Incompetence or Corruption: You Choose

In the fallout of the financial system implosion of the fall of 2008 there has been some interesting fact finding that is now coming to light. In general whenever the financial system goes through a major turbulence it is instructive to look at government actions (or lack thereof) before passing judgment. More often than not the consequences of government meddling in monetary policies is a disaster waiting to happen. Whether in pursuit of servicing special interests or pure ignorance of our monetary system we have a government induced financial crisis in America every generation. You'd think the same mistakes would not be repeated again and again - you'd think.

Interestingly, the seeds of the current crisis were sown in the 1990's. With the revised Community Reinvestment Act and the new rules for Fannie Mae and Freddie Mac coupled with the deregulation of the investment industry that allowed banks and insurance companies to become investment houses the stage was set for abuse on a massive scale. This much has been chronicled - thoroughly.

We are slowly learning of a new wrinkle that deserves a closer look. A large majority of the big institutional failures in the financial sector were all regulated by the same Federal agency - the Office of Thrift Supervision. The OTS is the primary regulator of federal savings associations which we sometimes referred to as federal thrifts. Federal savings associations include both federal savings banks and federal savings and loans.

Established in the fallout of the last great financial crisis known as the S&L crisis the OTS sprang to life on August 9, 1989 as part of the Financial Institutions Reform, Recovery and Enforcement Act of 1989. Incredibly the OTS does not receive appropriations from the U.S. Congress to fund its operations; instead, the entire budget of the agency is paid by fees charged to the institutions it regulates. The process of how banks and savings institutions positioned themselves in order to fall into the criteria of being regulated by the OTS is an interesting side story to all of this.

The facts are straight forward enough. The institutions that have become the face of the credit crisis during this economic recession all have one thing in common - the OTS.

American International Group (AIG)
Citicorp Trust Bank
Countrywide Bank
IndyMac Bank
Washington Mutual
BankUnited

Sure it's easy to pick the names of failed (or failing) institutions from a list and find a common denominator. The point is that these particular failures are the result of a lack of oversight on a massive scale. These entities have caused serious damage to our economy. Who was supposed to be looking out for the rest of us while the cock roaches gobbled everything up?

Whenever I'm in an ideological discussion and am being asked which do I trust more - corporatism or statism - business or government? I am inclined to side with business simply because government is in so many ways thoroughly incompetent. With business the motives are clear, you can trust their untrustworthiness and live with it. Trusting incompetence is a fool's game.



CW