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Market Reform: Ready, Fire, Aim

Nerd on the Street: Pre­vious disasters have led to serious analysis.

By David Leinweber (author of Nerds on Wall Street: Math, Machines and Wired Markets , John Wiley & Sons).

Pre­vious disasters — most far less damaging than the Great Mess of ’09 — have led to deep, serious analysis of their causes, the general notion being that such analysis might be useful in avoiding nasty repeat performances. The alternative “ready, fire, aim” approach can be hazardous to your health, yet that seems to be the plan for the newly announced Financial Crisis Inquiry Commission, tasked with reporting by December 2010 on the crisis that nearly broke capitalism, while legislation is being crafted now to avoid a financial crisis.

There have been more than a few comparisons with the Pecora Hearings in 1933. Ferdinand Pecora was a former New York DA, who as counsel for the Senate Banking Committee, had enough clout, backing and sense of mission that in six intense months, his investigation led to the legislation that established the SEC and the basis for modern market regulation. He also, famously, got J.P. Morgan to admit to not paying taxes for years, and to let a circus midget sit in J.P.’s illustrious lap.

A comparison can also be made to the more recent Brady Commission, appointed less than three weeks after the crash of October 1987. Let’s compare a few salient features of the 1987 and current investigations.

Last October, Dave Mason of the Heritage Foundation called for a Brady style commission immediately. He wrote, “Appointing a commission now would avoid losing the three months until the next President takes office.” Shortly after, Reuters reported that Phil Angelides, a former California state treasurer, hoped to name an executive director “sooner rather than later,” but was unsure this could be done before the commission’s first public meeting, September 17.

Nicholas Brady assembled a team and delivered a report that surprised even Wall Street experts with its wealth of detail and cogent explanations of what went wrong.” They did this in less time than this commission is taking to pick a director.

By all accounts, Angelides is an able public servant, best known as the sacrificial Democrat offered up to be clobbered by the Gubernator in 2006. But Angelides is not a heavy hitter in the arcane world of modern Wall Street. Brady’s father was a partner of John D. Rockefeller. All the players knew that Brady and his financial and computer-­trading experts could not be fooled.

Many on the current commission, though accomplished citizens, seem distant from the core issues. The exception is Brooksley Born, who as chair of the CFTC in 1998–’99 was on the losing end of a battle with Robert Rubin, Larry Summers and others regulating the very activities that caused the crisis. We can hope that she and her commissioners have the horsepower to expose what many would still like to hide.

Choosing a universally respected leader can provide that horsepower. There are close to a dozen living Nobel laureate American economists, several in finance. Were any offered a job?

In a parallel world a Paul ­Volcker–Warren Buffett commission would be figuring out what to do. It was nice to see the wise old guys during the Obama transition, but they’ve been scarce lately. Is it too late to give them something to do and hold off on changing the game until they do it?

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