, mass unemployment and so on. You laid it out at the beginning. We're not there yet. And if the economy — I hope that we don't get there. If the economy turns around, if we — even if we sort of get a recovery — it's not completely convincing. But, we sort of feel like we're not falling, we're not having the massive unemployment of the '20s and '30s, the pressure will come off the banks.
They know this. This is why they think they've won. They faced down the dangers, and they've gone through this difficult phase. And they came through it stronger than ever. And so, the hearings at — you know, if you held the hearings in '29 or '30, I would guess they wouldn't have been as pointed and would not have really galvanized opinion in the same way.
MICHAEL PERINO: Part of the effect, the long-term, long-lasting effect of any sort of hearings is going to be contingent on factors that are completely behind the control of the people who are running them. And if Pecora's hearings had happened a year earlier, if unemployment wasn't 25 percent, if banks weren't failing and, you know, this is the days before FDIC insurance. This is serious extremis that we are nowhere near yet in our economy. And it's the combination of the revelations on the hearing with that extremity in the economy that created the impetus for reform.
SIMON JOHNSON: Let's say the economy bottoms out and we start to get a recovery, which is certainly what I hope will happen. Although, I think the recovery will be sluggish. You still have to ask the question about risks in the future, right? We've learned that the financial structure that we allowed to develop after roughly 1980 is very dangerous for us as taxpayers. So, privately held debt, government debt held by private citizens, okay, was about 40 percent of GDP when we started this fiasco, this crisis. When it really, really hit us. I think in about five years when you go through all the things that we see on the table and you talk to the administration officials about what they're going to do in various contingencies, my very personal estimate is we'll end up with 80 percent of our debt as GDP. We will double our debt to GDP. Now, on that basis —
BILL MOYERS: And what's the consequence of that?
SIMON JOHNSON: The consequence of that is high taxes for me and for you and for our children and grandchildren, okay? It's a big redistribution that we've participated in of the kind we often see in emerging markets in middle income countries like in Argentina or Brazil or a Korea when there's a crisis. But, not something we often see in the United States, okay?
So, if you look at it in those terms and say, "Okay, we didn't repeat the Great Depression." Let's hope. But, we did take on this massive additional tax burden. Are we willing to really go forward with the same kind of financial structure that brought us to this point? Or should we try and find a way to take the risks out to, for example, go with Professor Stiglitz's public utility model, right? So, make banking boring and put the risk — make the risk takers in a — you know, put a wall between them and the risk takers. And keep the risk takers small relative to the economy so when they fail, when they do go out of business, they can actually go bankrupt as opposed to getting these kinds of bailouts. It's the risks that we've created that we really have to address going forward.
BILL MOYERS: Do you think we can get that kind of remaking of the economic — the financial system that Simon just said we should hope for?
MICHAEL PERINO: I think it's more difficult. Even if you look at more recent history. Look back to 2000, 2001. The dot-com bubble had burst. The stock market had dropped precipitously and then in the fall of 2001, the stories about Enron came out. And right after Enron there was some reform legislation that started to move forward in Congress and it basically went nowhere. Nothing happened until the other shoe dropped. And the other shoe was WorldCom. And it was only after WorldCom that Sarbanes-Oxley was passed.
BILL MOYERS: The paradox to me is that here is this son of a Sicilian shoemaker who actually saved American capitalism from itself. You're describing a situation where without some reform of the kind you've been talking about, the tendency toward oligarchy or monopoly or arrogance of power as you say could be building even as we speak now. So, do you think we need a Ferdinand Pecora right now?
SIMON JOHNSON: Well, I'm an immigrant, Bill. So, I like the idea that new people come to the United States and they challenge authority, and they become part of the system but, in a very healthy, renovating, rejuvenating kind of way. I'm not insisting that the hearings be run by an immigrant. But, I think that the one advantage we have because it's such a big country, because we have such an open fluid social structure is there are lots of people who are coming forward, very talented professionals, who can take this on. If you give them the right political backing.
BILL MOYERS: The Pecora Hearings as you indicated already produced a narrative, a story. Greed and scandal and privilege and exploitation of ordinary people. I mean, one of the banks went sort of door-to-door selling securities, right?
