Watch puppies?

At least five kinds of watch-dog organizations that are supposed to protect us, failed to do their job.

First, and most notably, the SEC allowed banks to vastly increase the amount they could lend against a dollar’s worth of assets. Not content with that lapse of judgment, the SEC let its investigations of stock fraud fall from 69 in 2000 to nine in 2007, an 87% drop.

Second, the big auditing firms charged with blowing the whistle on operations like Bernie Madoff’s somehow lost their breath. One of the Big Eight has paid out over $600 million in fines. Others are facing law suits. 

Third, the debt rating agencies, most notably Standard & Poor’s and Moody’s. They’re supposed to rate bonds on their financial solidity. Instead, they blithely gave investment-grade ratings to companies like AIG, Lehman Brothers, MBIA, FreddieMac, and FannieMae, right up to within a few weeks or days of the bitter end.        

Fourth, the Office of Thrift Supervision allowed IndyMac to backdate a capital infusion, enabling the bank (now failed) to keep its “well capitalized” status and collect brokered deposits from other institutions.

Fifth, As Vanguard founder John C. Bogle recently pointed out, mutual funds and money management firms control most of the shares in banks and mortgage companies. They had the responsibility to see what these financial companies were doing, and the power to influence their behavior, but they just let it all go by.

Self-Defense: It’s time to ask our legislators in Washington to provide adult supervision of the financial markets.

Copyright © 2009 Richard Evans and Andrew Bromberg