Wall Street Regulators Still “Funded at a Level to Fail”

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Wall Street

This Wednesday, Feb. 13, 2013 photo shows the Wall St. sign in New York. (AP Photo/Henny Ray Abrams)

In 2011, the government’s Financial Crisis Inquiry Commission issued an exhaustive report on the roots of the 2008 crash. It concluded that lax regulation and the inadequate enforcement of existing regulations lay at the heart of the meltdown.

More than 30 years of deregulation and reliance on self-regulation by financial institutions, championed by former Federal Reserve chairman Alan Greenspan and others, supported by successive administrations and Congresses, and actively pushed by the powerful financial industry at every turn, had stripped away key safeguards, which could have helped avoid catastrophe. This approach had opened up gaps in oversight of critical areas with trillions of dollars at risk, such as the shadow banking system and over-the-counter derivatives markets. …

Changes in the regulatory system occurred in many instances as financial markets evolved. But as the report will show, the financial industry itself played a key role in weakening regulatory constraints on institutions, markets, and products. It did not surprise the Commission that an industry of such wealth and power would exert pressure on policy makers and regulators… What troubled us was the extent to which the nation was deprived of the necessary strength and independence of the oversight necessary to safeguard financial stability.

Now, three years later, Joe Morris reports in The Financial Times that the regulatory agencies keeping an eye on Wall Street are being woefully underfunded given the complexity of today’s financial instruments.

Morris reports:

Even with new budget increases, US securities regulators are falling further behind the market when it comes to technology investment, and the investment advisers and swaps dealers they oversee are likely to remain largely uninspected.

The first comprehensive federal spending plan since 2009, hammered out in Congress last week, raises the Securities and Exchange Commission funding by $29m, to $1.35 billion, or $324 million below the White House’s request. The Commodity Futures Trading Commission (CFTC) budget rises about $10m, to $215 million, or $100 million less than requested.

The additional funding sought by the administration for the SEC was intended to pay in part for the hiring of 250 examiners dedicated to registered investment advisers, whom the regulator now examines only once every 11 years on average.

“Whatever increase in the examination of advisers they are able to perform will have to be gained through efficiencies, and while I am certain that examiners’ productivity can be increased, I don’t think we can expect to see a significant change in the overall examination rate,” says Neil Simon, vice-president for government relations at the Investment Adviser Association…

Dennis Kelleher, president of Better Markets, the financial reform advocacy group, contends the technology allocations suggest the SEC and CFTC are “funded at a level to fail.”

“What both agencies are trying to do is get a better understanding of high-speed computer trading and how it is affecting markets, and yet they are not getting anywhere near the ability to do that,” Mr Kelleher says. “When you cut the reserve fund at the SEC by 50 per cent, and on top of that you underfund them overall, you really are putting them in an impossible position.”

Read the whole story at The Financial Times » (registration required)

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  • Anonymous

    So let me get this straight-Congress cutting spending for regulators, leads to bank criminal behaviors, leads to finger pointing at the failure of “big govt. regulation”, leads to more tax payer bank bailouts and more deficits. Got it.

  • Anonymous

    More big govt. incompetent regulations leads to higher cost to consumers, it is the hidden tax to create more power for big govt. The bureaucrats then muscle their way to settlements of fines so their poltical bosses can claim headlines “big govt is looking out for you”. Through the massive complex regulations, smaller competitors are economically removed fattening the margins for big business. Big govt and big business are always in bed together, one just needs to look at socialist and communist countries to see how this love fest destroys competition.

  • lostinbago

    Corporate funded congressional seats cut funding regulating those same corporations.

    Sounds like business as usual for the oligarchy.

  • JonThomas

    Of course the cost of business should be higher. What you are advocating is a false economy where hidden costs are carried after the fact.

    Look at the deregulation which caused the huge banking and mortgage failure. The after the fact costs carried by the tax payer in the form of bailouts, along with the loss of wealth for homeowners across the nation, was a direct result of the gutting of competent regulations.