MICHAEL PERINO: They did. Yeah, one of the reasons that Mitchell, the president of National City was in many ways the banker of his day, much more so than Morgan even though that Morgan still had the mystique was he fundamentally changed the way Wall Street worked. He went there and his view was that we can sell securities the same way we sell vacuum cleaners or groceries. He created a large retail network. He had door-to-door salesmen to sell securities. And he focused for the first time for Wall Street on the middle class. This was the new market out there for the things that Wall Street was selling.
SIMON JOHNSON: Let me put it this way, Bill: 150 years ago, I could have stood outside your studio on the street of New York and sold anything in a bottle and called it a medicine, okay? Quack medicine is what it was called. And it could have been, you know, good for you or bad offer you or it could have killed you. And it would — I could have done it. I would have done it, right? People did it.
Now that's illegal. You go to prison. There are serious criminal penalties for selling things that you claim are medicine that are not medicine. And obviously we argue even about very fine distinctions of how good is this for you under what circumstances? The same transformation will take place, I am sure, over the next 150 years for financial products. I'd like to bring it forward a little bit and have it happen in the next couple of years.
MICHAEL PERINO: I'm not —
SIMON JOHNSON: I think that change of view of, you know, to what extent can the consumer decide for himself or herself, to what extent do you need protection, guidance, very strong labels on products? I think that we've changed many ways we think about things as we modernized our economy looking over the past century. But the financial products, not so much.
MICHAEL PERINO: If you look back at the history, the first securities regulations were not federal regulation but state regulation. They were called the "blue sky laws." And the "blue sky laws" were exactly the model you're talking about. The "blue sky laws" were what were called merit regulation. And the idea behind merit regulation is that there will be a state regulator who will look at the quality of these securities and will determine whether they are appropriate or not to sell to investors in that state.
It's a model that federal securities regulation rejected because the view was, you know, do we really want to be in a position where some bureaucrat is deciding what's an appropriate risk for an investor to take? Or are we better off with the progressive model, a model that Brandeis wrote about in his famous book called Other People's Money where he says, No, we don't need to be regulating the substance of this. What we need to rely on, in his phrase, is sunlight, electric light, he says, is the best policeman.
SIMON JOHNSON: Another thing we've learned about Wall Street and the way it works is they didn't understand their own risks. David Brooks wrote a column in The New York Times where he criticized me. And he said that, you know, thinking of these people as all-powerful oligarchs is wrong. The issue is not their power, the issue was just they were stupid, right? They didn't understand what they were doing to ruin their own business.
Now, that's kind of an interesting defense to use. But I think if you apply it to this and you take the point, take with Michael's earlier point about how Wall Street has become more complex, right? What if it's become too complex for the Wall Street titans themselves to control even within their own organizations? Maybe these banks, seriously, became too big to manage and that's why they failed.
BILL MOYERS: You wrote on your new blog this week — that's the one with The Washington Post — that we have to get tough on bankers, bring in the antitrust division, and enforce the criminal penalties for bad behavior by executives. Is that where the debate is going?
SIMON JOHNSON: That's my read of the situation. Obviously that's my position. That's what I'm pushing for. But on this panel before the Joint Economic Committee on Tuesday was Joe Stiglitz, who I think is usually to the left of me; Mr. Thomas Hoenig, who I think is usually to the right of me on most issues. And literally this is how we were sitting at the table, the right, center and left. We were all agreeing on more or less this kind of formulation. I could completely live with what Mr. Hoenig is proposing in terms of the way you approach insolvent financial institutions, following the model used for Continental Illinois in the 1980s, which is called negotiated conservatorship using our existing legal frameworks, okay?
I could also completely live with what Joe Stiglitz was proposing as a public utility model for banking. And I don't know if the two of them would agree on everything. But there's a lot — there was an enormous amount of common ground. And where is, Bill, where is the strong intellectual voice, the arguments on the table not behind closed doors? Where is the argument on the table for why we should really keep this financial structure the way it is? Lloyd Blankfein wrote in the Financial Times a couple of months ago —
BILL MOYERS: Head of Goldman Sachs.
SIMON JOHNSON: Head of Goldman Sachs. He said the way Wall Street is structured, the way finance works in the United States today is an essential catalyst of risk, okay? Now, I'm in favor of risk. I'm a professor of entrepreneurship. I work with entrepreneurs, I work with venture capital. I was just at a big conference where all these people came together. And they think he's wrong. They think that the way big finance is operated has actually been a problem. In the good times, it was a problem.
