The Enforcement Deficit

There’s been a lot of clucking in the news media and blogosphere about the need for tighter banking and securities laws, presumably in the wake of the revelation of JPM’s $2 billion losses. I’m in no position to know whether we should be concerned about JPM’s losses. I would prefer it that only JPM shareholders be interested in JPM’s profits or losses but as long as big banks are deemed to be too big to be allowed to fail I don’t think I’ll have my way about that.

However, I did want to weigh in on the need for more regulation. I don’t think we need more regulations; I think we need more enforcement of the existing regulations and the perception that the regulations that are in place will be enforced. Let me give some examples of how, at the very least, we’re sending the wrong signals.

When the president of the New York Federal Reserve, the functionary most responsible for ensuring the stability of New York banks is appointed Secretary of the Treasury immediately following the revelation that big New York banks are teetering on the brink of collapse, that’s a very bad signal.

When the former director of the SEC’s Division of Enforcement on leaving the department goes to work for a large securities company, that’s a very bad signal.

When his successor on leaving the department goes to work for a large DC law firm specializing in defending clients against SEC enforcement actions, that’s a very bad signal.

And when presidential economic advisors after leaving the government go to work for big banks, that’s a very bad signal, too.

As long as the incentives for lax enforcement remain high, don’t expect more laws to produce a sounder system.

14 comments… add one
  • michael reynolds

    As so often, the real crime is what’s legal.

  • Ben Wolf

    The problem is that a given administration effectively determines what is and is not legal. Fraud is not an easy thing to prove, but it can be done as evidinced by the George H.W. Bush Administration and its directive to regulators and prosecutors to make examples of the crooks responsible for the S&L crisis. The result was hundreds of criminal convictions for top executives.

    The Obama Administration has repeatedly told us that fraud is just too hard to prove and as evidence we haven’t seen a single prosecution of a top executive for a financial crisis far greater in scope. They’ve claimed they don’t have authority to pursue wrongdoing because there weren’t specific regulations in effect to prevent the most egregious activities, but that’s exactly where fraud prosecution is suposed to come in, when a creep is deliberately cheating either their customers or the governments on which they rely.

    Big Finance effectively controls the legislative and executive branches. Eric Holder was also a corporate lawyer working in finance, and as I recall one of his deputies just left the Justice Department and went back. Who wants to bet Holder plans to do the same? Will he really do anything to piss off the people who make him rich?

  • Icepick

    You forgot having a former GS CEO as SecTreas. Or perhaps you just wanted to limit it to things that have happened since Lehman Bros. collapsed.

  • Icepick

    Will he really do anything to piss off the people who make him rich?

    That’s totally unfair. Holder has been busy figuring out how not to prosecute the guys in Gitmo, and now he has to get justice for the President’s not-son in Florida.

    Or something.

    (Has anyone checked the DoJ website lately? Has Holder been inserting himself into the biographies of prior AGs? That might take up a lot of time, too.)

  • steve

    How about writing the law, then leaving to go work for a bank? (Gramm) At any rate, I think you can make a good case that these kinds of products should be listed on a market. The FT had a nice piece on how it was not even possible to look at the volumes of what the London trader was doing. If others could track prices and volumes it should lower the risk of this kind of event, in theory.

    Query- Why do you leave out the most obvious case? When the AGs of several states tried to stop the risky lending (no-doc loans) they were prevented from doing so by the Office of Thrift.

    Steve

    Steve

  • Ben Wolf

    @steve

    I agree. I can think of no good reason shareholders in these banks are prevented from knowing exactly what the corporation they own is doing, but banks have fought like lions to keep over the counter derivatives totally opaque.

  • Drew

    Absolutely correct, Dave. And you, too, Ben.

    This administration talks a good game but knows where its bread is buttered. Whores. Just whores.

  • PD Shaw

    I think Dave is holding the wrong end of the stick, though I think he is wielding a stick.

    The ability to enforce a regulation starts with the laws passed by Congress. The lawmakers increasingly are incapable of passing a law in a complex environment. Dodd-Frank, at 2,319 pages is full of extraneous crap bundled around assignments given to the regulator to pass regulations that balance and are expected to achieve countervailing purposes, rules that makes unicorns dance with lions for less than $x. So far, regulators have missed 70% of the 400 deadlines given to them by Congress.

    And the regulations often are subject to judicial review. I know of at least one SEC study that has been invalidated by the courts. (the “proxy access” rule) The court didn’t do it because they disagreed with the study, the court thought it wasn’t a study, so much as a blog post stamped with the words “A Study” on it.

    Meanwhile, its widely known that the effort to understand and deal with with Dodd-Frank has marginalized enforcement of the pre-Dodd-Frank. Too much work on Dodd-Frank, and not enough incentive to work on an area of law that might be outdated shortly.

    Congress has to do its job first. If it doesn’t, the regulations will always be subject to challenges and the enforcers will be reluctant to enforce regulations where there is doubt.

  • Michael Reynolds

    Drew:

    So… You object to Obama because he’s a whore and hope to replace him with an even more supine whore?

  • I’m with PD Shaw and Dave. For some the solution to “failure to regulate” is to pass evermore complicated regulatory schemes. Frankly, I think the idea that huge corporations can be regulated to be systemically “safe” is both a stupid and foolish notion.

  • Drew

    Micheal

    I think its pretty simple. I reside in the libertarian wing of the Republican Party. Hence, I have difficulty with anything but a yawn on social issues. Its not the governments place. But the government is in the economic business big time. And its a disaster. And it is the single most important issue for the balance of our lifetimes.

    Obama is screwing it up so fast it makes your head spin. So my view is that we need him to exit, stage left, as fast as possible. We need a President who will advocate broad spectrum economic growth. To me, that’s Romney. I know you differ.

    If we can get the economy back on track then the zealots can get back to the business of attempting to regulate our personal lives. They will get no quarter from me, perhaps from no one……hopefully. But if people are able to make their way economically I think we will be fine. I’ll be making my tee time as people grouse over gay marriage or other inane topics……..

  • Ben Wolf

    @Andy

    I think the most market-friendly way to deal with banks which control too much of the global financial infrastructure is to simply cap their assets. I can’t think of a reason any bank should need to be larger than $100 billion.

    But why do that when we can pass useless junk like Dodd-Frank?

  • To put Ben’s proposal into perspective the 22 largest banks all have assets in excess of $100 billion. You have to get all the way down to Northern Trust before you find a bank that’s smaller than that.

  • Asamoa

    I think its pretty simple. I reside in the libertarian wing of the Republican Party. Hence, I have difficulty with anything but a yawn on social issues. Its not the governments place. But the government is in the economic business big time. And its a disaster. And it is the single most important issue for the balance of our lifetimes.

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