Yves Smith pulls out a key quote relating to the regulators’ complicity in the Lehman Brothers accounting fraud that played a large role in the firm’s failure:
[T]he Examiner questioned Lehman executives and other witnesses about Lehman’s financial health and reporting, a recurrent theme in their responses was that Lehman gave full and complete financial information to Government agencies, and that the Government never raised significant objections or directed that Lehman take any corrective action.
In the financial regulatory reform sweepstakes, you can pass a law that sets up an agency that performs consumer-protection functions. And you can pass a law that sets up a process for resolution of insolvent “too big to fail” firms instead of having bailouts. And both of these things are important. But in terms of prudential regulation, there’s just no substitute for regulators who have the desire and political will to actually crack the whip. If regulators feel that the rules on the books are undesirable relics of a bygone age, then the existence of the rules doesn’t make that big a difference. If the regulators are zealous in their jobs, then if authority is lacking at some point they’ll ask for more authority.
And it seems to me that we don’t really have the consensus among political/financial/business elites that it would be desirable to change Wall Street and have a rigorously regulated system.
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