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Everything You Need to Know About the Financial Crisis Inquiry Commission


Three hundred days of theater followed by a thousand pages of gibberish.

"All the money and all the banks in Christendom cannot control credit."
-- John Pierpont Morgan, Epigrams from his testimony before the Bank and Currency Committee of the US House of Representatives, appointed for the purpose of investigating an alleged Money Trust on Wall Street.

Seventy-seven years ago, a big-bodied, imposing figure with dark fuzzy eyebrows stitched to his ruddy face as if to keep a permanent scowl attached, sat to one side of a US Senate caucus room, an immense cut-glass chandelier dangling overhead, blazing fire in the afternoon, as he listened to his partners testify before the Senate Banking & Currency Committee. The proceedings were safeguarded by heavy baronial doors, a thick carpet covered the stone floors, and high, placid windows overlooked a courtyard fountain with indifference. Inside the room, politicians and lawyers mopped sweat from their necks and took turns peppering financiers with hard questions born of deep-rooted fear; fear of the dark, fear of the light, fear of the truth.

John Pierpont Morgan, the man with the permanent scowl stitched to his forehead, sat through the testimony of his partners with a curious mix of detachment and consideration. Occasionally, he fiddled with a heavy gold watch chain, causing a ring on his hand to spray shards of light around the room. His own testimony already completed, Morgan the private banker had already admitted, among other things, to paying a grand sum total of exactly zero dollars in income taxes in 1930. He followed that with another non-payment of zero in 1931. And again in 1932. Indeed, the rich are different.

Among the other Morgan-specific findings to emerge from that room were the following:

1. JP Morgan and partners paid a total income tax of $51,538,074 during the years spanning 1917-29.

2. Lists of JP Morgan "friends" cut into stock deals below the market included a New Jersey Senator, Massachusetts' Lieutenant Governor, and a business associate of Herbert Hoover.

3. The partnership papers of the House of Morgan were "so arcane that even Lawyer Davis had never seen them."

4. "Partner Morgan was the firm's supreme arbiter."

Where Is Our Pecora?

Those juicy nuggets of heavy-handed wheeling and dealing were only a fraction of the dirt teased out of JP Morgan and his partners by the man who would go on to become the real star of the hearings -- the man with the name they'd eventually come to be known by -- the man Time Magazine called a "kinky-haired, olive-skinned, jut-jawed lawyer from Manhattan": Ferdinand "Pick" Pecora.

It would be a hell of a thing to call a man kinky-haired in the press these days, and to layer the nickname "Pick" on top of it is almost too much for a decent person to bear, let alone a pie-eyed editor staggering in under deadline. Remember, this was, after all, the Great Depression.

"Banker Morgan's inquisitor was swarthy Lawyer Ferdinand Pecora, counsel for the Committee. At his side, prompting him continuously, was his own chief counsel, courtly, white-crowned John William Davis, onetime Democratic nominee for President."
-- Time Magazine, May 29, 1933, "Business & Finance: Biggest Show"

Yes, it's tempting to chalk it up to a "different age," but make no mistake: 2010 is still a white man's banking world. In the 1930s, in spite of it all -- the crushing unemployment, the financial ruin, the hunger and the fear -- the American press drew sharp lines between courtly, white-crowned "Banksters" and their "swarthy" opponents, even as they cheered the drama. Then, as today, they... we... demanded revenge, punishment -- but just a little bit of it; just enough to hurt. Remember, we've always known which side our bread is buttered on.

And the crowd in the Senate room loved every minute of it; the tension, the drama, the sound and fury of a swarthy immigrant lawyer daring to badger the principal of a white shoe firm, the man some considered to be the Face of Capitalism itself. Virginia Senator Carter Glass -- yes, the Glass of Glass-Steagall -- like a carnival barker overstating the obvious, frequently pounded the heavy mahogany Senate room table demanding Mr. Pecora stop badgering Mr. Morgan. Just in case anyone had missed it.

Now, 77 years later, many are wondering who will become the Pick Pecora for a new generation. We already know who's playing the role of John Pierpont Morgan.

Repent! Repent! The Beginning Is Nigh!

