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Independent Investigation Required

Posted by Larry Doyle on April 21, 2009 1:14 PM |

How does our economy and country move forward after having experienced rampant abuses throughout our financial industry? It is disheartening that we have not already seen an aggressive pursuit and prosecution of many involved in these financial improprieties. Bloomberg releases a story today indicating House Speaker Pelosi Wall Street Probe Modeled on Pecora After Wall Street Crash.

While a thorough investigation is critically important to improve the health and well being of our markets and economy, I would propose we employ an independent investigation. Why?

Our financial industry is intertwined with the regulatory and political oversight which is supposed to monitor it. If we employ a currently sitting legislative body to investigate Wall Street, can or will we receive a truly unbiased analysis? Do we recall Franklin Raines of Fannie Mae being questioned by members of Congress who had received significant campaign contributions from Fannie?  The “investigation” of Freddie and Fannie was certainly more theatre than true investigation. Will we get the same with Ms. Pelosi’s probe? Bloomberg offers:

House Speaker Nancy Pelosi plans to push for a comprehensive inquiry, saying that three-quarters of Americans want to know what led to the bankruptcy of Lehman Brothers Holdings Inc. and the collapse of Bear Stearns Cos. and Merrill Lynch & Co. She favors one patterned after Senate Banking Committee hearings led by Ferdinand Pecora starting in 1933, according to her spokesman, Nadeam Elshami.

The Pecora review “was probably the single most important congressional investigation in the history of our country, except perhaps the Watergate hearings,” Donald Ritchie, associate historian for the U.S. Senate, said in an interview.

Congress is reacting to an economic collapse that has generated $1.3 trillion in financial industry losses, $700 billion in U.S. taxpayer cash infusions and loans, and $37 trillion in destroyed world stock market value since 2007. The Pecora Commission generated public support for creating the Securities and Exchange Commission and laws that governed financial services for seven decades.

Pelosi, a California Democrat, will speak about hearings this week to lawmakers, including Representative Barney Frank, chairman of the panel that writes banking law, Elshami said.

“I think it’s useful to have it, but that should not be a reason to hold off on legislating,” Frank, a Massachusetts Democrat, said of Pelosi’s proposal after a speech in Washington yesterday.

Prior to this review by Congress, I believe we should ask those who have received campaign contributions from the financial industry to reveal the level of those contributions. None other than current head of the CIA, Leon Panetta, and former U.S. Senator Chuck Hagel (R-NE) have impugned many members of Congress of engaging in Legalized Bribery. A public airing of that “bribery” should be included in an investigation of Wall Street.

Over and above that angle, the oversight of Wall Street itself needs to be addressed and changed. How is it that an SRO (self-regulatory organization) such as FINRA, funded by Wall Street, can then in turn oversee Wall Street? That model presents enormous conflicts of interest. The WSJ investigated FINRA this past January when FINRA’s then head Mary Schapiro was nominated to head the SEC. The WSJ reported that in 2008 under Schapiro, FINRA saw a greater than 30% decline in cases and fines. Is FINRA too cozy with Wall Street? Former bank regulator Wiliam Black believes so.

In addition to FINRA’s “cozy” relationship with Wall Street, FINRA itself has an internal investment portfolio of approximately $2 billion. The presence of this portfolio also creates significant potential for conflicts of interest. Those monies should be placed under management outside of FINRA to eliminate that conflict.

FINRA is conflicted in both regards. In my opinion, Wall Street should not directly fund FINRA, nor should FINRA oversee its own investment activities.

Can Washington divorce itself from the incestuous nature of these relationships? Can we expect real investigations with real change? Unless and until we have an independent investigation by outside counsel, I have serious reservations. As Bloomberg reports, none other than Chris Dodd said:

“Certainly we want to examine what happened, but also we need to move forward.”

Why do I suspect Senator Dodd has little serious interest in these investigations? As the beneficiary of enormous political campaign contributions from Wall Street,  he may be exposed as part of the problem. Bloomberg addresses this very point:

Members of Congress may be reluctant to tackle the recommendations of such an inquiry because of financial industry donations to political campaigns, said Wall Street historian Charles Geisst.

Financial services has been the biggest contributor in every U.S. election cycle in the last 20 years, according to the Center for Responsive Politics, a Washington research group that tracks campaign money. Its individual and political action committee donations in 2007 and 2008 totaled $463.5 million, compared with $163.8 million from the health-care industry and $75.6 million from energy companies.

Individual and PAC donations from Goldman Sachs Group Inc. which totaled $30.9 million, and Citigroup Inc., at $25.8 million, were higher than those from any other company except AT&T Inc.’s $40.9 million over the last 20 years, the center’s compilation of Federal Election Commission data shows.

“How can you seriously propose a law when you’ve been taking money from ‘The American Poodles for Wall Street’ or whatever fund for the past 10 years,” said Geisst, a professor of finance and economics at Manhattan College in New York and author of “Wall Street: A History.”

I concur!!!

For newer readers, you may also care to read:

How Wall Street Bought Washington: a review of the massive money spent by Wall Street to buy favor in Washington.

Let’s Really Question Ms. Schapiro: a review of the nomination of Mary Schapiro to head the SEC along with addressing investment activities of FINRA.

Does The Palace Guard Have No Clothes?: a review of FINRA’s investment in Auction Rate Securities and assorted other stories on the ARS travesty!


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