Risk and Regulation

Sometime in the next 12 to 24 months we will have a brand new regulatory bill emerge from Congress detailing the manner in which information is disclosed during the process of applying for a mortgage. Like Sarbanes-Oxely, it will once again demonstrate the tragedy of American business practices that we have all come to accept. Certainly it was no surprise to even the most junior financial executive five years ago that there ought to be controls in the financial management process, that the senior executives of the firm should know what they are and that a firm’s auditors should not be their consultants. Similarly, the new regulations will put in place standards for the mortgage application process that are stunningly obvious.

The concern is that the time span between scandals is growing shorter and shorter. We had the savings and loan scandals of the 1980s, which resulted in the passage of FDICIA (Federal Deposit Insurance Corporation Improvement Act) in 1991; a precursor to Sarbanes. Then we had the dot-com bubble (beginning in 1995 and ending in 2000) that, via WorldCom and Enron, bled into the corporate scandals of 2001. It seems we had just led the last of the criminal executives involved in Enron off to jail when the sub-prime mortgage scandal rises to public attention. As the executives who ran these financial institutions resign and slip away with lucrative severance packages we can only wonder if the underlying malfeasance will result in criminal prosecutions. It appears that that is unlikely at this point; what is more likely is a plethora of lawsuits.