Inspector General CaptureJune 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: