The Times makes a point that has appeared elsewhere but is one that nonetheless bears re-emphasizing: supposedly independent watchdogs—this time government banking regulators, no less—are funded by those they regulate.
Because each agency receives its funding from fees paid by the banks or thrifts they regulate, critics have long argued that they often treat the institutions they regulate as constituents to be protected.
But even as we celebrate good work, it’s fair to point out that the piece comes fully eight months into the crisis, advances only marginally what is already in the record, and includes material that was publicly available at the time the events were happening. It is, in the end, a particularly well-executed example of explanatory reporting, a time-honored and respected journalistic form that has but a single limitation: it is, by definition, late.
No problem. But just as lenders, rating agencies, and regulators should draw lessons from the mortgage calamity, so, too, should business journalists. Is the lesson that only muckraking investigations have merit? No. But to move beyond its current role of financial coroner, drawing chalk lines around a financial system that has already hit the pavement, the business press must change its thinking: It must take regulators as seriously as it takes the institutions they regulate. This means sustained, active beat coverage of the OCC, FDIC, and the Fed’s regulatory function and other regulators.
The business press has for years treated regulators, I believe, with the soft bigotry of low expectations. I think I know why, and I’ll get to it. The point for now is that so little has been expected of bureaucracies that, by law, and in theory, have enormous power—power for good, by the way—that reporters and editors have treated them as an afterthought.
And yet, think of it this way: bad or compromised regulation helps explain the subprime story. And effective regulation could have prevented it.
The Times says watchdogs missed clues:
Had officials bothered to look, frightening clues of the coming crisis were available.
I would add that frightening clues of regulatory dysfunction also “were available,” in spades.
It’s not just that this lending bubble occurred in the context of a decades-long rollback of financial and banking regulation, something that is hardly a secret.
No, this particular regulatory collapse was preceded by the spectacle of federal regulators publicly fighting not banks or their affiliates over lending practices, but state banking regulators who were trying to come to grips with the very lending abuses that haunt the financial system today.
It started—who remembers?—when acting comptroller and potential Medal of Freedom recipient Julie Williams, siding with a group that includes J.P. Morgan Chase and other big banks, went to court to block then-New York Attorney General Eliot Spitzer’s attempts to enforce New York’s anti-predatory lending laws on nationally chartered banks. The OCC argued that national banks should be exempt from state lending laws.
The OCC is part of the Treasury Department, which Paulson now oversees:
This, Audit readers, started in early 2003. Nearly Five. Years. Ago.
As The New York Times reported in December of that year:
State officials and consumer groups have opposed the [OCC’s] move to override state laws aimed at protecting consumers, including those to curb ‘predatory’ lending practices.
These lending abuses include exorbitant fees and interest rates and
payments for undisclosed insurance products.
But the comptroller has the power to override state banking laws.
‘Federal pre-emption is not unprecedented,’ a spokesman, Bob Garsson, said.
And remember, the OCC wasn’t just fighting Spitzer. Actually, it was Michigan that challenged OCC preemption in a case that went to the U.S. Supreme Court, and attorneys general from all fifty states filed amicus briefs in support.