Senator Richard Shelby's Opening Statment on new "Pecora Hearings"

February 5, 2009 (LPAC)--

"Pecora Hearings"
Senator Richard Shelby
Opening Statement
2/4/09 Senate Banking Committee Hearing

Senator Shelby (after welcoming Volcker to testify):

"As I've said many times and will continue to say, believe that before we discuss how to reorganize our regulatory structure, or even before we consider how to address the financial crisis, we need to first understand its underlying causes. If we don't have a comprehensive understanding of what went wrong, we will not be able to determine with any degree of certainty, whether our regulatory structure was sufficient and failed, or was insufficient and must changes.

"I understand that next week, Chairman Dodd plans to hold a hearing on the origins of the financial crisis, for which I commend him. I welcome that hearing. But I believe that one hearing, or even a handful of hearings, falls well short of what these exceptional times will demand.

"Instead, I believe, this committee should, I believe, and must, conduct a full and thorough investigation of the market practices, regulatory actions, and economic conditions that led to this crisis. The committee should hear testimony from all relevant parties, and produce a written report of its findings. This work is crucial, I believe, if we are to develop policies that will end this crisis, and prevent it from occurring again. While I understand that many people have their own views of what happened, this committee has yet to make that determination, in a comprehensive and organized manner. As a result, nearly a year and a half later, we still have not documented what started the crisis, and why it became so severe.

“The uncertainty about its origins has not only exacerbated the economic downturn, by undermining confidence in our entire financial system, but it has left us without a clear understanding of what needs to be done. We need to remedy that.

“Thus far the efforts of the Treasury Department and the Congress have been ad hoc at best. When this all began, I strongly opposed the TARP bailout legislation, because I believe Congress jumped right to a legislative solution without identifying the problem it was trying to solve. Since we never developed a consensus about what caused this crisis, neither Congress nor the Treasury Department have been able to devise a targeted solution.

“As a result, TARP has drifted rudderless, since it was passed four months ago, wasting taxpayer dollars, while the crisis rages on without an end in sight.

“It is well past time that we investigate the origins of the financial crisis, so that we can begin to lay the groundwork for a bipartisan, effective, and durable solution.

“In the absence of such effort, there is now talk of creating a commission to examine the origins of the financial crisis, and to make recommendations for further action. At this time, I would oppose the creation of such a commission because a thorough investigation is something that this committee can do, and must do.

“The American people rightly expect their elected representatives, the Senators here, not unaccountable commissions, to do their work, necessary to solve the problems facing the country. This committee is uniquely positioned to conduct a transparent investigation that could build the necessary political consensus around the appropriate legislative remedy that we must seek. This particular committee has a long history of conducting such investigations.

“The best precedent, I believe, for this type of investigation that our current economic situation demands, is the year-long investigation of stock market abuses the committee conducted during the Great Depression. The so-called `Pecora hearings’ produced a detailed report, exposing a wide range of abuses on Wall Street. This committee heard testimony from hundreds of witnesses, producing nearly 12,000 pages of transcripts from over 100 hearings. The investigative staff was made up of dozens of individuals, and included attorneys, accountants, and statisticians, conducting scores of interviews and sworn depositions. The committee subpoenaed corporate records, and heard testimony from the heads of Wall Street and industry, including three days of testimony, I’ve been told, from Mr. Morgan himself. The committee’s investigative record comprises 171 boxes in the National Archives.

“The record that the Pecora hearings established ultimately laid the groundwork for the passage of the Securities Acts, and the creation of the Securities and Exchange Commission.

“Recently, renowned economic historian Ron Chernow wrote an editorial in the New York Times calling for Congress to initiate an investigation in the tradition of the Pecora hearings. He stated the importance of such an investigation to resolving the current crisis. He pointed out, and I quote him, `If history is any guide, legislators can perform a signal service by moving beyond the details of the rescue plans, to provide a coherent account of the origins of the current crisis. The moment calls for nothing less than a sweeping inquest into the twin housing and stock market crashes, to provide both the intellectual context and the political constituency for change.’

“I believe that he is correct. The hearings that this committee has held, to date, on the credit crisis, have been helpful, but I think they have lacked the purpose, and focus displayed during the Pecora hearings, partly due to the committee’s lack of resources up to this time. To remedy this problem, Senator Dodd and I have already submitted an initial request for additional funding and office space for the committee. We were recently informed that the committee is going to receive additional funding, although not what is necessary, I believe, to conduct a thorough and fair investigation.

“I’m hoping that our colleagues on the Rules Committee would agree, that this type of effort here in the Banking Committee, right now, is not only necessary, but deserving of their support.

“I believe the investigation should start by calling before the committee, all of the regulators from the past decade or more, who were appointed to make sure this crisis did not happen—but it did. The committee has heard from regulators on their views of how to solve the crisis, but it has yet to hear from present and former regulators, on what caused of the crisis, and whether steps could have been taken to prevent it.

“The committee, I believe, should supplement this testimony with an exhaustive review of the records of the regulators from that period.

“Once again, there will be a time to discuss what needs to be done, but before we entrust any new or existing regulator with additional responsibilities or authorities, I believe we need to know, if and how our present regulatory structure failed us.

“After we complete a thorough review of the role of the regulators, we should then call the CEOs of the largest banks, insurance companies, brokerage firms, homebuilders, realtors, and other financial services companies of the past ten years, to testify. This, of course, would be preceded by an extensive staff effort to examine the activities of each institution or industry. Since the crisis began, the committee has not yet heard from Wall Street CEOs on their role in creating the toxic assets that have spread throughout our financial system like a cancer. Nor have they publicly explained why their risk management systems failed, or why they operated with such dangerous levels of leverage.

“Because many of these firms have either failed, received public money, or sought some type of Federal assistance, I believe they owe it to the American people, to explain how this crisis started, and what role they played in it.

“Last year, I called for a hearing to examine the role of underwriting practices in spawning the crisis. The committee announced that it would hold a hearing to examine underwriting practices, but it was postponed and is yet to be scheduled. That hearing can now be part of this effort.

“My Chairman, I am more than willing to work with you, as I have, and I believe this committee is uniquely positioned, as you do, to perform this important service at this time for the American people. I pledge my full support, should you choose to undertake your own version of the Pecora hearings, as long as they are comprehensive.”

Senator Dodd: “Well, I thank the Senator very, very much, and I just note for the record, that there have already been some proposals, including one from Senator Isakson and Senator Conrad, for a sort of a 9/11 Commission—I inform my colleagues; they may be aware of this already—to be done outside of this committee, to go back and examine. That has, obviously, some appeal as well. And certainly we want to examine what happened, but also we need to move forward…..”