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Still More News of Regulatory Failures

Regulatory failure is often cited as a major cause of the financial crisis. As the details of each falling financial institution come to light, the roles of individual regulatory agencies get highlighted. For example, two big enablers of the Lehman failure were the SEC and the Federal Reserve, according to Lehman's Bankruptcy Examiner.

Similarly, a new report will apparently blame the Office of Thrift Supervision and the Federal Deposit Insurance Corporation for failing to keep Washington Mutual in line, and thereby facilitating its collapse. (OTS is the federal savings and loans regulator, created in the wake of the S&L crisis of the 1980s and 1990s.)

According to the New York Times's preview of the report, the OTS believed WaMu was "fundamentally sound" until Feb. 2008, when it downgraded it to "exhibits some degree of supervisory concern," and then, four days before WaMu's collapse that September, OTS downgraded it to "unsafe and unsound." Sounds like OTS was really paying attention.

The FDIC apparently had a better grip on what was happening, but didn't act effectively on its knowledge. Ongoing Congressional hearings will focus on WaMu starting Tuesday.

The Office of the Comptroller of the Currency, which regulates national banks, is also taken to task in two new studies about the housing crisis. OCC-regulated banks are exempt from state predatory lending laws and other state banking regulations, and the studies found that those banks had much higher foreclosure rates and problem loans than banks subject to the state laws. In fact, Texas's relative insulation from the housing crisis can be traced to its fairly strong consumer protection laws. Until recently, Texas's Constitution banned home equity loans, one of the main drivers of the home-as-atm mania.

And Corporate Counsel has a story that further undermines confidence in the regulators. Stephen Friedman was the Chairman of the Board of the New York Federal Reserve and a Board Member of Goldman Sachs during the peak of the financial meltdown. In Dec. 2008 and Jan. 2009, after the Fed decided to use bailout funds to repay AIG's counterparties -- a move that sent $13 billion of taxpayer money to Goldman Sachs -- but before the public knew Goldman was getting the money, Chairman Friedman bought $4 million in Goldman stock. That stock is now worth $9.4 million.

The article notes that, at the time, the purchase was against Federal Reserve policy, and only belatedly did Friedman receive a waiver from the policy, over significant misgivings of the other New York Fed board members. Policy and waiver aside, Friedman's actions seem awfully close to insider trading. Sure, the bailout of AIG was public in Sept. 2008, but the public wasn't told what Goldman got until March 2009.

Introducing the President of the Chamber of Commerce

In response to the U.S. Supreme Court's Citizens United decision, which allows corporate campaign spending on behalf of candidates, Congress is considering legislation that would require the chief executive of any company or organization primarily bankrolling an ad campaign to personally appear in the ad and acknowledge sponsorship. (I imagine it would be equivalent to candidates having to say "I'm Barak Obama and I approve this message".) Given that the Chamber of Commerce is a major campaign ad funder, expect to see a lot of its president, Thomas J. Donohue, if the bill passes.

Stepped-Up FCPA Enforcement Having a Deterrent Effect?

The Department of Justice has been vigorously enforcing the Foreign Corrupt Practices Act, which goes after companies for bribing foreign officials to get business. Now the Wall Street Journal reports that Avon Corporation has suspended four of its Chinese division's top executives as it probes possible FCPA violations.

And in the Business of Law...

Above the Law continues its colorful narration of the Conference on the Future of Legal Education, and highlights one would-be attorney who thinks he's got a better shot at the NBA than a legal job.

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