[DEBATE] : Without regulation, the invisible hand of the market is robbing us blind. By Al Meyerhoff
Riaz K Tayob
riazt at iafrica.com
Tue Jan 15 10:21:23 GMT 2008
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
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
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administration, Congress repealed a Depression-era law called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
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
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