"Ready, Fire, Aim" Market Reform

Guest blogger David Leinweber is Haas Fellow in Finance and Founding Director of the Center for Innovative Financial Technology at UC Berkeley. This is an annotated, linked & expanded version of Nerd on the Street, Institutional Investor Magazine, September 2009.


Previous disasters, all notably less damaging than the Great Mess of ’08, have led to deep serious analysis of their causes. The general notion being that understanding the causes might be useful in avoiding nasty repeat performances. This has been Standard Operating Procedure for a long time for good reason. 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 back on the crisis that nearly broke capitalism by the end of 2010, while the legislation to avoid a financial crisis is being crafted now.

There have been more than a few comparisons with the Pecora Hearings in 1933. 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 lady circus midget sit in J.P.’s illustrious lap.


Could Angelides get a midget
into Larry Summers’ lap?

A more recent comparison is the Brady Commission, appointed by Ronald Reagan less than three weeks after the crash of October 1987. Let’s take a Nerd approach and compare a few salient features of the two investigations. The details are found in the “More than you want to know” section at the end of this column.


(Research assistance from Nina Ji, Institutional Investor. See supplements for details.)

The absence of any sense of urgency in this is odd. Back in October of 2008, the Heritage Foundation called for a Brady style commission immediately: “ Appointing a commission now would avoid losing the three months until the next President takes office.”

Now, a mere nine or ten months later, the commission has been named, but they appear to be in no great hurry to do anything. “Angelides, a former California state treasurer, said, .. he hoped to name an executive director “sooner rather than later.” But he was unsure this could be done by [the first meeting on] September 17. “ Contrast this with Brady, who named his executive director, Harvard Business School professor Robert Glauber, immediately. Together they assembled an 50 person 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 on schedule, in 60 days, less time the current commission is taking to pick a director, let alone a staff.

Ten members on the commission is hardly lean and mean. Brady had four. By all accounts, Phil Angelides is an able public servant, best known as the sacrificial democrat offered up to be whacked by the Gubernator in 2006 (a choice many voters may regret, as the state sinks into the fiscal sea). But he is not exactly a heavy hitter in the arcane world of modern Wall Street. Brady’s father was a partner of John D. Rockefeller. He knew the markets, and all the players knew that Brady and his team of financial and computer trading experts could not be fooled.

Others on the current commission, while accomplished citizens all, seem distant from the core issues that came close to burying us in toxic assets. A Las Vegas investor, Chairman of an anti-virus firm, a former McCain campaign operative. One member, Brooksley Born, clearly understands what’s going on. As chair of the CFTC in 2000, she was on the losing end of a battle with Rubin, Summers and others about regulating the very activities that caused the crisis. She has “I told you so” bragging rights. We can hope that she and her commissioners have the horsepower to expose what many would still like to hide.

feynman-challenger.jpgIn many investigations, choosing an irrefutable and universally respected leader provides that horsepower.

Think of Nobel prize-winning physicist Richard Feynman in the investigation of the Space Shuttle Challenger accident. There are close to a dozen living American Nobel laureate economists, several in finance. Were any offered a job?

In a parallel bizarro world, maybe we’d have a Volcker-Buffet Commission to figure out what hit us and what to do about it? It was nice to see the wise old guys during the Obama transition. Buffet was mentioned for Sec Treasury, but they’ve been scarce lately. Is it too late to actually give them something to do, and hold off on changing the game until they do it?