Regulators like the Fed and SEC have said they didn’t know about Lehman’s use of Repo 105s to hide its mountain of debt.
But in a must-read New York Times Op-Ed, law school professors Susan P. Koniak, George M. Cohen, David A. Dana, and Thomas Ross point out:
Our bank regulators were not, as they would like us to believe, outside the disco, deaf and blind to the revelry going on within. They were bouncing to the same beat. In 2006, the agencies jointly published something called the “Interagency Statement on Sound Practices Concerning Elevated Risk Complex Structured Finance Activities.” It became official policy the following year.
What are “complex structured finance” transactions? As defined by the regulators, these include deals that “lack economic or business purpose” and are “designed or used primarily for questionable accounting, regulatory or tax objectives, particularly when the transactions are executed at year end or at the end of a reporting period.”
How does one propose “sound practices” for practices that are inherently unsound? Yet that is what our regulatory guardians did. The statement is powerful evidence of the permissive approach bank regulators took toward the debt-dissolving financial products that our banks had been developing, hawking and using themselves for years. And it’s good reason for Americans to be outraged by the “who me, what, where?” reaction of Mr. Bernanke and the S.E.C. to the revelation of Lehman’s Repo 105 scam.
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The interagency statement on “sound practices” of 2006 … was greeted with effusive praise from bankers, their lawyers and accountants. Gone was the requirement [proposed by the law professors and others] to ensure that customers understood these instruments and that the banks document that they would not be used to phony-up a company’s books.
The focus on complexity was also gone, as was the concern over transactions “with significant leverage” — that is, deals with little real cash underneath, another unfortunate deletion because attending to excessive leverage would have served us well.
Instead, the only products that the banks were asked to handle with special care were so narrowly defined and so obviously fraudulent that suggesting that they could be sold at all was outrageous. These included “circular transfers of risk … that lack economic substance” and transactions that “involve oral or undocumented agreements that … would have a material impact on regulatory, tax or accounting treatment.” [and these weren’t banned, but apparently only required special disclosures by the banks]
Just as troubling, at least in retrospect, the new statement specifically exempted C.D.O.’s from the need for any special care ..
Only two years later, these same regulators were explaining that the complexity and opaqueness of instruments like C.D.O.’s had contributed significantly to the economic collapse…
Moreover, the collapse was characterized by institutions supposedly healthy one day and on the verge of collapse the next, due in no small part to their extraordinary debt burdens — debt burdens that complex instruments magically removed from the books.
To this day, that final interagency statement (which was adopted in 2007) has not been repealed or replaced. It can still be found on the S.E.C. Web site, along with the letters from industry representatives praising the 2006 draft.
As the law professors point out, you can have all sorts of laws on the books, but if regulators aren’t enforcing them, they are not worth the paper they are written on.
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I believe this is known as corruption.
Where’s the OUTRAGE?
It is NOT just the captive regulators but also, captive Lawmakers of all stripes!
America, the Best Democracy Money can Buy!
Thieves, Looters and Financial Terrorists All, and yet the sheeple carry on not noticing or caring that they’ve been fleeced. Oh well, Ignorance is bliss, until you find yourself hungry with no roof over your head. I guess we will all just move south and steal oranges.
As the law professors point out, you can have all sorts of laws on the books, but if regulators aren’t enforcing them, they are not worth the paper they are written on.
Yup. And those are the same regulators we keep being assured will be transfigured into paragons of enforcement now that the health racket bill passed, and if/when an Obama/Geithner/Dimon finance “reform” bill passes.
When a country goes out of its way to not enforce it borders then why do you think it would enforce any of its other laws?
Recall former SEC head Harvey Pitt imploring that the SEC staffers who ignored the Maddoff Ponzi scheme not be held accountable. These imbeciles are now working for prominent law firms in NYC and elsewhere. Why would anyone hire a law firm that employed such obviously unethical attorneys? Why wouldn’t they?
Here is a great whitewashed biography of Christopher Cox, who sold out this country to Wall Street. What, no mention of Madoff????
“During his tenure at the SEC, Chairman Cox made vigorous enforcement of the securities laws the agency’s top priority…”
http://www.sec.gov/about/commissioner/cox.htm
Where are the indictments? And who makes the decisions to IGNORE all the crap and fraud? I can not wait for November to cast my one puny vote for anyone but those politicians currently sitting fat and happy, confident in the ignorance, stupidity and indifference of the American people.
I’d have to read the actual regulations, but if what this post and it’s underlying story are true, then this is worse than regulators sleeping on their watch. It sounds as if these “regulators” were in fact giving permission to “Looting 2.0” practices.
