[Corp. Watch] Financial crisis made - and perpetuated - in DC by *both* parties

[Corporation Watch]

The Systemic Dismantling of the System

  By Lynne Turner

(Corporate Counsel blog, March 20) -- I am taken aback when people  
like President Obama say our problem is we had an outdated regulatory  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become out-of-date, but rather had been almost entirely dismantled by  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 as they:

	During the Clinton administration, Congress passed Gramm-Leach-Bliley  
(also known as the Financial Services Modernization Act) guaranteeing  
large financial supermarkets that can only be too big to fail, while  
prohibiting the Securities and Exchange Commission (SEC) from being  
able to require regulation of investment bank holding companies.

	The act essentially said that one could put all these businesses  
under one roof, without a single word in the law requiring regulation  
of the inherent conflicts, thereby sealing in stone that there would  
be huge institutions the government would have to bail out if they  
failed.

	This legislation was specifically passed to permit the merger of  
CitiBank and Travelers to form CitiGroup, now one of the largest  
institutions requiring a bail-out.

	Successive administration cut the budgets at Commodity Futures  
Trading Commission and SEC, effectively dismantling those agencies  
block-by-block and all too often sending them to a gunfight with an  
empty gun.

	As new products such as credit derivatives were created and  
introduced to the credit markets, Congress and the administrations  
passed laws to ensure those products could not be regulated.

	Companies such as Enron and AIG used the laws to avoid regulation of  
these products. And history now has another chapter on how these  
products became financial weapons of mass destruction.

	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 [i.e., consumer]  
money.

	The banking regulators became "prudential supervisors" and not  
regulators, as they allowed the banks to engage in unsound lending  
practices, notwithstanding 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.

	It used to be they were simply in the business of making loans to  
local community and regional banks. As a result of the laws passed,  
they now have balance sheets loaded up with lousy mortgage securities  
and loans from Citi, Washington Mutual, Countrywide, and Wachovia.

	And when Congress passed this legislation, they also allowed the  
compensation for the executives of these banks -- whose business is  
federally guaranteed in the same manner as Freddie Mac and Fannie Mae  
were -- to jump significantly.

	Congress failed to provide authority, tools and resources for the  
Office of Federal Housing Enterprise Oversight, 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. Their balance  
sheets grew unchecked, with insufficient capital in light of the risks  
they were taking on and imposing on the taxpayer.

	Securities regulators granted credit-rating agencies an exemption  
from accountability to the investing public that it turns out they  
were misleading as well. Yet it was mandated that their ratings be  
used to determine the creditworthiness of financial instruments and  
the corporations that were issuing them.

	To this day, the SEC must judge the work of these credit-rating  
agencies by a set of policies and procedures that the rating agencies  
themselves decide are sufficient, even if the results in flawed and  
inaccurate ratings. That is quite simply still the law today.

	Congress interceded to block attempts to bring greater transparency  
to financial reporting of equity compensation that grew to hundreds of  
millions of dollars in some cases, as the use of stock options became  
a drug many executives and their boards became addicted to.

	The courts and Congress stepped in to prevent investors from getting  
justice through legitimate legal actions. It ultimately led to the  
Supreme Court ruling that it was perfectly legal for people to assist  
others in the commission of a securities fraud -- in essence, drive  
the get-away car -- and there would be no legal recourse for their  
victims.

	The SEC -- first in 1992, and then again in 2007 -- stripped  
shareholders of their rights by denying them the same access as the  
management who work for them to the proxy of the companies they owned.

	While Congress was well aware of compensation abuses, they failed to  
pass legislation that would have reined in such abuses. When the House  
passed such legislation two or three years ago, it went no where in  
the Senate.

	We now have Congress stepping in to put undue pressure to undo  
transparent accounting practices. The Financial Accounting Standards  
Board has become extremely accommodating, as the new rules they are  
proposing (with only a two-week comment period) will effectively  
become a moratorium on fair-value accounting for banks.

	This means they will no longer have to report the effect of their bad  
investment decisions in their income statements -- much like suspended  
disbelief occurs at the movies. We are now going back to accounting  
that a 1991 Government Accountability Office report entitled "Failed  
Banks" said raised the cost to taxpayers of the S & L bail-out.

	And finally, people were put in charge of the key agencies who did  
not believe in regulation. Inspector general reports on the Office of  
Thrift Supervision, the Office of the Comptroller of the Currency  
(OCC), and the SEC cite serious lapses in regulation.

	From Federal Reserve Chair Alan Greenspan, who failed to act on the  
1994 Home Ownership and Equity Protection Act (HOEPA), to Dugan and  
Hawke at the OCC who opposed state regulators' attempts to rein in  
predatory lending practices, to the SEC Chair (and former  
Congressperson) Chris Cox -- all regulators who publicly opposed  
regulation and engaged in the dismantling of the regulatory system we  
once had.

	It wasn't that we didn't have an effective system -- the system we  
had was dismantled during the past two decades. And now tens of  
millions of Americans are paying for this with their jobs, the loss of  
their retirement, having to work for many more years when they have  
grown old, and kids having to leave college, no longer able to afford  
it.

	It is no wonder the public is so outraged by what they see going on  
with Congress and at companies such as AIG.

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Lynn Turner is the former chief accountant at the Securities and  
Exchange Commission