Closing the barn door after the horse has escaped

There are those that feel if only there was more government regulation we'd not be in the financial mess we're currently in. The problem with regulation is that like most legislation, it is a fairly blunt instrument with which to try to fix a specific problem, and it is not uncommon to find instances where the unintended consequences outnumber the intended consequences--often significantly. The Sarbanes-Oxley Act of 2002 (Sarbox) is a perfect example. Put in place with the intention of halting further accounting scandals like the ones that brought down Enron, WorldCom, Tyco and a host of other publicly traded companies, it has also acted to limit the choices a small business has regarding its growth and has moved most of what was left of our IPO market overseas and out of its jurisdiction. Rather than go public in the Unites States and wade through the sea of red tape and absorb the added costs that Sarbox has created, many companies ready to take the next step in their natural growth cycle instead choose to either sell out to a larger company--which makes a big company even bigger and has the correlative effect of limiting the competitive landscape--or go public in London where they will not be subjected to the excessive scrutiny that Sarbox mandates. Furthermore, you'd have to be crazy to choose to go public in the United States if you were a foreign company contemplating such a move.

Unsurprisingly, the monetary cost of compliance seems to not have been considered when Sarbox went into effect. If you are a $25bil company, this additional compliance cost is more easily absorbed than if you are a $25mil company. Setting aside the regressive nature of a law that burdens small companies more heavily than large ones, consider that micro, small and mid-cap companies outnumber large-cap companies by at least an order of magnitude. Also worth considering is the fact that if you are a CFO and you sign off on your company's quarterly financials and malfeasance later surfaces that you knew nothing about, you can be held criminally liable. Imagine what that does to a company's risk-taking initiative.

Though surely there are others, the most glaring unintended consequence of Sarbox is that thousands of law-abiding, jobs-providing, tax-paying smaller companies are penalized with significant added operating costs as a result of the regulatory reaction to the illegal actions of literally a handful of much larger companies. Forcing a firm to esentially prove their innocence each quarter is a perversion of the whole "innocent until proven guilty" theory that is the foundation of our laws.

Now to the point:

Yesterday it was revealed that IndyMac Bank is guilty of altering its records in order to appear more financially sound than they actually were just weeks before they were seized by regulators last summer. The twist is that a senior government regulator helped them do it.

A senior bank regulator was removed from his job after being accused of helping mortgage lender IndyMac Bancorp alter its records so it appeared to be in better shape -- weeks before it was seized by the government.

The Office of Thrift Supervision has reassigned its top West Coast official, Darrel Dochow, who was also a controversial figure in the regulatory lapses surrounding the savings-and-loan crisis of the late 1980s.

In a letter sent Monday to Sen. Charles Grassley, the senior Republican on the Senate Finance Committee, the Treasury Department's inspector general wrote that the federal OTS allowed the bank to backdate records of capital infusions last spring. That leeway made IndyMac appear more solid than was actually the case, shortly before federal regulators seized the bank in July -- at a cost of $8.9 billion to the government's deposit-insurance fund.

The key concern raised by Treasury Inspector General Eric Thorson in his letter was that OTS supervisors allowed IndyMac to register an $18 million capital injection from its holding company made on May 9 as if it had been carried out before the end of March. That appeared to put the bank's total risk-based capital ratio for the first quarter of the year over the 10% threshold for a "well-capitalized" institution, when in fact the bank had been below that mark and qualified only to be considered "adequately capitalized."

Mr. Thorson said in the letter that his investigators had also uncovered other incidents in which OTS supervisors had allowed banks to backdate capital infusions. The letter didn't specify which banks those incidents involved.

Darrel Dochow must be a cat, for surely he has 9 lives. Here's a guy that played a significant role in the Keating 5 Scandal by holding off on cracking down (which was his job BTW) on the unsound business practices of Lincoln S&L. Then he was only demoted for his role, and managed to work his way back up the ladder to again be named Western Regional Director of the Office of Thrift Supervision in 2007, only to again help at least one bank in trouble survive a little longer to again cost the taxpayer money. To add insult to injury, don't forget we're paying him a handsome taxpayer funded salary and benefits for all his "hardwork". This is not even a one-off event, there are other banks yet to be named. It will be interesting to see what other banks are also guilty of backdating capital with Mr. Dochow's help.

Lincoln later collapsed, costing taxpayers billions of dollars and triggering a political scandal for the "Keating Five" senators who had intervened with regulators on the thrift's behalf. Mr. Dochow was demoted in the wake of the scandal, but worked his way back up the OTS hierarchy.

Is this an example of more of the type of government regulation our nation should expect?

Institutions such as banks and our government are really a reflection of the habits of the citizens that make up the society that grants them legitimacy. Lately it seems that many of the institutions that make our nation what it is have been under assault by either the arrogant, the brazenly greedy, the incompetent, the criminal or all of the above. There will come a tipping point where those of us who keep our heads down, abide by the law, pay our taxes on time and generally behave like good citizens will say, "enough is enough." What happens then is anybody's guess, but whatever happens, it won't be pleasant for somebody.

"Those who destroy the protocols of civilization may well one day wish to rely on them".--Thucydides Book III