Last Chance for Justice

As he ushered in a new era in Washington, Franklin D. Roosevelt's theme song was "Happy Days Are Here Again," but people tend to forget that along with sunny optimism FDR delivered a strong dose of justice. He left that job to Ferdinand Pecora, a fierce New York prosecutor whom Roosevelt urged to investigate Wall Street's perniciousness. Pecora delivered big time. He humiliated and forced the resignation of Charles Mitchell, the head of National City Bank (later Citibank), and oversaw a 12,000-page probe into the causes of the Great Depression that gave birth to a new regulatory framework, including the Securities and Exchange Commission (Pecora was later one of the first commissioners). Other Wall Streeters were prosecuted, convicted, and jailed.

The theme song to our current era might be, more appropriately, “(I Can’t Get No) Satisfaction.”

Two years into the revelation that Wall Street was playing a giant confidence game with the world, disguising bad and often fraudulent mortgages as highly rated securities, selling scam derivatives by the trillions, there have been no major prosecutions. Afloat in taxpayer bailouts and the giant bonuses they're awarding themselves once again, Wall Streeters are back to being their feisty selves. No executive has gone to jail. The only ones who've resigned are those who had no choice because their companies disappeared (James Cayne of Bear Stearns, Dick Fuld of Lehman, John Thain of Merrill Lynch) or who were shown to be such astonishing incompetents that their boards had no choice but to can them (Stanley O'Neal of Merrill, Chuck Prince of Citigroup). The handful of prosecutions on the horizon are not promising: the trial of former Bear Stearns hedge-fund managers Ralph Cioffi and Matthew Tannin starts in mid-October, but their lawyers are confident they can show that the duo was simply foolish, not criminal. A grand jury has been convened to look into the behavior of Joseph Cassano, the former AIG executive who sold $500 billion worth of credit-default swaps without hedging them. But Cassano will no doubt argue the same thing: "I was just a moron." It will be hard for any jury to disagree.

So the public may have just one chance left for satisfaction: Congress's Financial Crisis Inquiry Commission, which started work Thursday. The early signs are, however, not terribly promising. The commission's chairman, Phil Angelides, is no Ferdinand Pecora, though he claims to keep Pecora's book next to his bed. Angelides is a crony of Nancy Pelosi and a California politician who, as state treasurer, was known as a mild reformer. While he enjoys subpoena power as Pecora did (and as the last famous Washington blue-ribbon panel, the 9/11 Commission, did not), Angelides says he's not eager to use it; he prefers "voluntary" cooperation. Beyond that, despite the presence of a few standouts like Brooksley Born, the derivatives whistle-blower from the '90s, the commission is manned with partisans of the left and right who could easily tie themselves—and the investigation—up in ideological knots.

Still, Angelides and his team may yet surprise us. It's happened before. The history of "blue ribbon" commissions like this one is rich and storied in Washington; one of them, in 1942, was led by an obscure senator from Missouri who was also seen as a political hack at the time. His name was Harry Truman, and he turned his commission on defense malfeasance into a ticket into the White House and the history books.

It's also not necessarily a bad thing that Angelides is no "Ferd" Pecora. After World War II, some prominent economists found that some of the Pecora Commission's conclusions were too zealous. That was especially true of the charge that the stock market crash was caused by banks that had stuffed their customers' portfolios with securities underwritten by their investment-banking sides (leading to the Glass-Steagall Act, which separated commercial and investment banks). We may need some restraint now along with righteous wrath.

In other words, we don't necessarily need a parade of Wall Streeters headed to the Big House. What we do need, however, is a parade of witnesses who will provide what's been missing so far in this crisis—a prominent outlet for public outrage. In the last nine months, the Obama administration and the grandees in Congress have been designing solutions without much input from the outside, often using experts from Wall Street (especially "Government Sachs"). It's pretty much been a closed system. Even Paul Volcker, considered perhaps the greatest Federal Reserve chairman in history (now that the Alan Greenspan era looks much worse retrospectively), has been all but ignored by the president he is advising. Volcker has been making a series of speeches around the country calling for sensible changes to the structure of Wall Street that the administration and Congress are not yet considering. He wants federally guaranteed bank deposits to be cordoned off from heavy risk-taking and proprietary trading. Volcker wants banks, in other words, to be barred from behaving like hedge funds. "Extensive participation in the impersonal, transaction-oriented capital market does not seem to me an intrinsic part of commercial banking," Volcker told a corporate group Wednesday in Los Angeles. He should be invited to Washington to say the same thing.