THE REGULATORS WERE ASLEEP. WHAT ELSE DID YOU EXPECT?

Bethany McLean describes what the banking regulators were up to as the housing market was getting ready to roll over:

Perhaps you’re thinking: If only the government had known at the time what these scoundrels were up to, we could all have been spared a great deal of pain. The trouble with that line of reasoning is that, um, the government did know what was going on. The Office of Thrift Supervision, which regulated WaMu, and the Office of Housing Enterprise Oversight, which regulated Fannie and Freddie, were supervising the very behavior that their sister agencies are now suing over. The government’s lawsuits call to mind a cynical boast by Burt Lancaster, playing tabloid power broker J.J. Hunsecker, in the 1957 noir classic Sweet Smell of Success: “My right hand hasn’t seen my left hand in 30 years.” . . .

While WaMu executives layered risk upon risk in subprime loans, the regulators did nothing to stop them. Rather than issue regulations to prohibit banks’ risky mortgage practices, the regulators issued a tepid “guidance” instead-and that “Interagency Guidance on Nontraditional Mortgage Products” wasn’t issued until the fall of 2006, by which time the horse was already pretty much out of the barn.

Of course the regulators knew that mortgage lenders were pushing the envelope-and of course they did nothing about it. Before the deluge, remember, it was the government’s policy to encourage subprime mortgage lending (oops, sorry, make that “expand home ownership”). Do you think the people at the OTS and OFHEO (and the FDIC and OCC, for that matter) were going to interfere with that? Have you seen Barney Frank when he doesn’t get his way? And don’t forget about plain old regulatory capture. . . . This is something for the people who dread (and the people who have high hopes for) the CFPB should keep in mind. Elizabeth Warren won’t be around forever. . . .