Now they've created massive tax burdens which, of course, are going to fall disproportionately on people who have more money. So the entrepreneur, people who built successful companies are going to face bigger taxes to pay off the problems created by the banks. They don't think Wall Street titans are essentially catalysts of risk. They, the entrepreneurs and the venture capitalists, think that these Wall Street titans are part of the problem, not at all part of the solution.
BILL MOYERS: Well, you have written that American financiers played a central role in creating this crisis, making ever-larger gambles with the implicit backing of the government until the inevitable collapse. That sounds a lot like the 1930s, doesn't it?
MICHAEL PERINO: You can't help but hear the echoes from back then, now. It's certainly the case. I want to go back to a point you made before and Simon's point about criminal enforcement.
There's no question that when we find criminal wrongdoing we need to vigorously prosecute it. There's absolutely no doubt about that. Criminal enforcement gets people's attention. If you want to create deterrents for that kind of activity, then that's the way to do it.
On the other hand, we need to recognize that not everything that — not every behavior that was inappropriate, that was excessive risk taking, that was imprudent amounts to criminal conduct. And we have to recognize, have some humility for, the role that those kinds of criminal statutes can play in preventing these kinds of excesses.
SIMON JOHNSON: I think that's exactly right. And what I would say, Bill, is having a commission, having independent investigation, really drilling down is going to show you perhaps some things that were criminal. I'm not saying very many. But a lot of things that, you know, when you shine this light on them, a very, very bright light, they look inappropriate, unethical, or at least things we're not comfortable with going forward.
And then there's another set of issues which may be totally ethical. Perhaps you don't have a problem with them from a legal, moral point of view. But as an economist I'm going to come in and say, you know, this creates danger for the system. This is where the origin of "you're too big to fail" is.
And you got to remember the dynamics. Maybe we'll be — maybe we can, you know, rejigger things a little bit so they'll be okay, two or three years, we'll be comfortable. But remember where this goes. Remember Mr. Hoenig's point. Anything that's too big to fail is going to lead to oligarchs. Right? Maybe they're not oligarchs right away. But they're going to become too powerful because a big difference from the '20s is what happened in the '30s.
We create an FDIC. There is a government guarantee implicitly available to many aspects of banking. And we've actually extended that massively in the past two years under severe duress. So that makes the "too big to fail" and "too connected with government to fail" even more of a problem going forward.
BILL MOYERS: Can these hearings go anywhere if President Obama remains passive about them and if people like Larry Summers, who is very close to the financial industry, and Tim Geithner, who came out of that world, can it — can they really do any good unless there's a strong and vigorous push from these people?
MICHAEL PERINO: Yeah, I think there's got to be strong political support behind these hearings because if they're doing their job, people are going to be unhappy. And that unhappiness is going to get voiced back in Washington. And unless the political support is there it's going to be very easy to wind things up without doing much.
SIMON JOHNSON: I think President Obama is the key to the whole situation. I voted for him. I believe he has exactly the right instincts in this kind of situation. Hasn't done it yet, it's true. But I think across other policies, you can see the kind of attitude that you could bring to bear now on finance. I think that the president has to insist on the details being a lot of openness, a lot of — you know, the modern equivalent of the telegraph wires being put in, I suppose, is live blogging. I think what you need is a sensible, responsible process, not a demonization, not a witch hunt. That I think would be unproductive.
MICHAEL PERINO: I agree.
SIMON JOHNSON: But there are many really important questions that can be examined in a responsible manner. I think you want to do this expeditiously. And you want to have a general counsel like Mr. Pecora, who really can ask the questions and follow through. And, of course, you've got to have subpoena power. If you don't have subpoena power, no one's going to take you seriously.
BILL MOYERS: In the memoir he published in 1939, Ferdinand Pecora himself wrote that as soon as business recovered, and I'm quoting, "The titans of finance developed, once again, an arrogant self-confidence and a dogmatic assurance that any attempt to restrain their own activities must inevitably mean the ruin of the country." Are we doomed never to learn?
SIMON JOHNSON: No. I think this country's good at learning and good at moving on. We will cycle, okay, honestly. Even in my best case, when we break up the power of the big finance and we make it all small, they'll find a way to come back. Somebody will make a finance company grow. And maybe they'll buy the name Morgan on the way up, by the way.
