COMBO Title and Securitization Search, Report, Documents, Analysis & Commentary COMBO Title and Securitization Search, Report, Documents, Analysis & Commentary


Representative Stephen Lynch, Democrat of Massachusetts, warned: “You think regulation is costly? How about the $7 trillion we just lost from not regulating the derivatives markets.”

EDITOR’S NOTE: Our institutions are compromised with moral hazard every way you turn. The FDA, running mostly on money from fees paid by drug and medical supply companies (who then turn around and hire the same FDA people who approve so-called blockbuster drugs) supposedly reviews test results and approves labeling without doing any independent testing of their own. And people die. The federal and state agencies regulating banks, insurance companies, oil companies all run the same way — funded by fees paid by the companies they regulate and then the people who were the regulators end up employed by the companies they were regulating.

Somehow we seem to expect that this “system” will provide us with protection from thieves and those indifferent to whether we live or die, as long as they make a profit. This isn’t a system. It is a scam on the American public. Except that with the financial crisis it ended up affecting the world. With Congress regulating its own ethics, and with money being the principal religion in Washington, D.C. it is a huge challenge to even offer a conjecture of a favorable outcome.

In the mortgage mess, it was the rating agencies who were funded by fees paid by investment bankers who told the rating agency how to analyze the “low-risk” derivatives and give them AAA ratings — while at the same time the same investment firms had paid lobbyists to make sure they were not regulated at all when it came to derivatives and credit default swaps and other “custom” exotic financial products. It was the appraisers who were funded by fees generated by “lenders” (most of whom were merely acting as mortgage brokers) in order to generate fee revenue for merely pretending to underwrite loans. It is quite natural that the appraisals and ratings were so favorable to the scheme — the people who were doing the appraising and ratings were being paid to see things the way their “benefactors” wanted them to see it.

The two “protections” — ratings for investors and appraisals for homeowners — were reasonably relied upon to their combined detriment. What was promoted as an independent third party evaluation became an in-house marketing tool. So the investigations and the charges against individuals will skim the surface just enough for government to say they did something but not so much to make sure it never happens again. The larger problem is that each iteration of this cycle ends up in a worse debacle than the one before it.

So it should come as no small surprise that the SEC operates the same way. Funded by fees paid by companies who are regulated by the SEC, the SEC spawns future employees of the law firms and investment banking firms that are the subject or should be subjected to scrutiny and compliance with applicable laws, rules and regulations. Not content with virtually total control over the dominant currency of the world — collateralized debt obligations — and not content with being virtually unregulated, the banks are now seeking to choke off the last vestige of any hope that our financial system will ever regain stature. In a word, they seek to stop funding from Congress just to make sure there is nobody who legally touch them. In other words, the mega banks are willing to pay the fees to the U.S. Government (fees meant for SEC enforcement), provided the government doesn’t use that money to fund the SEC which is the only real agency with teeth.

Running on Empty


The new financial regulation law gave the Securities and Exchange Commission a big new job to police hedge funds, derivatives dealers and credit agencies — some of the main culprits in the financial meltdown. It authorized raising the commission’s budget to $2.25 billion, over five years. Now Congress is threatening to deny the S.E.C. the necessary financing to carry out its duties.

What makes this even more absurd is that the S.E.C. doesn’t cost taxpayers a dime. Its budget, like that of other financial regulators, is covered by fees assessed on Wall Street firms. While the other regulators decide their own financing needs, Congress sets the S.E.C.’s budget.

The agency’s budget was due to rise $200 million this year to $1.3 billion, but hasn’t because of the across-the-board freeze in discretionary spending. If House Republicans get their way and roll back spending to 2008 levels, the S.E.C. budget would fall to $906 million.