    Go spread your ridiculous vitriol somewhere else! to someone else!

    The cost of doing business includes the liability that comes with negligence. Those costs are to be taken before, and as you conduct ‘business.’

    This has nothing to do with either Socialism or Socialist Nations. It has to do with in business ethics and the costs of having people like yourself who are advocating immoral business practices. We are seriously getting tired of people like yourself who want to legitimize criminal behavior!!

  • Anonymous

    JonThomas,

    Wow, it appears you have so much anger that you have stepped away from studying facts. Fact, it was the United States Federal Government (US) that set up the huge banking and mortgage failure. It was the US Affordable Housing Policy that created the requirement for loans to be made to their new classification “under-served” which was code for bad credit and no money.
    Here is your resource: http://oversight.house.gov/report/the-role-of-government-affordable-housing-policy-in-creating-the-global-financial-crisis-of-2008/

    It has everything to do with Socialism, where Big Government and Big Business get in bed together to take supress the freedom of citizens and the free markets that serve them. You may put your faith in Big Government Regulations, I chose to believe in the brilliance of citizens in solving the challenges of life when they are free of Big Government Regulations. Please, you and the CEO’s of teh Big Banks have something in common in the love of Big Government Incompetence.
    It is Big Government that legitmizes criminal behavior as Big Government runs cover for the politicians, bureaucrats, and Big Business criminal cohorts. Have not seen one politician, bureaucrat or Big Business executive going to jail for the housing crisis/financial crisis. That is because they have each other’s backs.

  • JonThomas

    The banking and mortgage failure was precipitated by the change to banking regulations such as Glass-Steagall.

    Before the deregulation, the commercial investment arms of banks was limited by competent, long-successful regulation.

    Once Glass-Steagall was removed, banks gained the ability to enter into a ‘situation of moral hazard.’

    It was the distinct lack of regulation which allowed mortgage derivatives to grow exponentially. It was a lack of regulation and oversight which allowed the rating agencies to apply triple-A ratings to toxic derivatives.

    If it was the US Affordable Housing Policy which carried the blame, then it would have only been those people who were involved in the bad loans who would have suffered losses.

    Instead, the entire banking system, with banks becoming ‘too big to fail’ (a direct result of the removal of Glass-Steagall,) caused the ‘Moral Hazard’ situation in which the entire deregulated Capitalist economic structure collapsed.

    These FACTS, and the subsequent conclusions, are common knowledge. We know what caused the meltdown. We know it was the drive for profits emanating from the environment caused by deregulation and the distinct lack of oversight.

    And YES I am angry! People like yourself, who advocate deregulation, and unfettered Capitalist exploitation, caused the greatest loss of wealth to the average American Citizen in modern times.

    Then, after the meltdown, the ‘keep Government out of business’ advocates, like yourself, accepted the tax payer’s money. Worse, instead of refusing the funds and relying on the invisible hand of the market to send unregulated Capitalism to the grave in which it belongs, they used those tax payer funds to pay bloated wages, and obscene bonuses to top tier management.

    I do agree with you that it is obvious that both – politicians, and business – are engaging in the type of crony capitalism which caused the deregulation. It’s good to see someone who realizes that election funding most be reformed, and who speaks with similar language to those who realize that corporations are not people, and that when money is equated to ‘speech,’ the playing field is not level. There can be no reform until these issues are settled.

    However, this is not Socialism. This is Crony-Capitalism. It is not the Government (The People) who are pulling the strings. It is a Plutocracy of Crony-Capitalists!

    Further, the Constitution of the U.S. calls for Congress ‘to lay and collect duties, excises, and tariffs.’ That same Constitution calls for the Congress to also… “To regulate Commerce with foreign Nations, and among the several States, and with the Indian Tribes.”

