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Private Consultants Replace Government Regulation

[Update – 4/14/11 – Holly Molly! The NY Times finally did some investigative work – and put Matt Taibbi’s “Why Isn’t Wall Street In Jail” story on the Front Page In Financial Crisis, No Prosecutions of Top Figures

What is NJ’s “Toxic Asset” LSP program and what does banking regulation have to do with toxic site cleanup?

Plenty. Here’s why.

As we all know by now, deregulation and lax regulatory oversight played major roles in the Wall Street speculation and fraud that caused the economic collapse and recession. Matt Taibbi nails the issues in “Why Isn’t Wall Street In Jail?

Over drinks at a bar on a dreary, snowy night in Washington this past month, a former Senate investigator laughed as he polished off his beer.

“Everything’s fucked up, and nobody goes to jail,” he said. “That’s your whole story right there. Hell, you don’t even have to write the rest of it. Just write that.”

I put down my notebook. “Just that?”

“That’s right,” he said, signaling to the waitress for the check. “Everything’s fucked up, and nobody goes to jail. You can end the piece right there.”

But these conclusions aren’t limited to former US Senate investigators and Gonzo journalists.

Here are the same views from Neil Barofsky, the former special inspector general for the Troubled Asset Relief Program. Barofsky is the ultimate regulatory insider and now whistle blower. In a devastating NY Times Op-Ed piece, “Where the Bailout Went Wrong“, Barofsky wrote:

Finally, the country was assured that regulatory reform would address the threat to our financial system posed by large banks that have become effectively guaranteed by the government no matter how reckless their behavior. This promise also appears likely to go unfulfilled. The biggest banks are 20 percent larger than they were before the crisis and control a larger part of our economy than ever. They reasonably assume that the government will rescue them again, if necessary. Indeed, credit rating agencies incorporate future government bailouts into their assessments of the largest banks, exaggerating market distortions that provide them with an unfair advantage over smaller institutions, which continue to struggle.

Worse, Treasury apparently has chosen to ignore rather than support real efforts at reform, such as those advocated by Sheila Bair, the chairwoman of the Federal Deposit Insurance Corporation, to simplify or shrink the most complex financial institutions.

In the final analysis, it has been Treasury’s broken promises that have turned TARP — which was instrumental in saving the financial system at a relatively modest cost to taxpayers — into a program commonly viewed as little more than a giveaway to Wall Street executives.

It wasn’t meant to be that. Indeed, Treasury’s mismanagement of TARP and its disregard for TARP’s Main Street goals — whether born of incompetence, timidity in the face of a crisis or a mindset too closely aligned with the banks it was supposed to rein in — may have so damaged the credibility of the government as a whole that future policy makers may be politically unable to take the necessary steps to save the system the next time a crisis arises. This avoidable political reality might just be TARP’s most lasting, and unfortunate, legacy.

Given this history, one would assume that financial reform efforts would include strict regulatory oversight and enforcement of the fraud that brought us here.

But a NY Times editorial yesterday blew up that naive assumption. In Banks Are Off the Hook Again

Americans know that banks have mistreated borrowers in many ways in foreclosure cases. Among other things, they habitually filed false court documents. There were investigations. We’ve been waiting for federal and state regulators to crack down.

Prepare for a disappointment. As early as this week, federal bank regulators and the nation’s big banks are expected to close a deal that is supposed to address and correct the scandalous abuses. If these agreements are anything like the draft agreement recently published by the American Banker — and we believe they will be — they will be a wrist slap, at best. At worst, they are an attempt to preclude other efforts to hold banks accountable. They are unlikely to ease the foreclosure crisis. …

But the gist of the terms is that from now on, banks — without admitting or denying wrongdoing — must abide by existing laws and current contracts. To clear up past violations, they are required to hire independent consultants to check a sample of recent foreclosures for evidence of improper evictions and impermissible fees.

The consultants will be chosen and paid by the banks, which will decide how the reviews are conducted. Regulators will only approve the banks’ self-imposed practices. It is hard to imagine rigorous reviews, but if the consultants turn up problems, the banks are required to reimburse affected borrowers and investors as “appropriate.” It is apparently up to the banks to decide what is appropriate.

It gets worse. Consumer advocates have warned that banks may try to assert that these legal agreements pre-empt actions by the states to correct and punish foreclosure abuses. Banks may also try to argue that any additional rules by the new Consumer Financial Protection Bureau to help borrowers would be excessive regulation.

The least federal regulators could do is to stress that the agreements are not intended to pre-empt the states or undermine the consumer bureau. If they don’t, you can add foreclosure abuses to other bank outrages, like bailout-financed bonuses and taxpayer-subsidized profits.

So what does all this have to do with toxic site cleanup in NJ? Here’s what:

• just like Wall Street, polluters are driven by profit and greed, not the public interest
• just like Wall Street created “toxic assets” that caused enormous harm, so have polluters
• just like Wall Street, deregulation and lax oversight have led to a pattern of disasterous failures
• just like Wall Street, instead of cracking down on polluters with stricter regulation and enforcement, reforms were stymied by political power, which was  used to further deregulate and privatize the cleanup process – a giveway to polluters that destroys the ability to hold polluters accountable
•  just like Wall Street, toxic site cleanups are under the control of private consultants (called LSPs) instead of government regulators.

And just like Wall Street financial reforms blasted by Taibbi, Barofsky, and the NY Times, we can expect the same results – creation of more “toxic assets”.