In 1933, JP Morgan, both the firm and the man himself, much like Goldman Sachs (GS) today, straddled the queer expanse between Wall Street and Main Street in an awkward pose. If one shoe was planted squarely in the middle of Wall Street, the other was perched precariously above Main Street, casting an omnipresent shadow over every bit of commerce to crawl beneath its hand-sewn leather sole.

Today, the gross national product of that awkward pose, its legacy, is a simmering fear & loathing that churns deep in the belly of anyone involved in its transactional demands. Like the dull pain of a rotting tooth, it lingers through the good and the bad, perseverative, its only release provided by sheer financial tragedy and ruin. Which is why the recently bankrupt frequently talk in terms of euphoric relief. Repent, sinner, repent! The beginning is nigh!

Easy to Overrun, Hard to Subdue

"...It is certainly well that Wall Street now professes repentance. But it would be most unwise, nevertheless, to underestimate the strength of hostile elements. When open mass resistance fails, there is still the opportunity for traps, stratagems, intrigues, undermining-all the resources of guerrilla warfare. These laws are no panacea; nor are they self-executing. More than ever, we must maintain our vigilance. If we do not, Wall Street may yet prove to be not unlike that land, of which it has been said that no country is easier to overrun, or harder to subdue."
-- Ferdinand Pecora, "Wall Street Under Oath: The Story of Our Modern Money Changers"

Today in Washington DC, a new show begins, the Financial Crisis Inquiry Commission -- a third-order simulacra of the image of a courtroom circus act. Created last May by Section 5 of the Fraud Enforcement and Recovery Act of 2009, the FCIC consists of a 10-person panel filled top to bottom with the typical random assortment of Washington freaks, fruitcakes, and wingnuts.

The commissioner is a lawyer, a veteran of securities litigation. Naturally, he lives in Las Vegas. There's also the former Treasurer of the failed state of California. Next, the Republican hothead who summoned Capitol Police to remove protesting Democrats from a meeting room back in 2003. (A few days later he broke down in tears while apologizing for it, a lesson that doubtless won't be lost or forgotten by bankers or their counsel.) You have the modest and humble National Hero of Derivatives Destruction who reportedly saw the whole thing coming as far back as 1996 but couldn't get anything done about it. There's a millionaire former governor whose supporters once proudly dubbed themselves "Graham crackers." There's a blogger. An economist. A former managing director at Merrill Lynch who's now married to the Chairman and CEO of MGM Mirage (MGM) casino. You have a part-owner of an NBA basketball team, just for good measure. And last, but not least, one of the chief architects of Reagan's proposals for deregulation in the financial services industry.

Not that any of it matters. Easy to overrun, hard to subdue. Ho ho. Yes indeed, friends. Yes, indeed.

Among the Wall Street titans testifying before the commission today are Goldman Sachs, CEO Lloyd Blankfein, Jamie Dimon of JPMorgan Chase (JPM), John Mack of Morgan Stanley (MS), and Brian Moynihan of Bank of America (BAC).

This weird bi-partisan panel is barely hours into their inquisition and already my heart is full of hate over the awful recognition that almost 11 full months of this lies ahead. After that, on December 12, 2010, a little more than 300 days from now, a final report will be submitted to the President of the United States by the commission. It will be at least a thousand pages long.

It will examine, specifically, the role of:

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

(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;

(J) affiliations between insured depository institutions and securities, insurance, and other types of nonbanking companies;

(K) the concept that certain institutions are 'too-big-to-fail' and its impact on market expectations;

(L) corporate governance, including the impact of company conversions from partnerships to corporations;

(M) compensation structures;

(N) changes in compensation for employees of financial companies, as compared to compensation for others with similar skill sets in the labor market;

(O) the legal and regulatory structure of the United States housing market;

(P) derivatives and unregulated financial products and practices, including credit default swaps;

(Q) short-selling;

(R) financial institution reliance on numerical models, including risk models and credit ratings;

(S) the legal and regulatory structure governing financial institutions, including the extent to which the structure creates the opportunity for financial institutions to engage in regulatory arbitrage;

(T) the legal and regulatory structure governing investor and mortgagor protection;

(U) financial institutions and government-sponsored enterprises; and

(V) the quality of due diligence undertaken by financial institutions.

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