    The Constitution of the U.S. IS a Socialist Instrument! For any person or group to try to deny these facts or insinuate that the U.S. should not employ Socialist policies is acting as an enemy to the Constitution. The Constitution is in place to first and foremost, protect THE PEOPLE of the U.S. When business acts against the General Welfare of U.S. Citizens, then Congress MUST, yes, MUST – through Constitutional mandate – regulate business!

    This is why I am angry, this is why I call your words vitriol, and this is why you MUST take your ‘free-market’ garbage somewhere else!

  • Anonymous

    You continue to keep a blind eye to what caused the housing crisis and pursuing financial meltdown. Over 90% of homeowners made their house payments during the housing meltdown. It was in fact President Clinton and key powerful Democrats in the Senate and House that created the “under-served” classification (code for bad credit no money) to achieve higher homeownership rates for their political headlines.
    It was not deregulation that pushed this “under-served” into homeownership. It was the aboved mentioned politicians that took over running Fannie Mae and Freddie Mac – the housing engine that ran successfully for decades as capitalist business. Once these once successful businesses became tools for the Affordable Housing bureaucrats, they began buying/gurananteeing the junk loans (bad credit, no money down) through their backdoors (their well established automated underwriting engines would not approve to be purchased as conventional loans).
    Wall Street and the rating firms were instructed by the aboved mentioned politicians to get creative in pushing these junk mortgage bonds as investment grade. The regulators then used the Equal Credit Opportunity Act (ECOA) to force lenders to open the floodgates to the “under-served” with the agreement they would be able to get this junk loans off their books via sales to Fannie/Freddie’s backdoors or directly to Wall Street for the larger banks. If they refused to participate, the bureaucrats through their regulators would entangle the banks with bad publicity and harrassment in operating their businesses. Have you ever read the regulations for residential lending? I suggest you try, it is not intended to protect citizens; rather it is to empower the bureaucrats.
    The United States has now become a Big Government little citizen economy. The brilliance of citizens is not respected and is supressed via the massive complex regulations. In socialist and communist countries you can not operate a business without violating some interprative

  • JonThomas

    I am not “turning a blind eye” to what you are describing. I am saying that it’s not the bad loans themselves which caused the the INTERNATIONAL banking crises.

    What you describe is a conspiracy theory with no facts to back it up. The ‘blame’ does not rest one any one issue. It was NOT a one issue crises. What you describe is a conspiracy theory.

    You claim there were ‘backdoors’ to lending. What backdoors? You claim there were threats to lenders who wouldn’t make loans? Prove it. Give us names of a few lending companies whose reputations where ruined by “bureaucrats’ spreading bad publicity.

    The lending institutions were not FORCED to loan to anyone with bad credit. Instead, the ‘innovations’ in lending practices ‘allowed’ the lending companies to offer federally backed securities. Yes, many of these loans, referred to as ‘subprime,’ were backed by Fannie and Freddie. It’s also true that “in 1992, President George H.W. Bush signed the Housing and Community Development Act of 1992.” [Wikipedia] That act was passed by Congress and signed by the President. Interesting how your conspiracy blames only Democrats (so much for “no spin”.)

    It’s also true that ‘in 1999, Fannie Mae came under pressure from the Clinton administration to expand mortgage loans to low and moderate income borrowers by increasing the ratios of their loan portfolios in distressed inner city areas designated in the Community Reinvestment Act (CRA) of 1977.” [wiki] However, “institutions in the primary mortgage market pressed Fannie Mae to ease credit requirements on the mortgages it was willing to purchase, enabling them to make loans to subprime borrowers at interest rates higher than conventional loans.” [wiki] These institutions were not FORCED to make the loans.

    The number of loans which were given out to people who could not afford to pay were indeed risky, but If a bad loan were made, and the people who couldn’t pay their mortgage defaulted, any housing crises would have began, and ended with those specific borrowers.

    Instead, to manage the risk, financial institutions, and many financial experts of the time, encouraged, and praised the removal of Glass-Steagall during those same years.

