No One Would Listen: A True Financial Thriller by Harry Markopolos (rainbow fish read aloud .txt) 📗

and if teams within one regional office don’t coordinate with each other, it makes no sense to maintain all of our financial industry regulatory agencies—the Federal Reserve, the Office of the Comptroller of the Currency (OCC), the Federal Deposit Insurance Corporation (FDIC), the Commodity Futures Trading Commission (CFTC), and the SEC—as independent entities. It gets worse: Each of these five regulators would have its own internal computer system—and none of them would have the slightest idea what any of the other regulators were doing with respect to a specific company.

Our current regulatory system was cobbled together in the 1930s, and the financial industry of that period had absolutely no resemblance to what exists today. But regulators in many cases are still bound by the basic structure created at that time and just don’t have the tools to deal with financial institutions magnitudes larger than those that existed decades ago. Unfortunately, these agencies have to confront gigantic “too big to fail—too big to succeed—too big to regulate” multinational corporations like Citigroup, Bank of America, American International Group, and all the others. While these companies once were vertically oriented (they operated within a certain narrow field), now they may have subsidiaries operating banks, insurance companies, mortgage lenders, credit card companies, money management arms, investment banks, and securities broker-dealers, and they’re operating both domestically and internationally. Relying on several separate regulators working independently to spot problems is like trying to rein in a beehive with a chain-link fence. If the SEC can’t coordinate two examinations within its own agency, there is little reason to believe that five separate agencies can successfully coordinate their examinations.

It seems to me that the existence of so many financial regulators leaves gaping holes for financial predators to engage in what I called regulatory arbitrage. They find those regulatory gaps where no agency is looking or there is some question about which agency has the oversight responsibility, and they exploit them. I’ve seen corporations in which employees have two very different business cards. One card identifies them as a registered investment adviser, which falls under SEC regulation, while the other card has their bank title, which falls under the control of banking regulators. It’s a very clever ploy: When the Federal Reserve comes in to question them, they claim to be under the SEC’s jurisdiction, and when the SEC shows up, they explain they’re under the Fed’s jurisdiction. If both the Fed and the SEC were to show up to search for fraud in the company’s pension accounts under management, that company could claim, “I’m sorry, but those are Employee Retirement Income Security Act (ERISA) accounts and they fall under the Department of Labor, so unfortunately you don’t have jurisdiction.” Obviously this structure allows firms to play regulators against each other, and literally to choose to be regulated by that agency least likely to pose any problems.

The objective should be to combine regulatory functions into as few agencies as possible to prevent regulatory arbitrage, centralize command and control, ensure unity of effort, eliminate expensive duplication of effort, and minimize the number of regulators to whom American corporations must respond.

It seems logical to me that one super-regulatory agency be formed, perhaps called the Financial Supervisory Authority (FSA). It should have all of the security and capital markets and financial regulators underneath it. To simply command and control, to ensure unity of effort and eliminate expensive duplication, I would place under its command the Fed, the SEC, a national insurance industry regulator, and some form of Treasury or Department of Justice law enforcement entity with a staff of dedicated litigators responsible for carrying out both civil and criminal enforcement for those three combined agencies. All banking regulators should be merged into the Fed, so that only a single national banking regulator exists. Pension fund regulation should be moved from the Department of Labor to the SEC. The Commodity Futures Trading Commission should be brought into the SEC, which would then become the sole capital markets regulator.

To ensure the highest degree of coordination, this super-agency would maintain a centralized database, a super-duper CALL center so that the details of any enforcement action by one agency would be online for all the other agencies to see and utilize. Spread the knowledge, share the experience, be bigger than the biggest bad guys. Bernie Madoff got caught for the first time in 1992, but apparently none of the investigators after the turn of the century knew about it. Cross-functional teams of regulators from the SEC, the Fed, a national insurance regulator, and the Treasury or Department of Justice should be sent together on audits whenever possible to prevent regulatory arbitrage. The SEC, the Fed, and the national insurance regulator would be responsible for the inspections, while the Treasury or Department of Justice would be responsible for taking legal action against offenders. American businesses need and deserve a simple, easy-to-follow set of rules and regulations, and they deserve to have competent regulation. Financial institutions currently pay high fees to support regulation, but neither they nor the public are getting their money’s worth.

Thirteenth (lucky thirteen), take away the “Get out of jail free” cards. Right now there is no accountability in government. None. Following the accounting scandals that led to the demises of Enron, Global Crossing, WorldCom, Adelphia, and the others, Congress passed very strict laws that held corporate CEOs and CFOs accountable for their companies’ financial reporting. Under the Sarbanes-Oxley Act (SOX), these leaders can no longer claim that they don’t know what is happening in their companies. If a CEO and CFO has signed off on a company’s books, he or she has assumed responsibility for the numbers; if those books are materially inaccurate, this officer faces a 10-year prison sentence. (That has gotten their attention.) And if they have been willfully cooking their books, they face a 20-year sentence.

I propose that Congress pass legislation that holds agency heads responsible for the successes or failures of their agency under their watch. If an agency falls