Regulating the Regulators
As more corrupt activities by financial institutions are uncovered 
every day it becomes evident that this conduct would not have been possible were it not for the failings of the regulators and the regulatory agencies charged with overseeing these institutions and their personnel. Cheating is rampant within financial institutions and if traders or other personnel can skirt the law to make an extra buck, most of them will do it. It is part of the culture of the investment banks and other financial establishments, where making money is the prime objective.
The LIBOR manipulation by Barclay’s and various other banks has recently come to light along with money laundering from HSBC and the fraud from Peregrine Financial. But going back a few years, there was also the sub-prime mortgage debacle and the bundling of troubled mortgages and other loans in collateralized debt obligations which were doomed from the start. And the lies from the financial giants like Lehmann, Bear Stearns, Merrill Lynch and Countrywide about their financial status, as well as all of the major banks that required bailouts from the federal government to survive.
We ‘ve spoken about the way these institutions have been fined at times by government agencies for their illegal activities and the way this is deemed a cost of doing business by these companies. We’ve mentioned as well the way the executives of these institutions responsible for the corruption have avoided any prison time for their conduct, occasionally having to pay some monetary penalties for their “mistakes.” This lack of criminal prosecution of these corrupt financial executives has been a blot on the record of the Justice Department, Treasury Department, and government regulatory agencies.
However, as disheartening as the corrupt behavior by the banks has been the lack of accountability by the regulators responsible for overseeing the financial institutions. They either turned a blind eye to the corrupt behavior, allowed it to go on because of some sort of pay back, or they were just not sophisticated enough to know what was going on. But what has happened to the government employees who were supposed to be watching the banks for us? Is their presence an exercise in futility? How many of these people subsequently wound up working for the institutions they were supposed to be regulating?
And it is not just government agencies that have been at fault in watching the financial institutions, but the independent rating agencies, like Standard and Poors, Fitch and Moody’s who were apparently in bed with the companies whose instruments they rated prior to the recession. These agencies labeled various CDOs, bonds, and so forth as sterling credit risks, when subsequently they were found to be highly risky and caused investors to take significant losses. There was a major conflict of interest here as they were being paid by the companies whose offerings they were rating.
And it is still going on. These “Independent” companies are still at work, rating corporations and the financial instruments for the investment community at large. And the inept government regulators are still at their posts.
Gertrude Morgonsen in the business section of the New York Times recently discussed the book “Bailout” by Neil Barofsky, who was in charge of overseeing the TARP program. (http://goo.gl/d4G9M) It describes the way government officials took the side of Wall Street over the public interest and it makes one wonder how the influence of Wall Street over the government can be reduced. Unfortunately, both political parties are on the take from the financiers and financial institutions, and true regulation of these institutions in the future seems like a pipe dream.
Resurrecting Democracy
A VietNam vet and a Columbia history major who became a medical doctor, Bob Levine has watched the evolution of American politics over the past 40 years with increasing alarm. He knows he’s not alone. Partisan grid-lock, massive cash contributions and even more massive expenditures on lobbyists have undermined real democracy, and there is more than just a whiff of corruption emanating from Washington. If the nation is to overcome lockstep partisanship, restore growth to the economy and bring its debt under control, Levine argues that it will require a strong centrist third party to bring about the necessary reforms. Levine’s previous book, Shock Therapy For the American Health Care System took a realist approach to health care from a physician’s informed point of view; Resurrecting Democracy takes a similar pragmatic approach, putting aside ideology and taking a hard look at facts on the ground. In his latest book, Levine shines a light that cuts through the miasma of party propaganda and reactionary thinking, and reveals a new path for American politics. This post is cross posted from his blog.
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The answer does not lie in more regulation. The answer is in the downsizing of financial insitutions like they have in Canada.
Once the banks are back to a size where they can not manipulate the markets, then and only then will stability return.
Start with the return of Glass Steagall.
Gonna happen? Not if our elected leaders have anything to say about it.
Wihtout the edit function, could not clarify.
Glass Steagall would downsize banks where less regulation would be required on the invesment size. The larger the operations, the more regulations required.
Regulations are useless if those in charge of enforcing them are incompetent, corrupt, or both. How much worse does this have to get before our leaders take action? I mean these guys have been caught red handed mucking with the major workings that underpin our entire financial system. How is it possible they just get a pass and are able to continue on as normal?
It must be pointed out that much of the failure to regulate wasn’t due to corruption or failure to comprehend what was happening, it was due to benign neglect brought on by adherence to a totally untested ideology that somehow the markets can self-regulate. While this idea has failed every test, every trial that it has been put to, with totally devastating results, it is still the keystone of the entire Republican economic and social policy recommendations. The Ryan budget, the proposals to privatize Medicare and Social Security. It is certain to be the cornerstone of their health care policy, should they ever be bothered to develop one.
Interesting, that last night’s crumb for Reps on Newsroom was a mention of repeal of Glass-Steagall being passed during Clinton’s watch.
Merkin, …you bring back the Republican arguement that they created all the mess we are in.
Do you remember the news conference that Clinton held when he signed the repeal of Glass Steagall? If not, ..it is on the internet.
