Crime and Lack of Punishment

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WE’RE HEARING…makers of a PBS documentary believe regulatory officials should have done more to find executives involved in the massive mortgage-related securities losses taken during the downturn that they could successfully levy criminal charges against.

I came away understanding the frustration but also wanting to clarify that doing so is less important than implementing and enforcing reform of the system as a whole.

Sure, we all want to punish when things go wrong and we want what sounds like appropriate punishment. But a more disturbing point in the documentary that is not necessarily acknowledged and more of a priority is the fact that the problem was a systemic one.

Can you fairly punish or blame an entire system, and which part of the system do you single out?  

Certainly, groups like Occupy Wall Street and others have argued so that the sell-side securities market mentality in conjunction with lax mortgage underwriting between 2005 and 2007 are largely to blame.

But others like veteran Wall Street researcher and executive Mark Adelson tell us the causes are much more far-reaching and complex. And as one regulatory official grilled in the documentary points out, the ramifications of taking a sweeping enforcement action that could jeopardize a large financial system are enough to keep you awake at night. The documentary is dismissive of this point but I’m not.

What regulators should be blamed for is allowing this to occur on too large a scale, either because recent history shows existing rules weren’t sufficient or that they weren’t enforced well enough.

The latter is where the documentary’s main point holds some water. Identifying a “criminal” level of behavior and showing that one “can’t get away with it” has some merit. And the RMBS Working Group should live up to its promise to look into both criminal and civil actions, or do a better job of explaining why the latter are not as feasible as the former if indeed they are not.

But given that government resources are scarce, I think there need to be priorities, and for regulators this means putting an emphasis on preventing financial crimes going forward rather than retroactively.

When it comes to a systemic problem, reforming the system’s the main way to do this, and it needs to be done in consultation with the industry so that it’s feasible. These won’t and haven’t always been friendly discussions, but they don’t need to be completely adversarial either. Both should be aligned in wanting to avoid to the extent possible the kind of market-driven punishment suffered by consumers, the government and businesses during the downturn.

Bonnie Sinnock is managing editor of National Mortgage News and editor of Origination News. She has been covering the mortgage industry since 1995.

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