Monday, July 27,2009

Last week, on Tina Brown's Daily Best, I expressed my curiosity why it could have been that GS didn't figure in the "Pecora Commission" hearings that in 1933-34 investigated the 1929 Stock Market Crash. After all, GS, with its pyramided investment trusts ("Blue Ridge," "Shenandoah" and "Goldman Sachs Trading Company") was as notorious as any other firm for Jazz Age abuses, thanks largely to the onstage abuse heaped on the firm by the comedian Eddie Cantor, who had been killed by his GS investments. But Pecora doesn't mention them in Wall Street Under Oath, the book he published in 1939, and the official GS history barely mentions Pecora, and not at all in context. What the GS history (Charles, D. Ellis, The Partnership, 2008) does reveal is that Sidney Weinberg of GS already well on his way to becoming a Wall Street and American legend, was FDR's largest Wall Street contributor, and was appointed by FDR to head a committee set up in 1934, at the same time that Pecora was grilling J.P.Morgan and others, to give business leaders "an assured hearing" in the White House. It would seem that GS may have learned a thing or two from the crafty Machiavellian at 1600 Pennsylvania Avenue as it - under Weinberg - began to develop what has become its signature business trait: a unique ability to place itself on every side of every issue, to be on both ends and the middle, of major financial and political transactions.
Since that post, I've been pondering the matter, and it strikes me that there may have been another factor at work, which simple fairness insists on putting on the table. The Pecora hearings were a ind of "show trial," a relatively benign ancestor of the proceedings that would begin three years later in Moscow. The great names of Wall Street - of which GS was then not quite yet one - were hauled into a Senate hearing chamber and publicly pilloried, mainly by their own testimony.
At the same time, however, across the Atlantic, the Nazis had come to power. FDR had always been sensitive to Jewish concerns (see Arthur Hertzberg, The Jews in America, 1989) and these feelings, possibly coupled with advice from the likes of Felix Frankurter, with whom FDR was still on good terms, may have convinced him that to put an upstart Jewish firm on public trial, as it were, could be combustible. After all, this was a time when people like Father Charles Coughlin, a spewer of radio-borne ethnic and religious hatred, were getting up to speed.
Anyway, it's an interesting, happily minor historical puzzle.
Pecora's book has long been out of print, but it makes for fascinating reading; one can only wish that someone in Washington or the New York Fed had taken down a copy in, say, 2006. What I find so interesting about Pecora is that his investigation found exactly the same kind of causal abuses figuring in the runup to 1929 that analysts have been connected to the Credit Crash of 2008: leveraged and pyramided securities too complex to be understood, massive amounts of credit for investment, the system twisted inside out and so on and so on.
I think this is what Santayana had in mind when he spoke of the lesson of history. As far as present action is concerned, we tend to think of the uses of history in terms of outcomes rather than causes. The latter is what we get into after the fact, among the ruins. What Pecora seems to show is that certain behaviors - behaviors that need to be understood psychologically and pragmatically, in a way that no trading/investment algorithm can ever capture - are going to produce a crash. That when these behaviors manifest themselves in markets, they need to be put a stop to - or else there is going to be a convulsion.
In 2009, Wall Street is behaving the way it did in 1930: the worst is over, business is getting back to normal, time to buy stocks again and away we go. I missed this rally, which pains my brain almost as much as, among other vital organs, it pains my wallet. Still, I cannot suppress the conviction that the only one true constant in history is human nature, and that generations alternate in a cycle of remembrance and forgetting, and that we have a way to go yet before this drama is played out.
And now I think I'll go ponder the fact that Warren Buffett has earned approximately twice the return on his bailout investment in GS as Washington has on behalf of the taxpayers' bailout investment of multiples of billions more. Which is why I have taken to calling the Wall Street Rescue of 2008-09 "the Great Geithner Giveaway."