Senate Banking Committee (Larry Downing/Reuters)
But it wasn't always like this.
Prior to FDR and his reforms (during the 50 years of which there was not a single American financial panic), panics were quite common. Every few years, a massive loss of confidence in financial institutions would take place, destroying massive amounts of wealth and ruining the economy. In 1907, there was a massive financial panic much like in 2008. Prior to the crash, speculators began to make risky side bets with the assets of insurance companies (like speculators do with pension funds these days). One such company, one could say the equivalent of Lehman Brothers, was the Knickerbocker Trust Company. Knickerbocker was a high flyer, with plenty of its traders and executives enjoying lavish lifestyles much like our investment bankers today. Knickerbocker, backed up by a syndicate of the nation's top banks, engaged in an elaborate bet to corner the market on copper. A massive amount of debt was run up against bank deposits and insurance company reserves in an attempt at monopoly. This didn't work out, naturally, so the trust collapsed and took the entire banking system down with it. There were bank runs. Industrial companies that depended on credit lines were ruined. Insurance companies failed to pay claims. Nationwide panic ensued.
Even if Morgan made money after the fact in 1907, the expectation of higher default risk made the possibility of lending in future panics unattractive. Perhaps this is what was realized by the New York bankers, causing them to abandon their role as de facto lenders of last resort and setting the groundwork for the establishment of the Federal Reserve System.After many years of study initiated by Morgan, the Federal Reserve was established to mitigate the risks of financial panic. The New York branch of the bank welcomed its first president, a Mr. Benjamin Strong, longtime assistant to Morgan. While President Roosevelt was pleased with Morgan's intervention, he was no fan of any one person having that much power. Nor was he any friend of Morgan's after having beaten him in the Supreme Court during TR's successful breakup of Morgan's western railroad trust. Still, despite all this, Roosevelt and his hand picked successor Taft went on to give a great deal of latitude to Morgan and his allies in setting up the basic structure for the Federal Reserve.
The Pujo Committee was the father of the more famous Pecora Commission, which looked into the causes of the Great Depression. Needless to say, J.P. Morgan himself was not welcomed into the hearing room and heaped with praise as Dimon was. In fact, he endured a torrent of tough questioning at the hands of the Committee, and derision and scorn on the House and Senate floor. Pujo's report is absolutely scathing in its takedown of Morgan and the big banks. The committee's lawyer lit into Morgan over and over again during several brutal days of testimony. In the end, some of Morgan's friends speculated that the stress of the hearings may have killed him.
Today, we have a situation where the majority whip of the Senate famously noted, speaking of Congress, that the bankers "own the place." Which is interesting considering the largest financial contributor to that Senate committee is...whaddayaknow...JP Morgan. Perhaps there needs to be a committee to investigate how that came about. You'd think a sitting Senator who is bold enough to admit that a private group of bankers owns a democratic institution would call at least one day of public hearings into the matter. Maybe then we could get to the root cause of why we have had three financial panics since the government began dismantling FDR's reforms. Maybe some sort of congressional committee concerned with banking could investigate the matter.
Perhaps one day someone on the
Senate Banking Committee Banker's Senate Committee will figure out that it is their job to supervise banks and not the other way around.