An Excellent WSJ Piece on Federal Regulators’ Inaction

The Wall Street Journal has an excellent follow to its scoop yesterday that New York is planning to sue Ernst & Young for fraudulent accounting in the Lehman Brothers collapse.

Covering regulation well is difficult because it all too often involves writing about something somebody is not doing. “X happened” is always easier to sell to editors and readers than “X didn’t happen”.

But reporter Michael Rapoport got this one through. He reports that federal regulators are sitting on their hands despite clear evidence of wrongdoing. Everybody knows that, right? How do you make a story out of it? Like this:

In 2001, the regulator of the nation’s biggest banks told its examiners to be on the lookout for firms whose regulatory filings made them look healthier than they really were. That followed guidelines issued in 1990 that said banks could face disciplinary action if their filings “have significant inaccuracies or are ‘window dressed.’ “

But as early as this week, it is the New York attorney general—not the Office of the Comptroller of the Currency, the bank regulator—who is expected to file a lawsuit alleging accounting firm Ernst & Young LLP allowed Wall Street broker Lehman Brothers Holdings to fake its books so it could appear financially healthier.

I like that the Journal goes back one and two decades to point out that regulators are failing to follow their own guidance. One of the problems with beat reporting and with journalism in general is that reporters and editors typically shuffle from beat to beat ever two or three years, and whatever accumulated institutional and historical knowledge they’ve accumulated in their field goes into the dustbin. If you’ve got, say, 21-year-old reporters covering major beats, they’re not going to remember or be informed by what happened in the Asian Flu in 1998, when they were nine years old. Better hope their editors do.

Or that reporters dig into the history enough to learn it, as Rapoport has done here. And he makes the inaction easier to sell by juxtaposing it with New York state’s action.

Meantime, we get a prominently placed quote from Bill Black, the former S&L regulatory bulldog, who is a fierce critic of modern-day regulators and banks. And in bold below, some very smart context about why this is even more important going forward:

“They haven’t taken any significant action in pretty much forever,” said William K. Black, a bank regulator during the 1990s savings-and-loan crisis who now teaches economics and law at the University of Missouri-Kansas City.

“It’s the usual problem of what you do with a ubiquitous practice,” he said.

Bank regulators’ apparent reluctance to crack down on window dressing comes as agencies assume even more authority for overseeing the banking system in the wake of the Dodd-Frank law’s overhaul of financial regulation.

Bank regulators may have pressured some banks privately. But federal regulators have been criticized for their inaction and coziness with banks they police.

And the Journal gives it C1 play. Good work all around.

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Ryan Chittum is a former Wall Street Journal reporter, and deputy editor of The Audit, CJR's business section. If you see notable business journalism, give him a heads-up at Follow him on Twitter at @ryanchittum. Tags: , , , ,