Magazine article The CPA Journal

The Systemic Dismantling of the System

Magazine article The CPA Journal

The Systemic Dismantling of the System

Article excerpt

I am taken when people like President Obama say our problem is that we had an outdated regulatory system. I beg to disagree. It was a regulatory system that in the past two decades had not become out of date, but rather had been almost entirely dismantled by Congress and the various administrations:

1) They passed the Gramm-Leach-Bliley Act, guaranteeing large financial supermarkets that can only be too big to fail, while prohibiting the SEC from being able to require regulation of investment bank holding companies. When legislation was passed saying one could put all these businesses under one roof, without a single word in the law requiring regulation of the inherent conflicts, it was sealed in stone that there would be huge institutions the government would have to bail out if they failed. And this legislation was specifically passed to permit the merger of Citibank and Travelers to form Citigroup, now one of the largest institutions requiring a bailout.

2) They cut budgets at the Commodity Futures Trading Commission (CFTC) and the SEC year after year, dismantling those agencies block by block. They sent these agencies to a gun fight with an empty gun all too often.

3) New products such as credit derivatives were created and introduced to the credit markets, and Congress and the administrations took action to ensure those products could not be regulated. Companies such as Enron and AIG used the law to avoid regulation of these products. And history now has another chapter on how these products became "financial weapons of mass destruction."

4) Hedge and private equity funds grew exponentially in the past two decades, and Congress again exempted them from any regulatory oversight, even as they took in increasing amounts of retail money.

5) The banking regulators became "prudential supervisors" and not regulators, as they allowed the banks to engage in unsound lending practices, notwith- standing the 1994 legislation giving the Federal Reserve the power to stop such destructive business practices. Congress passed legislation that even allowed the Federal Home Loan Banks to expand their lending and compete with one another for the same bank's business, with significantly increased risk. As a result, today they have balance sheets loaded up with lousy mortgage securities and loans to the likes of Citigroup, Washington Mutual, Countrywide, and Wachovia. It used to be they were sim- ply in the business of making loans to local community and regional banks. And when Congress passed this legislation, they also allowed the compensation for the executives of these banks, whose businesses are guaranteed in the same manner as Freddie Mac and Fannie Mae were, to jump significantly.

6) Congress failed to provide authority, tools, and resources for the Office of Federal Housing Enterprise Oversight (OFHEO), the regulator of Fannie and Freddie, blocking attempts to provide for effective oversight and regulation. These agencies watched as their assets and guarantees grew to trillions of dollars without effective oversight, while the government backed them up with the guarantee of taxpayer dollars. These agencies were allowed to grow their balance sheets unchecked, with insufficient capital in light of the risks they were taking on and imposing on the taxpayer.

7) The credit rating agencies were granted exemption from accountability by the investing public it turns out they were misleading, as well as by the securities regulators. Yet it was mandated that their ratings be used. To this day, the SEC must judge the work of these credit rating agencies by the policies and procedures the rating agencies themselves decide are sufficient-even if a rating results in a bad raring. …

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