[DEBATE] : Without regulation, the invisible hand of the market is robbing us blind. By Al Meyerhoff

[Riaz K Tayob]

Financial forces run amok

Without regulation, the invisible hand of the market is robbing us 
blind. By Al Meyerhoff

January 14, 2008

For about the last 30 years, our nation has been traveling the 
deregulation highway, a road with no rules or direction. We have let 
enterprise be free, business go unfettered, the good times roll. And 
roll they have, but to where? One stopping point: the current mortgage 
crisis.

Recently, however, there has been a slight regulatory bump in the road. 
After its chairman acknowledged that "market discipline has in some 
cases broken down," the Federal Reserve released new mortgage lending 
rules "to protect consumers against fraud [and] deception." Banks making 
sub-prime loans will be required to actually consider the borrower's 
ability to pay and confirm a borrower's income before handing over the 
money. Now there's a radical notion.

Disclosure also will be required of those nasty little (actually not so 
little) "bonuses" that brokers receive for writing loans at rates higher 
than a poor, unwitting consumer can afford.

To some, they may not be much, but the absence of such rules encouraged 
the predatory lending practices that have left millions of Americans 
facing foreclosure.

Let's take a look at how we got here before the deregulation highway 
takes us over a cliff.

The Reagan revolution was the beginning, when we started seeing 
rollbacks in government safeguards, such as those protecting food, 
drinking water and the environment. Then came the savings and loan crash 
in the 1980s, a pit stop that cost taxpayers $150 billion. President 
Clinton added the "bridge to the 21st century," along with his 
proclamation that the "era of big government was over." During his 
administration, Congress repealed a Depression-era law called 
Glass-Steagall, which kept banking and investment separate. Henceforth, 
banks could offer investment advice as well as loans -- one-stop 
shopping on the road to disaster.

However, deregulation of the markets really took hold in 1994 with the 
GOP's "Contract with America." The first to go were the nation's 
securities laws. Over a Clinton veto, Congress enacted the Private 
Securities Litigation Reform Act, making it far more difficult to prove 
securities fraud. Said to be necessary to free the markets of red tape 
and trial lawyers, it gave the green light to corporate chiefs such as 
Ken Lay and Dennis Kozlowski and led to the Enron, WorldCom, Tyco and 
HealthSouth fraud debacles. As a result, shareholders lost hundreds of 
billions of dollars from a wave of fraud unseen since the Roaring '20s 
-- and maybe not even then.

A declawed Securities and Exchange Commission, a neutered plaintiffs' 
bar and missing congressional oversight empowered Wall Street to push as 
far as it could. Facts were hidden, self-dealing was rampant and deceit 
rewarded. Congress finally intervened in 2002 by passing the 
Sarbanes-Oxley Act, imposing strict new accounting rules and other 
controls on business. That law is now under siege.

The current sub-prime mortgage mess is simply the latest wreck on the 
highway. Banks have been left to their own devices, unchecked by 
government watchdogs or pesky regulations. Interest rates on millions of 
mortgages are set -- like time bombs -- to accelerate in
2008. Defaults of $1 trillion are predicted -- affecting not only large 
institutions such as pension funds, hedge funds and universities but 
also countless average Americans. Hand-wringing time? Just consider 
these recent events:

* Moody's and other such agencies have threatened to downgrade the 
ratings of securities that are based on mortgages that allow accelerated 
payment -- with far more bad paper still out there.

* To avoid bankruptcy after its stock plummeted because of record high 
foreclosures, Countrywide Financial is being acquired by Bank of America.

* Money managers including Bear Stearns and investment bankers 
Citigroup, Merrill Lynch and Washington Mutual are under investigation 
for fraud and allegedly making Enron-like off-balance-sheet transactions.

* Of the nearly 3 million sub-prime adjustable-rate loans surveyed by 
the Mortgage Bankers Assn., a record 18.81% are already past due.

What clearer evidence do we need that markets do not regulate 
themselves? Yet the government response has been mostly timid.

The Fed's recent rules allow action against predatory lenders only on 
showing a "pattern and practice" of unlawful conduct; disclosures of 
"yield-spread premiums" -- kickbacks -- can still remain buried in a 
mountain of loan documents. Prepayment penalties make it nearly 
impossible for good-faith borrowers to get out from under bad loans. The 
Bush administration's voluntary mortgage rate "freeze" will reach less 
than 25% of borrowers.

Politicians of every stripe are running scared -- and for cover. Yet 
Republicans and some Democrats (lining up at the Wall Street trough) are 
actually still calling for less regulation of U.S. markets.

It is time -- it is past time -- to get off this deregulation highway. 
We need more government, not less, to protect us against banks and 
conglomerates and the sheer concentration of power they portend.

We need the SEC to change from Wall Street lap dog to aggressive 
advocate for the public interest. Instead of holding round-tables with 
corporate lawyers to find ways to prevent shareholder lawsuits, it 
should act, for example, on an investors petition to require polluters 
to disclose their multibillion-dollar liability for climate change. And 
the Justice Department needs to be the people's law firm again -- not 
house counsel for big banks and corporations, as has been the case in 
every major fraud and antitrust lawsuit before the Supreme Court of 
late. And Congress needs to enact and send to the White House the 
proposed Mortgage Reform and Anti-Predatory Lending Act to strengthen 
consumer safeguards against rapacious bankers and their Wall Street 
enablers.

Change, it is said, is in the wind. There is no better place to start 
than reining in the robber barons of the 21st century.

Al Meyerhoff is of counsel in a law firm specializing in securities 
fraud cases. Copyright 2008 Los Angeles Times