The Nation recently published an interesting article on the financial crisis of 2008 citing the head of the obscure regulatory body the Office of the Comptroller of the Currency (OCC), John Dugan, as one of the prime architects of our current economic woes.
I’ve read several lists citing people to blame for last year’s financial turmoil and Mr. Dugan, if cited, certainly wouldn’t be on the list of usual suspects.
While there may be many reasons for this chief of which is that the OCC is off of most financial journalists’ radar screens, it could also be that although Dugan has worked in Republican circles, the changes he championed were initiated by both Democratic and Republican administrations and it would be hard to gain a political advantage by pointing a finger at OCC.
The story says Dugan had three objectives: allowing banks to expand into multiple states without incurring additional regulatory oversight; allowing relatively safe commercial banks to merge with riskier investment banks and insurance companies and allowing commercial firms to purchase a bank.
Dugan recommended these “reforms” as well as others in a document he helped write when working at Treasury in 1991 called, Modernizing the Financial System: Recommendations for Safer, More Competitive Banks. It was basically the blueprint for the appeal of Glass-Steagall Act, which many have cited as a cause for the credit crisis though they rarely mention Dugan’s role.
If you have heard about the OCC it may have been in an editorial written by former New York Governor Eliot Spitzer in 2008. He stated that the Bush Administration had used the OCC to prevent state regulators from exercising its regulatory authority in regard to questionable lending practices by banks. Spitzer wrote,”Not only did the Bush administration do nothing to protect consumers, it embarked on an aggressive and unprecedented campaign to prevent states from protecting their residents from the very problems to which the federal government was turning a blind eye… The administration accomplished this feat through an obscure federal agency called the [OCC]. …In 2003, during the height of the predatory lending crisis, the OCC invoked a clause from the 1863 National Bank Act to issue formal opinions preempting all state predatory lending laws, thereby rendering them inoperative.”
Less than one month after that op ed piece appeared in the Washington Post the Spitzer sex scandal broker and he eventually resigned his office. Not that we are assuming a connection between the two but those predatory lending practices helped create the subprime loans that fueled the mortgaged backed securities which were bundled and sold by investment banks.
The Nation certainly does have a point of view but what is disturbing is that so many issues germane to the credit crisis are not being addressed. Yes legislation in the House has been passed that will require most over-the-counter (OTC) derivatives to be centrally cleared. However, that was a given well before the crisis hit. Futures wrote in the December 2007 Top 50 Brokers issue, “…there is a consensus among all parties that that [credit derivatives] will trade more and more on listed exchanges or at least with a clearing mechanism.”
More than a year after the Lehman meltdown led to a consensus that we were in the worst financial crisis since the Great Depression, the major regulatory reform passed mandates something that the industry had already basically consented to.
And it has taken a year for widespread coverage of some hard questions of The Treasury Department regarding the AIG bailout. Ironically, it is Spitzer who among others is pointing out Treasury may have forgotten who it is working for.
We noted here back in April and throughout the crisis the importance of asking tough questions and not being ruled by fear. The bailout was force fed to us by the people whose failure to do their jobs was a leading cause of the crisis and many of the folks still making decisions are the ones most responsible. Should we be surprised that we still haven’t gotten the full story?
