What Is The Regulatory Charade?

From Spitzer's presentation at the Commonwealth Club:

“What we are doing is what I call the Regulatory Charade. What do I mean by that? After a crisis of this sort – and it doesn’t matter whether it’s the Enron crisis which generated Sarbanes-Oxley or other crises – there is always the rush to pass a law. Why do we want to pass a law? The virtue of passing a new law is that malefactors in the private sector get to say: ‘Go pay attention to passing a new law, but don’t worry about prosecuting us.’ And the regulators who should have done something can stand up and say: ‘We would have stopped it but we didn’t have the power, so pass a new law to give us the power, and then it won’t happen next time.’

“This is all a charade because the reality is the regulators had the power, they just refused to enforce it. And the people who did the bad things should have been prosecuted. What we should have been doing is actually using the power that we had.

“Think of it this way, over the past year the Fed, the OCC, and the SEC have been doing an amazing number of things. They haven’t been granted new power to do it. They’ve been using the power they’ve always had, but never called upon. Why didn’t they call upon it before?

“I’ll give you an example from personal experience. We tried to investigate sub-prime lending back when I was AG (Attorney General). We went and served subpoenas and wanted to gather the data. I’d written an article in The New Republic in 2004 saying: ‘This debt’s not going to be repaid, this is bad stuff.’

“The OCC and the banks went to court to stop us from serving the subpoenas and getting the information. They said ‘You’re pre-empting.’ We had to litigate all the way to the U.S. Supreme Court in order to get the power to actually ask the questions to get the information. But worst of all, it’s not as though the OCC and the other federal agencies said: ‘You stop. We are doing it.’ They just said: ‘You stop.’ Nobody was doing it. So the agencies who had the power simply didn’t use it, and this catastrophe simply grew and grew and grew.

“It’s the Peter Principle on steroids. We all know the Peter Principle, where people are promoted to their level of incompetence and they end there. What’s happened in DC is that people are promoted to their level of incompetence. And now, this will seem harsh, and I don’t want to say anything bad about people, but I will. Because of that incompetence, a huge crisis erupts, and they then use the crisis to argue that they should get even more power. And if you look at who is now in charge, it is basically the people who were in charge of the Fed and the Treasury and the OCC and the OTS throughout the time when this crisis was brewing.”