And maybe we'll think, "Oh, that's good. They've figured this one out," and we'll have the — we'll have a crash again. My point, Bill, is, don't do that every five years. Do it every, you know, at most every 50 years. And when it happens next time, I don't want 40 percent of GDP loaded onto our national debt. Four percent of GDP would be plenty, okay?
In Europe, this problem exists. It's much worse. In Europe, if that's where we're going, if we really pick up on what, you know, follow through on what Mr. Pecora's saying and if we start to have a bit of economic recovery and we ignore what happened, say, "Oh, let's just go about what we're doing," we'll end up with what the Europeans have. And their banks, seriously, right now, are too big to save, let alone too big to fail.
MICHAEL PERINO: We have to be humble about what law can and cannot accomplish. There is no magic bullet out there. We could have the most intensive hearings in the world, find out the precise causes of all of the problems, enact whatever reforms that we see are the ones to enact, it's not going to prevent the next bubble. You can't legislate against those kinds of — Keynes called it the animals spirits in the marketplace. But you can lessen them.
SIMON JOHNSON: And you can push the bubble to being about equity and to being — people understand the risk of equity. They make money, they lose money on an equity basis. If it's debt, which is what this one's about, right, and about default, it spreads around the world in an incredibly scary, synchronized manner, you're going to get much bigger costs out of them.
BILL MOYERS: Are you scared right now?
SIMON JOHNSON: Yes, I'm scared.
BILL MOYERS: Of what?
SIMON JOHNSON: But in a good way. I'm scared that we'll stop worrying about this problem, that we'll move on, that we will — you know, we're having a moment of relative clarity right now where a lot of people are agreeing. But these things pass. The baseball season is upon us.
I mean, there are many new distractions. We'll soon be on our summer vacations. These moments pass Bill. And unless they're taken up in a responsible, diligent manner by the right people and at the very top, then we'll lose the opportunity to remove the risks for the future.
BILL MOYERS: Are you?
MICHAEL PERINO: I'm not scared yet. I agree, though, that there's an evanescence to these moments in politics when actual change can happen. And you may be right. We may have already slipped past the time when anything could change.
BILL MOYERS: So what would Ferdinand say?
MICHAEL PERINO: Ferdinand closed that same book that you quoted from with this phrase: he said, "laws aren't a panacea and they're not self-executing."
BILL MOYERS: Michael Perino and Simon Johnson, thank you very much for this very interesting discussion. I appreciate your being on the Journal.
SIMON JOHNSON: Thank you.
MICHAEL PERINO: Thank you.
BILL MOYERS: While the groundswell calling for new "Pecora hearings" has indeed reached Washington, Congress hasn't made up its mind yet as to how independent a commission should be. Will members of Congress control the hearings, or outside experts and citizens? The problem is for the last twenty years the financial services industry has been the largest campaign contributor in every federal election cycle.
So we would do well to remember the tale, perhaps apocryphal but containing a powerful truth, of the Great Wall of China. Fifty- five hundred miles long and twenty-five feet tall. Too high to climb over, too thick to break through and too long to go around, or so its builders thought. And in its first century of the Wall's existence, China was successfully breached three times by invaders, they didn't have to break through, climb over or go around. They simply were waved through the gates by obliging watchmen.
So, as this debate on the investigation in Washington moves forward, let's keep an eye on the gatekeepers. That's it for the Journal.
STEVE MEACHAM: This is a white collar crime scene.
BILL MOYERS: Next week, working people are fighting to keep a roof over their heads and to hold big banks accountable.
UNNAMED WOMAN: We need to have our neighbors to be able to stay in their homes and to be able to live here and to keep it the thriving community that we've worked so hard to bring it to be.
STEVE MEACHAM: When a person comes to their first rally it is a very scary thing to kind of raise your voice in a public setting like that. It's very transformative. People find their voice that way. And I've seen it happen a lot of times that people in moments of struggle become different people and they become better people.
MELONIE GRIFFITHS: It seems like just yesterday that we stood in front of my property, almost in the same way, a lot of the same people, defending the same cause.
BILL MOYERS: And log on to the Moyers website at pbs.org to learn more about the Pecora hearings and we'll link you to Simon Johnson's new blog at washingtonpost.com. There's also a guide to all of our coverage of banks and the bailout. That's at pbs.org. I'm Bill Moyers. See you next time.