    It was not some Democrat-to-blame conspiracy as you suggest, but an across-the-political-spectrum orgy of lust and greed which applauded these changes to the mortgage industry.

    They banks did not call these changes ‘regulations’! They touted them as ‘innovations’!

    The Removal of the Glass-Steagall regulations allowed the lending institutions to attempt to manage the new risks by using more innovative tools, such as Mortgage-Backed Securities (MBS)… more popularly known as ‘Derivatives’.

    Not all of the subprime loans were underwritten by Fannie and Freddie. Many of the loans went into through the primary lending institutions to be bundled into the MBS’s. These new Securities were lauded by the financial industry and pushed so heavily, that they caused the collapse of Lehman Brothers, one of the largest financial institutions ever to exist.

    These MBS were so desired and heavily pushed, that the credit rating agencies gave them triple A ratings with no detailed scrutiny. Again, a direct result of a lack of regulation and oversight. http://www.clevelandfed.org/research/commentary/2009/0709.cfm

    As I already described in a previous comment, and am detailing here, had there been sufficient regulation and oversight, had Glass-Steagall stayed in place, and any honest discussion also cannot ignore the housing boom, with it’s about-to-burst pricing bubble of the time… the crises would have begun and ended with the bad loans. Those bad loans would have (as they have been) backed by the tax payers.

    Yes, there would have been costs to the tax payers, but that may have easily been absorbed by the regular market forces when the properties were put back on the market. Instead, because the financial industry ran amok under the atmosphere of loose regulation, the primary mortgage industry, the IRA’s of otherwise financially secure people crashed because of investments of MBS, deregulated loans from between financial firms defaulted en-mass, and then came the subsequent difficulty in lending and borrowing,

    All these consequences would have been avoided if regulation would have remained in place. This is common knowledge.

    Instead of as you suggest… a one issue conspiracy… where you put the blame on Democrat Party bureaucrats, there is not one serious financial, or political observer who does not recognize that the crises became exacerbated nationally and international in scope DIRECTLY due to the laxation of financial regulations.

    Here is a starting link to a vast number of research articles to read which show that the situation was not, as many like to promote, a one issue conspiracy of ‘Democrat Party Bureaucrats.’

    http://www.clevelandfed.org/research/commentary/2009/0509.cfm

    It is interesting how a nation like Canada, which shares many of the traits found in the U.S., but has more Socialist policies than the U.S., was able to pretty much avoid the housing crises.

    http://www.clevelandfed.org/research/commentary/2009/0909.cfm

    Both before the housing crises started, and during it’s peak years, I was a contractor for Safeguard, Fidelity (LPS), Coutrywide, First American, Spectrum, and many other foreclosure specialists. I worked with the U.S. Marshal Service in their seizure process, the Sheriff Departments of over 10 Counties and 3 States. For good, or for bad, I personally performed the foreclosures of thousands of residential, and a few commercial properties.

    I recognize that you have read few articles, have listened to some pundits, and are not stupid. You may even work in the financial industry, I don’t know. But, for any person to say that the crises was caused by a relatively few number of loans (when compared to the number of home loans nationally) backed by Fannie and Freddie, and not the environment which promoted an unbridled profit motive fostered after deregulation, and the during an unconscionable absence of regulator oversight, has NO IDEA what they are talking about.

    Frontline did incredible exposes during, and after the crises. You can go to their website and look them up. They detail the crises from start to finish in a series that looks at the crises nationally and internationally. It is quite enlightening.

    I am glad to see that you are a small business owner. It’s neither important, nor unimportant to me whether you have taken any Big, or Small Government help. It’s fine if you want a Small Government, but please do not be misled. It is Powerful business interests which has manipulated the system into what we see now.

    ‘Bureaucrats’ without the backing of private and corporate business interests, and what is known as ‘The Revolving Door’ are generally mid-level wage employees with little power to affect anything other than their specific jobs. It’s only because of the political party system, being funded and controlled by monied interests, that Government has made the recent changes allowing the crises.

