Was There Bank Regulator Compliance in Banks Cooking Their Books?

April 5, 2010 - PRLog -- Ever since the run-up to / outbreak / and aftermath of Black September 2008, we have argued the crisis in the US has SIX aspects: financial / economic / ideological / political / media / intellectual-academic. While we generally have focused on the first five aspects of this on-going mess, a substantively fabulous Op-Ed piece in the New York Times -- underscores at least ONE side of the intellectual / academic aspect of this crisis

The article is by professors from four different law schools around the US, and shows in chilling and convincing detail how the entire regulatory apparatus allegedly keeping an eye on banks / hedge funds / large corporations et al were actively complicit in allowing them to get away with, literally, murder, at least in the financial economic realm. Unfortunately, it's often almost impossible to tell what they're saying. And this is due largely to the bizarre central fact that - for a "profession" in which "writing" is THE key to career advancement - almost all academic writing is hard to read at best, and downright impenetrable at worst. My guess is that the editors at the Times Op-Ed page had to work long and hard to get this piece into even MINIMALLY clear enough shape to be understandable for a public audience. And it's good they did so, because the substance is absolutely crucial. The only problem is that reading it makes it almost impossible to understand what is, in fact, a powerful and significant basic point: In the aftermath of Black September 2008, there was a lot of moaning about how one major factor in the financial collapse of Bear Stearns in the spring and Lehman in the fall was the FAILURE of the relevant regulatory agencies -- the Federal Reserve / the SEC / Treasury / Comptroller of the Currency / Office of Thrift Supervision / and FDIC - to work together.

The authors here argue that these institutions HAD, in fact, been working together, since at least 2004 -- but in such a way as to FACILITATE, rather than forestall, the financial disaster that erupted in Black September. The initiating event for this co-operation -- or is it conspiracy ;-) ??? -- was the Enron fiasco of 2001. This essentially laid out clearly the template for a whole range of deceptive and illegal accounting practices available to big corporations, financial or not, although as we know from what Goldman Sachs was doing with the Greek government at that same time, Enron was far from the ONLY major corporation engaging in systematic financial chicanery. In the aftermath of Enron, they argue, the various elements of the regulatory apparatus realized they had to at least LOOK like they were doing something to make sure nothing like this happened again. What ensued was a complex round-e-lay between the regulators on one side, and the banking / insurance industries on the other, that began in 2004 and continued until 2006.

The initial feint by the regulators wasn't exactly regulation, but more like a position paper, whose guidelines they thought the bankers should adopt, but wouldn't force them to, and whose focus was "complexity" in financial instruments. Despite what the authors call the "mildness" of the regulator's suggestions, especially given what Enron had exposed, the banks and other financial institutions reacted strongly against it, mobilizing their army of lobbyists to bombard the agencies involved with negative comments. Most importantly, in one of the few relatively clear passages of the entire piece:

The banks understood that the statement threatened the virtually regulation-free zone they had won for other forms of complex structured finance, particularly collateralized debt obligations. So the industry condemned the 2004 proposal, and the regulators caved. They agreed to think it over — for two more years. And what they came up with two years later, in 2006 -- remember, two years before Bear Stearns in the spring and then Black September -- had the allegedly regulated cheering.

To read the rest of this article at http://www.economywatch.com/, go to:

http://www.economywatch.com/economy-business-and-finance-...

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