« What's in Your Wallet Part II: Let's Shop for Credit Cards | Main | Why a Foreclosure Compensation Fund Is a Bad Idea »

Principles Aren't Always Enough; Rules Are Needed Too.

posted by Ethan Cohen-Cole

In my last posting, I discussed the tradeoffs of regulation on the consumer side, and the extent to which disclosure would be sufficient to resolve consumer protection issues.

Here, I pose a simple problem to illustrate why principles based regulation would be inadequate.

To illustrate why, I cut and paste the abstract from Ed Kane’s (Professor at Boston College) paper “Unmet Duties in Managing Financial Safety Nets”

He writes: “Authorities and financiers violated common-law duties of loyalty, competence, and care they owe taxpayers indicates a massive incentive breakdown in industry and government.”

“First, procedures adopted at private firms and federal agencies for supervising securitization activity at commercial banks, investment banks, and government-sponsored enterprises inappropriately shortcut due diligence by outsourcing the monitoring and policing of the safety-net consequences of potential defects in the securitization process to private parties. Second, when the adverse consequences of this imprudent arrangement emerged, officials falsely claimed that the difficulties that short-funded, highly leveraged firms were facing in rolling over debt reflected a shortage of market liquidity rather than a shortage of economic capital at key firms. Among knowledgeable parties, this raised severe doubts about the integrity and competence of the officials in charge of rescuing the industry. Finally, the panicky way that the Treasury and President recharacterized the nature and extent of the industry’s accumulated losses in September 2008 created an extreme urgency that subsequent delays in implementation revealed to have been dangerously exaggerated”

Why do we believe that any new, reformulated or reconstituted regulatory agency would act differently on consumer products issue if we have not first put in place explicit limitations, rules, etc.?

A principles based approach is only as effective as the individuals that are the regulators in place at the time. We all have hope for Professor Warren’s ability to rise above the regulatory history; however, it’s far from clear that we can find anyone to follow her. 

Comments

It's interesting that there are no comments on this important, albeit esoteric subject.

I posit the reason is most readers are loathe to admit there really is something else lurking below the surface - the sheer willingness on the part of some number of people to take advantage of others.

It's uncomfortable to think about our willingness to accept collateral damage.

After all, how could someone, anyone, rise to some level of authority in a corporation while actually fostering or condoning a culture of what boils down to illegal behavior?

Could it really happen? Are there really people willing to abrogate their morals to a corrupt cause? Could they really rise to a leadership position in an American corporation?

Really? Could that happen?

Please, dear reader, tell me you don't believe it couldn't.

Are we just too willing to simply go on ignoring the fact that some percentage of people are fundamentally able to live with themselves no matter what damage they do to others?

A dose of reality is in order. The financial services industry is not immune to having corrupt individuals in it - and there is no reason to believe moving up in an organization involves some kind of process that magically weeds out those who are willing to take advantage of other people.

Anything less than that cold, hard assessment is why we are where we are today, with multi-millionaire executives somehow immune to responsibility and their heirs and appointees appearing before congressional committees saying the same things (yes, lies) their predecessors have always said.

The culture of civil settlements where "_____________ admits no wrongdoing" has given countless executives and companies the proverbial get-out-of-jail-free card and the perpetrators of abusive practices know it.

It's a socially odd dilemma; we not only condemn but punish criminal wrongdoing on the part of individual perpetrators of crimes but somehow, corporations aren't subject to such penalties; the corporation is immune to criminal prosecution and can remain in existence no matter what "they" have done at the behest of certain persons running it.

Instead of a corporate death penalty that would challenge stockholders to insist on rigorous ethics in management, the current climate precludes putting a fundamentally corrupt corporation out of business when executives make themselves wealthy as they nurture a climate of misbehavior on the part of employees.

The comments to this entry are closed.

Contributors

Current Guests

Follow Us On Twitter

Like Us on Facebook

  • Like Us on Facebook

    By "Liking" us on Facebook, you will receive excerpts of our posts in your Facebook news feed. (If you change your mind, you can undo it later.) Note that this is different than "Liking" our Facebook page, although a "Like" in either place will get you Credit Slips post on your Facebook news feed.

News Feed

Categories

Bankr-L

  • As a public service, the University of Illinois College of Law operates Bankr-L, an e-mail list on which bankruptcy professionals can exchange information. Bankr-L is administered by one of the Credit Slips bloggers, Professor Robert M. Lawless of the University of Illinois. Although Bankr-L is a free service, membership is limited only to persons with a professional connection to the bankruptcy field (e.g., lawyer, accountant, academic, judge). To request a subscription on Bankr-L, click here to visit the page for the list and then click on the link for "Subscribe." After completing the information there, please also send an e-mail to Professor Lawless (rlawless@illinois.edu) with a short description of your professional connection to bankruptcy. A link to a URL with a professional bio or other identifying information would be great.

OTHER STUFF

Powered by TypePad