Flaws inherent in the current commission, and how to minimize them

Roosevelt Institute Braintruster William K. Black, who investigated the S&L debacle in 1993, explains why a strong lead investigator must be selected as a modern Pecora for the Financial Crisis Inquiry Commission. 

Congress recently passed legislation establishing the Financial Crisis Inquiry Commission (FCIC). The law was a significant accomplishment because it was strongly opposed behind the scenes by many powerful forces, but its design does not meet many of the standards that made the Pecora investigation so successful. A Commission of this nature is unwieldy and political. It cannot be non-partisan, it cannot be unified, and it is extremely difficult to make it effective. Having a large number of prestigious, often political Commissioners also makes it unlikely that they will take the steps essential to minimize the flaws inherent in any investigative Commission. The only way to minimize these flaws is to pick a Pecora as its executive staff director and then let him or her run the investigation, including the questioning. The difficulty, of course, is that Commissioners — selected through a political process, from the political class, for a partisan political purpose — are among the least likely to be willing to take a back seat role and allow a professional investigator to take the lead.

The Commissioners’ central functions are to select a modern Pecora as the executive staff director and then back him or her against the inevitable political push back. They need to recognize their inherent limitations. They will not be full-time, for example. Complex investigations have to be run by professionals working full-time on the investigation. The lead investigator and key staff will be working obscene hours for years. No part-time Commissioner can come close to having their knowledge and few Commissioners will have experience running complex financial investigations. Prominent Commissioners, however, tend to want to make decisions. A complex investigation requires several gifted sous chefs operating under the overall direction of the top chef.

Commissioners selected under a bipartisan appointment process are typically selected because the politician selecting them expects the Commissioner to protect the interests of the Party making the appointment. If even one Commissioner meets these destructive expectations, then the Commission’s effectiveness will be seriously impaired. Such Commissioners act as virtual defense counsel. They can demand full Commission votes prior to any action, opportunities to brief and present arguments against the executive director’s actions, claim that the executive director is being too harsh to witnesses, leak anonymous criticisms of the executive director to the media, leak investigative findings to witnesses before the hearings, and engage in hostile questioning of witnesses that disclose information that might embarrass prominent politicians or CEOs. If even one Commissioner engages in such conduct result is a civil war among Commission members.

Commissioners that are highly political generally avoid such open conflict, but they do so in a manner that is itself harmful. The way to maintain bipartisan cooperation is to compromise and avoid anything that would embarrass any the interests of either Party or their major contributors. Such Commissioners direct the executive director to avoid confrontational questioning, conduct the questioning themselves, and ensure that no Commissioner, Party, or major contributor is embarrassed by the investigation or the final report.

I was the Deputy Staff Director of National Commission on Financial Institution Reform, Recovery and Enforcement (NCFIRRE), which in 1993 investigated the causes of the S&L debacle and suggested reforms to prevent future crises. The law creating NCFIRRE appointed commissioners through the process FCIC uses. One of the Commissioners, a Republican, good-naturedly announced that he was appointed to serve as the Bush administration “spy.” He was a pretty good guy, but he functioned like a defense counsel for the administration. Another Commissioner, a prominent Democrat, virtually never participated. Our “hearings” were a pale imitation of a Pecora investigation. The Commissioners conducted the (extremely limited) questioning. They specifically directed that we were not to draft any questions for them that might embarrass any witness, e.g., by confronting them with contradictory statements or facts when they made false or absurd statements. The Commission members that actively participated generally found that they could work together constructively by muting their disagreements and compromising. In particular, some of the Commissioners were adamant that “control fraud” (fraud led by the CEOs of seemingly legitimate businesses) had to be trivial. Other Commissioners believed that the factual investigations and data we had assembled demonstrated that control frauds were a major contributor to the crisis. The result was a compromise in which a number was made up - the NCFIRRE report states that fraud could not have caused more than 10 -15 percent of all S&L losses. The report, however, presented analyses explaining why fraud caused far larger losses. It was all very polite, sometimes internally inconsistent, and contrary to everything that made Pecora’s investigation successful. The NCFIRRE report, at the Commissioners’ direction, does not hold any individual accountable.

The media, Congress, and the administration ignored NCFIRRE’s recommendations and the nation failed to learn the appropriate lessons from the S&L debacle. Instead we have suffered from recurrent epidemics of control fraud and severe economic crises that could have been avoided with even minimally effective regulation.

This is why we ask for:

-A single investigator with a proven record of exposing fraudulent elites. A non-partisan, non-politician investigative leader instead of bipartisan fiction and friction. The single investigator of his chosen staff conduct the questioning. Professionals — not politicians.

-No subject or elite is off limits or gets special protection.

-All the tools to do the job: ample budget and time, full subpoena authority, and the lead investigator picks his or her staff.

Roosevelt Institute Braintruster William K. Black is Associate Professor of Economics and Law, University of Missouri - Kansas City.