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Inspector General Capture

June 8, 2009 - by Donny Shaw

Later this year, Congress and the Administration will take a stab at reforming the financial regulatory system that pretty much failed to address any of the sketchy, unsustainable and fraudulent activities in banking that led to our current financial crisis. They’re thinking about consolidating the current regulatory agencies into one giant regulatory body, giving the Federal Reserve the power to decide that a financial corporation poses a systemic risk, and a few other things.

This week the House is taking up a small piece of reforming the regulators. The Improved Financial and Commodity Markets Oversight and Accountability Act is on the House suspensions calendar this week, meaning that it’s expected to pass easily by voice vote. The bill’s goal is to bring more independence and objectivity to the financial regulatory agencies’ Inspector Generals (IGs).

In general, IGs, which exist within every federal agency, are investigators in charge of detecting fraud and abuse with their agencies. They are also tasked with conducting audits and recommending policies to promote efficiency and effectiveness in regards to their agencies’ programs. Through laws made in the 70s and 80s, Congress has created two separate classes of IGs – ones that are appointed by the President, confirmed by the Senate and removed at the discretion of the President, and ones that are appointed and removed by the heads of the agencies they investigate and do not undergo a confirmation process.

The Improved Financial and Commodity Markets Oversight and Accountability Act would place the Federal Reserve, the Commodity Futures Trading Commission, the National Credit Union Administration, the Pension Benefit Guaranty Corporation, and the Securities and Exchange Commission, into the groups of agencies whose IGs are appointed by the President and confirmed by the Senate. Currently they are appointed by their respective agency heads.

It’s pretty clear how this would help these IGs remain independent. If they are hired and fired by agency heads, they have incentives to go easy on the agency. In fact, the people hired to be IGs at these agencies probably tend to be more sympathetic to the agencies’ status quo in the first place. The thinking behind the bill is that if they are made accountable to the President, who is generally concerned with ensuring that the government is working well, they have more of an incentive to remain objective and honest.

Gary Kepplinger of the Government Accountability Office put it succinctly in testimony to the House Oversight and Government Reform committee:

A general tenet to keep in mind is that the further removed the appointment source is from the entity to be audited, the greater the level of independence.

Here’s a video from a Financial Services Subcommittee on Oversight and Investigations hearing last month with Federal Reserve Inspector General Elizabeth Coleman that makes it pretty clear that IG oversight of the Fed is not being done very aggressively. Rep. Alan Grayson [D, FL-8] asks a few basic questions about her oversight of trillions of dollars that has been spent or lent by the Fed in the past six or so months, and finds out that she hasn’t bothered to looked into it:

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Comments

  • MatadorBID 06/08/2009 6:36pm

    I read the first sentence and stopped. Give me a break! Everyone knows it was Barney Frank, Chris Dodd, Franklin Raines, and all the other political hacks that brought the financial system to its knees with their flat out denial of obvious problems, as well as their unwillingness to give up this crusade of taxpayer-funded welfare “affordable” housing. How affordable is it now huh?!?

  • Anonymous 06/10/2009 10:06pm

    You speak in ignorance, MatadorBID. Are Frank and Dodd responsible for the collapse of housing prices in Ireland, Spain, Australia, Britain, Germany, South Korea and elsewhere? They deserve plenty of blame for not overseeing the banking system responsibly (along with Bush and probably Bill Clinton), but this argument holds no water (plus, the Fair Housing Act means that you have to lend to parties with equal credentials equally, not give special preference based on color, race, etc.). The more I see these arguments, the more disgusted I am.

  • MatadorBID 06/11/2009 5:35pm

    Frank and Dodd are not legislators in other countries, but what happens to the US economy has an enormous affect on the rest of the world. And they did far more than simply not oversee the system. They summarily dismissed calls for reform by none other than McCain and Bush (to name just two) on grounds of “affordable housing.” They denied claims of fraud and corruption in Fannie and Freddie, which are now known to be facts. Franklin Raines for one faked his firm’s numbers to receive millions in bonuses. Lastly, the Fair Housing Act enforces quotas on race, forcing institutions to make loans to many who wouldn’t otherwise qualify except for the color of their skin, lest the bank risk hefty suits and fines. It holds water very much and I am disgusted as well.

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