This made it possible for politicians to interfere in regulatory agencies enforcemnt actions in ways that had not been done since the 1930′s. In Texas both Vice President Bush and Speaker Jim Wright would request the transfer of Bank examiners who asked too many questions about questionable practices at savings and loans. Needless to say this contributed to the size of the S&L crisis.

“Regulatory Capture” is not something inevitable, it is the result of how the American political system works. A weak civil service cannot enforce laws impartially because of political pressure. Community bankers can legitimately fear that only politically weaker small banks would really be regulated by a CFPA.

The second part of the problem relates to how politicians run for office. They beg for money, often from the very same big money center banks who have caused this crisis. Even politicians in midwestern states like Minnesota take money from the big money center banks. This causes community bankers to believe that any regulations put in place would probably be designed to protect the big money center banks from competition. I remind that President Roosevelts first attempt at regulation, the NRA was designed to protect large firms by reducing competition.

Additionally small banks often have to deal with big banks. Sometimes not alienating people they do business with is also a factor.

This is a matter of Religion. A key tenet of the religion of American management is government non-interference because “Government is part of the problem, not part of the solution.” Another key tenet is managerial solidarity–these (mostly) guys would rather do nothing and watch the economy collapse than support intelligent financial reform. These folks all worship @ the First Church of American Capital!

Banks with $50-75mm in assets spending a couple million on executive payroll. Banks with $200mm in assets going heavily into the CDO world.

You just don’t hear about them because they are tiny, so either they float along under the radar or one Friday night they are gone (ever wonder about some of the absurd recovery ratios put up by the FDIC). They know they have a great Jimmy Stewart reputation, they know that under the status quo no one is wandering the Plains looking too closely in their books, and they have absolutely no desire to let the government stick its nose under their tent.

The big boys have learned to live with the government over the past nine months. They have seen the public outrage, they have dealt with the inspectors, they know that when push comes to shove, the feds blink. Whatever plan gets passed will work for the big guys, or it will be made work. They know that now.

The little guys who watch two or three of their number vanish each week can have no such comfort. They won’t get the Goldman waiver. And they know just how fragile their operations are; for example, true mark-to-market would put them under by the hundreds. Better to make a fuss now, when the government is focused on other things, than let the bill linger until a new crisis gives it urgency.

And to add a little history, we have adequate cases where Big Banks did stupid things even when there was no implicit government bailout in the offing. Witness the Panic of 1907, which was triggered when big NY banks underwrote a speculative attempt to corner the copper market, which failed.

I guess the Sheriff only gets to swear in and pin the Silver Star on volunteers wearing white hats at the cowboy movies.

One of the big problems with bank regulation is that regulators are always ten steps behind. Part of that is capital requirements that invite regulatory arbitrage, which became obvious when things blew up. This ultimately determines the consumer products that are available. But even beyond that, there is not a whole lot of interest in understanding risk. So are they really regulating financial institutions or just hanging around for when someone needs to step in and clean up the mess?

Re: Taxes, etc.

I think if we can change capital requirements and enforcement, these changes will channelize the industry (and compensation) considerably (make it less of a big game of hot potato). I do not think giving consumers the Cliffs Notes version of their mortgage is going to change the industry much.

I don’t understand what you mean here. Please explain.

Also, yes, apples and oranges are getting mixed up here. The apples being the need for better monitoring of risk, creating better regulation or bringing back older regulations that worked better, for example, the Glass-Seagall Act, or (horrors socialism) a 90% tax bracket for very high income earners perhaps.

Now for the oranges. Free-market proponents are all for privatization and outsourcing to eliminate or reduce government (taxpayer) funding. There is already tort for abused investors. So that part is covered. But there might be something here in the idea of: Financial bounty hunters who get 60% of the loot they bring in by investigating fraud as out-sourced, self-organized, self-financing law enforcement. It might get pretty scary in the right way. But then again this might be grist for a Grisham type novel. I just watch the movie version.

Don’t worry about the slackers and closet totalitarians in such a scenario — it’s all been thought out. No more loans, derivatives, wall street, dark pools, oligarchs, utilitarian poverty… just bungalows and gardens, solarpanels, and factories and service industry humming along at more than full capacity.

In 3 or 4 generations we could turn this ship right around (providing the asteroid doesn’t hit).

– This has been “Your Utopian Moment” for August 3rd, 2009

If the United States can hire mercenaries to fight the war in Iraq … why not outsource national defence in the form of outsourced securities regulation?

Where would there be legal barriers? The U.S. is famous for its tort system. Why not tort for abused investors?