...there are unquestionably problems at the Commission and reforms that are necessary. There are also reasons to believe that the problems rest not with the staff but with ideological commissioners like Paul Atkins, who fought the imposition of penalties on corporate wrongdoers. (Robert Brown, The SEC and Responsibility for the Financial Crisis)
And there you have it in a nutshell: ideology run amuck, deregulators out of control, regulators who don’t believe in regulating, and a Congress, that tosses out 70 years worth of Depression-era banking and investment regulation for Wall Streets Barbary Coast Impersonators -- with the complicit lemmings in subsequent Congressional Sessions falling in line.
Supervisors themselves showed a certain blinkered view when it came to banks' and securities firms' relationships with hedge funds, and a huge fund like LTCM in particular. The US Securities & Exchange Commission (SEC) appears to assess the risk run by individual broker dealers, without having enough regard for what is happening in the sector as a whole, or in the firms' unregulated subsidiaries. (Lessons from the Collapse of Hedge Fund, Long-Term Capital Management by David Shirreff)
The failure to look at industry trends, economic cycles, and cause and effect as an investigatory tool, and instead, to depend on ‘relationships’ with individual brokers and investment banks left the nation’s regulatory checks and balances dangerously ineffective. After all, if you don’t pay attention to what is going on in the industry, if you are not paying attention to geopolitical influences on the market place, if you allow past relationships to influence your audits and investigations, why not change the name of the agency from the Security and Exchange Commission to the Good Old Boys Club and save the taxpayers the bother of actually thinking regulatory agencies are supposed to REGULATE.
Some of the credit that was extended to individual corporations exceeded the GNP of some small nations. Yet, no red flags were tripped, nobody questioned the cronyism, revolving door between industry and regulatory agency. Some of the employees of the banks invested heavily in the corporations they lend money to, creating a serious conflict of interest situation.
Second were the banks, which conspired to give LTCM far more credit, in aggregate, than they'd give a medium-size developing country. Particularly distasteful was the combination of credit exposure by the institutions themselves, and personal investment exposure by the individuals who ran them. Merrill Lynch protested that a $22 million investment on behalf of its employees was not sinister. LTCM was one of four investment vehicles which employees could opt to have their deferred payments invested in. Nevertheless, that rather cozy relationship may have made it more difficult for credit officers to ask tough questions of LTCM. There were accusations of "crony capitalism" as Wall Street firms undertook to bail out, with shareholders' money, a firm in which their officers had invested, or were thought to have invested, part of their personal wealth. (Ibid)
Now, we have an alleged conflict of interest, where bank employees and officers heavily invest in projects that their institutions sell loans to, and we top that off with regulators who are too cozy with the banks they oversee to ask hard questions. Hence, our fragile house of cards has several layers of due diligence failure.
They say fire cleanses. The catastrophic meltdown that we are currently experiencing was fueled by crony capitalism in Congress, the banks, brokerage houses and regulatory agencies. Congress lit the match and the whole thing went up in flames, which now threaten economies worldwide. The question of the day is: what’s going to be left when the fire burns out?
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