Mary Schapiro, the chairwoman of the S.E.C., warns that more budget cutting will hamstring its ability to carry out its usual duties of policing increasingly complex securities markets — let alone discharge its new responsibilities. A group of lawyers representing the financial companies regulated by the S.E.C. sent a letter to lawmakers urging them to increase the commission’s budget. Otherwise, they warn, the markets will lose investors’ trust. “The regulator of our capital markets is running almost on empty,” they wrote.

The S.E.C. needs better technology and more employees. S.E.C. officials have pointed out that it took the commission three months to understand what happened during last May’s “flash crash,” because it took that long for its computers to handle all the trading data. The number of investment advisers that the S.E.C. must police has grown by half over the past decade and trading volume has doubled. In the years running up to the financial crisis, the commission’s staff declined.

Ms. Schapiro planned to hire 800 employees this year to beef up enforcement and meet the agency’s new duties. Those plans are on hold. The commission has also started cutting back on investigations and is considering canceling technology upgrades, including new data management systems and a new digital forensics lab.

The S.E.C.’s recent record was tarnished by its failure to uncover Bernard Madoff’s gargantuan Ponzi scheme, and it was caught off guard by the collapse of Bear Stearns and Lehman Brothers. The Bush administration’s lax approach to regulation should bear much of the blame. But a lack of qualified investigators was also a big problem. If the commission is to do its job right, it needs the resources to do it.

6 Responses

  1. Neil, thank you for what you do to spread the word and keep us informed.


    Who pays their bills? Have you ever actually read any of the FTC’s “Reg’s”? The look more like “Hey, heads up. Be careful not to….” kinda stuff.

  3. The SEC is lucky to be funded at all, they completely dropped the ball, and serves them right.

    You don’t get rewarded for not doing your job!

    Good ridance to them, another wasteful government company out of the way.

  4. All of the agencies are funded by the banks. That is why the Consumer Protection Agency was formed.
    Will they do their job??

  5. More of the same revolving door–now it is the SEC. I remember when people feared the SEC, and the SEC has some teeth. Now, it is toothless. What a mess. I am afraid that only when the people stand up and rise up will something be done to fix the mess.

  6. A good post but I am not buying it completely because it says to me that even though those listed in the post contributed to our demise, the American people themselves failed to take action that would have stopped them in their tracks.

    But so many did work in tandem even though they never for a minute understood the consequences. Now they can do something – take their money out from the banks and put it where the consumer still has a say. Those banks wanting the people’s business must post a Bill of Rights and the Banks’ guarantee that they will follow acceptable prudent business practices.

    I know many will think I have gone off the deep end, but nothing else has worked and the bans just keep on keeping on and laughing all the way, if you will, to the bank, with the hard earned money that keeps them going.

    The people have to move on this Neil and because they are not, they will continue to be led around by their noses and the banks profitability will soar. No the American people must take some responsibility for the demise because they too have not performed.

    We give of our time 24/7 to people who are trying to defend themselves to keep their homes. These are the real fighters, perhaps a little late in the day, but they are fighting back. Unfortunately we do not have the whole of society to back them up. Additional shame for the general public and that is what the banks are counting on. Playing right into their hands.

    For the first time now I have sufficient information for standing, to personally challenge the OCC, the Senator who by law was to represent us but did not, and refused to acknowledge that they are responsible for thenegligence of our federal agencies. Shapiro is already whining I don’t have enough money but I noticed they got plenty of it in the last five years and still did nothing. She needs to get a grip.

    Setting a strategy will do much for the American people, but they have to make come up with and they have to be prepared to follow throught. Otherwise, we continue and as Neil said, it just gets worse than it was the last time around. Coupled with this will be the do nothing performance of the Attorney General. and the State Attorney Generals who to my knowledge have made no comment about the wrong doing other than enditing a few people, big deal. But the big boys are out there doing their thing. I am still laughing at the settlement reached with Goldman Sachs of $500 M. What a joke. This was planned, no question and factored into their profits if indeed they were to get caught. The Congress did not call a spade a spade and so it goes.

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