    The U.S. Constitution describes Congress as a body whose purpose, apart from the other delineated objectives, is to REGULATE commerce. The U.S. Constitution IS A SOCIALIST INSTRUMENT!

    Up until the 1980′s, the financial industry was a fairly heavily regulated industry. Sure there were booms and busts. Housing gains and falls, but there was no huge crises since the Great Depression. It wasn’t until Deregulation and a cutback in oversight funding that the financial industry was allowed to take so much risk with customer assets.

    I realize that you desire to see your taxes spent on things important to you, but there is no way to insure that without regulation and oversight.

    When we see Congress People lobbied, advised, their campaigns funded, and the actual laws written by business interests whose goals are directly related to financial profit (often at the expense of the tax payer, and the U.S. citizenry when they are seen as little more than ‘consumers,’) it is NOT BUREAUCRATS who are solely to blame. It is an entire Crony-Capitalist system.

    It is disingenuous at best to SPIN the crises to look like it is the fault of ‘Democrat party Bureaucrats’! It was an across the board, unregulated celebration of greed and short-term profit, engaged in by people from many political affiliations, during a period without significant or appropriate oversight.

    When the law looks the other way, the criminals have a field day. And so it is.

    I will try to end my discussion on that note. Thank you.

  • JonThomas

    I was just looking at the “Morning Reads”… http://billmoyers.com/2014/01/28/morning-reads-obama-to-give-fed-workers-a-raise-20-kids-are-shot-each-day-in-us/ … and there is a link to this article… http://www.bloomberg.com/news/2014-01-27/let-banks-fail-becomes-iceland-mantra-as-2-joblessness-in-sight.html

    It’s interesting to see another country with Socialist Policies thriving under conditions when supporters of Unfettered Capitalism say it is impossible.

  • JonThomas

    In the spirit of agreeing to disagree, and having said what is necessary to make my points, without calling you out further on your spin… I will only add that in the U.S., contrary to your and the propaganda created opinions of many people, THERE IS NO SUCH THING AS A ‘FREE MARKET’ IN THE U.S. The idea is DIRECTLY anti-constitutional.

    There is not, nor has there ever been, a custom, a precedent, an example, a pattern, a policy, nor a basis for unfettered, laissez faire, free market capitalism in the U.S.

    Along with your other mistaken assertions and conspiracy theory, you keep arguing from a ‘free market’ point of view which does not, nor has ever existed in the U.S.

    It is an idea pushed by Capitalists who want to exploit every facet of existence regardless of the cost to every other plant, animal, insect, the environment, and human that exists, or ever will exist.

    Again, as I have delineated, the U.S. Constitution ESTABLISHES a Government whose purpose it is to REGULATE COMMERCE.

    Free market economics, while popular for some who have no understanding of the foundations of this Nation, is a completely foreign idea. Ironically, France… a Socialist nation, is an excellent example of a laizzaiz faire tradition.

    You have bought into an idea which is completely against the Constitution of the U.S.A. Sorry, but without regulation, there is no structure to punish wrong doers. There would be no way for the citizens of this nation to prevent unethical behavior. There would be no way for victims of those irresponsible business practices to find due process. There would be no way for morality to even attempt to have a role to play. There would be no way to find out who the bad players are. There would be no standards of right and wrong. And, there would be no justice.

    Sorry, but a society is not built upon trust absent of responsibility for one’s actions. The minute someone like you says… “we don’t need regulations. Trust me, I’m honest.”… then wise people know that it’s time to say… Katie! Bar the doors! Somebody wants to sell me a sight unseen used car!

  • Anonymous

    Jon,

    First let’s help remove your spin. I have never said, “we don’t need regulations. Trust me, I’m honest.” What your cumulative conversation has indicated is you put faith in Washington D.C. bureaucrats to be honest and trust the regulations they create are for the benefit of citizens.

