An Accounting of the Crisis

Related: A Who's Who of the Commission

In 1933, a New York assistant district attorney named Ferdinand Pecora came to Washington to write a Senate Banking Committee report on the financial crisis that kicked off the Great Depression. Realizing that the materials he received from the committee were incomplete, he called another month of hearings to cross examine bank officials, revealing an industry riddled with self-dealing, insider trading, and a host of other abuses. The president of National City Bank was forced to resign after the extent of his institution's corruption was revealed.

Today, a new financial-crisis commission will begin a year of investigation with two days of public hearings, and though the CEO of National City Bank's descendant, Citigroup, Vikram Pandit, won't be testifying, bank executives from Goldman Sachs, Bank of America, J.P. Morgan, and Morgan Stanley will be, along with a dozen other witnesses ranging from bank regulators to economists. The hearings are being held by the Financial Crisis Inquiry Commission (FCIC), which was created by Congress in 2009 to look into some 22 problem areas within the financial sector, from credit-rating agencies and sub-prime mortgages to compensation and short selling.

"The hearing, of course, will partly be political theater," writes The New York Times' Andrew Ross Sorkin, the Boswell of the bankers, in his column previewing the event. "There will be finger-pointing. But if the committee uses its inquiry for its stated purpose -- 'hearing testimony on the causes and current state of the crisis' -- it may help direct the national conversation and steer the current reform efforts."

One might think that locating the causes of the crisis might involve some finger-pointing, but perhaps that is too much for the delicate constitutions of Wall Street's titans. Can the public, though, expect the same results from the FCIC as we saw from the Depression-era commission? Pecora's findings led to the creation of the Securities and Exchange Commission and the Glass-Steagall Act, which separated commercial and investment banking.

Probably not. For one thing, questioning from an independent, bipartisan group of 10 commissioners will have a different tone and less direction than interrogation by a single prosecutor whose work was backed by a powerful Democratic Senate leader. Even more of an issue is that Congress is expected to pass a broad overhaul of financial regulation before the commission releases its report in December of 2010.

That doesn't mean the FCIC doesn't have value. The strength of Congress' proposed regulation is very much in question, with experts asking whether the new rules will go as far as they should to make the financial sector less risky. If the past year is any indication, we can expect that substantial compromise in the Senate will undermine the efficacy of the new legislation. If so, the arrival of the FCIC's report could be the impetus for a second bite at the apple.

The FCIC also plans to release regular updates before the final report and continue to hold public hearings, which could help shape the course of Congress' efforts. And the final report could also prove useful to future government officials by giving them a concrete outline of where trouble is likely to emerge.

"It's important to give the next generation of regulators a road map," FCIC Chair Phil Angelides, who battled Wall Street as a progressive California state treasurer, told me when the commission was announced in July. "Our work will be a guidebook."

It will also be a guidebook for the public. As well as taking inspiration from Pecora, the FCIC is driven by the example of the 9/11 Commission, which released its report directly to the public and provided a clear narrative. The financial crisis deserves a similar explanation, and to that end the FCIC has hired veteran journalist Matthew Cooper, who gained notoriety as a Time magazine reporter for refusing to testify about the leaked identity of CIA agent Valerie Plame, to guide the production of its own report.

Concerns remain about the commission's efficacy. Its membership doesn't include a prominent economic voice from the left -- although it does include liberal lawyers, housing experts, and securities experts -- which may result in a lack of balance as conservative economists on the commission propound free-market doctrines that rightly suffered in the wake of last year's financial cataclysm.

There is also the concern that partisan wrangling could undermine the commission's work; at least one Republican appointee is required to subpoena recalcitrant witnesses, and agreeing on a shared narrative could be hard if ideologues refuse to compromise. While most of the members are not involved day to day in Washington's political scraps, one in particular -- former John McCain economic adviser Douglas Holtz-Eakin -- remains a partisan voice, which could become a problem.

Angelides doesn't worry too much about these concerns, emphasizing that the commission will have a relentless focus on the facts and not solutions to the problems that they identify.

"My view is that the truth knows no partisan boundaries, and if we are strong and relentless in pursuit of the truth, if we're willing to turn over every rock, I think we can do a great service to the American people," Angelides says.

The first public meeting of the commission in September provided a preview of a collegial group, focused on their work to come, but it will be hard to know how the commission's dynamics shake out until we see it in action. Thus far, the commission has at least made progress in hiring, bringing on board dozens of staffers, including Thomas Greene, a longtime antitrust investigator who brings serious expertise to its efforts.

Even though many journalists and experts have already put forward theories of the crisis, the FCIC promises to put those theories to the test. There are still too many unanswered questions about the crash of 2008, and we still lack a complete map of the relationships between the New York Federal Reserve, the banks, and American International Group, which enabled the massive bubble of sub-prime lending fueled by fraud and incomprehensible securities. Time to get digging.

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