Once and Future Financial Crises: How the Hellhound of Wall Street Sniffed Out Five Forgotten Factors Guaranteed to Produce Fiascos

Abstract

This article revisits the role of the Pecora hearings in exposing the practices that captured national attention at the height of the Depression and links those practices to the emerging literature that describes the role of financial complexity and outsized compensation packages in creating today’s criminogenic environments. It will begin with an examination of the now classic accounts of the savings and loan crisis, examine the findings of the Pecora hearings in explaining the stock market bubble of the twenties, and then consider the extent to which the same factors are present in the FCIC Report. It will conclude that today’s inquiry lacks the things that made Pecora’s efforts so successful — a compelling narrative with a villain to focus attention, new revelations to command publicity, and a story of betrayal comprehensible to the financially unsophisticated — but that the factors that touched off the Great Depression are very similar to those underlying today’s financial crisis.

Keywords: banking regulation, executive compensation, finance, financial crises, criminology, fraud, mortgage fraud, mortgages, consumer protection, securities, mortgage-backed securities, white collar crime, accounting, accounting fraud

JEL Classification: G18, G21, G24, G28, K23