    Second, let’s help remove your attempting to meld free markets into a laizzaiz faire tradition.

    Finally, your sentiment that people can not be trusted without regulatory consequences is an indicator on your trust in your choices. Certainly, the “wrong doers” do not respond to regulations as their motivations override the sense of do onto others as you would have them do to you or the consequences of their choice. As far as knowing who the bad players are, the communication tool known as the internet provides much more timely information than any bloated government bureaucracy. Consumers have never had as much citizen to citizen information available to assist in making choices as exist today or will exist tomorrow.

    So as previously said, I prefer freedom of making my choices versus the controls of far removed political bureaucrats’ massively complex regulations. I accept responsibility for my choices rather than abdicate to the Washington D.C. politicians.

  • JonThomas

    From my second comment…

    “I do agree with you that it is obvious that both – politicians, and business – are engaging in the type of crony capitalism which caused the deregulation. It’s good to see someone who realizes that election funding most be reformed, and who speaks with similar language to those who realize that corporations are not people, and that when money is equated to ‘speech,’ the playing field is not level. There can be no reform until these issues are settled.

    However, this is not Socialism. This is Crony-Capitalism. It is not the Government (The People) who are pulling the strings. It is a Plutocracy of Crony-Capitalists!”

    From my 3rd comment…

    “‘Bureaucrats’ without the backing of private and corporate business interests, and what is known as ‘The Revolving Door’ are generally mid-level wage employees with little power to affect anything other than their specific jobs. It’s only because of the political party system, being funded and controlled by monied interests, that Government has made the recent changes allowing the crises.”

    and

    “When we see Congress People lobbied, advised, their campaigns funded, and the actual laws written by business interests whose goals are directly related to financial profit (often at the expense of the tax payer, and the U.S. citizenry when they are seen as little more than ‘consumers,’) it is NOT BUREAUCRATS who are solely to blame. It is an entire Crony-Capitalist system.”

    Your statement above….

    “What your cumulative conversation has indicated is you put faith in Washington D.C. bureaucrats to be honest and trust the regulations they create are for the benefit of citizens.”

    definitely misrepresents what I have said thus far.

    I think it’s pretty obvious that perhaps you are misunderstanding what I am saying, I’m not explaining myself well, or you are miss-characterizing my words.

    I will try once again… The regulations that have the potential of benefiting citizens are being gutted by both:

    - politicians of all ideologies and political affiliations whose campaigns are funded by, lobbied by, and who turn over the role of forging legislation to… extremely well funded business interests.

    and

    - bureaucrats who are brought into government after having worked in key positions of corporate and businesses. They are then tasked with regulating their former employers and ‘friends’. And… who, after serving in government positions, go back through that revolving door to those same companies.

    Never have I said I trust the regulators or the regulations. If my words are to be ‘parsed,’ what I have said is that the framers of the U.S. Constitution recognized that regulation of commerce is necessary for the General Welfare of The People of the U.S.

    I have also repeated ad nauseaum (mainly because I’m tired of hearing the constant use of the term ‘free market’ from people who are ignorantly misinformed and indoctrinated by disinformation campaigns) the fact that whether anyone likes it or not, the U.S., by Constitutional foundation, is structured to accept Socialist policies… especially those of regulation.

    The correct number of regulations has nothing to do with ‘big government’ or ‘small government.’ The proper amount of laws and regulations is the number that it takes to keep the citizens of this country safe from those who, for whatever reason, would harm the citizens of this country.

    The truth is… even though we’ve heard it over, and over, and over, in an attempt to inculcate Americans with the idea… there is no constitutional ‘right’ to a free market. Rather, it is exactly the opposite. The People have a right to expect a the market to be regulated in a way that protects, not self-serving business interests, but The People themselves.

    I think we’ve pretty much covered all the other ideas we’ve bandied back and forth. :-)