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Real Regulatory Review: “Gut Check”

Posted by Larry Doyle on May 20, 2009 6:00 AM |

The Washington Post reports the Administration Weighs Creating New Regulator for Financial Products.”

Will the new regulator merely address the effects of lax oversights in certain targeted financial products, or will the public get some satisfaction and the regulator address the causes of the massive regulatory breakdowns? I am not optimistic, but I am adamant to address this topic. The Post offers:

The proposal, which remains fluid, would centralize the enforcement of laws that protect consumers of financial products. That task currently is spread out across a patchwork of agencies, many of whom regard consumer protection as a low priority. Some financial products are not regulated at all.

Any proposal could also trigger a major regulatory turf war, with agencies such as the Securities and Exchange Commission and the banking regulators fighting to preserve authority. 

I am all for implementing effective regulation which levels the playing field and promotes free, fair, and equitable business practices. There is no doubt we need a thorough review of our existing regulations to see where they are sufficient and where they are delinquent. That said, as I wrote the other day, Future Financial Regulations: Not a Question of Sufficiency, But Of Transparency And Integrity.”  

In regard to housing finance, we need to develop effective oversight of the mortgage industry. We also need to accept the fact that our mortgage finance problems went a lot deeper than rogue mortgage brokers fraudulently underwriting unsuitable products to unsophisticated borrowers. If Obama and team really want to address the root causes, let’s return to the Congressional hearings throughout the 90s and up until 2006 and replay the testimony of the executives of Freddie Mac and Fannie Mae. The simple fact is the Clinton administration, with Congressional backing, promoted increased rates of homeownership without simultaneously implementing the necessary safeguards in the mortgage origination and underwriting process.

The executives of firms such as Ameriquest, Long Beach, Delta Funding, Aames Financial, and New Century preceded Countrywide into the sub-prime space. Make no mistake, those firms bought political cover in the process. Over and above that, political hacks from both sides of the aisle fed from the Freddie and Fannie trough, with Chris Dodd, Barack Obama, Hillary Clinton, and Chuck Schumer among the largest recipients.

How are Freddie and Fannie doing? Yesterday CNNMoney reported, “Fannie and Freddie In ‘Critical’ Condition”:  

Fannie Mae and Freddie Mac, charged with helping lead the nation out of its housing crisis, are facing “critical” financial problems, federal regulators said Monday.

The companies suffer from severe financial, operational and compliance weaknesses, the Federal Housing Finance Agency said a report to Congress detailing its annual examinations of the firms. Taken over by the government in September, Fannie and Freddie are not able to operate without federal assistance.   

Who in Washington has the guts and courage to take public ownership of the massive mistakes made with these agencies? Why should the public have any confidence in legislators defining roles and responsibilities for a new regulator when many of those same legislators so defiled and destroyed any sense of integrity in past regulatory oversight of Freddie and Fannie?

Remember, Freddie and Fannie aren’t merely injured. They are not merely in tough shape. They are not merely in severe pain. These wards of the state are ‘critical’ and nobody in Washington has publicly announced any sense of contrition for failed policies that led them to this condition. 

Yes, let’s put a new regulator in place and address rogue mortgage brokers and financial planners. However, if that is all we are getting out of the new regulatory oversight, then our political process, our political representatives, and our ombudsman have failed us and our country!


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