Professor Bainbridge...on law, politics, religion, culture & food

Regulating our way of the subprime mortgage mess? Remember SOX!

Corporate scandals and financial crises are always good news for big government types. After every bubble bursts, a slew of new laws have been enacted. Why? There is nothing a politician or regulator wants more than to persuade angry investors that he or she is “doing something” and being “aggressive” in rooting out misconduct.

Not surprisingly, in light of the subprime mortgage mess, regulation’s coming:

Signaling a willingness by the Bush administration to expand its oversight of Wall Street, Treasury Secretary Henry M. Paulson Jr. said Wednesday that investment banks should submit to greater supervision if they want regular access to Federal Reserve loans.

With Congress increasingly inclined to consider additional regulation of the mortgage industry—including Wall Street firms—Paulson’s statement, though limited, marks a significant shift from the position the administration held before the current credit crisis.

The watchword for Congress and the administration should be: “First, do no harm.” Remember Sarbanes-Oxley? Remember how the times required that something must be done? Well, here’s what co-sponsor Michael Oxley had to say a few years later when the dust settled:

Presiding over a recent dinner in Paris for more than 200 accountants, Oxley — the former Republican congressman from Ohio and co-author of the Sarbanes-Oxley corporate governance law — was asked during the question period whether he realized he had helped create one of the most crushing financial burdens ever imposed on business.

Was Oxley aware, his questioners asked, that the law that he and Senator Paul Sarbanes, a Maryland Democrat, rushed onto the books five years ago after the collapse of Enron and WorldCom had contributed to a sharp decline in listings on U.S. stock exchanges? And, knowing what he knows now about the cost and effects of the law, would Oxley — who retired in January after 25 years in Congress — have done it any differently?

“Absolutely," Oxley answered. “Frankly, I would have written it differently, and he would have written it differently,” he added, referring to Sarbanes. “But it was not normal times.” ...

“Everybody felt like Rome was burning,” Oxley, 62, recalled during an interview after the dinner in Paris. “People felt like they were getting cheated. It was unlike anything I had ever seen in Congress in 25 years in terms of the heat from the body politic. And all the members were feeling it.”

In another interview, Oxley again admitted that the pressure to something was unbearable, but that succumbing to that pressure had costs:

I think most people, even the business community, were saying just get it over with, you know, just try to stop the pain And in retrospect—and there was a lot of pressure from the White House to get it done, pressure from everybody, and in that kind of atmosphere it`s pretty darn difficult to have rational debate.

The lesson is that when something MUST be done, the best thing to do may be nothing. Not, to be sure, the politically wise thing, but the right thing. Unfortunately, we’re in the same sort of environment that led to SOX.

Something must be done about the subprime mortgage mess! Anything! Just so voters see their representatives doing something!

That way lies disaster.