07
Oct
08

Government regulation to the rescue?

There’s a lot of righteous chatter in the media these days about dangerous lending practices and how “the government” ought to regulate them out of existence.  There’s not nearly as much coverage of the fact that the US FedGov did in fact have regulations and agencies in place to prevent (some of) those practices, and those regulators failed miserably.

  • A Failure of Regulation (The Liberty Papers)
    (Rather than link directly to the source article, I’m linking to TLP’s article for its excellent links on regulatory capture and so forth.)

Not surprisingly, it takes Warren Buffett to point out the elephant in the room:

QUICK: If you imagine where things will go with Fannie and Freddie, and you think about the regulators, where were the regulators for what was happening, and can something like this be prevented from happening again?

Mr. BUFFETT: Well, it’s really an incredible case study in regulation because something called OFHEO was set up in 1992 by Congress, and the sole job of OFHEO was to watch over Fannie and Freddie, someone to watch over them. And they were there to evaluate the soundness and the accounting and all of that. Two companies were all they had to regulate. OFHEO has over 200 employees now. They have a budget now that’s $65 million a year, and all they have to do is look at two companies. I mean, you know, I look at more than two companies.

QUICK: Mm-hmm.

Mr. BUFFETT: And they sat there, made reports to the Congress, you can get them on the Internet, every year. And, in fact, they reported to Sarbanes and Oxley every year. And they went–wrote 100 page reports, and they said, ‘We’ve looked at these people and their standards are fine and their directors are fine and everything was fine.’ And then all of a sudden you had two of the greatest accounting misstatements in history. You had all kinds of management malfeasance, and it all came out. And, of course, the classic thing was that after it all came out, OFHEO wrote a 350–340 page report examining what went wrong, and they blamed the management, they blamed the directors, they blamed the audit committee. They didn’t have a word in there about themselves, and they’re the ones that 200 people were going to work every day with just two companies to think about. It just shows the problems of regulation.

That’s some fine government oversight, there.  Somehow I doubt that the usual response of “it’s not working, do it harder” is going to make things any better… but then again, it rarely does.

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