As we noted, Tuesday’s Senate Banking hearing was stunning in its rebuke – from a conservative Republican no less – of the role Wall Street played in the WeWork debacle.  Sen. Tom Cotton (R-AR) — not Elizabeth Warren — savaged WeWork’s former CEO, going on to say that Adam Neumann’s crimes against workers were “aided and abetted by some of Wall Street’s biggest banks and biggest law firms.”  It’s unlikely that WeWork will immediately spark national outrage given so much else so many of us are already so angry about, but Sen. Cotton went on to argue that cases such as this are why millions of Americans no longer believe in capitalism.  To understand if more WeWorks would fuel still more populist and progressive fury against big capital and what big finance can and should do about it, it’s worth revisiting the last times Wall Street enraged Main Street and regretted it over the next sixty years.

Doing so takes us to the Roaring Twenties and the ensuing Great Depression’s rewrite of U.S. financial regulation.  The universal banks of the 1920s were different in many important respects from those of 2019, but the risk to average investors of conflicted underwriting and lending are eerily familiar.  Before the Great Depression, big banks were on both sides of financial deals, profiting first from debt issuances and then from equity sales that paid off the debt but left hapless investors holding stock in worthless ventures.  All this came to light in Senate hearings so spectacular in terms not just of findings, but also showmanship, that they have come to be called the Pecora hearings after the Senate Banking Committee’s chief counsel, Ferdinand Pecora. 

As detailed in a lengthy, if opinionated, article on these hearings, Pecora demonstrated that the nations’ two biggest banks – the precursors of Citigroup and JPMorgan – created new companies – some of which they directly owned – and then sold shares in them and other high-risk ventures to middle-class investors, correspondent banks, and the all-too-classic “widows and orphans” convinced during the Roaring Twenties that stock prices go only one way and that way was up. 

It is debatable – indeed very much debatable – if the combination of commercial and investment banking created the Great Depression.  It is, though, irrefutable that contemporary conviction that it did led to the Glass-Steagall Act along with the Securities Act of 1933 and the Securities Exchange Act of 1934. 

Today, large banks generally do not make the loans that fund the investments that permit lower-wealth investors to take high-risk bets in speculative equity.  However, Wall Street firms today advise and manage large investment funds that purchase debt and shares recommended by others in the companies engaging in debt and equity underwriting, with big banks also lending to back leveraged buy-outs and other corporate moves that then lead to more debt and equity underwriting business and more investment recommendations.  This debt and equity travels through financial markets, with more than a little of it ending up in 401(k) s, pension funds, and retail-investor trading portfolios.  Banks are no longer at risk in these transactions thanks to lots of new rules, but conflicts remain an ever-present fact of financial life. 

Indeed, one of the most under-appreciated, but most important, unintended consequences of post-crisis regulation is the end they put to traditional financial intermediation and the impetus they thus provide to full-spectrum investment banking.  To ensure the kind of profitability investors demand and high-paid staff coveted, banks have changed their business model.  Much in the new corporate capital-formation construct advances economic growth, but WeWork is a sharp reminder that it can also engender conflicts that facilitate risk that then impoverishes only those who can least afford a loss.  When these conflicts are egregious, even populist senators are inspired to join with progressive Democrats in excoriating the biggest financial companies.

Does this mean a new burst of Glass-Steagall rewrites?  As I was recently reminded, Mark Twain is said to have observed that, “History may not repeat itself, but it does rhyme.”

In the 1930s, Sen. Carter Glass and Rep. Henry Steagall were among the most conservative Members of Congress, but they readily acceded to the demands of progressive Roosevelt Administration officials and liberal colleagues bent on economic justice after the 1929 crash.  Conservative though he surely is, Sen. Cotton’s statements at the Senate Banking hearing sound like those of many socialists, lamenting the cost to workers from business models fueled by leverage that then collapses into restructurings in which only low-wage employees suffer.  One of his equally conservative colleagues, Sen. Josh Hawley (R-MO) says much the same in taking on the “cosmopolites” he says distort capitalism’s true benefits to average Americans

These statements aren’t the same as the assertions Ferdinand Pecora levelled at Wall Street in 1933, but they do indeed rhyme.  Whether Congress dances to this new beat and enacts a raft of new laws remains to be seen.  But populists seeking to save capitalism and progressives trying to make it more equitable will surely speak for many voters next year.  It won’t take much to turn all this talk into action.