Yesterday I managed to attend one of Washington's famed breakfast briefings, conducted at the charming Capital Hill home of a p.r. firm head. The speaker was Professor Elizabeth Warren, who's now at Harvard Law and also chairs the panel named to oversee the administration of the TARP--the bailout money that started under Paulson/Bush last fall for the banks.
Professor Warren has previously taught at Penn and Texas law schools and is regarded as the preeminent figure in bankruptcy law and policy today. This has always been an interest of mine, going back to my time with the U.S. Trustees and even in practice--and the courses I had with the likes of Vern Countryman and Peter Coogan. She was talking off the record but said little of direct interest relating to the oversight work, which is the sensitive part of her charge.
She quite clearly outlined the three things that had weakened regulation enough to cause the disaster. First, the regulatory process had been weakened by easing of restrictions and rules such as the repeal of the Glass-Steagall Act separating investment and commercial banks; second, the enforcement mechanisms has been weakened by nonuse and by indications from top policymakers that strict enforcement was not appropriate; and third, the regulatory scheme was not extended to cover new "financial products" such as derivatives, and in fact, these were carefully excluded from its coverage.
Then she observed that one thing that might have prevented the subprime mortgage crisis was the barring of collection of prepayment penalties on mortgages. Apparently the enticingly low rates offered were only to sucker people in, after which rates rose and prepayment penalties made getting out more difficult.
I keep wondering if we will really get reform with the same people from Wall Street running the financial area of the government as who got us into this, at least in part. In short, Larry Summers was wrong about deregulation. And Bob Rubin and proteges also were wrong. (It's interesting that no one mentions those "sages" of anti-regulation itself, such as Murray Weidenbaum--they deserve to get relocated to one of Dante's lower circles...)
I also only place a small amount of blame on the SEC. When everyone in power--including the commissioners--preaches non-regulation and non-enforcement, it takes a lot to persevere when whistle-blowers or just people doing their job are not well protected. Also, I recall back when in practice I worked with people who had previously been at the SEC. It was a club of its own--and it probably would have taken enormous courage to take on a member in good standing, as evidenced by his membership on key SEC committees and chairmanship of NASD--such as Bernie Madoff. Notice how you see no columnists among those who preached deregulation talking about that now.