Senior regulators who turned a blind eye toward the fraud and systemic risk under their noses that brought the economy to the brink have been rewarded with even bigger jobs or are jockeying for increased responsibilities, according to well-known “Fair Game” columnist Gretchen Morgenson in her September 13th article in the New York Times, “But Who Is Watching the Regulators?” Despite the financial calamity, little has changed about how the financial markets operate and are supervised, says Morgenson. For example, she points out, the Federal Reserve Board, which did nothing as banks made reckless loans and over-leveraged themselves, wants to become the financial systems’ ultimate regulator. Moreover, our regulators have refused to produce complete documentation and accounts of their actions during the crisis, according to Edward J. Kane, Professor of Finance at Boston University. “Awarding increased power to those who failed in their oversight duties flies in the face of all notions of accountability,” says Morgenson. What is the basis for believing that regulators who dozed off during the credit bubble will be alert to the next bubble?
Morgenson and Kane propose to hold regulators accountable for poor performance. But how? The article gets a bit fuzzy here, but Kane suggests that they take an oath of office to perform their duties, and that there be an inspector general at each agency charged with regularly auditing the performance of those in charge. Did not the SEC’s inspector general just issue a scathing report of the SEC’s dozing behavior? Yes. And if the oath is broken, what then? Perhaps we will learn that in a later column.
What’s needed, according to Eliot Spitzer, is pretty simple. We need regulators to stop hob-nobbing with Wall Street bankers and start issuing subpoenas. Perhaps our regulators should be required to wear ankle-bracelets, to track their movements, and submit to regular financial audits. Follow the money, said Deep Throat.
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