Sifting financial rubble for truth


The downside, if one can call it that, of being out in front on a reform issue is that occasionally you get asked to put your principles in action.

So it is with Phil Angelides, who as California’s Democratic state treasurer from 1999 to 2007 pressed for disclosure and transparency for investments by CalPERS, the state pension fund. He also threatened to stop giving state business to Wall Street firms that didn’t meet conflict-of-interest standards.

A week ago, Angelides, 56 -- a candidate for governor in 2006 who has lately been involved in “green” investing -- was named chairman of the 10-member congressional commission to investigate the financial meltdown. In schoolyard terms, he’s now “it.”


“Here’s the big picture,” he told me the other day. “The commission’s role is to be a pursuer of the truth. If we commit ourselves to pursuing the facts and uncovering whatever is underneath whatever rock, we will do Americans a great service. And hopefully avoid this kind of thing happening again in the foreseeable future.”

That may sound ambitious, but it tracks the commission’s marching orders from Congress. The enabling legislation enacted in May authorizes the panel to look specifically into 22 possible causes of the meltdown that include mortgage fraud, shady accounting practices, executive compensation and short-selling of stock.

It’s also instructed to examine the causes of the collapse of every major financial institution that failed from August 2007 to April 2009, as well as those that survived with taxpayers’ help. That means Bear Stearns, Lehman Bros. and AIG, but arguably Citigroup or Bank of America -- any bank that took a bailout. The commission must submit its report by Dec. 15, 2010.

The panel’s most important model is the Pecora inquiry, named after Ferdinand Pecora, who as chief counsel of the Senate Banking Committee in 1933-34 held Wall Street -- indeed, the nation’s entire financial aristocracy -- to account for the crash of 1929. Angelides also mentions the 9/11 Commission, which issued its report in 2004.

The lesson of both is that inquiries on this scale are inevitably fraught with partisanship and ideology, and replete with sacred cows and gored oxen -- but that they can serve a lasting purpose.

Pecora’s principal target was the Morgan bank. He exposed the bank -- then considered such a paragon of rectitude that the IRS never bothered to audit its tax returns -- as a hive of underhanded maneuvering. Not a single one of its 20 partners, he showed, had paid a dime of income tax in 1931 or 1932 despite earning millions from stock underwriting.


The very private J.P. “Jack” Morgan Jr. spent two humiliating days on the stand as Pecora exposed his way of doing business to sunlight for the very first time. The puncturing of his reputation, that of his august institution, and those of many other leading bankers, set the stage for a raft of crucial financial system reforms during the New Deal.

The 9/11 Commission produced a lucid chronicle of the terrorist attacks that remain the benchmark for understanding the event -- even though most of its recommendations for national security improvements have been ignored.

Neither panel plied an easy path. The Pecora transcripts show that the dogged chief counsel was often harried by his own bosses. (The transcripts run to about 10,000 pages, so you shouldn’t try this at home.) “We are having a circus,” groused Virginia Sen. Carter Glass -- a banking reformer, but a friend of Morgan’s -- “the only things lacking are peanuts and colored lemonade.”

Glass’ outburst inspired a press agent for the Ringling Bros. circus, then visiting Washington, to attend the next day’s hearing with a circus midget whom he duly plunked on Jack Morgan’s lap in front of a platoon of newspaper photographers. The shot became one of the enduring images of the Depression era.

As for the 9/11 Commission, the Bush administration moved heaven and earth to quash its subpoenas of White House officials, resisted producing key documents and kept the panel on a tight financial leash ($3 million in funding, compared with the new commission’s $8 million).

For the new panel, the task of analyzing the broad meltdown and its myriad component crises will certainly be colored by its members’ individual mind-sets. (Six are Democrats and four are Republicans.)


Angelides’ record suggests that he may see a lack of disclosure and transparency as important elements in the crisis; GOP appointee Peter Wallison, a fellow of the conservative American Enterprise Institute, has accused the government-sponsored mortgage companies Fannie Mae and Freddie Mac of promoting unwise mortgage practices. Democratic Commissioner Brooksley Born is famous for having tried unsuccessfully to rein in credit derivatives, a culprit in the banking meltdown, as the Clinton administration’s futures regulator. Her effort was opposed by (among others) then-Deputy Treasury Secretary Lawrence Summers, currently President Obama’s chief economic advisor, who may not relish being put on the hot seat if the issue comes up.

The risk is that these individual vantage points can congeal into ideology and partisanship when the topic is as highly charged as this one. Angelides says his remedy will be to keep the commission focused on the empirical, not the theoretical.

“Everybody should be entitled to their opinion, but facts are facts,” he says. The commission’s work will proceed by staff investigation and public hearing, which means any member’s ability to spin will be limited by the evidence of our own eyes. “If we’re all people of honesty and integrity, we probably won’t disagree over what the facts are,” he says, hopefully.

The committee will have the power to issue subpoenas on a majority vote, as long as one Republican member concurs, so anyone trying to block a sensitive subpoena may have to do so in public.

Angelides expects all the commissioners, partisan or ideological differences notwithstanding, to share the goal of preventing financial cataclysm from returning any time soon.

“In wake of 1929, it wasn’t until 1954 that the Dow Jones exceeded the pre-crash level,” he observes. “A whole generation of Americans refused to put their savings at risk in the public markets.” If the same phenomenon emerges now, that won’t be good for anybody.


No one can say whether a public inquiry will fully restore public confidence in the market, but does anyone doubt that naming the guilty and explicating their high jinks on the record will be a good first step?


Michael Hiltzik’s column appears Mondays and Thursdays. Reach him at, read his previous columns at, and follow @latimeshiltzik on Twitter.