The forthcoming report from the Financial Crisis Inquiry Commission will not likely disclose any great unknowns about the causes of the crisis. But total transparency would help secure its place in the historical record.
by Michael Perino, contributor
The Financial Crisis Inquiry Commission, the independent panel Congress established to investigate the causes of the financial crisis, has largely squandered its opportunity to influence the debate over financial reform. Its investigation was originally touted as the modern incarnation of the Pecora hearings, the Senate’s Depression-era investigation of Wall Street. The comparison, as I have noted, is entirely inapt.
Ferdinand Pecora, the committee’s stalwart counsel, relentlessly disclosed pervasive wrongdoing at the highest levels of the financial community, galvanizing public opinion for reform and shaping the revolutionary banking and securities laws enacted in the earliest days of the New Deal. Notwithstanding a few brief interludes of media interest, the public has generally ignored the FCIC’s hearings. The committee’s investigation had no discernible influence over the Dodd-Frank Wall Street Reform and Consumer Protection Act passed earlier this year.
Former New York governor Eliot Spitzer has bluntly written off the entire effort as “a waste,” but I think there is still an opportunity for the FCIC to provide a valuable service to the American public.
The vehicle for that rehabilitation, however, is unlikely to be the FCIC’s final report, which is due to Congress on December 15 and slated to be released the same day in bookstores around the country and is already available for pre-order on Amazon. Will it be the run-away success the 9/11 Commission report was five years ago? FCIC chairman Phil Angelides certainly hopes so — he wants the commission’s report to be the “official history of what brought our financial and economic system to its knees” and he hopes that the report will influence the numerous rules Dodd-Frank requires regulators to draft. The report certainly promises bells and whistles — an e-book version will reportedly provide links to relevant testimony from the hearings — but it remains unclear whether the substance will measure up to Angelides’s lofty expectations.
One step forward, two steps back
The FCIC has been hobbled by high-level staff departures, most notably journalist Matt Cooper, originally slated to be the report’s primary author. But the main difficulty in writing a compelling report is not finding an author — it is being able to tell readers something they don’t already know.
The hearings have unearthed some new details, most notably that investment banks knew (but did not tell investors) that many of the loans they packaged did not meet the embarrassingly low underwriting standards of many sub-prime lenders. These disclosures may yet prove important as investors attempt to recover their losses, but they hardly constitute shocking revelations. They are simply more detailed evidence of what we already knew — that the banks foisted increasingly shoddy mortgages on largely unsuspecting investors.
While the FCIC is playing its cards close to the vest (no doubt trying to maximize the newsworthiness of its report), in a recent interview on C-SPAN, Angelides all but conceded that the report would contain no bombshells. It will instead provide “new facets” on what people already know about the “disaster on Wall Street” and in Washington.
Another factor suggesting that the FCIC report may prove more mundane than riveting is the obvious fact that an “independent commission” is producing it. The moniker suggests an investigatory and reporting process separate and apart from normal political influences, but that is hardly the case. These panels aren’t designed to be “nonpartisan,” they are designed to be “bipartisan,” with members chosen by powerful congressional leaders both for their political connections and for their pre-determined, often partisan viewpoints.
The overwhelming goal of most commission chairmen is to merge the panel’s divergent perspectives into a consensus report. Often the only way to get there is to sidestep crucial questions. At worst, the need to hammer out language agreeable to everyone may yield a report that is nothing more than pablum. The FCIC may ultimately do better than that, but what the social scientist Frank Popper wrote about commission reports 40 years ago likely remains true today: “No commission report … is incompetent, negligent, or rash, but few, if any, are brilliant.”
Transparency is key
If a humdrum report is likely, what’s left for the FCIC to avoid failure? Along with its report, the panel could release all the documents and interviews it has collected. The amount of material is staggering –800 witness interviews and millions of pages of documents. Making these documents available will allow independent analysts (in essence, an army of wiki-investigators) to draw their own conclusions from the data. It’s just what Angelides said he wanted the FCIC to do — lay out the facts for the American public and allow them to draw their own conclusions.
The prospects for immediate release of this material, however, seem slim. Reports suggest strong internal divisions within the commission over when and how to release documents. The FCIC website now states vaguely that the panel will release documents “if and when it is appropriate” and “in accordance with federal archives requirements.”
All this sounds remarkably like the experience of the 9/11 Commission, the history of which provides a sobering illustration of what could happen to the FCIC documents. The 9/11 Commission released its report in mid-2004 and transferred its records to the National Archives and Records Administration a month later. The commissioners debated how long the records should remain closed to public scrutiny — some wanted immediate disclosure while others argued for a minimum of ten years of secrecy. In the end, they split the difference, directing NARA to begin opening records in January 2009. Today, more than six years after the 9/11 Commission ceased operations, two-thirds of its documents remain closed to researchers.
Even without the national security concerns that many of the 9/11 Commission documents implicate, full access to FCIC documents may not be forthcoming any time soon. The FCIC likely agreed to maintain the confidentiality of information submitted to it. NARA honored such agreements in the 9/11 investigation and would likely do so here as well. NARA regulations also state that archivists may withhold public access to records containing trade secrets and commercial or financial information. That rule provides a ready means for Wall Street firms to block disclosure or, at the very least, to tie up attempts to review the documents in expensive, time-consuming litigation.
These possibilities call to mind Pecora’s own conclusion about how financiers were able to get away with so much during the Roaring ‘20s. “Legal chicanery and beneficent darkness were the banker’s stoutest allies,” he wrote in his memoirs. Pecora succeeded because he was willing to shine the “fierce light of publicity and criticism” on the practices he uncovered. Let’s hope the FCIC will have the courage to do the same.
Michael Perino is a professor of law at St. John’s University School of Law in Queens, New York. His book, The Hellhound of Wall Street: How Ferdinand Pecora’s Investigation of the Great Crash Forever Changed American Finance is published by Penguin Press.