Big Bark, No Bite : Congress’ Power on Wall Street Peaked Years Ago

This week, the Senate Finance Committee took up hearings on mergers, takeovers, leveraged buyouts, corporate debt and other assorted sins often blamed on Wall Street.

Next week, the powerful House Ways and Means Committee follows suit, and at least seven other committees seem to be gearing up.

While it brings back memories of past inquisitions of investment bankers, by comparison this show is headed for an unspectacular run.

Only two previous congressional investigations stand out in American history for their far-ranging impact on the behavior of Wall Street and on public opinion. In 1912, Sen. Arsene P. Pujo of Louisiana turned a prolonged spotlight on alleged conspiracies among New York-based financiers to create and control big “money trusts” like U.S. Steel.

Despite its effective muckraking antics, the Pujo committee’s work did not in itself lead to new laws. But sweeping new banking legislation, including the establishment of the Federal Reserve System, followed soon after.

In 1933 the Senate Banking and Currency Committee launched the Pecora hearings--named not for a senator but for Ferdinand Pecora, the legal counsel--which put investment bankers on trial for fraud and other abuses during the booming 1920s. Pecora’s efforts led to milestone legislation that separated commercial lending from investment banking, created new rules for the securities business and set up the Securities and Exchange Commission.

There are, however, great differences between Congress’ past efforts and what will happen now.

Unlike today’s situation, the hearings of 1912 and 1933 were heavily driven by nonelected, firebrand prosecutors with independent political agendas. Pujo had Samuel Untermeyer, one of the country’s top trial lawyers who became wealthy creating mergers and then sought political fortune by tearing them apart. Pecora, a New Deal Democrat, had been a prominent Bull Moose Progressive in New York.

In the Pujo and Pecora eras, the balance of power between Washington and Wall Street was moving toward Pennsylvania Avenue. While in the early 1900s the House of Morgan and a few others single-handedly controlled American finance, by the second decade the government was wising up. Again in the 1920s private markets were running wild, but the Great Crash of ’29 ended all that.

In the late 1980s, however, the markets rule again. A deregulated, global financial casino that sees $200 billion of foreign currency speculation each day has the upper hand over governments. Congress recognizes this and is paranoid about setting off Wall Street’s hair trigger.

In the past, Congress could push for broad policy changes because financial regulations were so primitive. Pujo, for example, had no real authority to compel officials of Kidder, Peabody and other firms to disclose their business records. Before Pecora there were hardly any federal constraints on investment banking.

But today Washington maintains the world’s most elaborate regulatory regime, and hardly anyone advocates wholesale reform. Some measures, such as tax changes, may be required to reduce the attractiveness of financing deals with so much debt. But this will have to be done with great delicacy and, in any event, it is not technically a securities issue.

A common refrain for Pujo and Pecora was the evil of concentration and monopoly on Wall Street. It has always been good populist politics to wail about lack of competition among the investment banks and about the dominance of financiers over the industrial corporations that make goods and create jobs.

But these days the Merrill Lynches, the Shearsons and the Salomons compete ferociously. And few would challenge the need for size and concentration to compete with the Nomuras or the Deutschebanks.

As for whether Wall Street has the nation’s corporate titans on a leash, who can really say, when the management of so many companies and their investment bankers team up to take over someone else--or, as in the case of R.J.R. Nabisco, when they collaborate to buy management’s very own company from its public shareholders?

During past congressional hearings, the executive branch has not been a wallflower. Pujo could ride on the waves of Teddy Roosevelt’s trust busting and Woodrow Wilson’s crusading idealism. Pecora had Franklin D. Roosevelt and New Deal government activism. While President Bush has been making kinder and gentler noises about reexamining the LBO scene, its hard to envision dramatic departures. Its not just that Bush & Co. are moderates. But in today’s greed-glorifying culture, there is little push from outside the Washington Beltway to clobber the money men.

Finally, Pujo and especially Pecora were reacting to financial debacles, in one case the recurrent turn-of-the-century financial panics and, in the other, the Crash of ’29. With October of ’87 but a footnote in history, and with the Justice Department moving enthusiastically to lock up insider traders, there is today no real lightning rod for outrage.

Merger and LBO mania may be leading to severe problems, to be sure, especially if a recession hits and topples all those debt-laden firms. But Congress has never distinguished itself by locking the barn door early. That didn’t happen in Pujo’s or Pecora’s time, and who would bet that it will do so in ours?