Blogs > Your Money

Dave Patterson and Erin Preston, a father-daughter team of Certified Financial Planner® licensees, provide thoughts and suggestions on a broad collection of personal finance topics.  Information provided in this BLOG is intended to be of a general nature and may not be appropriate for all situations.  Readers should consult with their own financial advisors before relying on any information contained herein.

Friday, April 23, 2010

The Weak Links of Financial Regulatory Reform

Now that the health care bill has been passed, Congress has turned its attention to financial-regulatory reform. As with the healthcare legislation, the Republicans and Democrats appear to be in agreement about very little, other than something needs to be done. Most Americans seem to want significant reforms to help prevent another crisis like we’ve just experienced. Clearly, Congress will do something, since both sides need to take some action before the November elections.

Whatever they do, one thing seems very clear. There will still be financial crises in the future. There will still be market bubbles. There will still be serious recessions. And, there will still be Ponzi schemes and fraud committed by financial and non-financial institutions alike. The best we can hope for is that the revised regulations allow for earlier recognition of problems while at the same time avoid stifling the operation of our markets.

Probably the biggest reason reforms will have limited success is their inability to deal with individual human greed and incompetence. A recent article in the Saturday Wall Street Journal titled “Report Says Regulators Missed Shots at Stanford” by Michael Crittenden and Kara Scannell (April17, 2010), stated that “The Securities and Exchange Commission suspected Texas financier R. Allen Stanford of running a Ponzi scheme as early as 1997 but took more than a decade to pursue him seriously, according to a report further tarring the agency that missed Bernard Madoff’s huge fraud.”

The article went on to say that “SEC examiners concluded four times from 1997 to 2004 that Mr. Sanford’s businesses were fraudulent, but each time decided not to go further. Reports about the Madoff Ponzi scheme indicated that the SEC also failed to adequately investigate his operations.

There will always be greedy people. There will always be those who overlook the obvious or have conflicts of interest that motivate them to overlook the obvious.

A number of factors have been said to contribute to the crisis of 2007 and 2008. Low interest rates fueled the housing market. Warnings about problems at Fannie and Freddie were ignored long before the crisis started. Congress itself pushed the mortgage industry to give mortgages to low-income people who really couldn’t afford them. The financial institutions created complex financial instruments that few really understood. Individual Americans ran up their credit card bills and took out second mortgages to buy things they really couldn’t afford. There are many to blame for the crisis – probably others not mentioned here.

So whatever Congress does in the way of regulatory reform, it’s not likely to prevent another crisis down the road. We can only hope that it provides for earlier recognition of problems and helps reduce the magnitude of the resulting damage.


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