How to Regulate Mortgage Lending, Part 3

This is Part Three of William K. Black's column on regulating mortgage lending. To see Part One, go here. To see Part Two, go here.

Honest accounting is essential for effective regulation – and for integrity. It is also very helpful to prosecuting accounting fraud. The banking industry lobbyists, including the Chamber of Commerce, with Bernanke's support, induced the House to extort successfully the Financial Accounting Standards Board (FASB) to gimmick the accounting rules so that banks would not have to report their losses. This accounting scam was implemented in order to gut the Prompt Corrective Action law (which the Bush and Obama regulators wished to evade) and allow the banks controlling officers to pay themselves and their officers billions of dollars of bonuses to which they were not entitled. This shameful act makes it far more difficult for regulators to take effective action against fraudulent and incompetent bankers. It is essential that we restore honest accounting. Indeed, it is vital that the SEC, the PCAOB, and FASB clean up existing accounting defects, such as the endemic failures to provide remotely adequate loss reserves (ALLL) for mortgage loans, CDOs, and CDS. (The international accounting rules are being interpreted even worse – abusive accounting is an open invitation to accounting control frauds.) The only effective way to implement such a sea change in regulatory mindset is with new leadership. The Obama administration has largely left in place Bush's failed regulators like Dugan (OCC), reappointed failed regulators like Bernanke (Fed), appointed failed regulators like Shapiro (SEC), and promoted failed regulators like Geithner (Treasury). There are financial regulators with a track record of success, regulators who public administration scholars use as exemplars in their writings of effective regulatory leadership. To my knowledge, the Obama administration has appointed none of them and consulted none of them as to the lessons they learned about what worked and what failed. The exception is Paul Volcker, who was never an “in the trenches” regulator, but who is certainly brilliant. He prompted passage of the Volcker Rule in the Dodd-Frank Act. Larry Summers, according to published accounts, deliberately marginalized and excluded Volcker in order to minimize his ability to influence President Obama. Rubin and his protégés fear a real regulator investigating the banks whose nonprime loans and CDOs drove the crisis. Rubin's personal nightmare is a vigorous investigation of Citicorp. Any real regulator would make that nightmare a reality within a week. The chances that the administration will appoint a senior banking regulator with a track record of success remain small.

Bill Black is the author of The Best Way to Rob a Bank is to Own One and an associate professor of economics and law at the University of Missouri-Kansas City. He spent years working on regulatory policy and fraud prevention as Executive Director of the Institute for Fraud Prevention, Litigation Director of the Federal Home Loan Bank Board and Deputy Director of the National Commission on Financial Institution Reform, Recovery and Enforcement, among other positions.

Bill writes a column for Benzinga every Monday. His other academic articles, congressional testimony, and musings about the financial crisis can be found at his Social Science Research Network author page and at the blog New Economic Perspectives.