Obama should not just forgive and forget

Bangkok Post  |  Jan 26, 2009

By Sin-ming Shaw

In all the gin joints in all the towns in all the world filled with unemployed investment bankers and piano players, there is increasing talk about a rising stock market and the beginning of the next bull market starting 2010.

The bubble that had burst is already a distant memory. The pain of the bust has been accepted as a tolerable price for previous excesses. So why not just move on?
US President Barack Obama, striking a message of national unity and inclusiveness, seems to be on the same wavelength,
On a recent TV interview he said that "we need to look forward as opposed to looking backwards" when he was asked whether he would seek an investigation of all the wrongdoings, possibly even crimes, committed by various senior Bush appointees who had betrayed the nation's trust.

Even without a thorough investigation there already exists a substantial and substantiated body of misdeeds to keep the courts busy for years. They range from illegal hiring practices at important government agencies such as the Department of Justice based on political beliefs to uneven-handed granting of multi-million-dollar contracts on a no-bid basis in Iraq to companies that are political allies of the Bush administration.

However, the ability to forgive is one of the most admirable traits of human nature. We should not knock it.

But wait one second.

What if by ignoring the past we are only sowing the seeds for a repeat performance in the future? Wouldn't we be setting a precedent for our children that crime can and does pay? That loyalty to your boss is more important than obeying the law?
Let's take a quick tour down memory lane before we totally forget, let alone forgive. At the epicentre of the bubble that is still bursting was the systematic wrecking of governance built up over years to ensure the market was a level playing field.
Space forbids listing the wreckage. A good place to start is publicintegrity.org that has provided a partial list called "Our Broken Government".

Let me start with Alan Greenspan, once idolised by the financial world and a docile press who should have known better as a mystical god-like figure upon whose shoulders global finance rested. He is a devotee of Ayn Rand's philosophy who painted all governments as evil differentiated only by degree, not kind, that trampled on the creativity and the genius of the individual.

Last October, an angry US congressional committee demanded Mr Greenspan to fess up: "Do you feel that your ideology pushed you to make decisions that you wish you had not made?"

Mr Greenspan conceded: "Yes. Those of us who have looked to the self-interest of lending institutions to protect shareholders' equity, myself included, are in a state of shocked disbelief."

Mr Greenspan's ideology may have blind-sided him in his rarified world of economic theory, but many at the government frontline to ensure a level playing field for the public had completely abandoned their responsibility. They had taken to heart the cue from their leaders: the best government is least government.

There is much to that thinking. All too often, public officials behave as if they were masters, forgetting they are paid by the people to serve them. All too often they are as arrogant as they are incompetent. It is not difficult to paint public authorities as "hate" figures.

However, there is a difference between good and bad governance, between excessive and no regulation.

Imagine a football game without a referee enforcing universally accepted rules. Or if he simply leaves the match leaving the players to faithfully observe those rules because a "free market" solution is optimal?

Many of Mr Bush's appointees went about wrecking that referee part of the government with the presumption that regulations, per se, were "guilty" until proven otherwise. Often it was not out of ideology but also out of private interests lining their own pockets at the expense of the public.

The Federal Reserve Board and the Securities Exchange Commission (SEC) are the two principal guardians of the financial system. Mr Greenspan is at least contrite.
SEC under Mr Bush was notorious for looking the other way, especially when violators were significant financial backers of the Republican Party.

Enron was the single largest contributor to Mr Bush's 2000 presidential campaign and helped the new president draft legislation "regulating" the energy industry. Its then chairman, Ken Lay, once told the head of the regulatory board of the electricity industry to fall in line lest he risked losing his job. He refused to comply and lost his job. Mr Lay had stayed at the White House 11 times as Mr Bush's guest.
Harvey Pitt, the first SEC chairman appointed by Mr Bush was known for his coziness with the accounting profession. Major accounting firms had at times signed off on questionable financial statements of their major client companies. Enron was a classic case.

Mr Pitt left under an ignominious cloud of having taken his eyes off corporate malfeasance.

Mr Pitt's successor, William Donaldson, tried to rebuild the integrity of the SEC but had to beat a hasty retreat after serving only two years because the Republican-dominated SEC board joined up with powerful private sector interests to make his work impossible. SEC became toothless and the message to Wall Street was clear.
And then there is Christopher Cox who resigned on Jan 20, the day Mr Obama was sworn in as the 44th president of the United States. President Bush appointed him to head the SEC and praised him as "a champion of the free-enterprise system".
His championship is best illustrated by what happened on March 15 last year when Fed and Treasury officials were hammering out the terms of JP Morgan's takeover of Bear Stearns in an industry directly under SEC supervision. SEC staff desperately looking for Mr Cox to be involved found him at a private party. Mr Cox, like Mr Greenspan, believed a good regulator is one who regulates less and less.
Worse than "non-interference" in Wall Street shenanigans, Mr Cox ignored warning signals while the housing bubble was going off the chart. He never bothered to consider whether bond rating agencies were doing their job to provide accurate information to investors while highly leveraged credit based derivative products were being sold all over the world based on good ratings given to the underlying bonds.

CRAs charge debt issuers for rating them. "It would be like cattle ranchers paying the Department of Agriculture to rate the quality and safety of their beef," said one expert.

It was no surprise they totally "missed" the subprime meltdown. Recall, four days before Enron collapsed, CRAs maintained an "investment grade" of its bonds. Did they miss by incompetence or because they feared they might lose their clients?
This list hardly scratches the surface of mind-boggling government breakdowns under Bush because of his administration's deliberate anti-regulation mindset.
President Obama would be making his first major policy mistake if he were to forget and forgive. Eternal human greed will ensure rules will be broken unless punishment is a certain outcome of a crime.

Sin-ming Shaw is a former stock analyst for a Los Angeles-based fund management company.

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