Well… How Did We Get Here?

The question you keep hearing these days is “How did it come to this?” – no matter what problem is being discussed, in fact. People will ask how in the world the current gasoline crisis could have happened, or how the Enron Scandal could ever have happened, or how the mortgage/housing crisis could possibly have happened, as if there was never any indication that any of these things might happen. The sad part is that most of the time, disasters of this magnitude don’t just appear one day, fully-formed and ready to start wrecking lives and fortunes. In the case of any large and powerful (or at least lucrative) industry that comes to grief because of a lack of government oversight, in particular, it’s usually not that hard to figure out…

The Enron situation is a particularly pungent example of this principle. For years, the SEC and various Congressional factions had been trying to increase the regulations placed on corporate audits, and in particular, to pass requirements that the same accounting firm that certified a corporation’s books could not be providing any other services to the same corporation. Obviously, if one of these firms is receiving millions (or, in some cases, hundreds of millions) of dollars worth of consulting work from a company, they would be unlikely to report anything negative about that company for fear of losing all of those millions in other contracts. Unfortunately, all of the Big Five accounting firms (and many smaller companies) routinely had such contracts with the very firms they were supposedly auditing as “disinterested third parties” as required by Federal law – and they were determined to hang onto those contracts by any means necessary…

So for more than a decade prior to the collapse of Enron, all of these companies fought tooth and nail to prevent the SEC from imposing any regulations on them, to the extent of threatening at least one SEC chairman with personal and professional ruin, and contributing millions to members of Congress to ensure favorable votes. Nothing was ever done about these too-friendly relationships until the news came out that Enron’s senior management had intentionally defrauded both their stockholders and their own employees, and the Big Five accounting firm Arthur Anderson had helped them to do it…

You all know how that story came out, of course: Enron is gone, several of those senior managers have been charged (and in a few cases, convicted) of criminal offenses, and Arthur Anderson itself has been dismantled. What you may not realize is that none of it was really necessary; the SEC was never trying to prevent the auditing companies from having consulting contracts with publicly-held companies. The agency’s intent was to have the big accounting firms retain ALL of their consulting and support contracts, and simply rotate the auditing contracts (which represented a relatively small percentage of their total business anyway) instead. With plenty of audit business to go around, and the contracts rotating among the major companies every year or two anyway, no one would have wound up suffering. But the Big Five firms, in their greed and arrogance, were not about to let any such thing happen…

In the mortgage crisis, the breakdown was even simpler. As noted in my last post, there is no Federal statute regarding predatory lending practices, or even defining the term. So during the last housing boom, unscrupulous lenders took advantage of the greedy, the inexperienced and the stupid, encouraged people to take out mortgages and loans they could not possibly afford, so that the lenders could foreclose on their property, thus effectively seizing all of the payments made and equity acquired by the borrower, and then resell the foreclosed houses and recover all of the loan money as well. This time the results were even worse – and even more predictable. Lending institutions nationwide are stuck with properties that are unsellable, and therefore worth essentially nothing to them, banks are in danger of failing, and the overall effect on the economy has been devastating. And still, there is no prospect of any regulation that might change any of this…

The unfortunate fact is that we are to blame for all of this; every one of us. And unless we start demanding a government that is accountable to the people, or at least more so than it is to the special interests and lobbyist groups, we’re going to be responsible for the next foreseeable crisis, too…