Compared with the depth of the damage, there has only been the slightest public acknowledgment from financial regulators that oversight during these past few years has been pathetically lax. During hearings on the downfall of AIG earlier this year, ousted Office of Thrift Supervision Acting Director Scott Polakoff conceded that the OTS could have done more to curb AIG´s risky behavior as a thrift holding company, and this was the clearest mea culpa yet. Officials from the Securities and Exchange Commission, an agency similarly put-upon after the Bernard Madoff scandal, have also acknowledged the formerly weak position of their organization and vowed strengthen it. But no agency has gone as far as the much-marginalized Commodity Futures Trading Commission in showing, rather than telling, a commitment to stronger oversight.
The CFTC has declared a state of "Ponzimonium," engaging with relish in a spate of enforcement actions against mom-and-pop "Ponzi" schemes across the U.S. and winning itself a fair amount of publicity. The nearly weekly "gotcha" announcements from the agency-there have been 19 fraud cases so far this fiscal year, resulting in eight criminal actions-have bolstered its calls for more power, even as some legislators want to merge it with the SEC. As new efforts to bring supervision to unregulated areas of the financial sector such as derivatives trading get underway this spring, that recognition may count for something big.
A spokesman for the CFTC said part of the increase in "Ponzi" scheme busts can be attributed to natural reactions that occur during a financial crisis. (During good times, perpetrators of such schemes can easily find new investors wanting to buy into their funds just as older ones are calling for their cash. During panics and recessions, there´s less free cash and holders of it are more cautious.) But the agency has also begun trying harder to uncover the schemes, offering a hotline with calls returned in 24 hours and a Web-based complaint system. "We´ve been more aggressive in our investigations," the spokesman said.
It might help other regulators to have something to show for their increased oversight efforts. Undoubtedly, in many cases, the best evidence of strong regulation is to have nothing to show-no crashes, crises or scandals at all-but a little grandstanding once in a while on enforcement accomplishments never hurt anybody. The Treasury Department and other regulators seem to have gotten a taste of that satisfaction during their announcements yesterday about the crackdown on loan modification fraud. They shouldn´t stop there. Publicizing their tougher stances will help regulators separate themselves from the institutions they oversee. And for those threatened species, such as the OTS, a little publicity could go a long way to restoring legitimacy.