A Pecora-Style Commission Will Help the Narrative

This occurred to me while reading the extensive coverage leading up to, the live blogging of, the video, and next-day stories this morning about Ken Lewis’s testimony before the House Committee on Government Oversight and Reform. (It was yesterday but it seems like a month ago already.)

I have no problem with the coverage, much of which was quite good, especially stories based on leaked emails sent by torqued-off Fed officials castigating Lewis for balking on his decision to have BoA buy Merill Lynch after the full extent of Merrill’s financial horrors began to revealed themselves late last fall. And I have no problem with the hearings themselves. More information is always good.

It’s a good question, and certainly of keen interest to BoA shareholders, to ask when Lewis learned the extent of problems and whether government officials had undue influence on his decision to go through with the deal.

A lot of the coverage dwelled on how seriously BAC (its ticker symbol) contemplated using its MAC (the “material adverse change” clause in takeover contracts) to back out of the deal and whether Ben Bernanke’s Fed would have forced Lewis out if he did. This apparently was in the cards if BoA later tried to come back to the government for more money (it had received $25 billion in TARP money in October) without Merrill in its portfolio. In the end, BoA did buy Merrill, got $20 billion more to cover its losses in January (just typing these numbers is nauseating), and Lewis stayed as CEO (though angry shareholders stripped his chairman’s title in April).

It strikes me, though, that this is a fairly narrow slice of the credit crisis to focus so much legislative and media firepower on, and that the taxpayer interest here is actually somewhat academic. In the end, the second bailout went to BoA, but it just as easily could have gone to ML directly or to some other institution dragooned into buying it. As far as taxpayers are concerned, it appears the Fed in the end may have saved the government money by fobbing off losses onto BoA shareholders, with the understanding that the Merrill unit would help earn some of it back later.

The problem, though, was the losses in the first place, no matter how you shuffled them around. I think it is becoming clear that, of all the bad actors leading to the crisis, Merrill might just have been the worst. For more, read this amazing WSJ story from December 2007 and this strong NYT piece from November:

“The mortgage business at Merrill Lynch was an afterthought — they didn’t really have a strategy,” said William Dallas, the founder of Ownit Mortgage Solutions, a lending business in which Merrill bought a stake a few years ago. “They had found this huge profit potential, and everybody wanted a piece of it. But they were pigs about it.”

That’s why the week-long drama of the hearings struck me as a bit of a waste of resources.

Rather than sporadic, one-off hearings about various moments in the crisis in more or less random order, how much better it would be to have a systematic investigation and presentation, one that would form a single narrative, told chronologically, to educate the public (and, I have to say, the press) about how this crisis brewed and blew.

Make it bipartisan. Throw in Fannie, Freddie, Clinton, Bush, Gramm, Reagan, Rubin, Summers, Greenspan, Paulson, my personal favorite, the financial sector, the Chinese, whatever is relevant.

And that’s why it is a good thing that in the Fraud Enforcement and Recovery Act, a bill President Obama (surprisingly quietly) signed last month, there indeed contains a provision for the creation of a Financial Crisis Inquiry Commission.

Among its functions:

(1) to examine the causes of the current financial and economic crisis in the United States, specifically the role of—

(A) fraud and abuse in the financial sector, including fraud and abuse towards consumers in the mortgage sector;

That’s a good start right there.

Here’s some more:

(B) Federal and State financial regulators, including the extent to which they enforced, or failed to enforce statutory, regulatory, or supervisory requirements;

(C) the global imbalance of savings, international capital flows, and fiscal imbalances of various governments;

(D) monetary policy and the availability and terms of credit;

(E) accounting practices, including, mark-to-market and fair value rules, and treatment of off-balance sheet vehicles;

(F) tax treatment of financial products and investments;

(G) capital requirements and regulations on leverage and liquidity, including the capital structures of regulated and non-regulated financial entities;

(H) credit rating agencies in the financial system, including, reliance on credit ratings by financial institutions and Federal financial regulators, the use of credit ratings in financial regulation, and the use of credit ratings in the securitization markets;

(I) lending practices and securitization, including the originate-to-distribute model for extending credit and transferring risk;

All good stuff.

A tip of the cap to Barry Ritholtz for dogging this issue.

The commission is modeled on Depression-era hearings led by Ferdinand Pecora, a former New York prosecutor, who weaved the facts of the 1929 Crash, its causes and consequences, into a compelling narrative that galvanized the public.

Reading these posts, particularly this one from January by historian Ron Chernow, one can see the country lucked out in finding Pecora.

Bob Kuttner has some suggested candidates for the next one.

In any case, bring it on. Let’s get this story told in a thorough and systematic way.

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Dean Starkman Dean Starkman runs The Audit, CJR's business section, and is the author of The Watchdog That Didn't Bark: The Financial Crisis and the Disappearance of Investigative Journalism (Columbia University Press, January 2014). Follow Dean on Twitter: @deanstarkman.