That one piece of legislation that was bipartisan was huge in the eventual collapse of the financial intitutions in this country.
And remember, the LIBOR scandal would not be a regulated activity by the US. That is sponsored by the British Bankers Association and is not considered a regulated activity under the UK financial Service and Markets Act.
Yes, lets not forget Clinton’s roll in all of this. His impressive economic record is somewhat based on the deregulation that occurred during his Presidency.
if we are going to blame W for this mess..we have to blame Clinton too.
Actually I think we can blame Graham, Leach, and Bliley for this. You know, the republicans that came up not only with the bill that bears their name, but also the strategy to frame it in terms that big govt is hurting the economy by having these regulations. Therefore, if we don’t deregulate we are effectively hurting the economy. If memory serves, the Dems were against this, but instead of digging in their heels, used it to negotiate for somethings they wanted, like getting more low income families access to home loans. While they should have never got on board with this legislation, I still think the lions share of not only the legislation, but the creation of the entire narrative used to justify it, is on the GOP.
RP- I know that we have had this discussion before, but I have been think ing a little more about it.
I don’t see why we would simplify just to avoid regulations. We have gained a lot from the mixed market economy, the combination of government and private enterprise. Government regulation has allowed a more complex economy, has allowed corporations to be much larger than they could possibly be if the economy had to operate closer to the ideal of perfect competition to gain a larger degree of market discipline control over prices.
I think that the same will apply to the financial markets. Certainly I agree that the necessary consumer banking must once again be separated from the speculation, that is, separate Wall Street from Main Street. But there is value in some of the financial innovations that Wall Street has devised. Certainly derivatives are useful as a method of low cost financing for crop futures. Derivatives are useful as a kind of insurance when they are used to offset actual risk, the problem with them that we had was when virtually none of the people buying the hedges were facing the real world risk, the hedges were being purchased as a form of gambling. We can use the financial instruments as they were intended if we just regulate and control them so that they don’t again get out of hand.
Merkin, first step is to bring back Glass-Steagal.
Until a more honest crop of “bank” managers evolves (dreaming), we have to separate banking from casino investing. In its present form, it is as hard to control as a Frankenstein monster. Regulatory pitchforks don’t work against a computer designed and armored trading and screwing machine that the banks have become.
The lesson of Lehman has failed to penetrate their Masters Of Wall Street brains, and seeing the survival and feeding of the twin giant slugs called FDMC and FNMA has only encouraged them in a “too big to fail” mindset.
Once again I refer all of you to Patrick Byrnes and the DeepCapture blog. He details who, what and when all of this was going on. Michael Milken (Junk Bond King/criminal) is on the loose and has been operating for quite some time now. Organized crime syndicates from Russian, the USA and elsewhere are using the fraud as a means to the good life.
Regulators (SEC lawyers) work some five to ten years in the SEC. During that time, they meet former employees who now work for legal firms that support Wall Street financial firms. They are ‘encouraged’ not to investigate certain claims. This encouragement includes the likelihood that if they should comply, they will be offered a seven-figure salary at one of those law firms when they finally get out.
That Bernie Madoff was able to perpetrate his crime for so long is not the really amazing happenstance. What is amazing is that so few people have been caught doing similar things. It is amazing whether they are simply still operating or never did it in the first place. The SEC is totally captured by the industry they are supposed to regulate. It would actually be safer to eliminate the agency than to continue the farce that they are protecting the public.
Oh, and in case you wanted to ‘blame’ the SEC lawyers, consider:
If you have a boss who tells you to drop a case, the case would likely take huge amounts of time and then likely not have enough evidence to cause any meaningful penalties, why would you choose, instead, to pursue it?
Merkin, you comment “I don’t see why we would simplify just to avoid regulations”.
I truely believe you can simplify the regulatory environment and still have regulations. What I do not believe in is the enlargement of government agencies that have large number of individuals that really do not understand the problem, so they can not be part of the solution. Simplified regulations leads to better regulation since those doing the regulation are just as knowledgeable as those doing the commerce.
For instance,regulation that controls the size of banks eliminates much of the other regulations since the banks do not have the capital that will lead to a financial meltdown if they lose money. Regulation that prohibits banks from owning investment firms or being involved in many of the activities associated with investment firms greatly reduces the exposure to risky investments, thus reducing the large regulatory agencies that are now needed to try to keep up with each new invention that creates new risk. Had AIG gone belly up during the fnancial crisis in an environment where banks were still statewide or regional at best, that would have caused a ripple and not required a bailout like it did.
When I was in healthcare finance, CMS, a part of the Department of Health and Human resources would draft regulations that controlled reimbursement. Before that regulation ever became active, consultants across the country had already found ways to circumvent the regulation legally, and some found ways to circumvent them illegally. For every regulation that someone is caught and convicted for fraud, there are many that CMS is unable to catch because they do not have the tools to identify the problem until is has cost millions.
The same problem will exist with financial regulations as the larger the number of regulations become, the larger the number of people finding wasy to circumvent the regulation and the greater the number if risky investments will be made that are legal. The regulators will always be playing catchup if controls are not on prohibition of activities and controls on size.
