In researching the blogosphere for material for today's post, I came across a post quoting former SEC Chief Accountant Lynn Turner that I thought might be of interest. What stood out to me was Turner's defense of our current regulatory system at a time when bashing it seems to be all the rage. He argues that it is not the system that is the problem, but rather the fact that it "had been almost entirely dismantled by Congress and the various Administrations" over the past two decades. Some of the dismantling he points to includes:
1. Passed Gramm-Leach-Bliley 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. . . .
3. As new products such as credit derivatives were created and introduced to the credit markets, 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. As hedge and private equity funds grew exponentially in the past two decades, Congress again exempted them from any regulatory oversight, even as they took in increasing amounts of retail money. . . .
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 the rating results in a bad rating. That is quite simply still the law today.
It's not often one sees the blame due the "free" market laid out so starkly. Certainly these are points we should reflect upon as we consider adopting an entirely new regulatory regime. And it looks like the current administration is taking note.
The entire post is here.
{ 1 comment… read it below or add one }
The most common failure of legislators is to keep passing new laws and neglect enforcing those already on the books.
I seem to remember a Bush appointee about eight years ago telling whomever it was she was in charge of regulating that they were essentially on the honor system. Wish I could remember which agency it was, but I think it was in the area of securities. Put the regulators back to work doing what they're supposed to do before we scream for more laws.