Independent commission to probe causes of financial crisis for Congress

While the administration readies its detailed plans for regulatory reform and the relevant congressional committees gear up for hearings on them next month, a new law just signed by the president creates an independent commission to investigate the causes of the financial crisis and recommend appropriate action.

The main purpose of the Fraud Enforcement and Recovery Act of 2009 is to provide $490 million in funding for added enforcement at the Justice Department, Securities and Exchange Commission and other government agencies to prevent and punish fraud and predatory lending in mortgages.

But the act also creates the Financial Crisis Inquiry Commission championed by House Speaker Nancy Pelosi to determine the causes of the crisis. The new commission will have until Dec. 15, 2010 to conduct its probe and submit its report. It will have broad investigative authority, including subpoena power, and will be able to refer evidence of criminal activity to the Justice Department or the state attorneys-general.

The bill specifies 22 areas, from fraud and abuse in the financial sector to due diligence by financial institutions, for the commission to probe as possible causes. The list includes hot-button issues like compensation practices and credit default swaps.

The 10-member commission will have six members named by the speaker and Senate majority leader, who will also designate the chairman, and four members named by the minority leaders in House and Senate, who will designate the vice chairman.

Pelosi had called for a commission that could conduct the same kind of thorough investigation as that made by the so-called Pecora Committee in the wake of the Great Depression. However, that committee was actually the Senate Banking Committee and its name comes from the panel’s general counsel, Ferdinand Pecora.

Although the bill was passed by large majorities in both houses because of its focus on mortgage fraud, it’s uncertain how welcome the new commission is for many lawmakers, particularly the heads of the Senate Banking and the House Financial Services committees, who have their own agendas for dealing with the crisis.

The new commission also overlaps with a proposal from Sens. Byron Dorgan (D-N.D.) and John McCain (R-Ariz.) to create a select committee to investigate the causes leading to the financial meltdown. An ad hoc committee like this would seek to avoid the duplication of effort from various standing committees claiming jurisdiction.

The actual influence and effectiveness of the commission will depend in large part on who is chosen to be on it, particularly the chairman and vice chairman. The law specifically excludes anyone employed by the government, so it’s not clear if former Federal Reserve chairman Paul Volcker, who would be a natural pick for the job, could take it, given that he already chairs the government’s Economic Recovery Advisory Board.

Other potential candidates are likely to include Arthur Levitt, a former SEC chairman, and Jim Leach, a former Republican congressman. Both men have been vocal about causes of the crisis and have consulted at one time or another with the Obama economic team.

Commission staff will be headed by a director, whose role will be the one corresponding most closely to that of the legendary Pecora.

The panel will have its work cut out for it. Although he signed the bill, which calls for all federal agencies to provide any information or documents sought by the commission, Obama made it clear in his signing statement that the executive branch will not hesitate to invoke privilege in denying its requests.