This is huge. This implies that these (anti-regulation) regulators have no interest at all in the national interest as any ordinary person might rationally define it: sustaining the business conditions where you and I are free to get on with our lives.
What are “complex structured finance” transactions? As defined by the regulators, these include deals that “lack economic or business purpose” and are “designed or used primarily for questionable accounting, regulatory or tax objectives, particularly when the transactions are executed at year end or at the end of a reporting period.”
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Wow, what an admission. In other words, (complex) structured finance is econmically useless it just serves to obfuscate the balance sheet. Did regulators really say that?
‘..“Interagency Statement on Sound Practices Concerning Elevated Risk Complex Structured Finance Activities.” ‘
there are also the following,
1.plunge protection team.(PPT)
2.exchange stability fund.(ESH)
3.counterparty risk management policy group.(CRMPG)
if you look into the above organisations’ members,the collusion among the the greedy is widespread!
their motivation is not enforcement but to maximize profits among members.
“What are “complex structured finance” transactions? As defined by the regulators, these include deals that “lack economic or business purpose” and are “designed or used primarily for questionable accounting, regulatory or tax objectives, particularly when the transactions are executed at year end or at the end of a reporting period.”
How does one propose “sound practices” for practices that are inherently unsound?”
You could not even parody this…astounding
“I am shocked, shocked to find that gambling is going on in here!” (Renault, Casablanca 1942, or was that Cox, SEC, 2006)?
I feel a tad sorry for Yves and professors Koniak, Cohen, Dana, and Ross. They are professionals. They have a sense of morality and what they report is an outrage. Yet, America seems more concerned this morning with the cut of our first-pitch-throwing president’s slacks than with the outrages of Wall Street which has flat stolen trillions of dollars of America’s accumulated wealth. It is shocking that Americans are so easily distracted. It is as if we have gone to the carnival with a wad of hundreds in our pockets and have had so much darn fun we simply ignore the pickpockets, even when they flaunt our own cash (remember those bonuses?) in our faces. And the truly sad thing for those of us who care, we know that without chastisement, punishment, or even a modicum of regulation, they will do it all again. Depression is not merely an economic outcome, it is a state of being. Tootles.
It appears that the Wall Street Bankers and the government
regulators have broken the financial back of the American spirit and its economy.
That then translates to the fact these despicable evil doers have also destroyed the faith and trust of the American people to participate in the financial market place of this country.
This time the damage done is irreparable since those responsible have not been held accountable.
Wall Street is still doing business today in their quest for power and financial domination with the same lack of concern and at the expense of the American people.
Further more this President mistakenly has surrounded himself with those financial advisors that wear the same cloth as their Wall Street brethren as demonstrated by the monetary favors given to the financial Wall Street jackals.
The Congress has sold their legislative gifts to the ruthless rich and powerful Bankers from whom they receive their financial endowments.
Without accountability of the evil doers the political vomit from the Congress is only exceeded by the stench of corruption by those bankers that practice the art of financial fraud and deception
The real message of disdain and the display of contempt that these bankers have for their fellow Americans is demonstrated by their demands that there shall be no consumer financial protection legislated for this society by the congress to address unethical banking practices.
10 million people lost their homes, millions lost their jobs, millions lost their pension values and 330 million lost their faith and trust in America.
We shall never forget that those we elected to represent our well being sold it to the highest bidder.
The attack from our enemies from outside our borders who we thought would do us harm pale in comparison to the destruction done to us by the Bankers that value gold more than the American way of life.
Michael LittleBig
Cleveland Ohio
The Interagency Statement cited in the op-ed piece by the professors is a great example of the anti-regulatory philosophy of the Bush Administration and Greenspan and a great demonstration of the perils of structuring laws which allow for a lot of regulatory discretion in implementing the laws. The regulatory philosophy of the Bush Administration was basically to allow the industry involved to set its own standards. Its thinking was premised on the concept that institutions would not do things against their self-interest. Of course, with executive compensation designed to reward short term profits without regard to long term risks, that premise was, at best, naive. So when the industry blasted the proposed Interagency Statement (with apparently few comments from people like the law professors), of course the regulators changed it to be more in line with the anti-regulatory philosophy of the Bush Administration. It’s no wonder that regulatory examiners wouldn’t spot Lehman-type accounting. They weren’t instructed to be looking for it.
The concept of “regulatory capture” should include not only capture by the industry but capture by a President and political party antithetical to the enforcement of the regulations and laws. Developing laws that prevent regulatory capture is difficult but important.