Over at the Baseline Scenario, Simon Johnson was kind enough to mention The Hellhound of Wall Street in his call for President Obama to nominate Elizabeth Warren for the top spot at the new Consumer Financial Protection Bureau. The continuing controversy over Warren calls to mind a similar battle waged in Washington exactly 77 years ago.
In May 1934, the Securities Exchange Act was finally making its way through Congress after a bitter lobbying campaign to defeat it. With passage now virtually certain, the predominant question was who would lead the new agency the law created, the Securities and Exchange Commission.
Most New Dealers wanted James Landis, the Harvard law professor who had been a primary architect of the federal securities laws and who was already in charge of the securities division at the Federal Trade Commission. Others wanted Ferdinand Pecora, the stalwart lawyer who led the investigation of Wall Street that was just then wrapping up. Bankers hated both ideas. They thought either man would push through regulations that were far too stringent.
With mid-term elections on the horizon and with hopes of jump starting a business recovery, President Roosevelt sought to make a “truce of God” with bankers. The rumor was that he would appoint as the new chairman Joseph P. Kennedy, a man who had made a substantial part of his fortune operating the very manipulative pools the Exchange Act sought to eliminate.
Word of Kennedy’s potential appointment reached future Supreme Court Justice Felix Frankfurter, who wrote to the President to lobby for his protégé, Landis. Frankfurter’s advice is just as salient today as it was then.
Legislation, Frankfurter wrote, means predominantly administration and less than vigorous administration would doom the new agency. Frankfurter pointed to the then well documented cases of public service commissions, which had been extremely weak-kneed in the face of lobbying from the utilities they oversaw. Securities regulation, Frankfurter warned, presented even graver dangers:
Now the administration of the Stock Exchange Act will, I am sure, be even more difficult and call for even greater skill, resourcefulness, firmness as well as fairness of temper, a will not worn down by fatigue, than has been the work of the older regulatory commissions. The problems are more subtle, the abuses less obvious, the public more misleadable [sic] and the consequences of non-action more far reaching. What will matter most to Wall Street indeed is what the Commission will refrain from doing, in view of what the law might enable a courageous and knowing commission to do. I don’t know, of course, what the final terms of the Act will be, but I do know that the extent and effectiveness of the powers conferred by the legislation will depend largely upon the understanding of the possibilities under the statute by those charged with its administration. … [Y]ou need administrators who are equipped to meet the best legal brains whom Wall Street always has at its disposal, who have stamina and do not weary of the fight, who are moved neither by blandishments nor fears, who in a word, unite public zeal with unusual capacity.
Roosevelt was unswayed. On July 2, 1934, Kennedy became the first chairman of the SEC. Perhaps the result will be different this time around.