Regulating Banks

This American Life (my favorite radio show) produced a recent episode on the current economic meltdown, called The Watchmen. They explore who was supposed to be regulating the Wall Street companies before they collapsed and required trillions in taxpayer bailouts.

We all know now that mortgages were being handed out like handbills at a political rally or maybe more like credit card enticements we get in our daily mail - regardless of anybody's ability to pay them off. It turns out many jobless people were given a mortgage while the bank execs and jr. execs were swimming in bonus millions – soon to be joined by creative insurance companies like AIG. But who was watching the store for us depositors and taxpayers and regular people who work far from the financial sector doing little jobs like teaching, construction, nursing, and firefighting?

They trace down three regulating bodies that could have put an early stop to the whole thing, but didn't. One was the Office of Thrift Supervision. One was Congress which has committees overseeing the banks. One was the ratings agencies like Moody's and Standard & Poor's. ("Poor" must be some kind of joke for that firm.)

The Office of Thrift Supervision is funded according to the number of banks and holding companies that it regulates. When banks close OTS'ers lose their jobs. Congress members depend dearly on the campaign contributions from the banks they regulate. The ratings companies, it turns out, are also paid by the issuers of stocks and bonds that they rate. What's wrong with this picture?