- The Washington Times - Wednesday, February 17, 2010


Last November, Presi -dent Obama created a new financial task force by Execu -tive Order. Led by the Department of Justice, it involves more than two dozen government agencies, including Treasury, the Department of Housing and Urban Development, the FBI and the Department of Homeland Security, which are combining forces to combat financial and mortgage fraud, Recovery Act and rescue fraud, and financial discrimination.

If the task force does something new and impartial relative to what existing oversight efforts have historically done, and if they innovate to align their actions, methodologies, and technologies to produce measurable and meaningful results, then it’ll be terrific.

But there are more than 5,000 cases of alleged fraud at financial institutions pending investigation at the Justice Department, and 2,800 cases of mortgage fraud being investigated at the FBI. If the two agencies can’t handle their existing investigatory caseloads, how will they handle an increase in responsibility? Does Justice have the budget and capability to hire analytical experts? If staff is transferred, how many other critical initiatives will lag when these analysts leave their existing jobs? Both the Securities and Exchange Commisssion (SEC) and the Financial Crimes Enforcement Network (FinCEN) are on the task force - are they backlogged, too?

It’s difficult to have an accurate perspective on the reported backlogs without more details. We don’t know how many firms were named in these complaints, or how many of the 7,800 pending investigations relate to the same firms. We don’t know how many licensed securities representatives or mortgage brokers might be involved, from which states the complaints originated, the specific nature of the complaints (e.g., mortgage, insurance, or brokerage fraud), or the inherent risk to the financial system based on which firms are named.

Still, should we recognize the writing on the wall? The Sarbanes-Oxley Act was hurriedly enacted to calm investor sentiment after Enron’s failure. But it could never do what the average person might have believed it would do, and what financial professionals knew it couldn’t - namely, to prevent Enron-scale fraud. At least one author of the bill has suggested he’d have written it differently if he’d had more time.

However well-intentioned, however honorably inspired, is the promise of increased regulatory oversight in the form of a task force destined to become another calming gesture?

Fighting financial crime is hardly a new concept. But financial wrongdoing stems less from failed regulation than from failed leadership - failed leadership that is enabled by competitive earnings pressure and a powerful lobby.

Regulations and task forces don’t fix poor leadership in any sector, nor can they prevent fraud when someone is deeply committed to perpetrating it.

The fact that no one at the SEC seemed anxious to investigate Bernard Madoff despite repeated warnings certainly raises questions of failed SEC leadership. But a case backlog might also raise questions as to whether inaction has simply become as institutionalized as the actual wrongdoing. Even though corporate responsibility always rests with management, some firms see little incentive in examining excessive risk taking or in acknowledging wrongdoing until circumstances force a disclosure - or until profits plummet. Something else, almost anything else, has to be tried, and a task force is born.

We are facing a business problem that transcends special interests, and it must be analyzed with a bigger picture in mind. If failed leadership is a true culprit, then regulators must be staffed sufficiently and completely to do the job at hand. They need funding to look swiftly at those 7,800 cases, identify patterns in the data, and take prompt action. Robust detective controls and data analysis efforts are critical.

Financial regulation can work. Lawmakers should certainly continue to close existing regulatory loopholes and establish meaningful regulation where it makes sense to do so and where it truly mitigates the risks that lead to crisis. We have the ability to reverse engineer excessive exposures and frauds to understand what makes them possible, and to evaluate regulatory effectiveness on that basis. A series of mandatory regulatory “sweeps” might also help in this regard, to identify whether the same risk conditions that caused past corporate meltdowns are still present.

Regardless of any increased regulatory effort, corporations must take greater responsibility for their own leadership, internal controls and corporate ethics. Boards of directors and management teams must be objective enough and involved enough to demand this. Reducing bonus awards by a few percentage points might even help pay the tab.

There are no easy or inexpensive answers. There is a lot of choice, and a lot of history to guide us, but we have to get it right. The Obama administration will need highly trained analysts, responsive management, great technology, and incredible courage, and I wish them Godspeed.

Because the last thing we need when the next crisis blows is another calming gesture.

Andie Ryan is a Wall Street veteran, most recently as managing director at Bear Stearns, and is author of the financial thriller “Shakedown” (Lenox Road Publishing, 2009).

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