Regulation, Oversight and Auditing Badly Needed

Today is April 15 and I hope everyone has remembered what day it is. You have until midnight to file your tax return unless you are getting an extension.

Today is also the 61st anniversary of Jackie Robinson breaking into Major League Baseball. For those of you who may not know the history of race and Major League Baseball, before April 15, 1947, there were no African-Americans or other men of color playing in the Major Leagues. Today, 61 years later, men of color from all over the world play baseball and other professional sports in America today. This year, a presidential election year, there is an African-American man (and a white woman) running to be their party’s candidate for the presidency. While no society is perfect, things have changed over the last 61 years. Perhaps not fast enough to suit all of us, but as someone who has read a little history over my 65 years, on a historical basis change is taking place very fast in America today. TV, the Internet and newspapers can lead the way if they have the desire and talent to educate and inform.

The Sunday Business Section of the New York Times was filled with business articles about the failure of regulations, oversight and auditing that lead up to the present financial service industry crisis. After the train wreck in the financial services industry, everyone now has an opinion and a few have even taken the effort to start digging into the details of how business was conducted that brought about the mess. Those, like myself, that offer an opinion are OK in my book, but the real praise should go to those reporters that dig and write detailed accounts of where and when the wheels first started to come off. For them I have a great deal of respect, especially when they get it right because this stuff is more than a few rungs up the ladder for its degree of difficulty.

To analyze the mortgage train wreck, the writers go back to the point before the train left the station. Big mistakes were made right from the get go. People knew that corners were being cut and the proper reserves were not being held back for mortgages that would not meet the test for securitization. Yet, they went a head any way and continued the practice until bankruptcy was the only avenue left for management to take.

Back in the mid-1970’s, I had the opportunity to work with a very bright and nice man. His name was Joe Hutton, and he was my boss and the head of the investment division of the trust department at the Provident Bank. I remember him explaining to me the importance of keeping files on the stocks we used in the trust account portfolios. You need to have a file and show that you tried to bring your research and intelligence to bare even if you lost money on a stock, he said. Why? I asked. Because, he said, they can fault you for not doing the research and keeping the file, but they can not fault you for being stupid.

The mortgage meltdown was not so much a matter as being stupid as being greedy.
I once had a brief discussion a few years back with a man a little older, who was a broker for many years in Cleveland, about greed. We were discussing the events that lead to some one that was convicted of “cherry picking stocks” and sent to prison for doing that to pension funds under his management. I said, this particular person was too greedy. His response to me was that there is no such thing as “too greedy.” I disagree. There are a lot of greedy people in the financial services industry. Some stay within the law, while others do not. Those that find it necessary to break the law, in my opinion, are too greedy.

The present financial crisis could have been averted had the people that make the laws wanted to come down on the side of safety and proper regulations and oversight. The problem is that the leaders that make the laws do not know enough about the financial services business and banking industry to think for themselves. As a result, they hear from those that have the money to lobby and push their agenda. I will grant you that regulation is another layer of expense, but so are the police and fire fighters, the military and so many other safety nets that we construct to protect society. Does it not make more sense to have effective regulation, oversight and auditing, than to be putting out the billions of dollars now required to clean up the mess?

The argument that New York and the United States will lose business to Europe (London) and Asia (Hong Kong) if the government adds new regulations does not, in my opinion, hold up. The government needs to be concerned about the erosion of the purchasing power of the dollar. The decline in the value of the dollar and the size of our national debt are more likely to be the reasons why the investment banking business may shift away from New York. It will not be because of better regulations. But which congressional member knows that?

The investment banking business has grown to such a level of complexity that many of our congressional leaders are left in the dark. Some might have a rough idea as to what is going on, but the majority are clueless. If you listen to the comments and questions at the hearing, both from senators and members of the House, it is clear just how little they really know and understand. Given past performance, I think the financial services industry will continue to have meltdowns every so many years. Eventually, through our own greed and mismanagement, the United States will lose its place in the world of finance, if it has not already done so to some extent. Stay tuned.