RP has it right.
Ditto.
I think the valuable part of the free market is the law of gravity: companies that aren’t adding value lose their customers and go bankrupt, all involved lose their shirts, and their successors in fact do self-regulate, at least with respect to that one risk. Which is reactive, to be sure, but so is every other form of regulation.
So good regulations are ones that are minimalist and therefore not susceptible to gaming, but which leverage the law of gravity. For the financial sector, regulations need to focus on insulating the economy from the risky parts of banks so that we’re free to let them close when they fail.
White collar criminals cause misery for the entire country and don’t nobody gets locked up. Some ordinary citizen gets caught with a couple joints in his pocket and it’s off to the hooscow. It’s no wonder people are so cynical and untrusting. Where are the role models? The people who conduct themselves ethically? The Banks? Congress? Lobbyists? Corporate leaders? Cops? Who???
Firefighters!
LMAO. There have been incidents where there were firefighters gathered in restaurants where wholesale fighting and drinking went on for hours, because the cops backed off.
http://www.nytimes.com/1998/06/06/nyregion/a-darker-picture-of-firefighters-brawl.html?pagewanted=all&src=pm
There was another one in a restaurant on 2nd Avenue, but I can’t remember the name.
My suggestion is the average Joe that works hard and takes care of his family while obeying most of the rules written and unwritten (even when nobody is watching).
Agree with your suggestion dd, which is why families are so important. That’s where my role models came from.
As I said before being so crudely interrupted… Firefighters!
NFPA estimates that there were approximately 1,103,300 firefighters in the U.S. in 2010. Of the total number of firefighters 335,150 or 30% were career firefighters and 768,150 (70%) were volunteer firefighters. (cont.)
In 2011, a total of 61 on-duty firefighter deaths occurred in the U.S. This is another sharp drop from the 73 on-duty deaths in 2010 and 82 in 2009, and the lowest annual total since NFPA began conducting this annual study in 1977. Stress, exertion, and other medical-related issues, which usually result in heart attacks or other sudden cardiac events, continued to account for the largest number of fatalities. More than half of the deaths resulted from overexertion, stress and related medical issues. Of the 32 deaths in this category, 31 were classified as sudden cardiac deaths (usually heart attacks) and one was due to a stroke.
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NFPA estimates that 71,875 firefighter injuries occurred in the line of duty in 2010. An estimated 32,675 or two-fifths (45.4%) of the all firefighter injuries occurred during fireground operations. An estimated 14,190 occurred during other on duty activities, while 13,355 occurred at nonfire emergency incidents. The leading type of injury received during fireground operations was strain, sprain or muscular pain (52.8%), followed by wound, cut, bleeding, bruise (14.2%). Regionally, the Northeast had the highest fireground injury rate.
On the other hand dduck claims a handful of them got drunk. He thought it was so funny he “laughed his ass off”… Quite a research technique ya got there duck.
Before you blow a gasket, I fully support the FDNY and the NYPD and all of these and lesser known people that lay their lives on the line.
Please be aware that the subject was role model and yes they get drunk and brawl, but the difference in this case was that it went on for HOURS. So please accept my apology for your not seeing any irony or humor in that situation. Different rules apply to your trade or profession’s brawls.
Well duck… Unlike you, few of us were around in the 1800′s when “Boss” Tweed and his cohorts ran everything, including the police and fire departments in your fine city.
http://www.wiki-cine.com/photos/6492/42855.jpg
But, I did see “Gangs of New York” if that counts… And not even their brawls “went on for HOURS” so I think mayhaps you be exaggerating just a wee bit, eh?
I’d go on to mention how you appear to be painting an entire profession by the actions of a few but I don’t think that would advance the conversation so I won’t.
For those who don’t follow links…
Boss Tweed?
“As three city investigations went forward, investigators said 50 to 100 firefighters, scores more than originally reported, had battled one another for hours in scenes of chaos that left faces bloody, teeth knocked out, bodies cut and bruised and uniforms shredded.”
http://www.nytimes.com/1998/06/06/nyregion/a-darker-picture-of-firefighters-brawl.html?pagewanted=all&src=pm
P.S. I don’t paint, and I still support and depend on NY’s finest, bravest and strongest.
Meanwhile, back at the ranch, from the column on Barofsky’s “Bailout”
[He is Neil Barofsky. Remember him — the man whose job it was to POLICE the $700 billion Troubled Asset Relief Program? And his new account, a book titled “Bailout” (my emphasis)
....
We tag along with Mr. Barofsky, a former federal prosecutor, as he walks into a political buzz saw as the special inspector general for TARP. Government officials, he says, eagerly served Wall Street interests at the public’s expense, and regulators were captured by the very industry they were supposed to be regulating. He says he was warned about being too aggressive in his work, lest he jeopardize his future career.]
He was also told that if he didn’t get too aggressive in his investigations, he could look forward to a lucrative future.
Corporatism –
: the organization of a society into industrial and professional corporations serving as organs of political representation and exercising control over persons and activities within their jurisdiction
Ranch appreciates the info.