And Outsourcing Oversight

Only a handful of bankers or brokers have been indicted for criminal actions during the frenzy that led up to the credit crisis, and yet there is widespread agreement that hundreds if not thousands are to blame for having over-valued securities, ignored the signs of risk, misled investors,  and compromised their integrity in overseeing the behavior of colleagues.  Now, however, private lawsuits are seeking some redress.

The New York Times reported that A.I.G., the insurance giant, is suing Bank of America for ten billion dollars, and it looks like many other such lawsuits are on the way.  The management team that presided over its collapse is long since gone, leaving the new mangers to act like the aggrieved victims of a Ponzi scheme.  The irony is that A.I.G., following its bailout, is largely government owned today. (See, “A.I.G. to Sue Bank of America Over Mortgage Bonds.”)

Clearly, those who have been injured are entitled to seek redress.  But in practice that option is only open to those who can afford to recruit the army of lawyers needed to challenge massive corporations.  Individual small investors don’t have the resources to do due diligence before making their decisions – or to pursue justice afterwards.  That’s why we all rely on government to do the job.

Yet in this the government has been inert, inactive, ineffective, and that leaves us, in effect, dependent on the privatizing of justice.

Clearly Washington is gridlocked, but has government become irrelevant?  To be sure, Republicans in congress have a bias against regulation.  The Wall Street reform bill comes nowhere near protecting investors against greedy bankers, much less guaranteeing that another financial crisis won’t happen.  Yes, the Consumer Protection Agency has been established, but it still remains to be seen if it will have the political will or the funds it needs actually to protect investors.

The underlying problem is that it is caught in a contradiction.  The same people who brought us financial disaster three years ago are largely still in charge, and government is relying on them to get the system going again.  If they are needed, they can hardly be prosecuted.  Besides, they remain a major source of contributions to political campaigns.

But that leaves the rest of us feeling confused if not betrayed.  If we feel that government is not doing the job we rely on it to do, where do we turn?

A retired congressman, Tom Davis, former chairman of the National Republican Congressional Committee, put it bluntly:  “The political system, Republican or Democrat, over the last decade has delivered two failed wars, an economic meltdown, 20 percent of homes underwater, stagnant wages.”  (See, “Voters Want a Change Politicians Can’t Deliver.”)

He concluded:  “Voters look at the political system as a whole as just not giving them anything.”  Such an attitude will lead to either depressed withdrawal or extreme and possibly violent reaction.  The riots in London may be giving us a foretaste of what is in store for Americans.