For about the last 30 years, our nation has been traveling the deregulation highway, a road with no rules or direction. We have let enterprise be free, business go unfettered, the good times roll. And roll they have, but to where? One stopping point: the current mortgage crisis.
Recently, however, there has been a slight regulatory bump in the road. After its chairman acknowledged that "market discipline has in some cases broken down," the Federal Reserve released new mortgage lending rules "to protect consumers against fraud [and] deception." Banks making sub-prime loans will be required to actually consider the borrower's ability to pay and confirm a borrower's income before handing over the money. Now there's a radical notion.
Disclosure also will be required of those nasty little (actually not so little) "bonuses" that brokers receive for writing loans at rates higher than a poor, unwitting consumer can afford.
To some, they may not be much, but the absence of such rules encouraged the predatory lending practices that have left millions of Americans facing foreclosure.
Let's take a look at how we got here before the deregulation highway takes us over a cliff.
The Reagan revolution was the beginning, when we started seeing rollbacks in government safeguards, such as those protecting food, drinking water and the environment. Then came the savings and loan crash in the 1980s, a pit stop that cost taxpayers $150 billion. President Clinton added the "bridge to the 21st century," along with his proclamation that the "era of big government was over." During his administration, Congress repealed a Depression-era law called Glass-Steagall, which kept banking and investment separate. Henceforth, banks could offer investment advice as well as loans -- one-stop shopping on the road to disaster.
However, deregulation of the markets really took hold in 1994 with the GOP's "Contract with America." The first to go were the nation's securities laws. Over a Clinton veto, Congress enacted the Private Securities Litigation Reform Act, making it far more difficult to prove securities fraud. Said to be necessary to free the markets of red tape and trial lawyers, it gave the green light to corporate chiefs such as Ken Lay and Dennis Kozlowski and led to the Enron, WorldCom, Tyco and HealthSouth fraud debacles. As a result, shareholders lost hundreds of billions of dollars from a wave of fraud unseen since the Roaring '20s -- and maybe not even then.
A declawed Securities and Exchange Commission, a neutered plaintiffs' bar and missing congressional oversight empowered Wall Street to push as far as it could. Facts were hidden, self-dealing was rampant and deceit rewarded. Congress finally intervened in 2002 by passing the Sarbanes-Oxley Act, imposing strict new accounting rules and other controls on business. That law is now under siege.
The current sub-prime mortgage mess is simply the latest wreck on the highway. Banks have been left to their own devices, unchecked by government watchdogs or pesky regulations. Interest rates on millions of mortgages are set -- like time bombs -- to accelerate in 2008. Defaults of $1 trillion are predicted -- affecting not only large institutions such as pension funds, hedge funds and universities but also countless average Americans. Hand-wringing time? Just consider these recent events:
* Moody's and other such agencies have threatened to downgrade the ratings of securities that are based on mortgages that allow accelerated payment -- with far more bad paper still out there.
* To avoid bankruptcy after its stock plummeted because of record high foreclosures, Countrywide Financial is being acquired by Bank of America.
* Money managers including Bear Stearns and investment bankers Citigroup, Merrill Lynch and Washington Mutual are under investigation for fraud and allegedly making Enron-like off-balance-sheet transactions.
* Of the nearly 3 million sub-prime adjustable-rate loans surveyed by the Mortgage Bankers Assn., a record 18.81% are already past due.
What clearer evidence do we need that markets do not regulate themselves? Yet the government response has been mostly timid.
The Fed's recent rules allow action against predatory lenders only on showing a "pattern and practice" of unlawful conduct; disclosures of "yield-spread premiums" -- kickbacks -- can still remain buried in a mountain of loan documents. Prepayment penalties make it nearly impossible for good-faith borrowers to get out from under bad loans. The Bush administration's voluntary mortgage rate "freeze" will reach less than 25% of borrowers.
Politicians of every stripe are running scared -- and for cover. Yet Republicans and some Democrats (lining up at the Wall Street trough) are actually still calling for less regulation of U.S. markets.
It is time -- it is past time -- to get off this deregulation highway. We need more government, not less, to protect us against banks and conglomerates and the sheer concentration of power they portend.
We need the SEC to change from Wall Street lap dog to aggressive advocate for the public interest. Instead of holding round-tables with corporate lawyers to find ways to prevent shareholder lawsuits, it should act, for example, on an investors petition to require polluters to disclose their multibillion-dollar liability for climate change. And the Justice Department needs to be the people's law firm again -- not house counsel for big banks and corporations, as has been the case in every major fraud and antitrust lawsuit before the Supreme Court of late. And Congress needs to enact and send to the White House the proposed Mortgage Reform and Anti-Predatory Lending Act to strengthen consumer safeguards against rapacious bankers and their Wall Street enablers.
Change, it is said, is in the wind. There is no better place to start than reining in the robber barons of the 21st century.