A Must Read
Prepared Testimony of Harry Markapolos (PDF). The second part, regarding reform of our regulatory bodies, reminds of one thought I've always had. I think one reason for the mess we are in is because it's so easy for banks to pretty much misrepresent their holdings in financial statements. I mean they're banks. They can hide liabilities a million ways. An auditor friend in this line of business essentially confirmed this shenanigans.
I think it goes without saying the GOP will instinctively oppose any efforts to strengthen financial regulation. By their standards, even Hammurabi over-regulated the bartering in Babylon.
I think it goes without saying the GOP will instinctively oppose any efforts to strengthen financial regulation. By their standards, even Hammurabi over-regulated the bartering in Babylon.
posted by Armen Adzhemyan at 4:57 PM
17 Comments:
my god, YAWN. Must read? get a life
Beefing up regulation may be needed. But I'm not going to fault Republicans for bringing their POV to the debate. I'm a little concerned about reactionary over-regulation myself (and I think others should be as well).
6:02, with credit markets frozen, our financial institutions on the bring of collapse, the California legal market, and the Bay Area in particular, in dire straits, I'd say, yeah this is a must read. Or you can read Gilbert's.
TJ, I'm curious how many times the world economy must collapse due to rampant speculation/greed without proper oversight before you conclude that meaningful oversight is best for a functioning market economy. Can we finally put the nail in the libertarian anything goes coffin?
And to blast the Dems equally, dear lord, are there any competent government employees? It's almost like you're in danger of losing your job if you work too hard. The process of firing an incompetent civil servant is mind-numbing, to be generous. (This counts against the Dems because they are generally unwilling to make it easier to remove incompetent government employees given strong union ties).
Armen: you and I didn't say contradictory things.
"Proper" isn't an easily definable term in this context. I agree "proper" oversight is best for a functioning market economy. I even agree that it's more oversight than the gov't currently conducts.
But you must agree that your definition of "proper" does include an upward boundary as to how much regulation is imposed. And to that, I'm worried that hysteria may test that boundary. That is all.
Agreed, especially if the same incompetent morons who handled Mr. Markapolos' complaints are charged with further oversight.
the economic collapse of the housing market was due to elected government officials of a certain party in power -- officials who decided what the market should support. even SNL got that right.
Even a cursory read of Part I is enough to freak the living crap out of any sentient human being.
The issue isn't whether the government should beef up or impose more regulation. The issue is why on earth the SEC appears incapable of enforcing the regulations that are already in place. Based on this testimony, the answer to that question is ugly and embarrassing.
The WSJ ran a front-page article a few weeks ago detailing these efforts to expose Madoff. The article sums the story up well and doesn't have the hysterical "it's all the GOP's fault" conclusion that Armen throws in for seasoning.
It would be nice if our institutions could catch every fraud. The SEC must take a hard look at why it did not catch on here, despite the warnings and evidence submitted (although the evidence was apparently submitted anonymously). But the conclusion that "deregulation" was the main culprit falls under that post hoc ergo propter hoc reasoning that we should try to avoid. I think it's worth remembering that Madoff fooled not only the SEC but also some very sophisticated investors. To expect our institutions to always be smarter than even the wealthy and well-advised is not realistic.
One other thing: Madoff was not running a bank. It would be truly audacious if a bank could pull off this kind of fraud, because they are subject to much more stringent regulation that Madoff's investment shop was. Yes, banks are still very highly regulated, despite what the punditry keeps intoning about Gramm-Leach-Bliley.
Yes, but in this case the SEC was well-advised. The prepared testimony makes it quite clear that Markapolos did more than simply submit an anonymous tip; he proved fraud, and he proved it years ago.
There is a compare-and-contrast of Markapolos' complaints about the SEC, and a somewhat canned response from the Commission here. I'm sympathetic to the incredible task the SEC faces in sorting through ambiguous tips, but this isn't an example.
Patrick, do you agree that the failing may not be one of regulation per se, but might have had more to do with institutional incompetence? Not saying we have conclusive proof one way or another. But the laws can be smart and the enforcers can be dumb. This looks to me to be a plausible explanation of how Madoff continued to get away with his scheme, despite a meddling kid showing it was all fiction.
I think that's exactly right. If SEC personnel really are unqualified to enforce the current regulations, then increasing their burden by lengthening the list rules they must know and apply might be unhelpful. It might be like giving the clumsiest kid in shop class a brand new set of power tools.
Part II of Markapolos' testimony suggests ways to improve to the SEC. The thrust of his suggestions are essentially that the SEC needs to hire people who understand financial markets, so that when somebody comes with a report of fraud, they will know how to read it. That seems reasonable to me. If the SEC analysts and lawyers can't understand what the heck is going on, new regulations aren't likely to create new effectiveness. If Markapolos is right, intricate new regulations are about as sensible as giving someone a shiny new car when the problem is that they don't know how to identify a stop sign.
Don't forget that Fannie Mae and Freddie Mac were operating under a fairly adequate regulatory and fiscal management system until DEMOCRATS Barney Franks, Harry Reid, and others, pushed those institutions to abandon fiscal restraint and extend mortgages based on non-economic criteria. Regulation is useless where politicians can interfere or change it to suit partisan political goals.
Oh please... that was only a small part of the problem and you know it. Plenty of people were given variable rate mortgages with nothing down based strictly on their economic criteria (or lack their of).
Saying "the housing market crashed because Democrats required mortgages to be given to black people" is a Republican scapegoat excuse and doesn't fool anybody. The crash was far more the fault of greedy banks and tepid (if any) oversight.
10:35, I really don't understand why the right keeps repeating this debunked meme. OK, well I do understand why they do it. But stop.
And as I write this, I see Toney beat me to the punch. Well said.
I should also clarify my earlier points because I don't think I was exactly lucid.
Part I of the testimony, regarding Markapolos' efforts to get the SEC to stop Madoff are interesting in the "I want to pull my hair out" sort of way. But it's Part II, his recommended reforms, that grabbed my attention. In particular, the apparent regulatory-body shopping that goes on within financial institutions and the inability of the Fed to meaningfully oversee banks. These two, combined with the current opaque and probably misleading view of bank finances, paints a fairly clear picture of why our entire financial system is in a state of paralysis. The incentive to paint a rosy picture for shareholders overwhelms any desire to accurately reflect assets and liabilities. This is true for any publicly traded company, but very problematic for banks because of the role they serve in our markets and because of the relative ease with which they can shift "problems."
TJ's point about over-regulating in a panic is well-taken, but I think (a) we need reform of the oversight bodies because the current structure does not foster much cooperation or effective enforcement of existing regs; and (b) we need more regulations in the specific area of forcing greater transparency into banks. If we as tax-payers are going to bail them out when they are run into the ground, then we should know that the banks are betting that the price of pumpkin will continue to rise through October and peak in January.
I don't think that anybody has "debunked" the notion that lax lending standards contributed to the housing bubble. Were they the whole problem? No. Were they a "small part" as Toney says? Maybe. Maybe they were a significant part of the problem.
Whether the Dems are more to blame for pushing minority home ownership, or the Reps for encouraging the regulations that allowed MBS's to be peddled as better than the assets they bundled etc, is still very much an open question.
Armen, if you have a link to proof, please provide. A Krugman editorial will not suffice.
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